Estoppel Page3

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Vare also would receive all of the receipts and opened envelopes. The other pile Bacheler would again divide into two equal piles. Bacheler would then put cash from one of the piles immediately into his pocket, and according to his testimony, would "generally deliver the other pile to Cipparone in a day or two." Petitioner was not usually present during this division of money.

On October 6, 1978, Bacheler and petitioner were indicted by a Federal grand jury in Philadelphia, and each was charged with participation in the affairs of an enterprise, the activities of which affect interstate commerce through a pattern of racketeering activity, in violation of 18 U. S. C. 1962(c) and (d) (namely, the so-called "RICO" statute) and in violation of the Pennsylvania statute prohibiting bribery in official and political matters. Both were charged with receiving money from Vare in exchange for, in the words of the Pennsylvania statute, their "decision, recommendation and other exercise of discretion as a public servant, and as consideration for violation of a known legal duty as a public servant," ⁵ in connection with their duties at the Traffic Court. Bacheler was also charged with having received approximately $3,000 in bribers from an agent of the computer company that contracted with the Traffic Court . In addition, Bacheler was charged with two counts of subscribing to false tax returns in violation of section 7206(1) . Vare was given immunity from criminal prosecution in exchange for testifying against petitioner and Bacheler. Both defendants were found guilty of each of the counts charged. Findings of fact and conclusions of law were entered by Judge Hannum of the United States District Court for the Eastern District of Pennsylvania on February 12, 1979. ⁶

Although the time frame is not entirely clear from the record herein, Vare destroyed many of the records of the Traffic Court pertaining to the years involved in this case. Although Vare thought the records should not be destroyed, he did so because Bacheler asked him to do it. Vare also took some of the money belonging to the Traffic Court , which represented fines that had been paid, but later repaid part of the fines taken. Bacheler requested Vare to sign a statement under penalty of perjury to the effect that Vare never gave any money to Bacheler. Although he knew it to be false, Vare did provide such a statement to Bacheler.

Opinion

Collateral Estoppel Issue. The first issue to be decided is the applicability, if any, of the doctrine of collateral estoppel to this case. This issue was raised by respondent in an amended answer filed with the consent of the Court, in response to petitioners' amendment to their amended petition, which raised the statute of limitations issue. The issue specifically concerns what effect petitioner's criminal conviction for engaging in a bribery conspiracy has on the present civil suit for redetermination of a determined tax deficiency.

The doctrine of collateral estoppel generally applies to prevent relitigation of an issue that was determined in an earlier suit on a different cause of action. See Commissioner v. Sunnen [48-1 USTC ¶9230 ], 333 U. S. 591 (1948); Fairmont Aluminum v. Commissioner [Dec. 20,588 ], 22 T. C. 1377 (1954), affd. [55-1 USTC ¶9456 ] 222 F. 2d 622 (4th Cir. 1955). It has long been recognized that collateral estoppel in a civil case may be based on a judgment in a prior criminal case. Tomlinson v. Lefkowitz [64-2 USTC ¶9623 ], 334 F. 2d 262, 264 (5th Cir. 1964); Amos v. Commissioner [Dec. 27,012 ], 43 T. C. 50 (1964), affd. [66-1 USTC ¶9130 ] 360 F. 2d 358 (4th Cir. 1965).

Collateral estoppel applies with respect to those facts that were actually litigated and determined in the first proceeding and which were essential to the judgment in the first case. Commissioner v. Sunnen [48-1 USTC ¶9230 ], 333 U. S. 591, 599-601 (1948); see Wright v. Commissioner, 84 T. C. -- (No. 41) (1985). The fact that respondent was not a party to the criminal case in which petitioner was convicted is not a bar to application of the doctrine of collateral estoppel because the requirement of mutuality was eliminated as a necessary prerequisite by the Supreme Court in Parklane Hosiery Co. v. Shore, 439 U. S. 322, 331 (1979). A further limitation on the application of collateral estoppel is that it cannot apply with respect to any issue if the party against whom it is asserted did not have a "full and fair opportunity" to litigate that issue in the earlier case. Allen v. McCurry, 449 U. S. 90, 95 (1980).

Petitioner does not contest the fact that he was given every opportunity to litigate the issue of his participation in the bribery scheme in the Federal district court proceeding. We must therefore determine which of the findings of fact made by the Federal district court were "essential to its judgment" of guilt. See Commissioner v. Sunnen, supra at 601. In order to properly make that determination, we look to the statutes under which petitioner was convicted.

The Pennsylvania statute applicable to petitioner's conviction is set forth below:

§4701 . BRIBERY IN OFFICIAL AND POLITICAL MATTERS

(a) Offenses defined.--A person is guilty of bribery, a felony of the third degree, if he offers, confers or agrees to confer upon another, or solicits, accepts or agrees to accept from another:

(1) any pecuniary benefit as consideration for the decision, opinion, recommendation, vote or other exercise of discretion as a public servant, party official or voter by the recipient;

(2) any benefit as consideration for the decision, vote, recommendation or other exercise of official discretion by the recipient in a judicial, administrative or legislative proceeding; or

(3) any benefit as consideration for a violation of a known legal duty as public servant or party official.

(b) Defenses prohibited.--It is no defense to prosecution under this section that a person whom the actor sought to influence was not qualified to act in the desired way whether because he had not yet assumed office, had left office, or lacked jurisdiction, or for any other reason.

18 Pa. Cons. Stat. §4701 (1973).

Respondent asserts that we are bound by the findings of the Federal district court as to the specific amounts of money received by petitioner and Bacheler. Petitioner argues that the Federal district court did not make specific findings as to the amounts of money he received, or alternatively, that such findings were not essential to the judgment.

Our review of the findings of fact and conclusions of law entered by the Federal district court indicates that, with one exception (namely, 40 percent of the $1,350 received by Vare in November and December of 1974, or $540), there is no specific finding as to the amounts of money actually received by petitioner. At most, there is an "implication" (to use respondent's terminology) that the fees were split evenly between Bacheler and petitioner. Indeed, the findings contain the following passage, that would appear to cast some doubt on that "implication":

"The general procedure was for Vare personally to deliver the money to defendant Bacheler who was to see that defendant Cipparone received his portion; however, Vare's daughter occasionally delivered payments to Bacheler's house during the summer of 1977." [Emphasis added.]

Respondent cites a number of cases involving the collateral estoppel effect of a criminal tax conviction on a subsequent civil tax proceeding. Such cases have no proper application to this case because petitioner herein has never been convicted of a tax crime. Respondent also cites Keogh v. Commissioner [Dec. 33,279(M) ], T. C. Memo. 1975-197, for the proposition that convictions for receipt of monies through a bribery or embezzlement scheme give rise to the application of collateral estoppel, even in the absence of a criminal tax conviction. That case involved the collateral estoppel effects of a conviction for conspiracy to accept a bribe in violation of 18 U. S. C. section 1503 . Although we agreed with respondent in that case that taxpayer was "estopped to deny that he received some funds for his effort * * *" [34 TCM 844 at 851, 44 P. H. Memo T. C. par. 75,197 at 75-833, emphasis added], we also found that--

It is clear that the amount which [taxpayer] received was not essential to the judgment of conviction in the criminal case. [34 TCM at 851, 44 P. H. Memo T. C. par. 75,197 at 75-834.]

Therefore, Keogh supports petitioner's position that the amount of money received is not "essential" to a bribery or conspiracy conviction.

We conclude that petitioner is estopped from denying participation in the bribery scheme itself. However, the specific amounts of money he received were not essential to his conviction because any "pecuniary benefit" or merely "benefit" would support a conviction under the applicable statutes. Therefore, petitioner is not collaterally estopped by the findings of the Federal district court as to the specific amounts of money received by him (to the extent such findings exist), but such findings are, of course, relevant evidence.

Allocation of Income to Petitioner. We now consider the difficult issue of determining how much, if any, of the income from the kickback scheme is taxable to petitioner. Respondent alleges that with the exception of November and December of 1974 (during which time petitioner's split was allegedly 40 percent) petitioner received 25 percent of the total writ server fees generated by Vare from November, 1974, through June, 1978. The statutory notice of deficiency is based upon that determination. Therefore, respondent assumes that Bacheler did in fact split half of the fees he received with petitioner. Although petitioner denies involvement in the scheme at all, petitioner argues, in the alternative, that if he is found to be involved in the kickback scheme, he in fact received far less money than respondent determined, because Bacheler did not divide the money evenly with petitioner.

Given the factual circumstances of this case, we are inclined to agree and do agree with petitioner's alternative argument that petitioner actually received significantly less than what the oral agreement of the participants called for him to receive. Bacheler exercised a great deal of authority at the Traffic Court , and he was the one who controlled the actual division of the fees. Division of the fees, all of which had been previously converted into cash pursuant to procedures initiated by Bacheler, took place in Bacheler's office, without petitioner being present. Receipts were given to Vare, and not to petitioner. These factors, particularly when combined with Bacheler's control over Vare (which is demonstrated by Bacheler's order to Vare to destroy court records and his solicitation of a fraudulent statement from Vare that Vare never gave Bacheler any money) could easily have led Bacheler to enlist Vare's assistance to cheat petitioner out of his share, or to have done so on his own initiative.

However, our finding that petitioner actually received less money than what the oral agreement of the participants called for (regardless of what amount we might somehow estimate) does not aid petitioner under the circumstances of this case, at least with respect to the underlying deficiencies. We reach this conclusion because of the applicability of the partnership provisions of the Internal Revenue Code, which are contained in Subchapter K (sec. 701 et seq.), to the present case. Cf. Stern v. Commissioner [Dec. 41,368(M) ], T. C. Memo. 1984-383. In section 761(a) , the term "partnership" is defined in an expansive manner, as follows:

[T]he term "partnership" includes a syndicate, group, pool, joint venture, or other unincorporated organization through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title [subtitle], a corporation or a trust or estate.

The Supreme Court set forth the test to be used in determining whether a partnership exists for Federal income tax purposes in Commissioner v. Culbertson [49-1 USTC ¶9323 ], 337 U. S. 733, 742 (1949), namely, whether "the parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise." Under Culbertson, supra, we are to consider--

all the facts--the agreement, the conduct of the parties in execution of its provisions, their statements, the testimony of disinterested persons, the relationship of the parties, their respective abilities and capital contributions, the actual control of income and the purposes for which it is used and any other facts throwing light on their true intent. [337 U. S. at 742].

We conclude from the record herein that petitioner, Bacheler and Vare intended to conduct a venture or enterprise jointly for profit. They therefore are to be regarded as partners for Federal income tax purposes.

Partners are taxed on their distributive share of partnership taxable income in the year such income is earned, irrespective of whether or to what extent they actually received distributions from the partnership. Section 702 ; section 1.702-1(a) , Income Tax Regs. It is well settled that funds received as kickbacks as a result of extortion or bribery are includible in taxable income. Rutkin v. United States [52-1 USTC ¶9260 ], 343 U. S. 130 (1952). Partners are taxable on the full amount of their distributive share even where a partners is unaware that partnership income has been earned, and another partner has embezzled it without his knowledge. Commissioner v. Estate of Goldberger [54-1 USTC ¶9359 ], 213 F. 2d 78 (3d Cir. 1954), affg. in part and revg. in part sub nom. Trounstine v. Commissioner [Dec. 19,223 ], 18 T. C. 1233 (1952); Stoumen v. Commissioner [54-1 USTC ¶9112 ], 208 F. 2d 903 (3d Cir. 1953). This Court has expressly followed Goldberger and Stoumen in Beck Chemical Equipment Corp. v. Commissioner [Dec. 22,265 ], 27 T. C. 840, 855-856 (1957).

A partner's distributive share of taxable income is to be determined by the partnership agreement. Section 704(a) . There is substantial evidence in this case, particularly from the findings of the Federal district court, of the existence of an oral agreement as to a division of Vare's writ server fees. Initially, the partnership consisted of Vare and petitioner, who split the proceeds 60-40 in November through December, 1974. Then, the partnership added Bacheler to its membership. Initially a 60-20-20 split for Vare, Bacheler and petitioner, respectively, the agreement was modified to a 50-25-25 split in March, 1975, and the agreement remained in that form through June, 1978. We find the Federal district court findings of fact to be the best available evidence as to the amounts of money received by the partnership. It is based upon those figures that respondent calculated petitioner's deficiencies. ⁷ Accordingly, petitioner is properly taxable on the amounts determined by respondent, (with the minor adjustment previously noted at fn. 2, and subject to the statute of limitations defense discussed below), regardless of whether respondent has established, to our satisfaction, that petitioner actually received those amounts.

Fraud. The next issue for decision is whether the additions to tax under section 6653(b) that have been determined by respondent should be sustained. Section 6653(b) provides for an addition to tax of 50 percent of the underpayment if any part of the underpayment of tax was due to fraud. Respondent bears the burden of proving by clear and convincing evidence for each year in issue that (1) there was an underpayment of tax and (2) some portion of the underpayment was due to fraud. Section 7454(a) ; Rule 142(b). Fraud need not be established as to the entire amount of the underpayment; rather, if any part of the underpayment was due to fraud, the section 6653(b) addition to tax attaches to the entire deficiency. Otsuki v. Commissioner [Dec. 29,807 ], 53 T. C. 96, 105 (1969); Shaw v. Commissioner [Dec. 22,078 ], 27 T. C. 561, 570 (1956), affd. [58-1 USTC ¶9322 ], 252 F. 2d 681 (6th Cir. 1958).

The existence of fraud is a question of fact to be resolved upon consideration of the entire record before the Court. Gajewski v. Commissioner [Dec. 34,088 ], 67 T. C. 181, 199 (1976), affd. without published opinion, 578 F. 2d 1383 (8th Cir. 1978). In order to establish fraud, respondent must show that the taxpayer filed his return with the specific intent to evade a tax believed to be owed. Wilson v. Commissioner [Dec. 37,841 ], 76 T. C. 623, 633 (1981). Direct evidence of intention is rarely available and is not necessary. Fraud is never to be imputed or presumed; however "its proof may depend to some extent upon circumstantial evidence, and may rest upon reasonable inferences properly drawn from the evidence of record." Stone v. Commissioner [Dec. 30,767 ], 56 T. C. 213, 224 (1971).

The consistent understatement of substantial amounts of income over several years is strong evidence of fraud. Merritt v. Commissioner [62-1 USTC ¶9408 ], 301 F. 2d 484, 487 (5th Cir. 1962); Vannaman v. Commissioner [Dec. 30,109 ], 54 T. C. 1011, 1018 (1970). Any conduct, the likely effect of which would be to mislead or conceal, is indicative of fraud. Spies v. United States [43-1 USTC ¶9243 ], 317 U. S. 492, 499 (1943). The failure to keep adequate records indicative of an attempt to defraud. Papineau v. Commissioner [Dec. 22,333 ], 28 T. C. 54, 58 (1957).

Respondent contends that petitioner's failure to report any income from the kickback scheme on his Federal income tax returns for each of the years 1974 through 1978 constituted fraud within the meaning of section 6653(b). ⁸ Petitioner contends that respondent has failed to carry his burden of proof with respect to the issue of fraud. For the following reasons, we agree with petitioner.

In the instant case, petitioner was convicted of participating in an illegal bribery scheme, and we have held that he is collaterally estopped from denying his participation therein. However, we have also held that we are not bound by the findings of the Federal district court as to the amounts of money actually received by petitioner, (to the extent that there were such findings) because findings as to the specific amounts of money were not essential to the judgment. Indeed, "any pecuniary benefit" (under 18 Pa. Cons. Stat. §4701(a)(1) (1973)) or even any "benefit" (under subsections (2) and (3) of the same statute) would suffice for a conviction under the Pennsylvania statute to which the Federal racketeering statute refers. ⁹

Because of the applicability of the partnership provisions contained in Subchapter K, which operate to tax petitioner on his agreed share of the profits irrespective of actual receipt, we did not previously find it necessary to reach the issue of how much money petitioner actually received from the scheme. In the complete absence of any other evidence on the subject and in light of the partnership agreement, we adopted the findings of the Federal district court on the issue of the amount of fees received by the partnership as income, and upheld the respondent's use of the same in his statutory notice of deficiency.

As previously noted, respondent has the burden of proof with respect to the issue of fraud, not by the usual standard of "preponderance of the evidence", but by the higher standard of "clear and convincing evidence." Section 7454(a) ; Rule 142(b). While the record herein supports a finding that petitioner was involved, to some extent, in the illegal kickback scheme described herein, and was therefore entitled (under the agreement) to his agreed upon share, respondent has not introduced sufficient credible evidence to demonstrate that petitioner actually received any substantial amount of money, let alone the amounts of money determined by respondent.

It is respondent's failure to prove that petitioner actually received any substantial amount of money that distinguishes this case from Keogh v. Commissioner, supra, which is relied upon heavily by respondent. In that case, this Court held that there was "clear and convincing" evidence that taxpayer received at least $17,500 on a specific occasion. [34 TCM at 852; 44 P. H. Memo T. C. par. 75,197 at 75-834.] There is no such evidence in this case. Indeed, the reasonable inference to be drawn from the circumstances of this case, as adduced from the evidence presented to us, is that petitioner did not actually receive substantial amounts of unreported income from the kickback scheme. Those circumstances include, (among others previously mentioned), the high degree of control exercised by Bacheler at the Traffic Court, the fact that Bacheler generally divided the money in his own office, the fact that petitioner was normally absent at the time the money was divided, the close personal relationship of Bacheler and Vare, and the demonstrated lack of credibility and honesty on the part of both Vare and, particularly, Bacheler. Petitioner's testimony regarding his very modest standard of living throughout the years in issue, which we find to be credible and which was not seriously controverted by respondent, buttresses our conclusion that much of petitioner's "share" was retained by Bacheler.

Petitioner testified at trial that he did not participate in the illegal kickback scheme at all. Petitioner did admit to having received a total of $5,100 from Bacheler over the span of some 45 weeks, but claims that the money represented payment for a car that he had sold to Vare. Vare had purchased a car from petitioner for $3,000 and agreed to pay petitioner $100 per week. Vare did not make the payments, and Bacheler agreed to make them on Vare's behalf. Petitioner claims that he initially thought the payments he received from Bacheler over the $3,000 sales price of the car were due to a "bookkeeping error," but then he decided to keep quiet about the overpayments. Petitioner testified that he was aware of a climate of corruption that existed at the Traffic Court, but had no one to report it to because there was no one he felt he could trust.

Although we do not believe petitioner's denial of participation in the kickback scheme in light of his criminal conviction, we found him to be a credible witness overall. In sharp contrast to Bacheler and Vare, both of whom frequently gave vague or nonresponsive answers while looking at the ceiling or back of the courtroom, petitioner would generally answer in a straight-forward manner.

Bacheler was a witness whom we found to be particularly lacking in credibility. For example, he initially denied having received any bribes from anyone other than Vare, but then changed his testimony and admitted to having received bribes from an official of the computer company with whom the Traffic Court contracted. At the trial of the instant case, Bacheler first denied having requested such a statement, and then changed his testimony and admitted that he had. Also, his memory was strangely selective--for example, he remembered that he paid money to an employee of the Traffic Court warrant department (who, Vare claims, originated the kickback scheme idea), but he could not remember why he paid the employee money.

At the time he testified, Bacheler was waiting to hear from respondent as to whether or not his then pending offer of compromise with the Internal Revenue Service would be accepted. He knew that acceptance of such an offer was discretionary on the part of respondent. His offer of compromise requested respondent to accept a $5,000 payment in order to extinguish a total outstanding liability of approximately $10,000. Bacheler had stipulated to this liability, which was calculated on the assumption that he received 25 percent of the total fees collected by Vare. The statutory notices of deficiency issued to Bacheler for the years 1975-1978 were based on the assumption that, with a few minor exceptions discussed supra, he divided the fees he received equally with petitioner, and it is very likely that he did not want to testify to anything that would contradict that assumption. He did, however, testify that the amount of income that respondent has determined that petitioner received was "way too high."

At the time he testified, Vare also had large outstanding tax liabilities arising from the kickback scheme which he had not paid. His testimony was also far from credible. Vare testified that he has tried to forget about the events in question.

Considering carefully all of the evidence in this case, we cannot find petitioner's failure to report his share of kickback income, of which he may never have received more than an insubstantial portion, to be clear and convincing evidence of fraud. Petitioner was not very knowledgeable nor sophisticated with respect to tax laws, and it is therefore highly unlikely that he would have appreciated the legal requirement of reporting the "deemed" partnership income that we have concluded he is liable for. We therefore conclude that petitioner lacked the specific intent to avoid a tax believed to be owed, Wilson v. Commissioner, supra at 633, and we find for petitioner as to the section 6653(b) additions to tax for all of the years in issue.

Statute of Limitations Issue. Petitioners, by way of an amendment to their amended petition, have raised the defense of the statute of limitations with respect to the deficiencies determined for the years 1974, 1975 and 1976. Respondent, in a supplementary brief, contends that this Court erred in allowing petitioners to raise this issue by amending their pleadings after trial and after final briefs were submitted and now requests the Court to reconsider that ruling. The basis of respondent's request is that Rule 34(b)(4), which requires a party to set forth its assignments of error in its petition, was thereby violated. However, respondent ignores Rule 41(a), which provides in relevant part that "otherwise a party may amend his pleading only by leave of Court or by written consent of the adverse party; and leave shall be given freely when justice so requires." It should also be noted that the Court allowed respondent to raise a new issue (by amending his answer and submitting a supplemental brief on the collateral estoppel issue) at the same time petitioners were allowed to raise the statute of limitations issue. We reject respondent's request.

Respondent asserts, in the alternative, that the years 1974 through 1976 are open and are not barred by the statute of limitations because of the presence of fraud (per section 6501(c)(1) ), and also, with respect to 1976, because petitioners omitted in excess of 25 percent of their income (per section 6501(e)(1) ). Respondent has the burden of proof on both of these alternative issue. Rule 142(b); Stratton v. Commissioner [Dec. 29,958 ], 54 T. C. 255, 289 (1970). We have previously found that respondent has not proved the existence of fraud, nor has he provided specific proof that petitioners omitted in excess of 25 percent of their income in 1976. Petitioners reported on their Federal income tax return for 1976 gross income of $28,470.25, and respondent has not carried his burden of proving that petitioners omitted any specific amount from income for that year, let alone the $7,117.57 that would be required under section 6501(e)(1) .

The statutory notice of deficiency herein for all years in issue was issued on April 15, 1981 . Petitioners timely filed their 1974, 1975, and 1976 Federal income tax returns. Respondent is barred by the applicable three-year limitation on assessments from assessing a deficiency with respect to the years 1974, 1975, and 1976. Section 6501(a) .

In summary, we find for petitioner, Rocco Cipparone, as to the additions to tax determined for the years 1974 through 1978 under section 6653(b). We find for petitioners as to the statute of limitations issue for 1974, 1975 and 1976. Lastly, we find for respondent as to the tax deficiencies determined for 1977 and 1978.

Decision will be entered under Rule 155.

¹ All section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue, and all rule references are to the Tax Court Rules of Practice and Procedure.

² Respondent now concedes that the unreported income figures set forth in the statutory notice for 1975 are incorrect and that they should be reduced by $245.00.

³ A "scofflaw" was a violator with ten or more violations outstanding. "High volume scofflaw" referred to a violator with one hundred or more violations outstanding.

⁴ Vare would not always receive 50 percent of the total, due to the fact that Bacheler would withhold money, at Vare's request, to help Vare pay various liabilities and also to save money to pay for the wedding reception of Vare's daughter. This was done, according to Vare, because "I couldn't keep any money in my pocket."

⁵ 18 Pa. Cons. Stat. §4701 , the text of which is set forth at pp. 11-12, infra.

⁶ Both defendants waived their right to a jury trial.

⁷ Petitioner's share of unreported income was determined to be as follows:

⁸ Respondent also argues that a stipulation entered into by the parties, to the effect that certain charitable deductions claimed by petitioners (for clothing allegedly contributed to the Salvation Army) were improper, constitutes additional "proof" of fraud. We do not consider that stipulation to have any material bearing on the fraud issue.

⁹ The Pennsylvania statute apparently has not been interpreted in such a way as to require any minimum or "substantial" amount of money. For example, in Commonwealth v. Tiberi, 361 A. 2d 318, 239 Pa. Super. 152 (1976), the defendant was convicted under the predecessor to the statute of receiving a mere $100 under color of office in return for promising to recommend an employee for advancement within the Pennsylvania Department of Transportation.

 

 

[Dec. 44,867(M)] James E. Ross, et al. ¹ v. Commissioner

Docket Nos. 4176-79, 4178-79, 4179-79, 4346-79, 10557-80., TC Memo. 1988-283, 55 TCM 1170, Filed June 28, 1988

[Appealable, barring stipulation to the contrary, to CA-11.--CCH.]

[Code Sec. 7206 ]

[Additions to tax: Civil penalties: Fraud: Prior criminal conviction: Effect of.]Held: Petitioners' "new evidence" was available in their prior criminal proceeding and cannot now be relied upon to preclude the application of collateral estoppel. Held further, petitioners' prior convictions under section 7206 and 18 U.S.C. sec. 371 (1982) do not collaterally estopthem from denying that they intended to evade taxes in this proceeding for purposes of determining whether the addition to tax for fraud under section 6653(b) is applicable.

Nathan D. Clark, 201 Alhambra Circle , Miami , Fla. , and Richard Josepher, 100 S.E. 2nd St. , Miami , Fla. , for the petitioners in docket Nos. 4176-79 and 4346-79. Steven Sonberg, One S.E. Third Ave. , Miami , Fla. , Ursula Mancusi-Ungaro, 1351 N.W. 12 St., Miami , Fla. , and Moises T. Grayson, 25 S.E. 2nd Ave. , Miami , Fla. , for the petitioners in docket Nos. 4178-79, 4179-79, and 10557-80. Kenneth A. Hochman, Susan Wynne, and Lourdes M. DeSantis, for the respondent.

Memorandum Opinion

WHITAKER, Judge:

This cause is before the Court on petitioners' Motions for Summary Judgment and respondent's Motions for Partial Summary Judgment (as amended), all of which raise the issue of collateral estoppel. ² The record with respect to these motions consists of the motions, responses, memorandums and affidavits in support of the motions and responses, and exhibits attached to the memorandums and affidavits. There appearing to be no genuine issue of material fact, a decision may be rendered as a matter of law. Rule 121(b). ³

In his motions Respondent seeks to collaterally estop petitioners James Ross and Emanuel Barshov (hereinafter petitioners) ⁴ from denying (1) that their 1974 and 1975 Federal income taxreturns contained false and fraudulent deductions for losses, which deductions petitioners knew were false when they subscribed and presented those returns to respondent, and (2) that petitioners' income tax returns were filed with false and fraudulent deductions with intent to evade tax. ⁵ Petitioners, in their motions, which should be entitled Motions for Partial Summary Judgment, seek a decision that they are not collaterally estopped from denying that they intended to evade taxes, the second element of respondent's amended motions. Petitioners also claim, in their responses to respondent's motions, that newly discovered evidence precludes the application of collateral estoppel altogether. ⁶

Factual Background

Respondent determined deficiencies and additions to tax in the following amounts:

                              BARSHOV

                                 6653(b)

Year                   Tax           7        6653(a)    6651(a)(1)

1971 ............. $  1,426.00      None     $    71.00     None

1974 .............  300,470.00  $150,235.00   15,075.65* $75,117.50*

1975 .............  197,963.00    98,981.50    9,898.00*    None

                   -----------  -----------  ----------  ----------

                   $499,859.00  $249,216.50  $25,044.65  $75,117.50

                               ROSS

                                 6653(b)

Year                   Tax           8        6653(a)    6651(a)(1)

1974 ............. $187,079.0O  $ 93,539.50  $ 9,354.00*    --0--

1975 .............  159,605.0O    79,802.50    7,891.00* $ 7,891.00*

1976 .............   16,398.00                   820.00      820.00

--------------

*Alternatively.

 

Petitioners' prior criminal convictions and the claimed deficiencies and additions to tax arise out of their involvement in two limited partnerships, Pan Properties, Ltd. (Pan) and Nap Properties, Ltd. (Nap), both of which were formed to acquire and distribute films. ⁹

On March 12, 1973 , Emanuel Barshov and James Ross, doing business as Pan, entered into an agreement to acquire all of the United States rights in four films from Freedom USA Records, Inc.(Freedom), a company owned by Samuel Lang. Pursuant to the terms of the agreement, Freedom was to sell the rights in the films for the following amounts:

    Film                           Terms of Payment

"Demons of the Mind"         $80,000 cash and a six

                               percent (6%), twelve-year

                               mortgage in the amount of

                               $720,000

"Straight on 'Til Morning"   $90,000 cash and a six

                               percent (6%) twelve-year

                               mortgage in the amount of

                               $810,000

"Fear in the Night"          $110,000 cash and a six

                               percent (6%) twelve-year

                               mortgage in the amount of

                               $990,000

"'Tis a Pity"  10           $70,000 cash and a six

                               percent (6%), twelve-year

                               mortgage in the amount of

                               $630,000.  11 

 

On June 28, 1973 , (subsequent to the March 1973 agreement, but prior to the execution of an Acquisition Agreement between Freedom and Pan), Freedom acquired all of the right, title, and interest in the first three films from Anglo EMI Film Distributors, Ltd. (EMI). In consideration for these rights, Freedom agreed to pay EMI $290,000; $90,000 was payable upon execution of the agreement and $200,000 was payable by Freedom's execution and delivery of a promissory note in that amount, payable in 10 years. Pursuant to the agreement:

all monies received by [Freedom] from the sale, distribution, marketing or other disposition of the Television Rights, Cassette Rights and Non-Theatrical Rights in the Photoplays ¹² [would] be paid to EMI until such time as EMI * * * received an amount equal to [$200,000].

To secure the $200,000 note, Freedom granted EMI a security interest in and to the television rights, cassette rights, and nontheatrical rights in the films and in and to all of the proceeds derived and to be derived from the film's exploitation through these means, pursuant to the provisions of the Uniform Commercial Code. Freedom also assigned to and pledged with EMI all of its right, title, and interest in and to the films.

As an inducement to EMI to enter into the purchase agreement, Freedom also, on June 28, 1973 , designated EMI its sole, exclusive sales agent in the United States in regard to the television, cassette, and nontheatrical rights to the films for the period until receipts from distribution to these media equalled $200,000, or the amount for which Freedom was obligated to pay EMI. Pursuant to this separate distribution agreement, EMI was to have sole and uncontrolled discretion in the exploitation of these rights and was to have the right to decide when, where, how, on what basis, and to what extent, if any, they would be exploited.

The next day, June 29, 1973 , Freedom entered into its "Acquisition Agreement" with Pan. Pursuant to this agreement, Freedom purportedly transferred all right, title, privileges, interest, ownership and claims, etc. it had in all four films to Pan. Freedom also specifically warranted that it had the "sole, full and exclusive right and interest in and to the Pictures and the unrestricted power to enter into and perform [the] Agreement * * *." The agreement does not mention the separate, earlier executed distribution agreement between EMI and Freedom.

Pan then entered into a distribution agreement that same day with Cinevision International Films Ltd. (Cinevision), a company owned by Mr. Lang, for all four films. Pursuant to this agreement, Pan granted Cinevision the sole and exclusive right, license, and privilege to distribute the films by any means except as specifically provided. In the agreement, Cinevision expressly acknowledged and agreed that the proceeds of any television or cassette sales of the films (except "'Tis a Pity") were subject to an overriding charge in the amount of $200,000, which amount was first to be paid to Pan prior to application of any distribution fees set forth in the agreement. ¹³

On July 19, 1973 , Samuel and Andrea Lang executed the following personal guarantee in favor of Pan with respect to all four films:

2. Euro-International Productions ("Euro") and Anglo EMI Film Distributors Ltd. ("EMI") will agree, on or before September 20, 1973 , to defend, indemnify and hold you harmless from and against any and all loss, damage, liability or expense, including reasonable attorney's fees, resulting from any breach or alleged breach of any of the warranties, representations and agreements, including without limitation, their warranties and representations relative to clear title, made by each of them in their respective agreements with Freedom U.S.A. Records, Inc. with respect to the sale of "'Tis a pity" by Euro and the sale of "Demons of the Mind", "Straight on Till Morning" and "Fear in the Night" by EMI; and

3. The film laboratories at which the preprint materials of the foregoing pictures are located will, on or before August 31, 1973 , execute the access letters granting you access to such preprint materials and statements to the effect that such preprint materials are of such quality that first class acceptable release prints may be made therefrom.

In the event that all of the events set forth in paragraphs (1), (2) and (3) above shall not have occurred on or before the dates specified above, time being expressly made of the essence, then, and in such event, the undersigned shall, upon your demand, deliver to you a certified check in the amount of $290,000. Upon such delivery, the acquisition agreement between you and Freedom U.S.A. Records, Inc. ("Freedom"), dated June 29, 1973 , together with all relevant documents and materials executed and/or delivered by you or Freedom shall terminate and be of no further forceand effect, without liability to either you or Freedom and the distribution agreement dated June 29, 1973 between you and Cinevision International Films Ltd. shall likewise terminate and be of no further force and effect without liability to any party.

Drafts of the indemnification promised in the Langs' personal guarantee were exchanged among counsel for Pan, EMI, and Freedom. The indemnity agreement between EMI and Pan with respect tothe films other than "'Tis a Pity" was finally executed sometime after October 31, 1973 . ¹⁴ It was made effective as of June 29, 1973 .

The indemnification agreement provided:

2. ACCEPTANCE BY PAN. Indemnitee accepts the assignment of Freedom's ownership interest in the Pictures as more fully set forth in the Acquisition Agreement. Indemnitee acknowledgesand recognizes the security interest running to Indemnitor which constitutes a charge on the television, non-theatrical and cassette rights acquired by Indemnitee to the extent of $200,000.00, asset forth in the Purchase Agreement, which charge and the payment of which charge are more fully described in the Acquisition Agreement. Indemnitee further acknowledges and confirms its agreementto the provisions of that certain distribution agreement, dated June 28, 1973 , between Indemnitor [(EMI)] and Freedom. ¹⁵

Up to the time of this transaction, Pan was represented by an attorney named Oliver C. Murray, Jr. Mr. Murray has no recollection of the Indemnity Agreement or of ever having any person reveal to him the existence of the arrangement for distribution of any of the rights of the films between EMI and Freedom. However, correspondence between Mr. Murray and Mr. Lang during this periodof representation refers to the Indemnification Agreement.

In 1981, petitioners were indicted in criminal proceedings in the United States District Court for the Southern District of Florida with respect to their involvement in the Pan and Nap limited partnership. Count I of the indictment charged petitioners with conspiracy to defraud the United States, by impeding, impairing, disrupting and defeating the lawful Governmental functions ofthe Internal Revenue Service in the ascertainment, computation, assessment and collection of the revenue, in violation of 18 U.S.C. sec. 371 (1982). Counts II, III, IV, and V charged petitioners with wilfully making and subscribing to their Federal income tax returns for the years 1974 and 1975 although they did not believe the returns were true and correct as to every material matter, inviolation of section 7206(1) . Counts VI, VIII, IX, and XI charged petitioners with wilfully making and subscribing partnership returns, Forms 1065, for Pan Properties, Ltd. and Nap Properties, Ltd. for the taxable years 1974 and 1975, which they did not believe to be true and correct as to every material matter in violation of section 7206(1) . ¹⁶ Counts XII-XXIV charged petitioners withwilfully aiding, assisting, and advising in the preparation of false and fraudulent individual income tax returns of investors in partnerships for the years 1974 and 1975 in violation of section 7206 (2).

On January 7, 1983, after a jury trial, petitioners were convicted on all counts as charged in the indictment. ¹⁷ See United States v. Barshov, 733 F.2d 842 (11th Cir. 1984), cert. denied 469 U.S. 1168 (1985). The judgments of the United States District Court provide that petitioners were convicted as charged of the offenses of conspiring to defraud the United States by impeding the lawful Governmental functions of the Internal Revenue Service, in violation of Title 18, U.S.C. sec. 371 , as charged in Count I; making and subscribing fraudulent income tax returns, Form 1040 to the Internal Revenue Service in violation of Title 26, U.S.C. sec. 7206(1) , as charged in Counts II, III, IV, V, VI, VIII, IX, and XI; ¹⁸ and aiding and assisting taxpayers in the preparation of fraudulent income tax returns, Form 1040, in violation of Title 26, U.S.C. sec. 7206(2) , as charged in Counts VII, X, ¹⁹ and XII through XXIV of the Indictment.

In 1985 ²⁰ petitioners filed a motion for a new trial based on the discovery of new evidence. In the motion they claimed that neither they, their trial attorney, or Mr. Murray were aware of the existence of the separate distribution agreement between EMI and Freedom or of any information that EMI had retained an interest in the ancillary rights in the films other than the security interest as a $200,000 charge on those rights. Petitioners also claimed that they had no reason to know of the pre-existing arrangement between EMI and Freedom. Respondent did not disclose the agreement during the criminal proceedings, and respondent's witnesses, Mr. Lang and a Mr. Dartnall, testified that Lang was the true and rightful owner of the films and that EMI had sold the threefilms (other than "'Tis a Pity") to Freedom "free and clear."

The separate distribution agreement, petitioners argued, was not discovered until December 1983 or January 1984, and their failure to learn of the evidence before or at the time of trial "was due to a fraud perpetrated by the key government witness." Petitioners further alleged that the Government's key witness presented perjured testimony at the trial by testifying that he had acquired the rights to the films outright and transferred all of those rights to petitioners. In the motion petitioners contended that:

The newly discovered evidence is highly material to the issues at trial since it provides a strong defense to the government's claim that [petitioners] had inflated the purchase prices ofthe films. Although the government's evidence, through the testimony of EMI, established that the value of the films sold to Lang was much less than the [petitioners] paid, the government's evidence also included the perjured testimony of the seller Lang that he had acquired from EMI and transferred all of the rights to the films to the [petitioners]. No distinction was made by the government between the limited rights sold by EMI and the entire rights sold by Lang to Pan, and the June 28 letter agreement was not introduced by the government. To compare EMI's valuations to [petitioners'] purchase prices, is like comparing apples and oranges.

Furthermore, the seller of the films was a witness of the government, and there is now an important and substantial issue of whether the government prosecutors knowingly suppressed the June 28 letter agreement from Lang to EMI, which is clear evidence that its key witness, Lang, had defrauded [petitioners] by misrepresenting that he had sold to them all of the rights to the films.This is a question that can only be answered at an evidentiary hearing. * * *

Petitioners also submitted a copy of a default judgment obtained by Pan in the Circuit Court of the 11th Judicial Circuit in and for Dade County , Florida , against Freedom and Samuel Lang,in connection with alleged misrepresentations made by Freedom and Lang to Pan about the rights to the films.

After an evidentiary hearing on petitioners' Motion for New Trial, the District Court denied the motion.

Discussion

The purpose of collateral estoppel is to protect litigants from the burden of relitigating identical issues and to promote judicial economy by preventing unnecessary or redundant litigation. Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 (1979). Three tests must be met in order for collateral estoppel to apply: The issues presented in the subsequent litigation must be in substance the same as those in the first case; the controlling facts or legal principles must not have changed significantly since the first judgment; and there must be no other special circumstances that would warrant an exception to the normal rules of preclusion. Montana v. United States , 440 U.S. 147, 155 (1979).

Newly Discovered Evidence

Petitioners first claim that the controlling facts of their case have changed since the first judgment was entered against them. They contend that although the District Court determined that it was too late for them to use their "newly discovered evidence" at the criminal trial, it is not too late to use the evidence in the trial of their civil fraud case. Petitioners make this assertion acknowledging that the District Court concluded that the evidence could have been discovered by due diligence prior to the criminal trial and therefore used at the criminal trial. In support of their claim, petitioners rely on the same arguments they raised in their Motion for New Trial before the District Court.

Respondent argues that petitioners' "new evidence" should not bar his reliance on collateral estoppel. He contends that none of petitioners' "new evidence" is in fact new; that petitioners knew or should have know of its existence; that it was available to petitioners at the criminal trial and is insignificant; and that the factual question to whichthe evidence pertains was fully litigated at the criminal trial and was considered and reviewed by the Eleventh Circuit Court of Appeals. ²¹

Generally, collateral estoppel is "confined to situations where the matter raised in the second suit is identical in all respects with that decided in the first proceeding and where the controlling facts and applicable legal rules remain unchanged." Commissioner v. Sunnen [48-1 USTC ¶9230 ], 333 U.S. 591, 599-600 (1948). If new evidence is submitted that was not available in the prior proceeding, that would tend to alter the controlling facts as they were found in that proceeding, then the doctrine of collateral estoppel is not applicable because controlling facts have changed. Dean v. Commissioner [Dec. 30,901 ], 56 T.C. 895 (1971); see also Milberg v. Commissioner [Dec. 30,271 ], 54 T.C. 1562 (1970). ²² "Evidence is considered 'available' at the prior proceeding if by exercise of due diligence it could have been produced." Sidoran v. Commissioner [Dec. 38,939(M) ], T.C. Memo. 1982-197, 43 T.C.M. 1067, 51 P-H Memo T.C. par. 82,197, citing Dean v. Commissioner, supra; Fairmont Aluminum Co. v. Commissioner [Dec. 20,588 ], 22 T.C. 1377, 1383 (1954), affd. [55-1 USTC ¶9456 ] 222 F.2d 622 (4th Cir. 1955).

Even though the District Court determined that petitioners' "new evidence" was available for the criminal proceeding, petitioners argue, in effect, that we should make a separate determination as to its availability here. We disagree. The District Court held an evidentiary hearing and concluded that petitioners' evidence could have been discovered. There is no reason to reconsider that determination. No new arguments have been raised, and in fact petitioners have relied almost entirely on the contents of their prior motion in support of their argument in this case. For these reasons we hold that petitioners are collaterally estopped from denying that their evidence was available in the prior criminal proceeding and petitioners cannot now rely on the same evidenceto preclude the application of collateral estoppel with respect to the issues in this case.

Furthermore, even if we found that the evidence was unavailable, we are not persuaded that it would tend to alter the controlling facts as they were found in the criminal proceeding. See Dean v. Commissioner, supra at 899. Petitioners allege that the new evidence goes to the issue of whether the purchase price of the films was inflated, i.e., whether they paid more forthe rights in the films than they were worth. The facts as they appear, without taking into account the side distribution agreement between EMI and Freedom, indicate that petitioners' down payments and notes for the three films other than " 'Tis a Pity" totaled $1.8 million when those films were allegedly purchased the day before by Freedom for $290,000. If anything, the new evidence aspetitioners present it would establish that the rights in the films were worth even less than the $290,000 paid by Freedom because of the side agreement. We fail to see how evidence showing that the rights in the films might have been worth even less adds credibility to the amount petitioners allegedly paid for the films or their reasons for relying on those amounts to establish basis in the films from which to claim deductions. While the side agreement might, if it is in fact something other than a right in the first $200,000 of the proceeds from distribution of the films in the ancillary market, cast doubt on the validity of the transactions at the sellers' end and cast doubt on the credibility of the sellers, it sheds no new light on petitioners' reasons for designatingto the films inflated values and claiming deductions based on those amounts.

Prior Convictions

Petitioners next argue that the issues in this proceeding are not the same as those in the criminal proceeding. They claim that their prior convictions under 18 U.S.C. sec. 371 (1982) andsections 7206(1) and 7206(2) do not collaterally estop them from denying that they lacked "intent to evade taxes" when they filed their returns knowing they contained false deductions. ²³ Petitioners essentially argue that because "intent to evade taxes" was not an element of any of the prior convictions, the issue was not litigated in the prior action.

Respondent does not contest that, as a general rule, convictions under section 7206(1) or 7206(2) are insufficient to collaterally estop petitioners from denying that intent to evade taxes has been proven ²⁴ or that, in some cases, a conviction under 18 U.S.C. sec. 371 by itself, is insufficient to collaterally estop petitioners from denying that element of fraud. ²⁵ Instead respondent argues that, taking into account the "entire factual picture" of this case, collateral estoppel should apply with respect to the element of intent to evade taxes. Essentially respondent is arguing that the facts that were litigated in the prior criminal proceeding that were necessary to prove the crimes under section 7206 and 18 U.S.C. sec. 371 are sufficient to prove that petitioners intended to evade taxes when they knowingly filed false income tax returns for the years 1974 and 1975.

Collateral estoppel precludes litigation of issues in a second action that were actually litigated and necessary to the outcome of a prior action. Parklane Hosiery Co., Inc. v. Shore, supra. Respondent, as the moving party, has the burden of proving that petitioners' intent to evade taxes was litigated in the prior action. United States v. Lasky, 600 F.2d 765, 769 (9thCir. 1979).

In order to determine whether the issue of intent to evade taxes was litigated in the criminal proceeding we must examine the elements of the crimes that were the subject of that proceeding. Count I of the indictment against petitioners charged that petitioners "did unlawfully, willfully and knowingly combine, conspire, confederate and agree with each other and with diverse otherpersons whose names are both known and unknown to the grand jury, to defraud the United States, by impeding, impairing, disrupting and defeating, the lawful Governmental functions of the InternalRevenue Service in the ascertainment, computation, assessment and collection of the revenue" in violation of 18 U.S.C. sec. 371 . Counts II through XXIV charged that petitioners filed individual and partnership tax returns for 1974 and 1975 which were not true and correct, in violation of section 7206(1) , that Barshov willfully aided and assisted in the preparation of the 1974 partnershipreturn in violation of section 7206(2) , and that both petitioners aided and assisted in the preparation of false individual returns filed by others in violation of section 7206(2) .

To obtain a conspiracy conviction under 18 U.S.C. sec. 371 , the Government was required to prove knowledge of the conspiracy and that some act in furtherance of it was intentionally done.United States v. Falcone, 311 U.S. 205 (1940); United States v. Maddox, 492 F.2d 104 (5th Cir. 1974). In addition, the Government was required to prove at least the degree of intent necessary for the substantive offense that was the object of the conspiracy. United States v. Feola, 420 U.S. 671 (1975); Ingram v. United States [59-2 USTC ¶15,245 ], 360 U.S. 672(1959); United States v. Davis, 583 F.2d 190 (5th Cir. 1978); United States v. Tavoularis, 515 F.2d 1070 (2d Cir. 1975). Thus, while the Government was not required to prove an actualdefrauding, (see United States v. Pintar, 630 F.2d 1270 (8th Cir. 1980)) proof of petitioners' specific intent to defraud the Government was required. See, e.g., United States v. Crooks, 804 F.2d 1441, 1448 (9th Cir. 1986), opinion modified with respect to another issue 826 F.2d 4 (9th Cir. 1987); United States v. Southland Corp. [85-1 USTC ¶9368 ], 760 F.2d 1366 (2d Cir. 1985), cert. denied 474 U.S. 825 (1985).

In order to sustain the convictions under section 7206(1) the Government was required to prove, beyond a reasonable doubt, that petitioners acted willfully, with knowledge that their returns were not correct in material respects. United States v. Crooks, supra. For the convictions under sections 7206(2) the Government must have proven that petitioners aided, assisted, procured, counseled, advised or caused the presentation of a return; that the return was false or fraudulent as to a material matter; and that the acts of petitioners were willful. United States v. Crooks, supra.

For none of the crimes charged was the Government required to prove that petitioners intended to evade their taxes. We have held this to be true for convictions under section 7206 , (Wright v. Commissioner [Dec. 42,013 ], 84 T.C. 636 (1985)), and the same is true for the conviction under 18 U.S.C. sec. 371 in this case given the charges in the indictment and the general jury verdict. Because the verdict was a general verdict we know only that the Government was required to prove petitioners' intent to defraud the United States ; we cannot ascertain whether petitioners' intent to evade taxes was proven as well. Even though it appears, as respondent argues, that the "entire factual picture" of this case if proven would be sufficient to show that petitioners intended to evade taxes by setting up the film distribution tax shelters, we cannot, from the face of the verdict, ascertain what facts were found in support of petitioners' conspiracy conviction. Collateral estoppel cannot be relied upon when it is possible that the convictions were based on grounds other than those which are the subject of the collateral estoppel claim. United States v. Lasky, supra.

In the criminal proceeding the facts necessary to prove that petitioners knowingly filed false returns for 1974 and 1975, in violation of section 7206(1) , were sufficient to prove that petitioners conspired to defraud the United States in violation of 18 U.S.C. sec. 371 by interfering with the lawful function of the Internal Revenue Service in ascertaining their deductions from the partnerships. See United States v. Southland Corp., supra. No showing that the Government was subject to property or pecuniary loss by the fraud was necessary; only that its legitimate official action and purpose were to be defeated by misrepresentation. Hammerschmidt v. United States , 265 U.S. 182, 188 (1924). Because it was possible to support the conspiracy conviction with the same facts relied upon to prove the violations under section 7206 , we can conclude only that those facts were proven. Although facts sufficient to show intent to evade taxes may also have been proven, we simply cannot assume that to be true without further evidence of the facts relied upon to support the criminal convictions.

Based on the foregoing, respondent's Motions for Partial Summary Judgment will be granted in that petitioners are collaterally estopped from denying that their 1974 and 1975 Federal income tax returns contained false and fraudulent deductions for losses, which deductions petitioners knew were false when they subscribed and presented those returns to respondent, and denied in that petitioners are not collaterally estopped from denying that their 1974 and 1975 income tax returns were filed with false and fraudulent deductions with intent to evade taxes. Petitioners' Motions for Summary Judgment will be treated as Motions for Partial Summary Judgment and will be granted in that they are not collaterally estopped from denying that the addition to tax under section 6653 (b) is applicable because they lacked the requisite element of intent to evade taxes.

Appropriate orders will be entered.

¹ The following cases are consolidated herewith: Emanuel R. Barshov, docket Nos. 4178-79, 10557-80; Emanuel R. Barshov and Ruth Barshov, docket No. 4179-79; James E. Ross, docket No. 4346-79. See n. 2, infra.

² These cases were consolidated for purposes of trial, briefing, and opinion by Order of the Court dated June 23, 1988 .

³ All section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue, and all rule references are to the Tax Court Rules of Practice and Procedure.

⁴ Petitioners James Ross and Emanuel Barshov are the same individuals who were defendants in the criminal case of United States v. Emanuel R. Barshov and James E. Ross, case No. 81-128-Cr-ALH, in the United States District Court for the Southern District of Florida. See 733 F.2d 842 (11th Cir. 1984).

⁵ Petitioners filed their Motions for Summary Judgment on October 2, 1985 , and respondent filed his Motions for Partial Summary Judgment on October 10, 1985 . Petitioner Barshov filed a response to respondent's motions on October 21, 1985 .

In his original motions, respondent argued that petitioners were collaterally estopped from denying that all or any part of the underpayment of tax required to be shown on petitioners' individual 1974 and 1975 Federal income tax returns was due to fraud, under the provisions of section 6653(b). Petitioners, in their motions and response, argued that their prior convictions did not establish all of the elements of fraud under section 6653(b), and furthermore, that while respondent relied on their convictions under 18 U.S.C. sec. 371 (1982) and sections 7206(1) and (2) in his motions, his Answer and Amended Answer addressed only the convictions under the latter provisions.

After the motions and response were filed, we postponed trial of these cases due to the pending appeal of the related criminal proceedings upon which respondent's collateral estoppel argument is based. In November 1987 the Court was notified that the related proceedings were finally terminated and that the parties were ready to proceed with the present action.

On December 31, 1987 , respondent filed a Motion for Leave to File Second Amendment to Answer, an Amendment to Motion for Partial Summary Judgment, and a Supplementary Memorandum in Support of Respondent's Motion for Partial Summary Judgment. Respondent's Motion for Leave to File Second Amendment to Answer was granted January 26, 1988 , and Respondent's Second Amendment was filed the same day. On February 22, 1988 , and March 10, 1988 , petitioners filed replies to Respondent's Amendment to Answer (which respondent had filed June 6, 1983 ) and to the Second Amendment to Answer.

Respondent makes the above arguments in lieu of his earlier general collateral estoppel claim with respect to the civil charges of fraud under section 6653(b), having abandoned the argument that petitioners' convictions establish an underpayment of tax.

⁶ In the original memorandum filed by counsel for petitioner Barshov, petitioners argue that "intent" to evade taxes is not established, yet in the supplemental memorandum, drafted by counsel for petitioner Ross, and adopted by petitioner Barshov, now proceeding pro se, petitioners argue that the element "attempt" to evade taxes is not established. We assume the supplemental memorandum was intended to mean "intent" rather than "attempt," since this case involves section 7206(1) and we have held that intent to evade taxes is not an element of the crime charged under that section. See Wright v. Commissioner [Dec. 42,013 ], 84 T.C. 636, 642-643 (1985), wherein we also discussed the difference between "attempt to evade," which is an element of the offense under section 7201 and can be used to collaterally estop a taxpayer from denying under section 6653(b) that part of his underpayment was "due to fraud," and "intent to evade," which is not an element of section 7206(1) .

⁷ The addition for fraud was pleaded in respondent's amended answer.

⁸ See n. 6, supra.

⁹ The criminal convictions relate to Pan and Nap; however the deficiencies include adjustments for deductions relating to other partnerships as well. The facts recited pertain almost entirely to Pan's purchase of films because those are the only documents that were attached to the parties' motions. We assume similar transactions occurred with respect to Nap that were the basis of petitioners' criminal convictions. For a discussion of those transactions see United States v. Barshov, 733 F.2d 842 (11th Cir. 1984), cert. denied 469 U.S. 1168 (1985).

¹⁰ U. S. and Canadian rights were to be sold with respect to this film.

¹¹ Pursuant to the later executed Acquisition Agreement, the purchase price was to be paid partly with cash and partly with the execution and delivery of nonrecourse promissory notes.

¹² Petitioners refer to these rights as the "ancillary distribution rights".

¹³ Pan and International executed a distribution agreement on January 1, 1974 , which included the same clause that was in the Cinevision-Pan distribution agreement pertaining to the first $200,000 received from television or cassette sales.

In August 1973, Cinevision assigned its rights in the Pan distribution agreement to International Co. Productions, Inc. (International). As part of this arrangement, Clayton Pantages, on behalf of International, agreed that Samuel Lang would be issued stock in the corporation.

¹⁴ The copy of the indemnification agreement in the record does not reflect its date of execution, but copies of correspondence between counsel indicate that as of October 31, 1973 , it had not been finalized.

¹⁵ A draft of an indemnity agreement between EMI and Pan with respect to the film "'Tis a Pity" did not specifically refer to the distribution agreement between EMI and Freedom:

2. ACCEPTANCE BY PAN. Indemnitee accepts the assignment of Freedom U.S.A. Records, Inc.'s ownership interest in the film as more fully set forth in the Acquisition Agreement between Freedom and Indemnitee dated June 29, 1973 .

Indemnitee further acknowledges and recognizes the security interest running to Indemnitor which constitutes a charge on the television and cassette rights acquired by Indemnitee from Indemnitor to the extent of $200,000.00, which charge and the payment of which charge are more fully described in the Acquisition Agreement between Indemnitee and Indemnitor dated June 29, 1973 .

¹⁶ Counts VII and X charged petitioner Barshov with aiding and assisting in the filing of the false partnership returns in violation of section 7206(2) .

¹⁷ The judgments in the criminal proceedings are dated January 7, 1983 . We note, however, that in respondent's Second Amendments to Answer he recites October 8, 1982 , as the date on which petitioners were convicted.

¹⁸ Petitioner Ross was convicted of offenses in Counts II, III, VI, VIII, IX, and XI while petitioner Barshov was convicted of Counts IV, V, VIII, and XI.

¹⁹ Only Barshov was convicted on Counts VII and X.

²⁰ There is no date on the copy of the Motion for New Trial that is part of the record, however during the stay of these proceedings the parties informed the Court that they filed a Motion for New Trial in 1985. The copy of the Supplement to Motion for New Trial in the record contains a District Court stamp that reflects a filing date of September 1986.

²¹ Respondent also contends that the factual basis for petitioners' convictions consisted of more than the facts to which the evidence pertains. The significance of this argument is not entirely clear.

²² Sidoran v. Commissioner [Dec. 38,939(M) ], T.C. Memo. 1982-197, 43 T.C.M. 1067, 51 P-H Memo T.C. par. 82,197.

²³ See n. 5, supra. We assume petitioners concede that they are collaterally estopped from denying that their 1974 and 1975 returns contained false and fraudulent deductions that they knew were false and fraudulent when they subscribed and presented them. See Wright v. Commissioner [Dec. 42,013 ], 84 T.C. 636, 641, n. 9 (1985) (discussion of Considine v. United States [81-1 USTC ¶9280 ], 645 F.2d 925, 928-931 (Ct. Cl. 1981)).

²⁴ See Wright v. Commissioner, supra.

²⁵ See Lahr v. Commissioner [Dec. 41,467(M) ], T.C. Memo. 1984-472.

 

 

[Dec. 48,824(M)]  Yarbrough Oldsmobile Cadillac, Inc. v. Commissioner. Elvin P. Yarbrough v. Commissioner

Docket Nos. 7174-92, 7175-92., TC Memo. 1993-20, 65 TCM 1766, Filed January 19, 1993

[Appealable, barring stipulation to the contrary, to CA-11.--CCH.]

[Code Secs. 7206 and 7422 ]

Corporations: Fraud and false statements: Guilty plea: Collateral estoppel: Individuals not party to criminal proceeding.--A corporation and its stockholder, who was convicted of fraud and of aiding in making false statements to the IRS, were estopped from denying fraud on the basis of their Alford pleas. Despite the fact that an Alford plea is a guilty plea entered by a defendant claiming to be innocent, because it was a guilty plea, the circumstances behind the pleas are not examined in applying the doctrine of collateral estoppel. However, the conviction of the shareholder did not collaterally estop the corporation from denying fraud because the corporation itself was not a party to the criminal proceeding and was entitled to be heard on the question of fraud regarding its underpayment.--CCH.

James D. O'Donnell, 1648 Osceola St. , Jacksonville , Fla. , for the petitioners. John Donovan, for the respondent.

Memorandum Opinion

PANUTHOS, Chief Special Trial Judge:

These cases were heard pursuant to the provisions of section 7443A(b)(4) and Rules 180, 181, and 183. ¹ These cases are before the Court on petitioners' motions to strike certain allegations contained in respondent's answer in each docket. By notices of deficiency dated January 22, 1992 , respondent determined that petitioners were liable for deficiencies and additions to tax as follows:

         Yarbrough Oldsmobile Cadillac, Inc., Docket No. 7174-92

                                              Additions to Tax

                                 -----------------------------------------

Year              Deficiency Sec. 6653(b)(1) Sec. 6653(b)(2) Sec. 6661

1983 .............  $ 33,649      $16,825            1         $ 8,412

1984 .............    18,097        9,048            1           4,524

1985 .............    34,118       17,059            1           8,529

----------------------------------------------------------------------

 1  50 percent of the interest due on the deficiency.

 

                          Elvin P. Yarbrough, Docket No. 7175-92

                                                Additions to Tax

--------------------------------------------------------------------

                 Sec.    Sec.     Sec.       Sec.        Sec.      Sec. 

Year  Deficiency 6651(a)(1)6653(b)1)6653(b)(2) 6653(b)(1)(A) 6653(b)(1)(B)  6661

1983 .....  $165,498 ($2,242)  $104,567      1        -- --      $41,374

1984 .....   164,324     (8,570)   148,555      1     -- --       41,081

1985 .....   150,708      --         75,354      1    -- --       30,177

1986 .....    95,021      --  --          --    $71,266  1        23,755

-----------------------------------------------------------------------

 1  50 percent of the interest due on the deficiency.

 

In her answer to the petition in docket No. 7175-92, respondent alleges that petitioner Elvin P. Yarbrough (hereinafter Yarbrough) should be estopped from denying fraud for the 1983 tax year because of Yarbrough's prior criminal conviction under sections 7201 and 7206(2) . Further in her answer to the petition in docket No. 7174-92, respondent alleges that petitioner Yarbrough Oldsmobile Cadillac, Inc. (hereinafter Yarbrough Oldsmobile), should be estopped from denying fraud for the 1983 tax year because of Yarbrough's prior criminal conviction under section 7206(2) .

Background

At the time the petitions were filed herein, Yarbrough Oldsmobile had its principal office in St. Augustine , Florida , and Yarbrough resided in St. Augustine , Florida .

The parties do not dispute that Yarbrough was convicted under section 7201 with respect to his individual liability for the taxable year 1983 and that Yarbrough was also convicted under section 7206(2) with respect to the liability of Yarbrough Oldsmobile for its 1983 taxable year. The conviction on both charges was the result of an "Alford plea". ²

The motions to strike present two issues: (1) In each docket, petitioners contend that the "Alford" plea should be considered a plea of nolo contendere and that, therefore, collateral estoppel should not apply. ³ (2) In docket No. 7174-92, Yarbrough Oldsmobile also argues that respondent's allegations of collateral estoppel should be stricken with respect to the section 7206(2) conviction of Yarbrough because Yarbrough Oldsmobile was not a party to the criminal proceeding.

Discussion

Rule 52 permits a party, within certain time limits, to move to strike "any insufficient claim or defense or any redundant, immaterial, impertinent, frivolous, or scandalous matter." Rule 52 was derived from Rule 12(f), Federal Rules of Civil Procedure (FRCP) and the FRCP will be considered in applying Rule 52. Estate of Jephson v. Commissioner [Dec. 40,900 ], 81 T.C. 999, 1000-1001 (1983); see Note to Tax Court Rule 52, 60 T.C. 1093.

In Estate of Jephson v. Commissioner, supra at 1001, we set forth various principles, along with citations (omitted here), to be followed in connection with motions to strike, as follows:

Motions to strike under FRCP 12(f) have not been favored by the Federal courts. "Matter will not be stricken from a pleading unless it is clear that it can have no possible bearing upon the subject matter of the litigation." "A motion to strike should be granted only when the allegations have no possible relation to the controversy. When the court is in doubt whether under any contingency the matter may raise an issue, the motion should be denied." If the matter that is the subject of the motion involves disputed and substantial questions of law, the motion should be denied and the allegations should be determined on the merits. In addition, a motion to strike will usually not be granted unless there is a showing of prejudice to the moving party. [Citations omitted.]

We note that the issues raised by the parties involve disputed and substantial questions of law and, accordingly, a motion to strike would not appear to be the appropriate means of resolving the questions. See, e.g., Estate of Jephson v. Commissioner, supra. However, because the parties have fully argued and briefed the merits of the disputed questions and further since the parties do not dispute the relevant facts herein, it is appropriate to consider the issues raised. Accordingly, we consider petitioners' motions to strike as motions for partial summary judgment under Rule 121.

We first consider the issue of whether petitioners are collaterally estopped from denying fraud in this proceeding as the result of a prior criminal conviction based on an "Alford plea". In Lackey v. Commissioner [Dec. 34,030(M) ], T.C. Memo. 1976-298, we held that a taxpayer was collaterally estopped from denying fraud in a subsequent civil proceeding after a prior conviction based on an "Alford plea". See also Blohm v. Commissioner [Dec. 47,827(M) ], T.C. Memo. 1991-636. ⁴ As further pointed out by respondent, this Court has also determined that it will rarely look behind the circumstances of a guilty plea in applying the doctrine of collateral estoppel. Stone v. Commissioner [Dec. 30,767 ], 56 T.C. 213, 221-223 (1971); Votsis v. Commissioner [Dec. 44,595(M) ], T.C. Memo. 1988-70; Hull v. Commissioner [Dec. 39,398(M) ], T.C. Memo. 1982-577. In this case petitioner has not argued nor presented any evidence that the plea was entered involuntarily, that counsel was incompetent, that there was prosecutorial misconduct, or that there was any reason to possibly look behind the circumstances of the plea.

It is clear that the Court of Appeals for the Eleventh Circuit (the Court to which this case would be appealable) has determined that collateral estoppel applies equally to a conviction based on a guilty plea as to a conviction based on a trial on the merits. United States v. Killough, 848 F.2d 1523, 1528 (11th Cir. 1988); United States v. Satterfield, 743 F.2d 827, 838 (11th Cir. 1984). Thus, we find no support for petitioners' position on this issue, and petitioners' motions for partial summary judgment will be denied in this regard.

We now consider Yarbrough Oldsmobile's motion insofar as it seeks to prohibit respondent from asserting collateral estoppel against it with respect to the conviction of Yarbrough under section 7206(2) . We have considered this very issue previously and held that "a corporation is not collaterally estopped by the conviction of its president and principal stockholder for filing or causing the corporation to file false and fraudulent corporate returns". American Lithofold Corp. v. Commissioner [Dec. 30,681 ], 55 T.C. 904, 924 (1971) (citing C.B.C. Super Markets, Inc. [Dec. 30,081 ], 54 T.C. 882, 894-896 (1970)).

Respondent cites Jaffe v. Grant, 793 F.2d 1182, 1188 (11th Cir. 1986), and Dudley v. Smith, 504 F.2d 979, 982-983 (5th Cir. 1974), in support of the proposition that the issue of privity between a corporation and its officers and shareholders constitutes a genuine issue of material fact so that summary judgment could not be rendered. However, in those cases, the corporation, and not the stockholder, was the party to the prior adjudication and, in the subsequent proceeding, collateral estoppel was asserted against the stockholder, and not the corporation. We have previously responded to this argument and stated that:

We regard as inapposite cases holding that in some circumstances a stockholder may be bound by a prior adjudication in a suit brought by his corporation: The proposition that the corporation's acts may bind the stockholder * * * does not support the converse proposition. * * * [C.B.C. Super Markets, Inc., supra at 895, quoting American Range Lines, Inc. v. Commissioner [52-2 USTC ¶9568 ], 200 F.2d 844, 845 (2nd Cir. 1952), remanding on another issue [Dec. 18,615 ] 17 T.C. 764 (1951).]

The controlling case law clearly holds that a corporation is not collaterally estopped by a prior adjudication involving a shareholder. The corporation is entitled to be heard on the question of whether any part of its underpayment was due to fraud. Thus, it is clear that, as a matter of law, respondent is not entitled to rely on the doctrine of collateral estoppel to prove fraud against petitioner Yarbrough Oldsmobile.

To reflect the foregoing,

An order will be issued granting petitioner's motion for partial summary judgment in Docket No. 7174-92.

An order will be issued denying petitioner's motion for partial summary judgment in Docket No. 7175-92.

¹ All section references are to the Internal Revenue Code unless otherwise noted. All Rule references are to the Tax Court Rules of Practice and Procedure unless otherwise noted.

² An "Alford plea" is a guilty plea entered by a defendant who nevertheless claims to be innocent. See North Carolina v. Alford, 400 U.S. 25 (1970).

³ Fed. R. Crim. P. 11(e)(6), and Fed. R. Evid. 410, provide that evidence of a plea of nolo contendere is not admissible in any civil or criminal proceeding.

⁴ In Blohm v. Commissioner [Dec. 47,827(M) ], T.C. Memo. 1991-636, the taxpayer did not argue that an "Alford plea" per se prevents the use of collateral estoppel by the Commissioner. Rather, the taxpayer argued that the "Alford plea" was obtained through the Government's misconduct and therefore collateral estoppel could not be invoked. This Court determined that the taxpayer's guilty plea was not obtained through misconduct and that the valid "Alford plea" entitled the Commissioner to invoke the doctrine of collateral estoppel in the subsequent proceeding.

 

 

 

[Dec. 48,804(M)] Palladin Precision Products, Inc. v. Commissioner

Docket No. 980-92., TC Memo. 1993-3, 65 TCM 1698, Filed January 4, 1993

[Appealable, barring stipulation to the contrary, to CA-2.--CCH.]

[Code Secs. 6653 (Prior to amendment by P.L. 101-239), 7122 and 7206 ]

Additions to tax: Civil penalties: Fraud: Collateral estoppel.--A written plea agreement executed by a corporation's president in connection with his alleged criminal falsification of his corporation's income tax returns did not collaterally estop the IRS from asserting a civil fraud penalty against the corporation. The government stipulated in the plea agreement with the president that the corporation's false corporate tax returns were not filed in order to facilitate evasion of tax. However, a later disclaimer in the plea agreement indicated that the agreement was reached without regard to civil tax matters. Collateral estoppel was inapplicable because the plea agreement plainly established that the civil fraud issue was neither presented in substance nor actually resolved in the criminal proceeding. Moreover, the Assistant U.S. Attorney was without authority to bind the IRS in any civil tax matter involving the IRS since the case was not referred to the Department of Justice.--CCH.

Richard G. Convicer, One Corporate Center , Hartford , Conn. , for the petitioner. Carmino J. Santaniello, for the respondent.

Memorandum Opinion

PETERSON, Special Trial Judge:

This case is before the Court on petitioner's Motion for Partial Summary Judgment under Rule 121(b), regarding additions to tax determined by respondent under section 6653(b) for petitioner's taxable years ending August 31, 1986 , August 31, 1987 , and August 31, 1988 . Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

Respondent determined deficiencies in petitioner's Federal income taxes for its taxable years ending August 31, 1986 , August 31, 1987 , and August 31, 1988 , in the respective amounts of $943.50, $3,126.34, and $6,199.53. Respondent also determined additions to tax attributable to the deficiencies for each of the taxable years in issue under section 6653(b)(1)(A) in the respective amounts of $471.75, $2,344.76, and $4,649.65, and under section 6653(b)(1)(B) in the respective amounts of 50 percent of the interest due on $943.50, 50 percent of the interest due on $3,126.34, and 50 percent of the interest due on $6,199.53.

The sole issue for decision is whether a written plea agreement executed in connection with the criminal prosecution of petitioner's president (Anthony Palladino) for violation of section 7206(1) collaterally estops respondent from determining that petitioner is liable for additions to tax for fraud under section 6653(b) for each of the years in issue.

Summary judgment is a device intended to serve judicial economy through the avoidance of "unnecessary and expensive trials of phantom factual questions". Shiosaki v. Commissioner [Dec. 32,519 ], 61 T.C. 861, 862 (1974). Under Rule 121(b), a motion for summary judgment is granted when it is shown that "there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law." The party moving for summary judgment bears the burden of proving that there is no genuine issue of material fact. Naftel v. Commissioner [Dec. 42,414 ], 85 T.C. 527, 529 (1985).

In considering a motion for summary judgment, we view the facts in the light most favorable to the party opposing the motion. Id. Accordingly, the facts set forth herein are derived from respondent's pleadings and attorneys' affidavits in opposition to petitioner's motion, and are viewed in a manner most favorable to respondent. Id. ; Estate of Gardner v. Commissioner [Dec. 41,293 ], 82 T.C. 989, 990 (1984).

Background

During each of the years in issue petitioner manufactured screw machine products, and Anthony Palladino was petitioner's president and business affairs manager. During petitioner's taxable years ended August 31, 1986 , and August 31, 1987 , Mr. Palladino owned 25.75 percent of petitioner's stock. During petitioner's taxable year ended August 31, 1988 , Mr. Palladino owned 60 percent of petitioner's stock.

During each of the years in issue, petitioner sold scrap metal by-products to Michael Schiavone & Sons, Inc. (Schiavone), a scrap metal dealer. An audit of Schiavone's books by respondent indicated that Schiavone regularly purchased scrap metal from suppliers, including petitioner, with cash payments. In May, 1989, Leanne G. Charette, a Special Agent with the Internal Revenue Service (IRS), Criminal Investigation Division, was assigned to investigate possible criminal violations committed by Mr. Palladino in his capacity as petitioner's president. Special Agent Charette's investigation determined that under an agreement between Schiavone and Mr. Palladino, each purchase of petitioner's scrap metal by Schiavone was paid for one-half by check and one-half with cash. The investigation further concluded that the cash payments were hand delivered by a Schiavone employee to Mr. Palladino in an envelope, and that petitioner only reported the amount of the checks on its returns filed for the years in issue.

In July, 1990, Special Agent Charette recommended that criminal proceedings be instituted against Mr. Palladino for willfully making and subscribing to false U.S. corporate income tax returns filed by petitioner for each of the years in issue, in violation of section 7206(1) . By letter dated November 21, 1990 , respondent referred the case against Mr. Palladino for violation of section 7206(1) to the U.S. Department of Justice (DOJ) for prosecution. Special Agent Charette did not recommend that any criminal proceedings be instituted against petitioner, and no such referral was made to the DOJ.

In March, 1991, the U.S. Attorney, Judicial District of Connecticut, received a referral from DOJ requesting the U.S. Attorney to initiate the criminal prosecution of Mr. Palladino under section 7206(1) regarding petitioner's corporate income tax returns filed for the years in issue. The case against Mr. Palladino was assigned to Joseph C. Hutchinson, Assistant U.S. Attorney, Judicial District of Connecticut.

On May 21, 1991 , after discussions between Mr. Hutchinson and Mr. Palladino's attorney, the U.S. Attorney's Office for the District of Connecticut (Government) signed a plea agreement with Mr. Palladino concerning Mr. Palladino's alleged violations of section 7206(1) . Under the plea agreement, Mr. Palladino agreed to plead guilty to a one count information charging him with subscribing to a false corporate income tax return filed by petitioner for its taxable year ending August 31, 1988 . On July 15, 1991 , Mr. Palladino was sentenced and received no months to serve and no probation, but was fined $5,000.

The plea agreement is organized by sections. The following stipulation appears near the top of page 3, in a section of the plea agreement entitled "Sentencing Guidelines":

The Government also stipulates that the false corporate tax returns were not filed in order to facilitate evasion of a tax.

The following disclaimer appears near the middle of page four, in a section of the plea agreement entitled "Scope of Agreement":

[Mr. Palladino] acknowledges and understands that this agreement is limited to the undersigned parties and cannot bind any other federal authority, or any state or local authority. [Mr. Palladino] acknowledges that no representations have been made to him with respect to any civil or administrative consequences that may result from this plea of guilty because such matters are solely within the province and discretion of the specific administrative or governmental entity involved. Finally, [Mr. Palladino] understands and acknowledges that this agreement has been reached without regard to any civil tax matters that may be pending or which may arise involving him.

Discussion

Petitioner's motion is based on the government's stipulation that petitioner's false corporate tax returns were not filed in order to facilitate evasion of tax. Petitioner argues that the stipulation collaterally estops respondent from determining that petitioner is liable for additions to tax for fraud for the years in issue.

Essentially, petitioner argues that since respondent's case under section 6653(b) against petitioner is based solely on the conduct of its president, Mr. Palladino, it is fundamentally inconsistent for the Government first to agree that Mr. Palladino did not file false corporate tax returns in an attempt to evade tax for the years in issue, and for respondent later to contend that petitioner filed false corporate tax returns with an intent to evade tax for these years.

In opposition to petitioner's motion, respondent contends that the plea agreement does not preclude respondent from raising the issue of petitioner's liability for additions to tax under section 6653(b) because the stipulation was not intended to have any effect on petitioner's civil tax liability. Alternatively, respondent argues that collateral estoppel does not apply in this case, and that in any event, Mr. Hutchinson was not authorized to compromise petitioner's civil tax liability.

Supported by an affidavit by Mr. Hutchinson, respondent argues that the stipulation was incorporated into the plea agreement for the sole purpose of establishing Mr. Palladino's eligibility for a non-incarcerating sentence under the Federal Sentencing Guidelines. According to Mr. Hutchinson's affidavit, at no time during plea negotiations with Mr. Palladino's counsel did the Government represent or suggest in any way that the stipulation was intended to have civil tax consequences. This fact, respondent argues, is amply demonstrated by the above-quoted disclaimer from page four of the plea agreement, from the section entitled "Scope of Agreement".

We agree with respondent. Mr. Hutchinson's affidavit and the disclaimer on page four of the plea agreement make it clear that the plea agreement was not intended to have any application extending beyond the criminal matter involving Mr. Palladino, and that the stipulation petitioner relies upon in support of its motion was included in the plea agreement for the sole purpose of establishing Mr. Palladino's eligibility for a nonincarcerating sentence. We note that petitioner has not set forth any facts indicating any contrary or additional intention for the stipulation's inclusion into the plea agreement.

In reaching our conclusion, we reject petitioner's argument that the parol evidence rule precludes our consideration of Mr. Hutchinson's intent in writing the stipulation into the plea agreement. The parol evidence rule is inapplicable here, particularly for the reason that petitioner was not a party to the written plea agreement. Estate of Craft v. Commissioner [Dec. 34,422 ], 68 T.C. 249, 260-263 (1977), affd. per curiam [80-1 USTC ¶13,327 ] 608 F.2d 240 (5th Cir. 1979); Coven v. Commissioner [Dec. 33,824 ], 66 T.C. 295, 306 (1976).

Moreover, we conclude that petitioner's collateral estoppel argument in this case is misplaced. Collateral estoppel precludes a party or his privy to a prior suit from relitigating in a later suit issues of fact and law which were actually and necessarily decided by the prior court in reaching judgment in the prior suit. United States v. Mendoza , 464 U.S. 154, 158 (1984). Collateral estoppel is available even though the prior suit was resolved by plea agreement and was not litigated through to resolution by a trier-of-fact. Castillo v. Commissioner [Dec. 41,940 ], 84 T.C. 405, 409-410 (1985). However, collateral estoppel is inapplicable in this case because the plea agreement plainly establishes that the section 6653(b) issue in this case was neither presented in substance nor actually resolved in the criminal proceeding, and, further, because petitioner was neither a party nor a privy to the plea agreement. Montana v. United States, 440 U.S. 147 (1979); see American Lithofold Corp. v. Commissioner [Dec. 30,681 ], 55 T.C. 904, 923-924 (1971); C.B.C. Super Markets, Inc. v. Commissioner [Dec. 30,081 ], 54 T.C. 882 (1970).

Further, besides the inapplicability of collateral estoppel, we conclude that even if the stipulation petitioner relies upon in support of its motion was included in the plea agreement with the express intent to preclude respondent from determining additions to tax for fraud against petitioner, and even if we were to presume the stipulation sufficient to achieve that end, petitioner's motion still must be denied, because, as a matter of law, Mr. Hutchinson is without authority in this case to bind respondent in any civil tax matter involving petitioner.

If we were to accept petitioner's interpretation of the stipulation, then the stipulation effectively would serve as a compromise of petitioner's civil tax liability. However, section 7122(a) , which governs the granting of authority to compromise a case against a taxpayer, provides that unless the taxpayer's case has previously been referred to the DOJ, no person in that department, including an Assistant U.S. Attorney, is authorized to compromise any of the taxpayer's taxes. Botany Worsted Mills v. United States [1 USTC ¶348 ], 278 U.S. 282 (1929); Wagner v. Commissioner [Dec. 46,813(M) ], T.C. Memo. 1990-443. Petitioner bears the burden of ascertaining whether a government representative is authorized to compromise taxes. Federal Crop Ins. Corp. v. Merrill, 332 U.S. 380, 384 (1947); Wagner v. Commissioner, supra.

In this case, Mr. Hutchinson was not authorized to compromise the taxes in issue since it is clear that petitioner's case was never referred to the DOJ. Accordingly, even if we were to accept petitioner's interpretation of the stipulation it relies upon in support of its motion, we must conclude that it nonetheless did not effect a valid compromise of petitioner's liability for additions to tax under section 6653(b).

Accordingly, we conclude that the plea agreement entered into between the Government and Mr. Palladino does not preclude respondent from raising the issue of petitioner's liability for additions to tax under section 6653(b) for the years in issue, and petitioner's Motion for Partial Summary Judgment will be denied.

To reflect the foregoing,

An appropriate order will be issued.

 

 

 

 

[Dec. 50,297(M)] Joseph and Rose Driskill v. Commissioner

Docket No. 19188-93., T.C. Memo. 1994-620, 68 TCM 1463, Filed December 19, 1994

[Appealable, barring stipulation to the contrary, to CA-8.--CCH.]

[Code Sec. 7206 ]

[False and fraudulent statements: Estoppel.]Held: R is not estopped from assessing Federal income taxes (and additions thereto) in Ps' 1987 and 1988 taxable years.

Jeffrey S. Gershman, 7733 Forsyth, St. Louis. , Mo. , for the petitioners. Thomas C. Pliske, for the respondent.

Memorandum Opinion

LARO, Judge:

The parties submitted this case to the Court fully stipulated under Rule 122. ¹ Joseph and Rose Driskill (petitioners) petitioned the Court to redetermine respondent's determination of deficiencies in, and additions to, their 1987 and 1988 Federal income taxes. Respondent determined the following deficiencies and additions to tax:

                                     Sec.         Sec.

Year                  Deficiency 6653(b)(1)(A) 6653(b)(1) Sec. 6661

1987 ................  $10,352      $8,010         -       $2,671

1988 ................   12,241         -         $9,587     3,205

 

Following concessions, the sole issue for decision is whether Joseph Driskill's guilty plea to filing a false 1988 Federal income tax return, see sec. 7206(1) , collaterally estops respondent from assessing income tax deficiencies for petitioners' 1987 and 1988 taxable years. We hold that it does not.

Discussion

All of the facts have been stipulated and are so found. The stipulations and attached exhibits are incorporated herein by this reference. When they petitioned the Court, petitioners resided in Crystal Lake Park , Missouri .

On July 1, 1992 , an Information was filed charging Joseph Driskill with violating section 7206(1) for the 1988 taxable year. That case was set to be tried before the U.S. District Court for the Eastern Division of the District of Missouri. Joseph Driskill pleaded guilty to filing a false return, see sec. 7206(1) , and the Government, in return, agreed not to pursue any other criminal charges against him with respect to his 1987 and 1988 Federal income tax returns. The District Court sentenced Joseph Driskill to 2 years probation and fined him $1,000.

Petitioners primarily argue in their brief that statements made by the Assistant U.S. Attorney in the criminal proceeding estop respondent from assessing an income tax liability against petitioners for their 1987 and 1988 taxable years. Petitioners also argue in their brief that the District Court found as a fact that they had 1987 and 1988 tax deficiencies of zero and $200, respectively, and, therefore, respondent is estopped from seeking the amounts included in her notice of deficiency.

We are not persuaded by petitioners' arguments. The record does not support applying any form of estoppel against respondent. ² See generally Total Petroleum, Inc. v. Davis, 822 F.2d 734, 737 at n.6 (8th Cir. 1987) (brief discussion of collateral estoppel and judicial estoppel, the two primary forms of estoppel on which petitioners rely). Moreover, the law regarding administrative settlement offers is firmly established. Written closing agreements under section 7121 and written compromise agreements under section 7122 are the exclusive means for respondent to make a formal, binding settlement of civil tax liabilities. Botany Worsted Mills v. United States [1 USTC ¶348 ], 278 U.S. 282, 288-289 (1929); Estate of Meyer v. Commissioner [Dec. 31,336 ], 58 T.C. 69, 70 (1972); secs. 301.7121-1 and 301.7122-1 , Proced. & Admin. Regs. The record does not indicate the existence of such a closing or compromise agreement that was entered into by petitioners and respondent for 1987 or 1988.

Accordingly, we hold that respondent may assess taxes and additions thereto in petitioners' 1987 and 1988 taxable years. In so holding, we have taken into account all of petitioners' arguments and, to the extent not discussed above, find them to be without merit.

To reflect concessions by respondent,

Decision will be entered under Rule 155.

¹ Rule references are to the Tax Court Rules of Practice and Procedure. Section references are to the Internal Revenue Code in effect for the years in issue.

² Petitioners bear the burden of proving their estoppel argument. Rule 142(a); Welch v. Helvering [3 USTC ¶1164 ], 290 U.S. 111, 115 (1933). The fact that the case was submitted to the Court under Rule 122 does not change or otherwise lessen their burden. Borchers v. Commissioner [Dec. 46,730 ], 95 T.C. 82, 91 (1990), affd. on other issues [91-2 USTC ¶50,416 ] 943 F.2d 22 (8th Cir. 1991).

 

 

 

[Dec. 50,531(M)] Thomas B. Verdunn v. Commissioner

Docket No. 28511-90., TC Memo. 1995-117, 69 TCM 2142, Filed March 21, 1995

[Appealable, barring stipulation to the contrary, to CA-11.--CCH.]

[Code Secs. 6651 , 6653 , prior to amendment by P.L. 101-239, 6661, prior to repeal by P.L. 101-239, and 7206 ]

Failure to file return: Reasonable cause: Penalties, civil: Negligence: Fraud: Admissions of taxpayer: Criminal conviction as evidence in civil proceeding: Underreporting of income: Substantial understatement: Estoppel: Preparation of fraudulent returns.--The sole owner of an S corporation understated his taxable income and was liable for several penalties. The owner diverted corporate funds into personal accounts and to third parties. He also claimed depreciation on nonbusiness assets and failed to report interest and dividend income. Although the owner's admissions made in a related criminal case did not estop him from denying that he intentionally filed a fraudulent return, it was probative evidence that one of his individual returns was filed fraudulently. Other evidence supported the finding that other returns were fraudulent. However, depreciation deductions for personal items purchased with corporate funds were inadvertently claimed by an accountant and not the result of fraud on the part of the owner. The failure to report certain distributable income was also due to the accountant's error and, thus, not fraudulent. The owner did not fraudulently omit certain interest income and amounts received from the sale of a damaged truck used in the owner's business. The owner was liable for the penalty for substantial understatement of tax. In addition, the owner was liable for the penalty for failure to file a return for one of the years in question because he did not show that his failure was due to a reasonable cause and not due to willful neglect. Finally, the owner was liable for the negligence penalty for failure to timely file one year's return.--CCH.

B. Gray Gibbs, One Fourth St., N. , St. Petersburg , Fla. , for the petitioner. Willie Fortenberry, Jr., and Michael Zima, for the respondent.

Memorandum Findings of Fact and Opinion

GERBER, Judge:

Respondent determined deficiencies in and additions to Federal income tax for petitioner's 1982 through 1986 taxable years as follows:

                                                   Additions to Tax

                                                   ----------------

                                     Sec.        Sec.         Sec.

Year                   Deficiency 6651(a)(1) 6653(a)(1)(A)6653(a)(1)(B)

1982 ...................$47,088          --          --              --

1983 ................... 16,982          --          --              --

1984 ....................16,618          --          --              --

1985 ....................16,039          --          --              --

1986 .................... 1,216     $1,702       $340             1 

                                      Sec.        Sec.

                                  6653(b)(1)  6653(b)(2)     Sec. 6661

1982 .......................        $25,487         1         $11,772

1983 .......................          9,047         1           4,246

1984 .......................          8,309         1           4,155

1985 .......................         12,668         1           4,010

1986 .......................           --          --            --

 1  50 percent of the interest due on the income tax deficiency.

 

Section references are to the Internal Revenue Code in effect for the years under consideration. Rule references are to this Court's Rules of Practice and Procedure.

The issues for our consideration are: (1) Whether petitioner failed to report income from his S corporation for each of the taxable years 1982 through 1986; (2) whether petitioner failed to report interest income for 1982 and dividend income for 1983; (3) whether petitioner is entitled to income averaging for his 1982 taxable year; ¹ (4) whether petitioner is entitled to passthrough investment tax credits from an S corporation for 1983, 1984, and 1985; ² (5) whether petitioner is liable for an addition to tax for fraud and/or substantial understatements of tax for each of the years 1982 through 1985; (6) in the alternative to fraud, whether petitioner is liable for additions to tax attributable to negligence and/or failure to timely file his income tax return for any of the years 1982 through 1985; (7) whether petitioner is liable for additions to tax for 1986 attributable to negligence and/or failure to timely file his income tax return; (8) whether the period for assessment and collection of the tax had expired for 1985 and 1986 at the time respondent mailed the notice of deficiency; ³ and (9) whether petitioner is estopped from denying that he willfully and knowingly made and subscribed to his own and his S corporation's returns of income for 1982, which he did not believe were true and correct as to every material matter, due to his guilty plea to charges under section 7206(1) . ⁴

Findings of Fact ⁵

Petitioner Thomas B. Verdunn resided at Treasure Island , Florida , at the time his petition was filed. Petitioner filed his 1982, 1983, and 1984 income tax returns on June 3, 1985 , and his 1985 and 1986 income tax returns on June 30, 1988 .

Petitioner completed high school and 3 years of trade school. He worked for 6 years in the automotive industry in positions involving mechanical skill. Petitioner then became employed as a laborer where he was responsible for the carrying, positioning, and tying of reinforcing steel that went into the construction of buildings. During 1979, petitioner began a labor contracting business where he obtained contracts to install reinforcing rods. Under the contracts, petitioner, as a subcontractor, provided the labor and wire needed to tie together the reinforcing rods, which were provided by the prime contractor. Initially, the business was operated as a sole proprietorship. As of April 1, 1981 , the business was operated through Statewide Steel Erectors, Inc. (Statewide), an S corporation that petitioner organized. Petitioner was the sole owner of Statewide during the years under consideration. Petitioner and Statewide were both on the cash method of accounting for tax reporting purposes.

From 1979 on, petitioner hired Douglas Davenport, an accountant, to assist in the record keeping and tax reporting of petitioner's business activity. Statewide's reported gross receipts were determined for the fiscal years ended March 31, 1982 through 1986, by Douglas Davenport, who totaled the amounts deposited to Statewide's bank account. Petitioner also provided the accountant with check stubs, vouchers, and other records from which deductions could be determined. Petitioner noted some of the purposes (i.e., whether the item was business or personal) on the check stubs. Petitioner was generally aware of the method by which the accountant prepared the return and the difference between personal and business items. The accountant relied on petitioner to identify which items were business and which were personal.

Petitioner failed either to deposit to Statewide's account or to report separately checks totaling $11,519, $4,451.60, and $7,640.40, which were includable in the gross receipts of petitioner and/or Statewide for the fiscal years ended March 31, 1982 , 1983, and 1984, respectively. During 1981, petitioner purchased a boat for $42,000 and, for part payment, used checks totaling $10,700 that were made payable to Statewide from Tyler Construction. Petitioner also used other checks made payable to Statewide in connection with his boat and other personal expenditures. Statewide did not report these amounts as gross receipts in the total amounts of $19,172 and $1,875 for its fiscal years ended March 31, 1982 and 1983, respectively. During the years in question, petitioner deposited Statewide corporate receipts into his personal bank account. Petitioner also issued checks drawn on Statewide's bank account for improvements to petitioner's personal residence, recreational boat, and automobile. For example, during 1982 and 1983, petitioner paid for a swimming pool and boat dock in connection with his personal residence with Statewide checks (or funds). During the same period, petitioner used the same method to purchase a large screen television and watch, and to make numerous payments to his wife and mother.

During some of the years under consideration, petitioner purchased cashier's checks with checks made payable to Statewide, and those amounts were not included in Statewide's gross receipts. On numerous occasions, the proceeds of the cashier's checks were used for petitioner's personal purposes. Petitioner thus diverted corporate funds which were not first included in Statewide's gross receipts, or reported on its returns, in the amounts of $36,760.17, $18,221.89, $32,444.25, and $20,790 for Statewide's fiscal years ended March 31, 1982 , 1983, 1984, and 1985, respectively.

During the years in question, Statewide claimed depreciation on its returns for petitioner's personal assets, such as his television, sports car, boat trailer, and other items. For 1982, petitioner received $1,551.76 of interest income, which he did not report on his income tax return. During 1983, petitioner's pickup truck, which he used in his business (and depreciated to a book (salvage) value of $75.02) was involved in an accident. The damaged remains were later sold for $2,500. However, no gain from this sale was shown on Statewide's or petitioner's returns. Due to an error by petitioner's accountant, petitioner failed to report $13,464.19 of passthrough income from Statewide for petitioner's 1983 taxable year. Statewide's return reflected approximately $18,000 in distributable income, but the accountant reported approximately $4,500 from Statewide on petitioner's return. This error was caused by confusion about the difference in taxable years. Statewide was in a fiscal year and petitioner was in a calendar year.

On April 14, 1988 , a two-count criminal information was filed against petitioner, charging him with willfully and knowingly subscribing to Statewide's fiscal 1982 Form 1120S under section 7206(1) . The information contained the charges that petitioner did not believe the return to be true and correct as to every material matter and that he likewise made and subscribed to his 1982 Form 1040 not believing it to be true and correct in every material matter. Petitioner entered a guilty plea to both counts on May 6, 1988 , and admitted in his plea agreement that he caused his return preparer to understate Statewide's income and to overstate deductions for Statewide's 1982 fiscal year. Petitioner, in the plea agreement, also admitted that he diverted income from Statewide's bank account, which caused such income to be excluded from Statewide's returns. More specifically, he admitted depositing Statewide's checks in his personal account, endorsing Statewide's checks to third parties, and using Statewide's checks to purchase cashier's checks. Petitioner also agreed that, for 1982, he paid personal expenses with Statewide's checks, indicating on the check stubs that the expenditures were for business purposes, such as payment of a subcontractor or the purchase of materials. Petitioner and respondent, through respondent's agents, entered into valid consents extending the period for assessment of the 1982, 1983, and 1984 taxable years beyond the time of respondent's September 25, 1990 , mailing of the notice of deficiency in the instant case. In addition, petitioner's 1985 and 1986 income tax returns were both filed on June 30, 1988 , so that the period for assessment for 1985 and 1986 had not expired at the time the notice of deficiency was mailed to petitioner.

Ultimate Findings of Fact

Petitioner's taxable income was understated for the taxable years 1982, 1983, 1984, 1985, and 1986 in the amounts of $102,479, $44,235, $48,858, $35,471, and $3,734, respectively. Of those amounts for 1982, 1983, 1984 and 1985, $97,282, $18,482, $34,903, and $18,059, respectively, were attributable to fraud. Petitioner's tax was underpaid in the amounts of $47,088, $16,982, $16,618, $16,039, and $1,216 for the taxable years 1982, 1983, 1984, 1985, and 1986, respectively.

Opinion

Respondent determined that petitioner's S corporation did not report the correct amount of income and, in turn, that petitioner did not report his full distributive share of income for each of the taxable years 1982 through 1986. Respondent's determination was based on specific adjustments, including the diversion of corporate funds into personal accounts, the diversion of corporate funds to third parties and to other personal uses, depreciation claimed on nonbusiness assets, and gain on the sale of a business asset. In addition, respondent determined that petitioner failed to report interest and dividend income. With respect to these determinations, petitioner bears the burden of proving that respondent erred. Rule 142(a); Welch v. Helvering [3 USTC ¶1164 ], 290 U.S. 111 (1933).

There is no dispute that petitioner was required to report his distributive share of Statewide's income. See sec. 1366(a)(1)(A) . On brief, petitioner concedes that, for the most part, he does not contest the additional income tax liability as determined by respondent. ⁶ Petitioner argues that a few of respondent's adjustments to Statewide are incorrect because the amounts were attributable to petitioner's predecessor proprietorship and should not be included in petitioner's distributive share of Statewide's income. The checks referenced by petitioner were drawn by customers naming Statewide as payee, but without Statewide's corporate designation (Inc.). Despite positing the assumption that those checks were properly for work performed by petitioner's proprietorship rather than the S corporation, petitioner has not shown that he accounted for or reported such amounts on his individual Federal income tax return for the period(s) covered by the specific checks referenced. Accordingly, petitioner's distinction would not make a difference in the amount of tax liability ultimately due in this case.

Petitioner failed to carry his burden of proof; hence, we find that he is liable for the full amounts of the income tax deficiencies determined by respondent for each of the taxable years 1982 through 1986.

Fraud is defined as an intentional wrongdoing designed to evade tax believed to be owing. Miller v. Commissioner [Dec. 46,435 ], 94 T.C. 316, 332 (1990) (citing Powell v. Granquist [58-1 USTC ¶9223 ], 252 F.2d 56 (9th Cir. 1958)). Respondent has the burden of proving, by clear and convincing evidence, that an underpayment exists for the years at issue, and that some portion of the underpayment is due to fraud. Sec. 7454(a) ; Rule 142(b). To meet this burden, respondent must show that petitioner intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes. Stoltzfus v. United States [68-2 USTC ¶9499 ], 398 F.2d 1002, 1004 (3d Cir. 1968); Webb v. Commissioner [68-1 USTC ¶9341 ], 394 F.2d 366, 378 (5th Cir. 1968), affg. [Dec. 27,918(M) ] T.C. Memo. 1966-81; Rowlee v. Commissioner [Dec. 40,228 ], 80 T.C. 1111, 1123 (1983). Respondent need not prove the precise amount of the underpayment resulting from fraud--only that some part of the underpayment of tax for each year at issue is attributable to fraud. Lee v. United States [72-2 USTC ¶9652 ], 466 F.2d 11, 16-17 (5th Cir. 1972); Plunkett v. Commissioner [72-2 USTC ¶9541 ], 465 F.2d 299, 303 (7th Cir. 1972), affg. [Dec. 30,349(M) ] T.C. Memo. 1970-274. Petitioner concedes that there was unreported income and a resulting underpayment for each of the years at issue. We accordingly must decide if any part of the underpayments was due to fraud. Hebrank v. Commissioner [Dec. 40,488 ], 81 T.C. 640 (1983).

The existence of fraud is a question of fact to be resolved upon consideration of the entire record. Gajewski v. Commissioner [Dec. 34,088 ], 67 T.C. 181, 199 (1976), affd. without published opinion 578 F.2d 1383 (8th Cir. 1978); Estate of Pittard v. Commissioner [Dec. 34,775 ], 69 T.C. 391 (1977). Fraud is not to be imputed or presumed, but rather must be established by some independent evidence of fraudulent intent. Beaver v. Commissioner [Dec. 30,380 ], 55 T.C. 85, 92 (1970); Otsuki v. Commissioner [Dec. 29,807 ], 53 T.C. 96 (1969). Fraud may not be found under "circumstances which at the most create only suspicion." Davis v. Commissioner [50-2 USTC ¶9427 ], 184 F.2d 86, 87 (10th Cir. 1950); Petzoldt v. Commissioner [Dec. 45,566 ], 92 T.C. 661, 700 (1989). However, fraud may be proved by circumstantial evidence and reasonably inferred from the facts, because direct proof of the taxpayer's intent is rarely available. Spies v. United States [43-1 USTC ¶9243 ], 317 U.S. 492 (1943); Rowlee v. Commissioner, supra; Stephenson v. Commissioner [Dec. 39,562 ], 79 T.C. 995 (1982), affd. [84-2 USTC ¶9964 ] 748 F.2d 331 (6th Cir. 1984). A taxpayer's entire course of conduct may establish the requisite fraudulent intent. Stone v. Commissioner [Dec. 30,767 ], 56 T.C. 213, 223-224 (1971); Otsuki v. Commissioner, supra at 105-106. The intent to conceal or mislead may be inferred from a pattern of conduct. See Spies v. United States , supra at 499.

Courts have relied on several indicia of fraud when considering the section 6653(b) addition to tax. Although no single factor may conclusively establish fraud, the existence of several indicia may be persuasive circumstantial evidence of such. Solomon v. Commissioner [84-1 USTC ¶9450 ], 732 F.2d 1459, 1461 (6th Cir. 1984), affg. per curiam [Dec. 39,427(M) ] T.C. Memo. 1982-603; Beaver v. Commissioner, supra at 93.

Circumstantial evidence which may give rise to a finding of fraudulent intent includes: (1) Understating income; (2) keeping inadequate or no records; (3) failing to file tax returns; (4) maintaining implausible or inconsistent explanations of behavior; (5) concealing assets; (6) failing to cooperate with tax authorities; (7) filing false Forms W-4; (8) failing to make estimated tax payments; (9) dealing in cash; (10) engaging in illegal activity; and (11) attempting to conceal an illegal activity. Bradford v. Commissioner [86-2 USTC ¶9602 ], 796 F.2d 303, 307 (9th Cir. 1986), affg. [Dec. 41,615(M) ] T.C. Memo. 1984-601; see Douge v. Commissioner [90-1 USTC ¶50,186 ], 899 F.2d 164, 168 (2d Cir. 1990). These "badges of fraud" are nonexclusive. Miller v. Commissioner, supra at 334. Both the taxpayer's background and the context of the events in question may be considered as circumstantial evidence of fraud. United States v. Murdock [3 USTC ¶1194 ], 290 U.S. 389, 395 (1933); Spies v. United States , supra at 497; Plunkett v. Commissioner, supra at 303.

Respondent argues that petitioner knowingly used Statewide as a device with which to understate income by failing to report various corporate receipts and by claiming false deductions. For 1982, respondent argues that petitioner is collaterally estopped from denying facts that arise from petitioner's plea of guilty to an information concerning the filing of Statewide's and petitioner's individual returns. Respondent further contends that petitioner's failure to report relatively large amounts of his taxable income for the years 1982 through 1985 was part of a continuing pattern of activity that was intentionally pursued.

Petitioner counters that many of the traditional badges of fraud are not present in this case. For example, petitioner points out that there was no second set of books, no attempts to conceal assets by means of nominees or alter egos, and no evidence of false or altered documents. Petitioner asserts that the only evidence of fraud here is the existence of 4 years of understatements and that, standing alone, such evidence is insufficient to support a finding of fraud in any of the taxable years under consideration. Finally, petitioner argues that his lack of sophistication was the reason for the underreporting of income.

We agree with respondent. The evidence here demonstrates that petitioner was well aware that Statewide's income was understated and, in turn, that his own 1982 through 1985 income tax returns likewise had understated income. We cannot accept petitioner's self-serving statement that he believed that his accountant was receiving his Forms 1099 and that all receipts were being included. This is especially true in light of the many personal expenditures made with Statewide's funds and/or unreported receipts. Having observed petitioner at trial and considering the record, we cannot accept petitioner's claim of naivete. Obvious personal expenditures were made and labeled by petitioner as being for business. Petitioner knowingly diverted Statewide's income by depositing Statewide's checks into his personal bank account, endorsing Statewide's checks, and negotiating them with third parties for nonbusiness purposes, and converting Statewide's receipts, in the form of checks, into cashier's checks and using the cashier's checks for personal purposes. All of Statewide's checks were gross receipts of Statewide, not petitioner individually. Petitioner diverted these gross receipts knowing that in doing so gross receipts and taxable income of Statewide would be understated and, ultimately, petitioner's individual income tax return would be understated. We accept petitioner's argument that he treated the corporation's funds as his own, yet we cannot accept his contention that he did not know the difference or the ultimate consequences. Likewise, we are unable to place fault on petitioner's accountant, other than with respect to his error involving the difference between Statewide's fiscal year and petitioner's calendar year, resulting in the omission of $13,464.19 of distributable taxable income (from Statewide) for petitioner's 1983 taxable year.

Petitioner also overstated some business deductions by paying personal expenses with checks drawn on Statewide's checking account and by reflecting a business purpose on the check stub, which petitioner presented to the tax return preparer.

These were not isolated instances of error or inadvertence; these were part of a continuing pattern of activity that petitioner knew would result in his individual income tax return being false for each of the taxable years 1982, 1983, 1984, and 1985.

Respondent argues that petitioner is collaterally estopped from denying that he willfully and knowingly subscribed to Statewide's fiscal 1982 Form 1120S and his own 1982 Form 1040 which he did not believe to be true and correct as to each material matter. In the plea agreement, petitioner admitted that he diverted income from Statewide's bank account, causing its omission from Statewide's tax returns. Additionally, he admitted depositing Statewide's checks in his personal account, endorsing Statewide's checks to third parties, and using Statewide's checks to subsequently purchase cashier's checks. Petitioner also admitted that, for 1982, he paid personal expenses with Statewide's checks, indicating on the check stubs that the expenditures were for business purposes, such as payment of a subcontractor or the purchase of materials.

Although petitioner's admissions to violations of section 7206(1) for 1982 do not estop him from denying that he intentionally filed a fraudulent return, they do represent probative evidence on which we may rely in reaching the conclusion and finding that petitioner's 1982 income tax return was fraudulent. Wright v. Commissioner [Dec. 42,013 ], 84 T.C. 636, 643-644 (1985). Although petitioner's guilty plea for 1982 supports our finding that petitioner's 1982 individual return was fraudulent, respondent has also proven, by other clear and convincing evidence, that each of petitioner's Federal income tax returns for 1982, 1983, 1984, and 1985 was fraudulent.

Although we have found that a part of each underpayment for 1982, 1983, 1984, and 1985 was due to fraud under section 6653(b)(1), we must still decide what portion of each underpayment was fraudulent. The addition to tax under section 6653(b)(2) applies only to that portion of the underpayment attributable to fraud. Some of the specific items of unreported income or overstatement of deductions were caused by an accountant's error in judgment, and did not rise to the level of being fraudulent.

For example, during the years in question, depreciation was claimed on Statewide's returns for petitioner's personal assets, such as his television, sports car, boat trailer, and other items. Petitioner purchased these items using Statewide's checks which likely led his tax return preparer to treat these items as business assets. Our record, however, does not support the finding that petitioner intentionally and fraudulently attempted to reduce his income by means of depreciation claimed by his accountant on the corporation's return. Based on these circumstances, we are unable to hold that petitioner would have been aware of the existence or effect of these items. For 1982, petitioner received $1,551.76 of interest income, which he did not report on his income tax return. Likewise, we cannot find that this omission was within petitioner's knowledge.

During 1983, a pickup truck used in petitioner's business and depreciated to a book (salvage) value of $75.02 was involved in an accident, and the damaged remains were sold for $2,500. This also represents an item that is somewhat technical in nature, and considering petitioner's background and knowledge, we cannot find that this item was intentionally or fraudulently omitted by petitioner. Also, due to an error by petitioner's accountant, there was a failure to report $13,464.19 of distributable income from Statewide on petitioner's 1983 tax return. This, obviously, is not a fraudulent item. After analyzing the entire record, we find that for the taxable years 1982, 1983, 1984, and 1985, understatements of $97,282, $18,482, $34,903, and $18,059, respectively, were attributable to fraud. Accordingly, those years amounts are subject to the section 6653(b)(2) portion of the addition to tax.

Having decided that petitioner is liable for the fraud addition for 1982 though 1985, it is unnecessary to consider respondent's alternative position to fraud; i.e., whether petitioner is liable for the additions to tax attributable to negligence and/or failing to timely file his income tax return for any of the years 1982 through 1985.

We next consider whether petitioner is liable for the addition to tax under section 6661 for any of the taxable years 1982, 1983, 1984, or 1985. Section 6661 provides for a 25-percent addition to tax attributable to a taxpayer's substantial understatement of income tax. A substantial understatement exists if the amount of such understatement exceeds the greater of 10 percent of the tax required to be shown on a return, or $5,000. Sec. 6661(b)(1)(A) .

If the percentage or monetary threshold is met, then petitioner may show that the addition should not be applied to any part of the understatement for which there was either substantial authority or adequate disclosure. Respondent may waive the addition on a showing by the taxpayer that there was reasonable cause for the understatement and that the taxpayer acted in good faith. Petitioner argues that Congress never intended that section 6661 apply automatically or that a stacking of additions to tax should occur. Petitioner, however, has the burden of showing that respondent's determination regarding this item is in error. Rule 142(a). Petitioner has presented no evidence or arguments which would carry his burden. Furthermore, see Condor Intl. Inc. v. Commissioner [Dec. 48,032 ], 98 T.C. 203 (1992), where additions under sections 6651 , 6653 , and 6661 were applied. Accordingly, to the extent that the recalculation of the deficiencies under Rule 155 results in a substantial understatement for any of the 1982 through 1985 taxable years, section 6661 shall apply.

Respondent also determined that petitioner's 1986 return was delinquent under section 6651(a)(1) and that petitioner was negligent and/or that he intentionally did not follow the rules or regulations pursuant to section 6653(a)(1)(A) and (B). Section 6651(a)(1) provides for a 5 percent per month, not exceeding 25 percent in the aggregate, addition to tax if a tax return is filed late without a showing that it is due to reasonable cause and not due to willful neglect. Section 6653(a)(1)(A) provides for a 5-percent addition to tax on the underpayment of tax attributable to negligence and/or the intentional disregard of rules and regulations. If section 6653(a)(1)(A) is applicable, then section 6653(a)(1)(B) provides for additional interest in an amount equal to 50 percent of the interest due on the portion of the underpayment of tax attributable to negligence.

Petitioner's 1986 income tax return was filed on June 30, 1988 , more than 5 months after the April 15, 1987 , due date. Petitioner has not shown that his failure to file timely was due to reasonable cause and/or not due to willful neglect. Accordingly, respondent's determination with respect to section 6651(a)(1) for 1986 is sustained.

Negligence is a lack of due care or a failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Neely v. Commissioner [Dec. 42,540 ], 85 T.C. 934, 947 (1985). Petitioner bears the burden of proving that respondent's determination of negligence is erroneous. Rule 142(a); Bixby v. Commissioner [Dec. 31,493 ], 58 T.C. 757, 791-792 (1972). A taxpayer's failure to file may be considered evidence of negligence. Emmons v. Commissioner [Dec. 45,490 ], 92 T.C. 342, 350 (1989), affd. [90-1 USTC ¶50,217 ] 898 F.2d 50 (5th Cir. 1990); Bagby v. Commissioner [Dec. 49,772 ], 102 T.C. 596, 607 (1994).

With respect to the addition to tax for negligence, petitioner argues that he is not liable for that addition to tax because he relied on his accountant to prepare Statewide's return for 1986 (which resulted in his deficiency). The adjustment to petitioner's 1986 tax return, unlike his 1982 through 1985 tax returns, involved a relatively small amount, composed of $3,770 in items attributable solely to the disallowance of Statewide's depreciation of petitioner's personal assets. Although in our review of petitioner's 1982 through 1985 taxable years we did not find that the depreciation items were fraudulent for purposes of the additional interest of section 6653(b)(2), we note that petitioner supplied the information to his accountant that resulted in the depreciation of his personal assets. Further, and more importantly, petitioner is considered responsible for the failure to timely file his 1986 return. It is not reasonable here for petitioner to hide behind his preparer or delegate his filing obligation to the preparer of his S corporation's return. See United States v. Boyle [85-1 USTC ¶13,602 ], 469 U.S. 241, 249-250 (1985). Under those circumstances, we find that petitioner is liable for the additions to tax under section 6653(a)(1)(A) and (B) for 1986. To reflect the foregoing,

Decision will be entered under Rule 155.

¹ Petitioner raised this issue on the eve of trial and presented no evidence in support of it at the trial. On brief, petitioner concedes that he is not entitled to income averaging for 1982.

² Petitioner presented no evidence on this issue and conceded it on brief. It was petitioner's burden to prove his entitlement to the credits; thus respondent's determination is presumed correct and must be sustained.

³ Petitioner conceded on brief that the period for assessment for the years 1982 through 1986 had not expired at the time of the mailing of the notice of deficiency. In addition, respondent has shown by competent evidence that the assessment period had been properly extended for 1982 through 1984 and that the notice of deficiency was mailed less than 3 years from the filing of the 1985 and 1986 returns. Further, our finding of fraud for 1982 through 1985 would cause the period for assessment to remain open beyond the normal 3 years. See sec. 6501(c)(1) .

⁴ Petitioner conceded on brief that he was estopped from denying that he filed a 1982 return that was "false as to a material matter", but he reserved the right to contest respondent's determination for fraud for 1982 and the other tax years.

⁵ The parties' stipulations of facts and exhibits are incorporated by this reference.

⁶ Petitioner also conceded on brief that he was not entitled to investment tax credits for the taxable years 1983, 1984, and 1985.

 

 

 

[Dec. 54,233(M)] Charles Jerome Posnanski v. Commissioner

Docket No. 17900-98., TC Memo. 2001-26, 81 TCM 1107, Filed February 7, 2001

[Appealable, barring stipulation to the contrary, to CA-10.--CCH.]

[Code Sec. 6663 ]

Penalties, civil: Fraud: Conviction as evidence in civil proceeding.--The Tax Court sustained the IRS's imposition of fraud penalties against an individual because his criminal conviction for fraud and his pattern of misconduct aimed at concealing interest income, which included intentionally falsifying his own records and the records of a bank that he owned and misleading the IRS with respect to his correct income tax liabilities, conclusively established fraud in the civil action for the same tax years.

[Code Secs. 7206 and 7442 ]

Fraudulent and false statements: Aiding and abetting preparation of false returns: Estoppel.--A bank owner's guilty plea to the charges of concealing facts from the IRS and to aiding and abetting in the filing of a false federal income tax return resulting from his concealment of interest income did not collaterally estop the IRS from assessing income tax deficiencies resulting from fraudulent mortgage interest deductions and civil penalties for fraud for the tax years at issue. Even though the individual satisfied his tax liabilities for the unreported interest as a requirement of his plea agreement, the disposition of his criminal case did not bar the IRS from determining additional civil tax liabilities arising from his admitted fraudulent underpayments.--CCH.

Charles Jerome Posnanski, pro se. Randall B. Pooler, for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

RUWE, Judge:

Respondent determined deficiencies in petitioner's Federal income taxes and penalties as follows:

                                                              Penalty

Year                                           Deficiency  Sec. 6663(a)

1989 ..........................................   $3,815       $2,861

1990 ..........................................    5,531        4,148

1991 ..........................................    5,688        4,266

1992 ..........................................    5,071        3,803

1993 ..........................................    4,430        3,317

     The issues for decision ¹ are: (1) Whether petitioner's civil tax liabilities for 1989, 1990, 1991, 1992, and 1993 were satisfied in his prior criminal proceeding; and (2) whether petitioner is liable for the fraud penalty under section 6663 2 for the years 1989, 1990, 1991, 1992, and 1993.

FINDINGS OF FACT

Most of the facts have been stipulated and are so found. The stipulation of facts, supplemental stipulation of facts, and the attached exhibits are incorporated herein by this reference. Petitioner resided in Cheyenne , Wyoming , at the time he filed his petition.

Petitioner was the president and principal owner of the Bank of Manawa, Wisconsin (the Bank), from June of 1976 through and including the years in issue. Petitioner was active in the day-to-day operations of the Bank and had access to all the computer programs utilized by the Bank. During the years in issue, petitioner and his former wife, Lois Posnanski, maintained two personal, interest-bearing bank accounts at the Bank. For each of the years in issue, petitioner accrued and was paid interest income on these personal accounts in the following amounts:

Year                                                                 Amount

1989 ..................................................... $12,334.79

1990 .....................................................  11,116.45

1991 .....................................................  10,999.62

1992 .....................................................   9,320.28

1993 .....................................................   7,493.44

 

Toward the end of each year in issue, petitioner accessed the computer programs at the Bank and deleted information that would cause his interest income to be included on the computer disk sent to respondent for purposes of reporting interest paid. Petitioner further caused Forms 1099-INT, Interest Income, not to be filed with respondent reporting the actual interest income earned on his personal account and other accounts for each year in issue. On his tax returns for the years in issue, petitioner reported the following amounts of interest income:

Year                                                                 Amount

1989 ..................................................... $   785.00

1990 .....................................................      35.00

1991 .....................................................     118.14

1992 .....................................................      31.76

1993 .....................................................      65.62

Petitioner signed tax returns for each of the years in issue with knowledge that the income was not properly reported.

Toward the end of the calendar year for each of his 1990, 1991, 1992, and 1993 taxable years, petitioner accessed the computer program utilized by the Bank and created entries for mortgage loan interest payments which did not exist. Petitioner caused false interest expenses to be reported and false Forms 1098, Mortgage Interest Statement, to be filed with respondent for petitioner's 1990, 1991, 1992, and 1993 taxable years. Petitioner utilized the false reported mortgage interest expense information to claim false deductions on his 1990, 1991, 1992, and 1993 returns in the following amounts:

Year                                                                 Amount

1990 .................................................... $    5,645

1991 ....................................................      7,424

1992 ....................................................      7,294

1993 ....................................................      7,149

      On November 13, 1995 , petitioner pleaded guilty to two counts of an Information in Case No. 95-Cr-188 in the United States District Court of the Eastern District of Wisconsin. Count One of the plea agreement charged petitioner with "knowingly and willfully [scheming] to conceal a material fact from agencies of the federal government", in violation of 18 U.S.C. sec. 1001 (1994). The material fact concealed was the true amount of interest earned by petitioner, Lois Posnanski, and petitioner's mother, Mary Posnanski. Count One also charged petitioner with falsifying bank records pertaining to loan interest payments in order to gain a tax deduction. Count Two of the plea agreement charged petitioner with willfully aiding and assisting in the false and fraudulent preparation and presentation of Mary Posnanski's 1993 Federal income tax return, in violation of section 7206(2) . Paragraph 7(e) of the plea agreement required petitioner "to pay the Internal Revenue Service those amounts owed for restitution on his personal restitution." An addendum to the plea agreement set forth the following tax liabilities for petitioner and Lois Posnanski:

Year                                                                 Amount

1989 ...................................................... $ 3,749.29

1990 ......................................................   3,592.41

1991 ......................................................   3,194.08

1992 ......................................................   2,600.30

1993 ......................................................   2,007.16

                                                             ----------

Total .....................................................  15,143.24

The addendum specifically stated that the tax liabilities were caused solely by petitioner. Petitioner transmitted a check dated February 12, 1996 , payable to the Internal Revenue Service in the amount of $15,143.24, which was acknowledged as received by Steven M. Biskupic, the attorney for the United States in petitioner's criminal proceeding.

On February 23, 1996 , petitioner entered his guilty plea and was convicted under 18 U.S.C. sec. 1001 for concealing material facts from the Internal Revenue Service and under section 7206(2) for aiding and abetting in the filing of a false Federal income tax return. In addition to prison time and other conditions, petitioner was sentenced to pay a fine of $30,000. At the arraignment, plea, and sentencing of petitioner, the presiding United States District Court Judge declared the following as one of the conditions of petitioner's criminal sentence:

You must cooperate with the I.R.S. and submit all delinquent tax returns and pay all back taxes and interest at the direction of the Probation Officer. The Court should note in regard to this condition that in determining the sentence that--the amount of tax penalties, civil penalties, the distressed sale of the bank, all of these are consequences that flow from your action, and are ones that I think are appropriately taken into account by the Court.

On September 8, 1998 , respondent issued a notice of deficiency to petitioner for the years 1989, 1990, 1991, 1992, and 1993. The deficiency amounts were higher than in the addendum to the plea agreement because the tax stated as due in the addendum did not include the additional income tax resulting from adjustments to petitioner's 1990, 1991, 1992, and 1993 income tax liabilities for claiming false mortgage interest deductions. Additionally, the notice of deficiency determined a fraud penalty for each of the years in issue. The total deficiency determined by respondent for all 5 years is $24,535, a $9,391.76 difference from the tax liability of $15,143.24 set forth in the addendum to the plea agreement. Petitioner has conceded the amount of the underpayments set forth in the notice of deficiency.

In separate letters dated March 7, 2000 , and submitted in lieu of live testimony in the instant case, Mr. Biskupic and petitioner's attorney in his criminal proceeding, Robert E. Meldman, both stated that they believed that petitioner's civil tax liabilities were not resolved as a result of the criminal proceedings.

OPINION

Petitioner has conceded the amounts of the underpayments set forth in the notice of deficiency. Petitioner appears to argue that the doctrine of collateral estoppel applies to bar respondent from seeking civil tax liabilities against him. Alternatively, petitioner argues that he is not liable for the civil fraud penalty.

Petitioner appears to argue that he is not liable for the underpayments because the plea agreement in his criminal proceeding disposed of his civil tax liabilities for the years in issue. The doctrine of collateral estoppel provides that once an issue of fact or law is "actually and necessarily determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation." Montana v. United States , 440 U.S. 147, 153 (1979). However, for collateral estoppel to apply, resolution of the disputed issue must have been essential to the prior decision. See Meier v. Commissioner [Dec. 44,995 ], 91 T.C. 273, 282 (1988).

In the instant case, petitioner was found guilty under 18 U.S.C. sec. 1001 for concealing material facts from the Internal Revenue Service and under section 7206(2) for aiding and abetting in the filing of a false Federal income tax return. Establishing petitioner's specific tax liabilities is not an element of 18 U.S.C. sec. 1001 or section 7206(2) and therefore no specific income tax liabilities needed to be determined in petitioner's prior criminal proceeding. See M.J. Wood Associates, Inc. v. Commissioner [Dec. 52,921(M) ], T.C. Memo. 1998-375; Hickman v. Commissioner [Dec. 52,413(M) ], T.C. Memo. 1997-566, affd. [99-2 USTC ¶50,706 ]. 183 F.3d 535 (6th Cir. 1999). The addendum to the plea agreement set forth specific tax liability amounts for the years in issue. However, it was not essential to the conviction against petitioner because it was not an element of the crimes petitioner was convicted of. See Hickman v. Commissioner, supra. The precise amount of petitioner's tax liability was not specifically litigated or adjudicated in the criminal proceeding.

Petitioner argues that the requirement in paragraph 7(e) of the plea agreement that he pay restitution to the Internal Revenue Service reflects the intention that his civil tax liabilities be included in his criminal proceeding. However, paragraph 7(e) does not set forth petitioner's precise tax liabilities, nor does it limit them to the amounts specified in the addendum. Petitioner also argues that his civil tax liabilities were accounted for in the criminal proceeding by the United States District Court Judge's comment that:

You must cooperate with the I.R.S. and submit all delinquent tax returns and pay all back taxes and interest at the direction of the Probation Officer. The Court should note in regard to this condition that in determining the sentence that--the amount of tax penalties, civil penalties, the distressed sale of the bank, all of these are consequences that flow from your action, and are ones that I think are appropriately taken into account by the Court.

The statement of the presiding judge does not provide that the disposition of the criminal case was meant to discharge all of petitioner's civil tax liabilities. Rather, it provides that petitioner must still account for his civil tax liabilities in addition to the other conditions of his sentence. Additionally, Messrs. Meldman and Biskupic indicate that petitioner's civil tax liabilities were not part of the negotiation of the plea agreement. In viewing the plea agreement, the remarks of the presiding judge, and the entire record, we hold that the disposition of petitioner's criminal case does not bar respondent from determining additional civil tax liabilities against petitioner. Because petitioner has admitted to the amounts of the underpayments in the notice of deficiency, he is liable for those amounts.

The total deficiency determined by respondent for all 5 years is $24,535. Petitioner has paid $15,143.24 toward these tax liabilities. Respondent acknowledges that petitioner paid this amount. Therefore, petitioner is liable for the payment of an additional $9,391.76 in income taxes, plus any penalties which may apply. See, e.g., Hickman v. Commissioner, supra.

Section 6663(a) imposes a penalty for fraud equal to 75 percent of the portion of an underpayment that is attributable to fraud. If any portion of an underpayment is attributable to fraud, then the entire underpayment is treated as due to fraud unless the taxpayer can establish that some portion of the underpayment is not attributable to fraud. See sec. 6663(b) . ³

Respondent bears the burden of proving fraud by clear and convincing evidence. See sec. 7454(a) ; Rule 142(b); Sadler v. Commissioner [Dec. 53,476 ], 113 T.C. 99, 102 (1999). To satisfy this burden, respondent must show that: (1) An underpayment exists; and (2) petitioner 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 [Dec. 46,545 ], 94 T.C. 654, 660-661 (1990). We have found, and petitioner admits, that he underpaid his taxes for the years in issue in the amounts determined in the notice of deficiency.

The existence of fraud is a question of fact to be resolved from the entire record. See DiLeo v. Commissioner [Dec. 47,423 ], 96 T.C. 858, 874 (1991), affd. [92-1 USTC ¶50,197 ] 959 F.2d 16 (2d Cir. 1992). Fraud may be proven by circumstantial evidence, and reasonable inferences may be drawn from the relevant facts. See Spies v. United States [43-1 USTC ¶9243 ], 317 U.S. 492, 499 (1943); Stephenson v. Commissioner [Dec. 39,562 ], 79 T.C. 995, 1006 (1982), affd. [84-2 USTC ¶9964 ] 748 F.2d 331 (6th Cir. 1984). Any conduct, the likely effect of which would be to mislead or to conceal, may establish an affirmative act of evasion. See Spies v. United States , supra at 499; Zell v. Commissioner [85-2 USTC ¶9698 ], 763 F.2d 1139, 1145-1146 (10th Cir. 1985), affg. [Dec. 41,093(M) ] T.C. Memo. 1984-152. A pattern of consistent underreporting of income, particularly when accompanied by other circumstances exhibiting an intent to conceal, justifies the inference of fraud. See Parks v. Commissioner, supra at 664.

Petitioner understated interest income and claimed false deductions for mortgage interest payments, resulting in the consistent underreporting of income tax liabilities for 5 years. Petitioner intentionally falsified computer records of the Bank and misled respondent with respect to his correct income tax liabilities. Petitioner signed the returns for each year in issue with full knowledge that he was underreporting his taxable income. As a result of his actions, petitioner was criminally convicted for his underreporting activities, and petitioner admitted in his plea agreement that he "knowingly and willfully [schemed] to conceal" interest income and that he falsified computer records to gain tax deductions.

Petitioner's only argument is that "The specific intent of my inaccurate income tax filings was not to avoid income taxes but to retaliate against congressional self-dealing." Petitioner consistently underreported income and claimed false deductions with full knowledge that his actions were in violation of a legal duty to file correct tax returns. Petitioner's alleged desire to retaliate against what he may have perceived to be congressional wrongs does not change the fact that he intentionally evaded taxes that he knew he owed, by conduct intended to conceal, mislead, and prevent the collection of taxes. See Parks v. Commissioner, supra at 661. Respondent has proven by clear and convincing evidence that petitioner fraudulently underpaid his taxes for the years in issue. Because petitioner has failed to present evidence establishing that any portion of the underpayments is not attributable to fraud, the entire underpayments for the years in issue are subject to the 75-percent penalty.

Decision will be entered under Rule 155.

¹ Petitioner and Lois Posnanski filed joint returns for each of the years in issue. If a joint return is filed, the liability with respect to the tax is normally joint and several. See sec. 6013(d)(3) . The notice of deficiency upon which this case is based was addressed only to petitioner. Petitioner argues on brief that his former wife, Lois Posnanski, is liable for half of any civil tax liability owed by petitioner because she signed the joint returns for the years in issue and she knew and encouraged his "retaliation against congressional self-dealing." Generally, our jurisdiction over a taxpayer is based on a notice of deficiency having been sent to the taxpayer and the filing of a timely petition by that taxpayer. See sec. 6213(a) . Neither occurrence is alleged with respect to Lois Posnanski, and petitioner alleges no other basis for our jurisdiction. Accordingly, we find petitioner's argument without merit.

² Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

³ In the case of a joint return, the fraud penalty does not apply to a spouse unless some portion of the underpayment is due to the fraud of such spouse. See sec. 6663(c) .