SectJack E. and Ruth I. Christians v. Commissioner.

Dkt. No. 21555-07 , TC Memo. 2008-220, September 29, 2008.



[Code Secs. 6663 and 7201]Penalties, civil: Fraud penalty: Collateral estoppel. --
A married couple was collaterally estopped from contesting their liability for the civil fraud penalty after they were convicted of willfully attempting to evade taxes under Code Sec. 7201. The couple admitted that they did not report the gain from the sale of their property on their Form 1040 but that they reported the gain on Form 1041 for one of the two trusts they created prior to the sale of the property. They asserted that their individual tax return did not contain a false statement when read in conjunction with the trust's return, thus, claiming that they should not be held liable for the civil fraud penalty. However, their conviction under Code Sec. 7201 conclusively established fraud in the subsequent civil tax fraud proceeding through the doctrine of collateral estoppel. Further, since a charitable contribution deduction was not addressed in the criminal proceeding, they were not estopped from raising that issue, which would be resolved at trial. Thus, the extent of the couple's liability will be determined after the issue relating to the claimed charitable deduction is resolved.





MEMORANDUM OPINION

JACOBS, Judge:1 This matter is before the Court on respondent's motion for summary judgment filed pursuant to Rule 121. Petitioners filed a response opposing respondent's motion. The issues presented are: (1) Whether petitioners, each of whom was indicted and subsequently convicted under section 7201 for

willfully attempting to evade and defeat a large part of the income tax due * * * for the calendar year 1995, by filing and causing to be filed * * * a false and fraudulent joint U.S. Individual Income Tax Return, Form 1040, wherein approximately TWO MILLION NINE HUNDRED FORTY SIX THOUSAND FIFTY dollars ($2,946,050) of income was excluded from the return causing an underpayment of approximately EIGHT HUNDRED TWENTY FOUR THOUSAND EIGHT HUNDRED NINETY FOUR Dollars ($824,894)in taxes,

are collaterally estopped from contesting their liability for the civil fraud penalty under section 6663 for the same taxable year; and (2) whether petitioners are entitled to a $25,600 charitable contribution deduction for taxable year 1995.

All section references are to the Internal Revenue Code (Code) as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.


Background

Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. The parties stipulated that any appeal in this case will lie to the Court of Appeals for the Sixth Circuit.

The Court of Appeals for the Sixth Circuit, in United States v. Christians, 105 Fed. Appx. 748 (6th Cir. 2004), affirmed petitioners' convictions under section 7201. The Court of Appeals identified the relevant facts to be as follows.

In 1995, Meijer, Inc., a large retailer, entered into negotiations with the Christians [petitioners herein] for the purchase of their Michigan home and an accompanying 20-acre tract of land. On the day before Meijer made its final offer of approximately $3.1 million, the Christians created Cornerstone Management Trust, naming themselves as trustees, and deeded their property to the trust for $10. The Christians accepted Meijer's $3.1 million offer.

A few days before the closing on the land sale, the Christians created Ottawa Trust, again naming themselves as trustees. After receiving a check written to the Cornerstone Management Trust for $3,072,699.94, the Christians deposited the funds in Ottawa Trust's account. In the months following the sale, the Christians moved most of the money to Barclays Bank in the Cayman Islands, ultimately sending over $3 million there.

On April 15, 1996, the Christians filed their individual IRS Form 1040, which omitted any reference to the real-property sale or to the gain realized from it.2 The Christians also filed an IRS Form 1041 for Cornerstone Management Trust. This return disclosed the property sale, calculated the tax due at over $1.1 million, and was signed by Jack Christians. Instead of paying the tax, however, Jack Christians attached a disclaimer, which read in part: "The assessment and payment of income taxes is voluntary with no distraint.... The above named taxpayer(s) respectfully disclaim any liability and decline to volunteer concerning assessment and payment of any [tax]." The disclaimer closed by suggesting that if the taxpayer "shows the tax to be zero," then the IRS has the obligation of assessing any tax deficiency.

The IRS audited the Christians, who refused to cooperate, even after Agent Rogowski of the IRS's Criminal Investigation Division became involved. After a court enforced an administrative summons for their records, the Christians produced documentation regarding the real property sale and the trusts. The documents revealed that the Christians maintained control of the two trusts and, as a result, retained control over the transfer of their real property and the proceeds from the sale.

After meeting with Agent Rogowski and after receiving an accountant's advice that the proceeds of the sale belonged on their individual tax return, the Christians filed an amended 1995 return using an IRS Form 1040X on July 17, 1997. The return listed the tax due at approximately $1.1 million,3 stated that the "admitted tax liability is zero," then added a tax disclaimer nearly identical to the one attached to Cornerstone Management Trust's earlier return.

On February 27, 2002, a grand jury indicted the Christians on a single count of willfully attempting to evade the payment of income tax due from the sale of their property "by filing ... a false and fraudulent joint U.S. Individual Income Tax Return, Form 1040" in violation of 26 U.S.C. § 7201. The jury returned a guilty verdict against both defendants. The court sentenced them each to 27-month prison sentences. [Id. at 749-750; joint appendix refs. omitted.]

On their 1995 return petitioners claimed a $25,600 charitable contribution deduction consisting of $600 in cash and $25,000 of other property. Attached to the return was a Form 8283, Noncash Charitable Contributions, which described the donated property as a house in good condition with a fair market value of $25,000 and identified the donee as the Evangelistic Center of Grand Rapids, Michigan. A letter of thanks and a receipt for $25,000, both signed by Pastor Harry Dunn of the Evangelistic Center, were attached to the return. In their amended 1995 return, filed July 17, 1997, in addition to increasing the amount of their adjusted gross income to include the gain from the sale of property to Meijer, Inc., petitioners claimed an additional $120,025 charitable contribution deduction.

Respondent issued a notice of deficiency on June 29, 2007. Respondent determined that petitioners' income should be increased by $2,948,000 to reflect the sale of property to Meijer, Inc., and disallowed the $25,600 charitable contribution deduction claimed in the original return. The resulting tax, according to respondent, is $845,049, leaving a deficiency of $835,580 after taking into account the amount of tax ($9,469) shown on the original return. Respondent acknowledges that petitioners made a payment of $824,894 on January 24, 2003, which will be applied to the deficiency amount. Respondent also determined that petitioners are liable for the section 6663 civil fraud penalty in the amount of $626,685.

Petitioners admit that the gain from the sale of property to Meijer, Inc., is includable in their income for 1995 and generated tax. They assert, however, that their tax liability was not understated but rather was reported by means of two returns --a Form 1040, U.S. Individual Income Tax Return, and a Form 1041, U.S. Income Tax Return for Estates and Trusts, filed by Cornerstone Management Trust.

Petitioners concede in their response opposing respondent's motion that "the law is not generally in their favor", but they maintain "they should be allowed to contest the fraud penalty on the basis of the facts which establish that no fraudulent tax returns were filed but rather the Petitioners refused to pay the original amounts due, and moved their assets out of the jurisdiction of the United States to frustrate collection efforts by the IRS."

In summarizing their position, petitioners state:

This is clearly a willful refusal to pay, tax protest type case not a fraudulent attempt to evade liability. Although convicted of violating IRC § 7201, it is clear that Petitioners were engaged in conduct to attempt to validate their incorrect positions that no taxes were due and owing at that time.

This should not result in collateral preclusion by fraud. It was not necessary under § 7201 for the jury to find a fraudulent filing to sustain or support the conviction. Therefore, the facts should be viewed as admitted by Respondent, thus precluding summary judgment on the issue.

Petitioners also assert that they are entitled to contest respondent's disallowance of their $25,600 claimed charitable contribution. Finally, petitioners claim that their $824,894 payment of January 24, 2003, extinguished their tax liability.


Discussion

As a preliminary matter, we note that summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). The Court may grant summary judgment where there is no genuine issue of any material fact and a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994). The moving party bears the burden of proving that no genuine issue of material fact exists, and the Court will view any factual material and inferences in the light most favorable to the nonmoving party. Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985). A partial summary adjudication may be made even if it does not dispose of all the issues in the case. Rule 121(b); Naftel v. Commissioner, 85 T.C. 527, 529 (1985). Rule 121(d) provides that where the moving party properly makes and supports a motion for summary judgment, "an adverse party may not rest upon the mere allegations or denials of such party's pleading," but must set forth specific facts, by affidavits or otherwise, "showing that there is a genuine issue for trial."

We now turn to the first of the two issues; namely, whether petitioners' convictions for income tax evasion under section 7201 collaterally estop them from litigating the issue of their liability for the civil fraud penalty under section 6663.

In Montana v. United States, 440 U.S. 147, 153-154 (1979), the Supreme Court provided guidance on the application of the doctrine of collateral estoppel as follows: "Under collateral estoppel, once an issue 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."

The two Code sections involved herein are section 6663 and section 7201. Section 6663 provides:

SEC. 6663. IMPOSITION OF FRAUD PENALTY.

(a) Imposition of Penalty. --If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

(b) Determination of Portion Attributable to Fraud. --If the Secretary establishes that any portion of an underpayment is attributable to fraud, the entire underpayment shall be treated as attributable to fraud, except with respect to any portion of the underpayment which the taxpayer establishes (by a preponderance of the evidence) is not attributable to fraud.

(c) Special Rule for Joint Returns. --In the case of a joint return, this section shall not apply with respect to a spouse unless some part of the underpayment is due to the fraud of such spouse.

An "underpayment" for purposes of section 6663 is defined in section 6664(a), in relevant part, as the amount by which the tax imposed exceeds the amount shown as the tax by the taxpayer on his return.

The record shows, and petitioners admit, that they filed a 1995 individual tax return on which they did not report the gain from the sale of their property to Meijer, Inc., or the tax imposed on the gain. However, petitioners assert that their tax liability was not understated but rather was reported by means of two returns --a Form 1040 and a Form 1041 filed by Cornerstone Management Trust. Petitioners made this same assertion in appealing their convictions under section 7201. The Court of Appeals for the Sixth Circuit rejected this argument, stating:

Nor may the Christians sidestep this conclusion [that they willfully evaded their taxes] by pointing out that their 1995 individual tax return did not contain a false statement when read in conjunction with Cornerstone Management Trust's IRS Form 1041, which did disclose the tax owed and proceeded to disclaim any liability for it. The Government prosecuted the Christians for income tax evasion with respect to their individual tax return, not the return of Cornerstone Management Trust. And their individual return neither acknowledged nor paid the tax due. No doubt, a jury could have concluded that the acknowledgment of the sale and the tax due on the Cornerstone Management Trust form undermined a finding that the Christians acted willfully and committed an affirmative act of evasion. But in view of the Christians' prior tax-filing experiences, their sudden decision no longer to use an accountant, their creation of the sham trusts and offshore accounts and their non-cooperative conduct once the Government inquired about the sale, the Christians cannot tenably argue that the jury was compelled to reach such a conclusion on the basis of the Cornerstone tax filing. [United States v. Christians, 105 Fed. Appx. at 752].

We are mindful that petitioners, in their amended return, admitted an underpayment of tax for 1995. See Badaracco v. Commissioner, 464 U.S. 386, 399 (1984).4 Therefore, there is no doubt that there was an "underpayment of tax required to be shown on a return" with respect to petitioners' 1995 return as required by section 6663.

Section 7201 provides:

SEC. 7201. ATTEMPT TO EVADE OR DEFEAT TAX.

Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.

Petitioners were convicted of violating section 7201. We have repeatedly held that "A conviction for an attempt to evade or defeat tax pursuant to section 7201, either upon a guilty plea or upon a jury verdict, conclusively establishes fraud in a subsequent civil tax fraud proceeding through the application of the doctrine of collateral estoppel." Marretta v. Commissioner, T.C. Memo. 2004-128 (citing DiLeo v. Commissioner, 96 T.C. 858, 885 (1991), affd. 959 F.2d 16 (2d Cir. 1992) and Frey v. Commissioner, T.C. Memo. 1998-226), affd. 168 Fed. Appx. 528 (3d Cir. 2006); see also Montalbano v. Commissioner, T.C. Memo. 2007-349 ("It is well established that a final criminal judgment for tax evasion under section 7201 collaterally estops relitigation of the issue of fraudulent intent in a subsequent proceeding over the civil fraud penalty."); Uscinski v. Commissioner, T.C. Memo. 2006-200 ("Because the elements of criminal tax evasion and civil tax fraud are identical, petitioner's prior conviction under section 7201 conclusively establishes the elements necessary for finding fraud under section 6663."); Wilson v. Commissioner, T.C. Memo. 2002-234 ("We hold that the doctrine of collateral estoppel bars * * * [the taxpayer convicted under section 7201] from relitigating in the instant case the matters litigated in * * * [the taxpayer's] criminal tax proceeding, i.e., whether * * * [the taxpayer] underpaid his tax for each of the taxable years * * * and whether his underpayment of such tax for each such year was due to fraud."). Our holding in this regard has been affirmed by the Court of Appeals for the Sixth Circuit. Shah v. Commissioner, 208 F.3d 215 (6th Cir. 2000), affg. without published opinion T.C. Memo. 1999-71; Gray v. Commissioner, 708 F.2d 243, 246 (6th Cir. 1983), and cases cited thereat, affg. T.C. Memo. 1981-1.5

As recounted supra, petitioners were indicted and convicted for willfully attempting to evade the payment of income tax due from the sale of their property by filing a false and fraudulent joint tax return for 1995 in violation of section 7201. As the Court of Appeals noted, the petitioners' filing of a false Form 1040 constituted the affirmative act of evasion under section 7201 charged in the indictment. United States v. Christians, 105 Fed. Appx. at 753. Therefore, contrary to petitioners' claim, the issue of whether they filed a false and fraudulent return for 1995 was in fact "actually and necessarily determined by a court of competent jurisdiction", Montana v. United States, 440 U.S. at 153. Thus, petitioners are estopped from relitigating that issue in this proceeding.

On the record presented, we find that there is no genuine issue of material fact with respect to the section 6663 penalty insofar as it relates to petitioners' 1995 underpayment attributable to petitioners' failure to report the gain from the sale of their property to Meijer, Inc., in their 1995 return. We thus hold that a decision may, and should, be entered against petitioners on that issue as a matter of law. Accordingly, we sustain respondent's determination to impose a penalty under section 6663 with respect to the portion of petitioners' 1995 underpayment attributable to the omitted gain from the sale.

We now turn to that portion of petitioners' 1995 underpayment which is attributable to petitioners' $25,600 claimed charitable contribution deduction. Petitioners' entitlement to the charitable contribution deduction was not addressed in the criminal proceeding which resulted in their convictions under section 7201, and petitioners dispute respondent's disallowance of the charitable contribution deduction. Summary judgment with respect to this matter is not appropriate. A trial with respect to this issue should proceed.

A determination of the extent to which petitioners have paid their outstanding tax liability must await the resolution of the issue relating to the claimed charitable contribution deduction.

To reflect the foregoing,

An order granting in part and denying in part respondent's motion for summary judgment will be issued.

1 This case was assigned to Judge Julian I. Jacobs for disposition of respondent's motion for summary judgment by order of the Chief Judge on Aug. 12, 2008.

2 The return showed a total tax of $9,469.

3 The amended return increased petitioners' adjusted gross income by $2,948,000, with the explanation "Ottawa Revocable Living Trust Not Included in Original Filing of Form 1040", and showed $1,118,112 as the correct amount of total tax.

4 Petitioners do not appear to argue that their amended return, filed after they were notified that the IRS's Criminal Investigation Division had become involved, remedied the fraudulent underpayment with respect to their original return. Indeed, as the Supreme Court noted in Badaracco v. Commissioner, 464 U.S. 386, 394 (1984), "once a fraudulent return has been filed, the case remains one 'of a false or fraudulent return,' regardless of the taxpayer's later revised conduct, for purposes of criminal prosecution and civil fraud liability" and "a taxpayer who submits a fraudulent return does not purge the fraud by subsequent voluntary disclosure".

5 Petitioners, in their opposition to respondent's motion for summary judgment, rely on the dissenting opinion in Gray v. Commissioner, 708 F.2d 243, 247 (6th Cir. 1983) Merritt, J., dissenting, affg. T.C. Memo. 1981-1. The taxpayer in Gray, who entered a guilty plea to income tax evasion under sec. 7201, claimed that he did not understand that his guilty plea would have collateral consequences in subsequent civil proceedings. The dissent objected to application of collateral estoppel under those circumstances. Even were we to recognize a difference between a guilty plea and a jury verdict for purposes of application of collateral estoppel in these circumstances, which we do not, see Marretta v. Commissioner, T.C. Memo. 2004-128, affd. 168 Fed. Appx. 528 (3d Cir. 2006), petitioners' convictions were the result of a jury verdict of income tax evasion under sec. 7201 rather than the result of guilty pleas to those charges. In any event, apart from our own precedent, we would be constrained by the majority position in Gray v. Commissioner, supra, to apply the doctrine of collateral estoppel to the case at bar. See Golsen v. Commissioner, 54 T.C. 742, 757 (1970), affd. 445 F.2d 985 (10th Cir. 1971).

Conviction estops denial of fraud. --Fraud Penalty: Criminal Fraud: Conviction estops denial of fraud

An individual who pleaded guilty to a charge of criminal tax evasion for one tax year in return for a dismissal of charges for other years was collaterally estopped from denying that he had underpaid his taxes and that the underpayment was due to fraud. The criminal conviction established that part of the underpayment for the tax year at issue was attributable to fraud. Collateral estoppel applied regardless of whether the conviction arose from a trial on the merits or a plea of guilty.

J.C. Stepien, 71 TCM 1688, Dec. 51,108(M), TC Memo. 1996-6.

Conviction of fraud estops taxpayer from denying applicability of fraud penalty.

J.W. Amos, CA-4, 66-1 USTC ¶9130, 360 F2d 358.

J.H. Moore, CA-4, 66-1 USTC ¶9399, 360 F2d 353.

H.M. Plunkett, CA-7, 72-2 USTC ¶9541, 465 F2d 299.

A.H. Fontneau, CA-1, 81-2 USTC ¶9557, 654 F2d 8.

G. Weber, Sr., 69 TCM 2216, Dec. 50,541(M), TC Memo. 1995-125., TC Memo. 1998-226.

D.T. Madge, 80 TCM 804, Dec. 54,144(M), TC Memo. 2000-370. Aff'd, per curiam, on another issue, CA-8 (unpublished opinion), 2001-2 USTC ¶50,761.

S.M. Zamzam, 80 TCM 808, Dec. 54,145(M), TC Memo. 2000-371. Aff'd, per curiam, CA-4 (unpublished opinion), 2002-1 USTC ¶50,180.

L.J. Moore, 81 TCM 1442, Dec. 54,291(M), TC Memo. 2001-77.

R.P. Console, 82 TCM 479, Dec. 54,471(M), TC Memo. 2001-232. Aff'd, CA-3 (unpublished opinion) 2003-2 USTC ¶50,593.

Y. Yang-Wu, 83 TCM 1363, Dec. 54,681(M), TC Memo. 2002-68.

M.C. Wilson, 84 TCM 321, Dec. 54,876(M), TC Memo. 2002-234.

S.C. Carter, 86 TCM 229,Dec. 55,258(M), TC Memo. 2003-235.

H.J. Uscinski, 92 TCM 285, Dec. 56,626(M), TC Memo. 2006-200.

In cases that probably will no longer be followed, it was held that criminal conviction does not estop taxpayer from denying fraud penalty.

S.L. Anderson, DC, 66-1 USTC ¶9441, 245 FSupp 177.

M.J. Safra, 30 TC 1026, Dec. 23,126 (Nonacq.).

R.F. Smith, 31 TC 1, Dec. 23,197 (Acq.).

H.L. Blackwell, 20 TCM 599, Dec. 24,816(M), TC Memo. 1961-124.

W.F. Slater Est., 21 TCM 1355, Dec. 25,733(M), TC Memo. 1962-256.

A prior criminal conviction for fraudulent failure to file income tax returns and to pay the taxes due estops the taxpayer from seeking a refund of the civil penalties assessed for the same fraudulent action. This is true even in the case of a fraudulent joint return where one party to the return was not prosecuted and is a party to the refund suit merely because he signed the joint return.

Lefkowitz, 64-2 USTC ¶9623, 334 F2d 262. Cert. denied, 379 US 962.

O.K. Armstrong, CtCls, 66-1 USTC ¶9119, 354 F2d 274.

An individual who had pleaded guilty to charges of tax evasion for one of the three years in dispute was estopped from denying that he had filed fraudulent returns. The fact that he faced numerous personal and legal problems at the time was not a sufficiently special circumstance to waive collateral estoppel.

J.G. Paschal, CA-3 (unpublished opinion), 96-1 USTC ¶50,013.

A self-employed manufacturer's representative was not collaterally estopped by his Code Sec. 7203 criminal conviction from denying that his failure to file returns was willful. The IRS had not raised the affirmative defense of collateral estoppel with respect to the addition to tax for fraud. The taxpayer's suspicious actions concerning bank deposits and accounts were not sufficient individually to prove fraud but provided support for the IRS's determination of fraud.

P.E. Niedringhaus, 99 TC 202, Dec. 48,411.

A corporation was not collaterally estopped by a stockholder's conviction for filing and causing it to file false and fraudulent returns. It was not a party to the criminal proceeding and did not participate in his defense.

C.B.C. Supermarkets, Inc., 54 TC 882, Dec. 30,081 (Nonacq.).

American Lithofold Corp., 55 TC 904, Dec. 30,681.

Although the taxpayer, a traffic court clerk, was estopped from denying participation in a bribery scheme because of conclusions of law entered by a Federal district court, he was not collaterally estopped by the findings of the court as to the specific amounts of money he received. However, based on reasonable inferences drawn from the circumstances of the case, and in light of the taxpayer's credible testimony, the Tax Court concluded that he lacked the specific intent to avoid the payment of tax.

R.C. Cipparone, 49 TCM 1492, Dec. 42,090(M), TC Memo. 1985-234.

An IRS agent who was convicted of conspiracy to bribe was not collaterally estopped from denying that he received bribes. The jury had not been required to find that the agent actually received bribe payments in the amounts that the IRS included in his income.

W. Kale, 71 TCM 2854, Dec. 51,311(M), TC Memo. 1996-197.

An individual who pleaded guilty to charges of criminal fraud was collaterally estopped from contesting the IRS's determination that he was liable for the fraud penalty. The individual's allegation that his guilty plea was coerced and involuntary did not constitute an exceptional circumstance. An appellate court that affirmed his conviction was not persuaded by his arguments, and the U.S. Supreme Court denied review. As a result, the criminal conviction was final.

J.R. Taylor, 73 TCM 2028, Dec. 51,887(M), TC Memo. 1997-82.

An individual who was convicted of criminal tax evasion was collaterally estopped from denying that he had underpaid his taxes for the years at issue and that part of those underpayments were due to fraud. The IRS was not required to prove the exact amounts of the underpayments or the taxes owed as an element of the criminal proceeding; consequently, the individual was not precluded from contesting the amounts of the deficiencies. No exception to the application of collateral estoppel was warranted by the individual's alleged ineffective assistance of counsel at the criminal trial.

H. Wapnick, 73 TCM 2317, Dec. 51,941(M), TC Memo. 1997-133.

A medical practice was liable for the additions to tax for fraud for the tax years in issue. The conviction of the doctor for criminal fraud for one tax year collaterally estopped it from denying civil fraud in a subsequent suit.

Richard A. Cole, M.D., Inc., 76 TCM 1055, Dec. 53,004(M), TC Memo. 1998-452.

The fraud penalty was imposed on a former state senator whose conviction for criminal tax evasion collaterally estopped him from denying that he had fraudulently underpaid his taxes. The elements for criminal and civil tax fraud were virtually identical, the criminal and civil proceedings involved the same parties, and it was immaterial that his conviction resulted from a guilty plea, rather than a trial. Also, the record did not support his claim that language in his plea agreement barred the government from asserting collateral estoppel or imposing penalties and interest.

J.L. Boettner, Jr., 76 TCM 622, Dec. 52,905(M), TC Memo. 1998-359.

An individual who voluntarily pleaded guilty to the charge of violating Code Sec. 7201 and was convicted of income tax evasion by a federal district court was collaterally estopped from denying in his Tax Court proceeding that some part of his tax underpayment was due to fraud. A clarification to his plea agreement indicating that the tax issues were not resolved did not prevent the application of collateral estoppel, because the district court subsequently entered judgment against the taxpayer for tax evasion.

J.S. Fagan, 82 TCM 443, Dec. 54,457(M), TC Memo. 2001-222.

When a petition is filed with the Board, it is its duty to review the administrative action of the Commissioner in determining a deficiency and penalties (here fraud and failure to file). It is not relieved of this duty by the fact that, in a criminal proceeding, the taxpayer was sentenced to pay and did pay the amount determined as the tax by the court.

Epstein, 34 BTA 925, Dec. 9461.

Fraud penalties were imposed against an attorney who admitted to having understated taxable income from his law practice by overstating business expenses. He was collaterally estopped from challenging the IRS's determination of a fraud penalty for one tax year because he had pleaded guilty to tax evasion charges.

D.R.. Cooley, 86 TCM 1025, Dec. 55,558(M), TC Memo. 2004-49.

A taxpayer was liable for penalties for fraud, under Code Sec. 6663, based on admissions he had made while pleading guilty in a criminal case and on his conviction in that case. The taxpayer was estopped from challenging the IRS's determination that he had taxable income and that he had filed a false tax return with the intent to evade income tax for that year. The taxpayer's guilty plea and conviction for attempting to evade or defeat the tax, under Code Sec. 7201, conclusively established fraud in the subsequent civil tax fraud proceeding.

J. Marretta, 87 TCM 1371, Dec. 55,649(M), TC Memo. 2004-128.

Because the elements of criminal tax evasion and civil tax fraud are identical, an attorney's prior conviction under Code Sec. 7201 conclusively established the elements necessary for finding fraud under Code Sec. 6663. His prior conviction collaterally estopped him from denying in the civil tax proceeding: (1) that his failure to report funds received from a former client resulted in an underpayment in his income tax; and (2) that at least part of the underpayment was due to fraud within the meaning of Code Sec. 6663. However, the IRS failed to carry its initial burden to show that there was no triable issue of fact with respect to the precise amount of the attorney's unreported income for the year at issue.

The sole owner of an S corporation who pled guilty to criminal tax evasion for failure to report in excess of $650,000 of corporate income was liable for the civil fraud penalty and was collaterally estopped from denying fraud. He argued that he suffered from diminished mental capacity based on the fact that in his criminal proceeding the government stipulated, and the sentencing court found, diminished capacity resulting from his bipolar disorder but that diminished capacity did not serve as a basis for waiving collateral estoppel.

C. Montalbano, 94 TCM 499, Dec. 57,183(M), TC Memo. 2007-349.


Failure to report income. --Willful Failure to File Return, Supply Information, or Pay Tax: Failure to report income

Taxpayer was a close friend of prominent political figures, and by virtue of his public offices was able to grant them favors in the way of contracts for materials and machinery in the construction of public works. The evidence sustains his conviction for failure to report the sums he received.

Murray, CA-8, 41-1 USTC ¶9247, 117 F2d 40.

Barrow, CA-5, 49-1 USTC ¶9112, 171 F2d 286.

Tax evasion conviction was upheld for failure to include in income a fee for arranging a mortgage loan.

B. Cohen, CA-5, 66-2 USTC ¶9560, 363 F2d 321.

Conviction of taxpayer who failed to report as taxable income the amounts extorted from another was upheld.

Rutkin, 52-1 USTC ¶9260, 343 US 130.

[Note: See also Rutkin at ¶41,318.20. --CCH.]

But a conviction for embezzling done before Rutkin was decided when Wilcox, 46-1 USTC ¶9188, was in effect (holding that embezzled funds are not taxable) was reversed since a willful attempt to evade could not be established so long as the law contained the gloss put upon it by Wilcox.

E.C. James, SCt, 61-1 USTC ¶9449, 81 SCt 1052.

Since funds which the taxpayer failed to report in his income tax returns were embezzled funds, and the embezzlement occurred before Wilcox was overruled, the taxpayer could not be prosecuted for willful evasion of income tax for his failure to include the funds in his tax returns.

M. Pitoscia, DC, 65-1 USTC ¶9281, 238 FSupp 135.

Conviction for failure to report certain funds which taxpayer acquired through his employment before James, was sustained, since the taking of the fund was not technically an embezzlement under local law.

R.C. Jannsen, CA-7, 65-1 USTC ¶9142, 339 F2d 941.

Failure to report funds embezzled 3 days before James was decided was willful evasion of income tax for the year 1961.

H.B. Nordstrom, CA-8, 66-1 USTC ¶9437, 360 F2d 734. Cert. denied, 385 US 826.

A taxpayer who acquired property and money by fraud and deceit, obtained such funds unlawfully in the first instance; therefore the Wilcox doctrine was inapplicable and the taxpayer could be found guilty of filing fraudulent returns as a result of his failure to include these amounts in gross income.


Conviction for tax evasion was reversed and a new trial was ordered, to find out if unreported income was embezzled funds or income from some other source, following James, above.

D.D. Beck, CA-9, 62-1 USTC ¶9227, 298 F2d 622.

To the contrary, where reliance on the James decision was first presented on appeal.

B.C. Wallace, CA-4, 62-1 USTC ¶9330, 300 F2d 525. Cert. denied, 370 US 923.

Dismissal of indictment for tax evasion before determining whether or not defendant had an interest in part of a fund allegedly embezzled was premature.

O.P. Colamatteo, CA-7, 63-1 USTC ¶9206, 312 F2d 154.

Proof that taxpayers deliberately omitted to report side payments received in connection with over-ceiling sales of whiskey and that after investigation had begun each taxpayer filed an amended return disclosing a part of the income previously omitted was sufficient.

Rosenblum, CA-7, 49-1 USTC ¶9314, 176 F2d 321. Cert. denied, 338 US 893.

Conviction for failure to report suppliers' cash discounts as income was sustained. Since the case was built on the correct amount of the discount receipts, the government was not required to prove the correct amount of the purchases, even though such discounts are normally reflected as reductions of purchases.

A.L. Wainwright, CA-10, 69-2 USTC ¶9503, 413 F2d 796. Cert. denied, 396 US 1009.

Circumstantial evidence supported the District Court's determination that the taxpayer made no agreement to repay unreported income from trade-outs in which businesses exchanged merchandise for newspaper advertising.

H.B. Brown, Jr., CA-10, 71-2 USTC ¶9557, 446 F2d 1119.

Taxpayer's conviction for failing to report long-term capital gain by using false basis was sustained.

R.R. Krilich, CA-7, 72-2 USTC ¶9767, 470 F2d 341. Cert. denied, 411 US 938.

Taxpayer's tax evasion conviction for fraudulently understating income was affirmed on appeal.


Taxpayer's conviction of willfully and knowingly attempting to evade and defeat federal income taxes for two years by omitting from gross income money received as salary was upheld. The court held that the taxpayer knew that money received from a partnership was income and that he deliberately omitted such sums from his returns. Such payments could not be construed as a return of equity since the taxpayer, as a limited partner, had not made any capital contributions and was not responsible for any partnership losses.

T.M. Fahey, CA-2, 75-1 USTC ¶9102, 510 F2d 302.

Taxpayer's conviction for willfully attempting to evade taxes by concealing his Irish Sweepstakes winnings of approximately $130,000 in a foreign bank account was affirmed on appeal.

F.L. McNulty, CA-9, 76-1 USTC ¶9215, 528 F2d 1223. Cert. denied, 425 US 972.

Although an individual correctly and timely reported the amount of tax due, his concealment of assets alone was a sufficient act to support a conviction for tax evasion. Congress did not intend that Code Sec. 7206(4) be the sole remedy for concealment of assets or be interpreted to limit the scope of Code Sec. 7201.

F.L. Hook, CA-6, 86-1 USTC ¶9179, 781 F2d 1166.

It was not shown that a payment received from a corporation for which the taxpayers were selling products, which payment was the only income they failed to report, was a discount or rebate rather than a bonus payment.

M.L. Schutterle, CA-8, 78-2 USTC ¶9773, 586 F2d 1201.

No error was committed when the defendant was found guilty of tax evasion for the years 1975 and 1976. Although the defendant had formal legal control over all of certain unreported funds prior to 1976, that did not preclude a conviction for 1976 because there had been an issue of facts as to when he felt free to use the funds. The funds in his bank account did not result in reportable income until he had "practical control" over the funds.

D. Dixon, CA-11, 83-1 USTC ¶9213.

Where the government in a tax evasion prosecution established that a resident alien received unreported income and that his nondisclosure resulted in a tax deficiency, the resident alien did not negate the deficiency by claiming a foreign tax credit when there had been no firmly established taxable amount owed the Dominican Republic and determined by it before the discovery of the federal tax deficiency.

J.M.A. Cruz, CA-11, 83-1 USTC ¶9216, 698 F2d 1148. Cert. denied, 104 SCt 391.

The conviction of an engineering president for failure to report income on his individual income tax returns was upheld. The firm's general business practices included depositing in the corporation's account payments received for engineering services rendered to its clients. For the tax years at issue, a number of the clients' checks were either cashed by the president or deposited in his personal checking account.

T.P. Meyer, CA-8, 87-1 USTC ¶9132, 808 F2d 1304.

A personal injury lawyer who concealed and attempted to conceal the nature, extent, and ownership of his assets by placing his assets, funds, and other property in the names of others and by transacting his personal business in cash to avoid creating a financial record was properly convicted by a jury on three counts of willful attempt to evade and defeat the payment of his personal income tax.

E.J. Conley, CA-7, 87-2 USTC ¶9469, 826 F2d 551.

The conviction of an individual for tax evasion was upheld. The taxpayer forged documents charging personal expenses to her family corporation, failed to report interest income on 10 money market accounts and deposited large amounts of cash that were not attributable to any known source into her bank accounts.

R.R. Walker, CA-8, 90-1 USTC ¶50,084, 896 F2d 295.

An individual's conviction for tax evasion was upheld. The government properly determined that the individual had unreported income under the cash expenditures and bank deposits method of reconstructing income. The individual's cash on hand at the beginning of each year was established with reasonable certainty based on the individual's personal records and safety deposit box access records.

C.T. Conaway, CA-5, 94-1 USTC ¶50,009, 11 F3d 40.

The evidence was sufficient to sustain an individual's conviction for willful failure to file tax returns and tax evasion. He could not claim that his taxes were not deficient by treating fees received from an insurance adjusting company as a nontaxable settlement award for personal injuries. The company stated that no settlement was ever agreed upon, and, even if one had been reached, the damages would have flowed from a breach of contract.

W.J. Benson, CA-7, 95-2 USTC ¶50,540, 67 F3d 641.

There was sufficient evidence for a jury to find that the majority shareholder, president, and director of a corporation was guilty of tax evasion based on his exercise of control over a liquidating dividend that was due another shareholder. The money was not used for the alleged purpose of providing a contingency fund to protect former officers and directors from claims arising out of the liquidation but, instead, was for the taxpayer's benefit.

R.P. Mueller, CA-11, 96-1 USTC ¶50,190.

Insufficient evidence was presented to support married taxpayers' convictions for tax evasion where the government failed to prove the required existence of a tax deficiency. Under the "no earnings and profits, no income" rule established in P.F. DiZenzo, CA-2, 65-2 USTC ¶9518, amounts that the couple diverted from their wholly owned corporation could not be taxable to them personally as a constructive dividend, where the company had no earnings or profits. Instead, the diverted funds constituted a nontaxable reduction of the couple's shareholder loan account.

J. D'Agostino, CA-2, 98-1 USTC ¶50,380, 145 F3d 69.

The taxpayer's contention that the bonus and interest payments were motivated solely by tax concerns and that they did not constitute taxable income and, thus, could not result in a tax deficiency, was rejected.

M.Y. Khalaf, CA-9 (unpublished opinion), 2002-1 USTC ¶50,297, aff'g an unreported District Court decision.

A federal district court properly determined the amounts embezzled by an individual from his employers. The individual produced no evidence in support of his claim that he embezzled less than the amounts alleged by the victim, and he failed to refute the reliability of the victim's allegations.

D.J. Peterson, CA-10, 2003-1 USTC ¶50,168.

An individual's conviction for filing false tax returns was not set aside because the evidence supported the jury's finding beyond a reasonable doubt that the individual's tax returns contained false information as to material matters in that he did not report income he should have reported. The evidence also showed that the individual exerted control over funds he obtained from his business trust but did not report those funds as income on his personal returns or otherwise properly account for the funds.

M.E. Diesel, DC Kan., 2006-2 USTC ¶50,398.

Two individuals who operated a printing and copying business were properly convicted for willful tax evasion. They concealed business assets using a secret bank account that was not known to their accountant and used the funds in that account for personal expenses. They also handled affairs in cash to avoid making records and repeatedly failed to report large amounts of income.

L.K. Spurlock, CA-5 (unpublished opinion), 2007-1 USTC ¶50,384, aff'g an unreported DC Texas decision.

An individual's conviction and sentence for tax evasion and failure to account for and pay over withholding taxes was proper. The government presented evidence that the individual was the hidden owner of a partnership, he diverted the partnership's funds for personal purposes without reporting the income, and misused taxes withheld from the partnership's employees. Further, contrary to the individual's arguments, an assessment is not necessary to prove tax evasion.

P. Lombardo, CA-3 (unpublished opinion), 2008-1 USTC ¶50,381, aff'g an unreported DC Pa. decision.
ion 7201 tax fraud also permits section 6663 penalty