Joseph Williams, III v. Commissioner, IRS , 498 F. App'x 284 ( 2012 )


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  •                                UNPUBLISHED
    UNITED STATES COURT OF APPEALS
    FOR THE FOURTH CIRCUIT
    No. 11-1804
    JOSEPH B. WILLIAMS, III,
    Petitioner - Appellant,
    v.
    COMMISSIONER OF INTERNAL REVENUE,
    Respondent - Appellee.
    Appeal from the United States Tax Court.       (Tax Ct. No. 2202-08)
    Argued:   September 19, 2012                 Decided:   December 4, 2012
    Before WILKINSON and THACKER, Circuit Judges, and Michael F.
    URBANSKI, United States District Judge for the Western District
    of Virginia, sitting by designation.
    Affirmed by unpublished opinion.      Judge Urbanski wrote          the
    opinion, in which Judge Wilkinson and Judge Thacker joined.
    ARGUED: David Harold Dickieson, SCHERTLER & ONORATO, LLP,
    Washington, D.C., for Appellant.    Damon William Taaffe, UNITED
    STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.
    ON BRIEF:       Pamela Satterfield, SCHERTLER & ONORATO, LLP,
    Washington, D.C., for Appellant.    ON BRIEF: Tamara W. Ashford,
    Deputy Assistant Attorney General, Robert W. Metzler, UNITED
    STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.
    Unpublished opinions are not binding precedent in this circuit.
    URBANSKI, District Judge:
    Joseph    B.   Williams,    III,       challenges    the   notice     of   tax
    deficiency issued to him by the Commissioner of Internal Revenue
    for tax years 1993 through 2000.                  The Tax Court upheld the
    Commissioner’s notice of deficiency.              Williams now appeals.
    Williams argues that the Tax Court erred in three ways:
    (1) by holding Williams’ guilty plea to criminal tax evasion
    collaterally estops him from denying liability for civil fraud
    penalties for tax years 1993 through 2000; (2) by attributing
    income generated by Williams’ consulting services to Williams
    individually instead of to the foreign corporation he formed;
    and (3) by disallowing certain charitable deductions taken by
    Williams for art donations made to two universities over the
    course of three years.         Finding each of Williams’ arguments to
    be without merit, we affirm.
    I.
    A.
    Williams worked for Mobil Oil Corporation from 1973 until
    his    retirement     in   1998.   In   the     1990s,     he   was   tasked      with
    developing strategic business relationships in Russia and former
    Soviet republics.          In 1993, separate and apart from his work
    with    Mobil,    Williams    began     providing        consulting    and     other
    services    concerning       pipeline-related         contracts       to     foreign
    2
    governments.          Alika Smekhova, a Russian actress and celebrity,
    arranged introductions and provided interpretation services for
    Williams     in     connection     with     his    consulting      work.           That    same
    year, Williams formed ALQI Holdings, Inc. (“ALQI”), a British
    Virgin    Islands       corporation.          Williams       was      the     sole    owner,
    operational director, and officer of ALQI.                       Neither Williams nor
    Smekhova had a written employment contract with ALQI.
    Two accounts were opened in ALQI’s name at a Swiss bank,
    Banque Indosuez (“the ALQI accounts”).                       Williams had complete
    authority over the ALQI accounts.                       The bank provided Williams
    with   use     of     its   office     space,      as    well    as     a    Swiss     mobile
    telephone      and     credit      card     that    were    issued      and        billed    in
    Williams’ name.             All monies deposited into the ALQI accounts
    between      1993     and   2000     were    received      for     Williams’         oil    and
    pipeline-related consulting services.                      There are no consulting
    agreements documenting the services rendered.                         Williams did not
    use the ALQI name in his dealings with third parties and did not
    maintain corporate accounting records.
    Smekhova was paid a stipend of $5,000 to $10,000 per month
    from   the     ALQI    accounts,      but    Williams      did    not       pay    himself    a
    salary    or   commission.           Funds    were      transferred         from    the     ALQI
    accounts at Williams’ direction, however, and were used to pay
    credit     cards      and    other    bills       reflecting       Williams’         personal
    expenses, such as a $30,000 shopping spree in Paris and a family
    3
    ski vacation.       Williams also made gifts to family and friends
    from these accounts, including over $41,000 in payments to his
    former secretary and a $15,000 gift to the wife of Williams’
    deceased father.
    More than $7 million in consulting fees were deposited into
    the   Swiss    accounts   during   the       relevant   period   and    over   $1.1
    million in interest, dividends and capital gains was earned on
    these deposits.      Williams did not report any of the consulting
    fee or investment income on his individual tax returns for tax
    years 1993 through 2000, nor did he disclose the existence of
    ALQI or its Swiss accounts.
    In 2000, at the request of the United States government,
    the Swiss government froze the ALQI accounts.                     Subsequently,
    Williams      disclosed   his   ownership       interest   in    ALQI    and   the
    existence of the ALQI accounts on his 2001 tax return. 1                 In 2003,
    Williams amended his 1999 and 2000 tax returns 2 to report the
    investment income earned on the funds in the ALQI accounts, and
    he paid the additional tax due.                Williams did not include as
    1
    Earlier this year we determined that Williams willfully
    violated 
    31 U.S.C. § 5314
    (a) by failing to file for tax year
    2000 the form TD F 90-22.1 (“FBAR”), on which he was required to
    disclose his interest in the ALQI accounts.     United States v.
    Williams, No. 10-2230, 
    2012 WL 2948569
     (4th Cir. July 20, 2012).
    2
    Amended returns for 1993 through 1998 were prepared but
    were never filed.
    4
    income on either his original or amended returns the corpus of
    the accounts.
    In 2003, Williams was charged in a two-count superseding
    criminal information with conspiracy to defraud the government,
    in violation of 
    18 U.S.C. § 371
    , and tax evasion, in violation
    of 
    18 U.S.C. § 7201
    .           On June 12, 2003, Williams entered a
    guilty plea to both counts.       The court accepted the guilty plea,
    sentenced Williams to 46 months’ incarceration, and ordered him
    to pay $3,512,000 in restitution.           Williams was released from
    federal custody on May 21, 2006.
    B.
    In 1996, Williams signed an Art Purchase Agreement in which
    he purportedly committed to purchasing at a discount from Abbey
    Art Consultants, Inc. (“Abbey Art”) certain works of art that,
    at Williams’ direction, were to be donated at fair market value
    to charitable institutions.       The Agreement recited that Williams
    “desire[d]    to   purchase”    $72,000   worth   of   art,    but   did   not
    identify specific pieces of art, and provided that the purchase
    price would not exceed 24% of the appraised fair market value of
    the art.      The Agreement required Williams to pay only $3,600
    upon signing; the balance of the purchase price was to be paid
    on or before such time as the art was donated to charity.
    Abbey Art was to facilitate all aspects of the art donation
    and   incur     all   expense,     including      paperwork,     appraisal,
    5
    packaging, shipping, and storage costs.                     The Agreement provided
    that       Abbey   Art   would    arrange       for   the     donation       “after   the
    required holding period of one (1) year.”                     While Williams could
    request a donation be made to a certain charitable institution,
    Abbey Art ultimately had the discretion to choose the donee.                          If
    Abbey Art was unable to facilitate the art donation for any
    reason, the Agreement required Abbey Art to refund Williams’
    payments.          Additionally,    Abbey       Art’s    sole       remedy    under   the
    Agreement       for   Williams’    non-payment          was    to    retain     payments
    already received and retake possession of the art. 3                     In the event
    of a reduction in the fair market value of the art, Abbey Art
    agreed to pay Williams an amount equal to “the percentage of the
    dollars paid for each dollar the fair market value of the Art
    has been reduced.”         Finally, the Agreement provided that it was
    the entire agreement between the parties and that it was to be
    interpreted under New York law.
    In December 1997, Abbey Art, at Williams’ direction, donated
    certain pieces of art with an appraised fair market value of
    $425,625 to Drexel University.                   Williams received an invoice
    from Abbey Art in the amount of $98,400, representing a purchase
    3
    A term of the Agreement requiring specific performance of
    the unpaid portion of the purchase price was crossed out and
    initialed by Williams and his wife who, while a signatory to
    this Agreement, is not a party to this case.
    6
    price    of     $102,000     (approximately              24%    of     the    appraised     fair
    market       value    of    the    art)      less        Williams’           $3,600   deposit.
    Williams paid Abbey Art $98,400 before the end of 1997 and on
    his federal income tax return for that year, Williams claimed a
    charitable contribution deduction of $425,625.
    In December 1999, Williams wrote Abbey Art requesting that a
    gift    of     art   be    made   on   his     behalf          to    Florida    International
    University for the current tax year.                                Williams enclosed with
    this letter a check in the amount of $57,500.                            Certain pieces of
    art     with    an    appraised        value        of    $250,525       were     donated     at
    Williams’ request prior to the end of the year.                                  On his 1999
    federal tax return, Williams claimed the full fair market value
    of the art as a charitable contribution deduction.
    In 1999, Williams paid Abbey Art $4,600, and in October
    2000, Abbey Art arranged a gift of additional artwork with an
    appraised value of $98,900 to Drexel University.                                Williams paid
    Abbey Art the balance due on this donation, $17,158, on December
    8, 2000.        Williams again claimed the fair market value of the
    donated art as a charitable contribution deduction on his 2000
    federal income tax return.
    C.
    On October 29, 2007, the Commissioner of Internal Revenue
    issued a notice of tax deficiency to Williams.                               The Commissioner
    found    the     consulting       fees    deposited            into     the    ALQI   accounts
    7
    between 1993 and 2000, as well as the investment income earned
    on those funds, to be taxable income to Williams and assessed
    civil fraud penalties for each of the eight years he failed to
    report this income on his tax returns.                     The Commissioner also
    determined        that   Williams   was       only    entitled      to   charitable
    contribution deductions in the amount of his basis in the art
    donated through Abbey Art, because Williams had not owned the
    art   for    at    least   one   year     prior      to    the    donations.      The
    Commissioner        assessed     accuracy-related            penalties       on   the
    underpayments        resulting      from       the        disallowed     charitable
    deductions.
    Williams challenged the notice of deficiency by filing a
    petition    in     the   Tax   Court.      The    Tax     Court    granted     partial
    summary judgment in favor of the Commissioner, holding Williams
    was collaterally estopped from denying that he had committed
    civil tax fraud during each of the years 1993 through 2000.
    Williams v. Comm’r, No. 2202-08, 
    2009 WL 1033354
     (U.S. Tax Ct.
    Apr. 16, 2009).          Following a bench trial, the Tax Court found
    that the consulting fee and investment income deposited into the
    ALQI accounts between 1993 and 2000 was attributable to Williams
    individually.        The Tax Court further held that Williams was not
    entitled to a charitable contribution deduction in the amount of
    the fair market value of the donated art because Williams did
    not hold the art for more than one year before donating it.
    8
    Accordingly, the Tax Court upheld the Commissioner’s notice of
    deficiency    and       assessment       of     civil    tax    fraud   and     accuracy-
    related penalties.             Williams v. Comm’r, No. 2202-08, 
    2011 WL 1518581
     (U.S. Tax Ct. Apr. 21, 2011).                    This appeal followed.
    We   review       the    Tax     Court’s       decision    applying       the     same
    standard of review as we would to a civil bench trial in the
    United States district court.                 Waterman v. Comm’r, 
    176 F.3d 123
    ,
    126   (4th    Cir.        1999).         Questions        of    law     and     statutory
    interpretation are reviewed de novo and findings of fact for
    clear error.        
    Id.
           The grant of the Commissioner’s motion for
    partial summary judgment on the collateral estoppel issue is
    reviewed de novo.             Henson v. Liggett Grp., Inc., 
    61 F.3d 270
    ,
    274 (4th Cir. 1995).            The Commissioner’s notice of deficiency is
    presumed to be correct, and the taxpayer bears the burden of
    proving it wrong.          McHan v. Comm’r, 
    558 F.3d 326
    , 332 (4th Cir.
    2009); see also Welch v. Helvering, 
    290 U.S. 111
    , 115 (1933).
    II.
    Williams first argues on appeal that the Tax Court erred in
    holding     that    his       guilty     plea       to   criminal     tax     evasion     in
    violation    of    
    18 U.S.C. § 7201
           collaterally      estops    him     from
    9
    denying his liability for civil tax fraud penalties under 
    26 U.S.C. § 6663
     for the years 1993 through 2000. 4
    The doctrine of collateral estoppel applies “where (1) the
    ‘identical         issue’    (2)    was    actually    litigated       (3)     and    was
    ‘critical and necessary’ to a (4) ‘final and valid’ judgment (5)
    resulting from a prior proceeding in which the party against
    whom the doctrine is asserted had a full and fair opportunity to
    litigate the issue.”           McHan, 
    558 F.3d at 331
     (quoting Collins v.
    Pond       Creek    Mining   Co.,    
    468 F.3d 213
    ,   217    (4th      Cir.     2006)
    (citation and quotation marks omitted)).                       “[O]nce 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.”              Montana v. United States, 
    440 U.S. 147
    ,
    153 (1979).
    A taxpayer is collaterally estopped from denying civil tax
    fraud when convicted for criminal tax evasion under 
    18 U.S.C. § 7201
     for the same taxable year.                    Moore v. United States, 360
    4
    Generally, the Commissioner must assess a deficiency
    within three years of the filing of the tax return from which
    the deficiency stems. 
    26 U.S.C. § 6501
    (a). If a deficiency is
    determined in the case of a false or fraudulent return with the
    intent to evade tax, however, the Commissioner can assess such a
    deficiency at any time. 
    Id.
     at § 6501(c)(1). The Commissioner
    bears the burden of proving civil tax fraud.        
    26 U.S.C. § 7454
    (a).
    
    10 F.2d 353
    , 355 (4th Cir. 1966); DiLeo v. Comm’r, 
    96 T.C. 858
    ,
    885-86 (1991), aff’d, 
    959 F.2d 16
     (2d Cir. 1992); see generally
    United States v. Wight, 
    839 F.2d 193
    , 196 (4th Cir. 1988) (“The
    doctrine of collateral estoppel may apply to issues litigated in
    a   criminal     case   which    a   party      seeks    to   relitigate     in    a
    subsequent civil proceeding.”).               “[W]hile the criminal evasion
    statute   does    not   explicitly    require     a     finding    of   fraud,    the
    case-by-case process of construction of the civil and criminal
    tax provisions has demonstrated that their constituent elements
    are identical.”     Moore, 360 F.2d at 356.
    A.
    Williams argues that the Tax Court misinterpreted the terms
    of his guilty plea in barring him from denying civil tax fraud
    liability for the years 1993 through 2000.                    Williams contends
    that he did not plead guilty to tax evasion, but rather to
    evasion   of   payment    of    taxes,    the   elements      of   which   are    not
    dependent upon any specific tax year. 5               As such, Williams argues
    5
    Section § 7201 “includes the offense of willfully
    attempting to evade or defeat the assessment of a tax as well as
    the offense of willfully attempting to evade or defeat the
    payment of a tax.” Sansone v. United States, 
    380 U.S. 343
    , 354
    (1965).   As the Third Circuit in United States v. McGill, 
    964 F.2d 222
    , 230 (1992), explained, the willful filing of a false
    return satisfies the elements of evasion of assessment.     Such
    cases are far more common than evasion of payment cases, which
    are rare and generally require an affirmative act that occurs
    after any filing, such as placing assets in the name of others
    (Continued)
    11
    that   he    is    not    collaterally      estopped       from    denying     civil    tax
    fraud for the entire eight year period set forth in the notice
    of deficiency, or for any particular year therein.
    We reject this argument because, in addition to lacking
    merit,      it    has    been   waived.         Williams    failed       to   raise    this
    argument before the Tax Court.                 Ordinarily, we will not consider
    an issue raised for the first time on appeal except in limited
    circumstances, Nat’l Wildlife Fed’n v. Hanson, 
    859 F.2d 313
    , 318
    (4th Cir. 1988), and this rule is applied equally by courts of
    appeals reviewing Tax Court decisions, Karpa v. Comm’r, 
    909 F.2d 784
    , 788 (4th Cir. 1990) (citing Grauvogel v. Comm’r, 
    768 F.2d 1087
    , 1090 (9th Cir. 1985)).                    Williams has not suggested any
    reason why we should depart from our ordinary rule in this case,
    and we see no reason to do so.
    B.
    Williams also takes issue with the Tax Court’s finding that
    his    conviction        for    tax    evasion    collaterally       estops     him    from
    denying      civil      fraud    for    each     year   from      1993   through      2000.
    Williams disputes that he pled guilty to tax evasion for each
    and every one of these years.                  The record, however, proves fatal
    or causing debts to be paid through and in the name of others.
    
    Id.
    12
    to this claim.     The plain language of the superseding criminal
    information charges Williams with tax evasion for each year from
    1993 through 2000:
    From in or about 1993, through in or about April 2001,
    . . . J. BRYAN WILLIAMS, the defendant, unlawfully,
    willfully and knowingly did attempt to evade and
    defeat a substantial part of the income tax due and
    owing by J. BRYAN WILLIAMS . . . for the calendar
    years 1993 through 2000, by various means, including,
    among others by (a) arranging for approximately $7.98
    million in payments which were income to Williams to
    be made into the secret Alqi accounts in Switzerland
    he controlled; and (b) preparing and causing to be
    prepared, signing and causing to be signed, and filing
    and causing to be filed, false and fraudulent U.S.
    Individual Income Tax Returns, Forms 1040, for the
    calendar years 1993 through 2000, on which he failed
    to disclose his interest in the secret Alqi bank
    accounts in Switzerland, and on which, in the years
    set forth below, he failed to report the approximate
    amounts of income set forth below, and upon which
    income there was a substantial additional tax due and
    owing to the United States of America:
    Calendar            Approximate
    Year                Amount of Income
    1993                $1,029,518.72
    1994                $752,479.52
    1995                $998,723.14
    1996                $3,917,762.57
    1997                $1,670,891.49
    1998                $133,371.90
    1999                $109,167.59
    2000                $256,234.64
    (Title 26, United States Code, Section 7201).
    Williams pled guilty to this tax evasion count, as well as to
    conspiracy to defraud the government in violation of 
    18 U.S.C. § 371
    .    Pursuant to a written plea agreement, Williams agreed to
    13
    “file accurate amended personal tax returns for the calendar
    years 1993 through 2000” and “pay past taxes due and owing to
    the [IRS] by him for calendar years 1993 through 2000, including
    any applicable penalties.”
    Additionally,        Williams   admitted      during   his   allocution   at
    his guilty plea hearing that he knew the funds deposited into
    the ALQI accounts were taxable to him.                 Williams acknowledged
    that for “the calendar year tax returns for ‘93 through 2000,
    [he] chose not to report the income to [the IRS] in order to
    evade the substantial taxes owed thereon, until [he] filed [his]
    2001 tax return.”          Williams continued:         “I therefore believe
    that I am guilty of evading the payment of taxes for the tax
    years 1993 through 2000.”            As the Tax Court observed, there is
    no question that Williams pled guilty to and was convicted of
    tax evasion for each of the eight calendar years 1993 through
    2000.
    Williams insists he made clear to the district court that
    he was pleading to a narrower statement of facts concerning tax
    evasion    than   those    contained    in   the    superseding    information.
    The record proves otherwise.             At the plea hearing, Williams’
    counsel told the district judge:
    [W]e’re not adopting or accepting the facts as stated
    in the conspiracy count, which I think is the
    recitation of what was in the original indictment in
    this case.   What we have agreed is that Mr. Williams
    would plead guilty to conspiracy counts, but based
    14
    upon the factual allocution, which he has given to the
    Court.
    This statement plainly refers to the conspiracy count, not to
    the tax evasion count.              Williams pled guilty to both conspiracy
    and tax evasion.            While he raised a concern at the plea hearing
    about the factual allegations surrounding the conspiracy count,
    Williams did         not    deny    any       fact    or   allegation        concerning     tax
    evasion, nor raise any issue whatsoever with respect to that
    count.        On the contrary, Williams expressly admitted to facts
    that       demonstrate      his    tax    evasion       scheme   continued        from     1993
    until the time he filed his 2001 tax return, as charged in the
    information.
    C.
    Williams’       final       contention          with   respect        to   collateral
    estoppel is that he did not have a full and fair opportunity to
    litigate the issue previously, because at the time he entered
    his    guilty       plea,    neither      the        Commissioner      nor    Williams      had
    analyzed       the   actual       tax    implications         arising    from      the     ALQI
    accounts      and    the    amount       of    deficiencies      for    each      tax    year. 6
    6
    Any suggestion that Williams’ conviction following a
    guilty plea, rather than a trial, renders collateral estoppel
    inapplicable misses the mark. “[T]here is no difference between
    a judgment of conviction based upon a guilty plea and a judgment
    rendered after a trial on the merits,” for purposes of applying
    the doctrine of collateral estoppel, as the conclusive effect is
    the same.    Blohm v. Comm’r, 
    994 F.2d 1542
    , 1554 (11th Cir.
    1993).
    (Continued)
    15
    Thus, argues Williams, the fraud penalties were not actually and
    necessarily decided by the court in his criminal case.
    Williams confuses the issues.    It matters not whether civil
    fraud penalties and interest had been calculated as of the date
    of his guilty plea or sentencing. 7   These determinations are not
    Moreover,    Williams’  reliance   on   United   States   v.
    International Building Co., 
    345 U.S. 502
    , 505-06 (1953), is
    misplaced.    Williams claims International Building stands for
    the proposition that collateral estoppel is not appropriate when
    the decision of a prior court is the result of compromise or
    negotiation rather than a full review of the facts.           But
    International Building involved “a pro forma acceptance by the
    Tax Court of an agreement between the parties to settle their
    controversy for reasons undisclosed.”    
    Id. at 505
    .   Indeed, in
    International Building, the Commissioner agreed to withdraw his
    proofs of claim for tax deficiencies filed in International
    Building’s bankruptcy proceeding, upon a stipulation that the
    withdrawal was “‘without prejudice’ and did not constitute a
    determination of or prejudice the rights of the United States to
    any taxes with respect to any year other than those involved in
    the claim.” 
    Id. at 503
    . The parties filed stipulations in the
    pending Tax Court proceedings that there was no tax liability
    for the years 1933, 1938, and 1939, and the Tax Court entered
    formal decisions to that effect. No factual findings were made,
    no briefs were filed, and no hearings were held.     The Supreme
    Court held that while the Tax Court’s decisions were res
    judicata with respect to tax claims for 1933, 1938, and 1939,
    they did not collaterally estop the Commissioner from assessing
    deficiencies for the years 1943, 1944, and 1945.     
    Id. at 505
    .
    International Building is plainly distinguishable from the
    instant case.
    7
    Moreover, the record makes clear it was Williams’ counsel
    who advocated for proceeding with the guilty plea and sentencing
    hearings before a sum certain in penalties and interest had been
    calculated.   Williams cannot now argue that he was rushed into
    pleading guilty before a final figure had been determined.
    16
    required to secure a criminal conviction for tax evasion.                       What
    matters for purposes of collateral estoppel is that Williams was
    indeed convicted of evasion for the years in question.                         As we
    held in Moore, that conviction “supplies the basis for a finding
    of fraud in [a] civil proceeding to determine tax liability.”
    360 F.2d at 355 (citing Tomlinson v. Lefkowitz, 
    334 F.2d 262
    (5th Cir. 1964)).
    Williams pled guilty to a tax evasion scheme that continued
    from 1993 until 2000.            In so doing, Williams admitted that he
    committed tax fraud in each of those eight years.                    In light of
    his   guilty    plea     and    allocution,      Williams    cannot      now    deny
    liability   for       civil    tax    fraud    penalties    for   the    years    in
    question. We find the Tax Court correctly applied the doctrine
    of collateral estoppel in this case.
    III.
    Williams next argues that the Tax Court erred in finding
    him individually liable for tax on the consulting fee income
    deposited      into    the     ALQI   accounts     between    1993      and    2000.
    Williams asserts that ALQI was a legitimate business for which
    he performed consulting work and contends that he acted on the
    company’s behalf when he earned the consulting fees at issue.
    We are not persuaded.
    17
    “The principle that income is taxed to the one who earns it
    is basic to our system of income taxation.”                                Haag v. Comm’r, 
    88 T.C. 604
    ,     610      (1987),      aff’d,      
    855 F.2d 855
       (8th    Cir.     1988)
    (unpublished table decision); see also Lucas v. Earl, 
    281 U.S. 111
     (1930).       For income to be taxable to a corporation:                             (1) the
    service-performer must be an employee of the corporation whom
    the    corporation        has    the    right       to    direct       or    control    in    some
    meaningful       sense;         and    (2)      there          must    exist       between    the
    corporation       and      the    person       a     contract         or    similar     indicium
    recognizing the corporation’s controlling position.                                    Haag, 
    88 T.C. at 611
     (citing Johnson v. Comm’r, 
    78 T.C. 882
    , 891 (1982)).
    No such employer-employee relationship exists here.
    Williams        testified        that       he    had     no     written       employment
    agreement and received no regular salary or commission payments
    from    ALQI.        He    stipulated        that       he     was    the   sole    operational
    director and officer of ALQI and the only person with authority
    to    act   on   the      company’s      behalf          in    its    business      activities.
    Williams       had     exclusive        signature             authority      over      the   ALQI
    accounts from 1993 through 2000 and was the sole person from
    whom Banque Indosuez would accept instructions with respect to
    those accounts.           There is simply no indication that ALQI wielded
    any form of control over Williams as an employee.
    Beyond that, the evidence strongly suggests that Williams
    did not act on behalf of ALQI when he earned the income in
    18
    question and merely used ALQI as a bank account.                                      Apart from
    Williams’       testimony,         there       is     no     evidence          that    Williams’
    consulting      clients       even       knew       ALQI    existed.            There    are     no
    consulting      agreements,          notes      or     other      records        that    reflect
    ALQI’s business dealings.                 In fact, there are no ALQI business
    records at all for the period at issue, except for bank records
    maintained by Banque Indosuez and a single balance sheet and
    profit    and    loss    statement         dated       June       30,    2000.          Williams’
    accountant, Donald Williamson, testified that while he reviewed
    voluminous      bank     records         and    incorporation            documents       in     the
    course of his work, he did not see any general ledgers, profit
    and loss statements or balance sheets for ALQI, nor did he see
    any consulting contracts.                 Williamson testified that he relied
    on the representations of Williams and Williams’ counsel that
    ALQI earned the consulting fees in question, and he took those
    representations at face value.
    In    an    effort       to    legitimize         ALQI’s      operations,          Williams
    points    to    ALQI’s    use       of   Banque       Indosuez’s         office       space,    its
    Swiss cell phone and credit card, as well as the fact that
    clients     deposited         consulting         fees       directly       into        the     ALQI
    accounts.        Williams          insists      that       ALQI   employed        Smekhova       to
    arrange, attend and translate at meetings conducted for ALQI
    business,       and    that     ALQI,      not        Williams,         paid     her    for     her
    services.         But     Smekhova,            like     Williams,         had     no     written
    19
    employment agreement with ALQI.                 As the Tax Court noted, “[t]he
    fact that Mr. Williams’ business and personal expenses were paid
    out of these same Swiss bank accounts does not prove that his
    clients contracted with ALQI or that ALQI was anything other
    than       the   receptacle   into     which      Mr.   Williams    diverted      his
    consulting income.”        Williams, 
    2011 WL 1518581
    , at *14.
    Williams      argues   that     because       ALQI   is     not   a   “sham”
    corporation - and the Tax Court assumed that it is not - it must
    follow that the consulting fee income is taxable to ALQI.                         But
    Williams’ reasoning is flawed.                  As the Tax Court persuasively
    explained,       whether   ALQI   is   a    legitimate      business     entity    is
    irrelevant; ALQI simply did not earn the income at issue. 8                    Id.;
    see Haag, 
    88 T.C. at 611
     (“A finding that the [corporation] is
    8
    Williams argues Moline Properties, Inc. v. Comm’r, 
    319 U.S. 436
     (1943), supports his position, but his argument falls
    short. In that case, petitioner Moline Properties claimed that
    gain on sales of its real property should be treated, and
    therefore taxed, as the gain of its sole stockholder, and that
    its corporate existence should be ignored as fictitious.
    Notwithstanding the fact that Moline “kept no books and
    maintained no bank account during its existence,” the Supreme
    Court held that it was a separate entity with a tax identity
    distinct from its stockholder. In reaching this conclusion, the
    Court noted the fact that the stockholder exercised negligible
    control over the entity, that Moline mortgaged and sold portions
    of its property, and that Moline entered into its own business
    venture by leasing part of its property and collecting rental
    income.    
    Id. at 440
    .   On the contrary, in the instant case,
    Williams exercised exclusive and complete control over ALQI, and
    there is no evidence that ALQI carried on any business activity
    apart from serving as Williams’ bank account.
    20
    not a sham does not preclude application of the assignment of
    income   doctrine   because    a    taxpayer   can    assign   income    to   a
    corporation with real and substantial businesses to avoid tax
    liability.”).
    Moreover, Williams cannot rise above his own admissions at
    his guilty plea hearing that the “purpose of the [ALQI] accounts
    was to hold funds and income [he] received from foreign sources
    during the years 1993 to 2000.”            Williams further acknowledged
    that he “knew that most of the funds deposited into the A[LQI]
    accounts, and all of the interest income were taxable income to
    [him],” but admitted he “chose not to report the income to the
    Internal Revenue Service in order to evade the substantial taxes
    owed thereon.”
    The Commissioner’s determinations of income are entitled to
    a presumption of correctness, and the taxpayer bears the burden
    of proving them wrong.        McHan v. Comm’r, 
    558 F.3d 326
    , 332 (4th
    Cir. 2009).      “The IRS is not given free rein, however:                 the
    taxpayer can rebut the presumption of correctness by proving, by
    a   preponderance   of   the       evidence,   that     the    IRS’s    income
    determination is arbitrary or erroneous.”            
    Id.
       Williams has not
    rebutted the presumption in this case.               For these reasons, we
    find that Williams is liable for tax on the corpus of the ALQI
    21
    accounts,        in   addition   to   the    passive    income    earned    on   those
    funds. 9
    IV.
    Williams’ final argument on appeal is that the Tax Court
    erred in limiting his charitable contribution deductions to his
    basis in the art donated through Abbey Art, rather than allowing
    deduction of the art’s fair market value.                        Williams contends
    that the Tax Court erroneously found the Art Purchase Agreement
    to be an option contract, ignoring both the mutual understanding
    of the parties and the plain language of the Agreement.                      For the
    reasons that follow, we find Williams’ arguments unavailing.
    A.
    Generally,       a   deduction       is    allowed   for    any     charitable
    contribution for which payment is made within the taxable year.
    
    26 U.S.C. § 170
    (a)(1).                The deduction is allowable, however,
    only       if   the   contribution     is   “verified    under    the    regulations
    prescribed by the Secretary.”               
    Id.
        When a contribution involves
    property        other    than    money,     the    amount   of     the     charitable
    contribution is the fair market value of the property at the
    9
    Given this holding, we see no reason to address Williams’
    challenge to the validity of the Controlled Foreign Corporation
    regulations, as this argument only becomes relevant if the
    consulting fee income were attributable to ALQI.
    22
    time the donation is made.               
    26 C.F.R. § 1
    .170A-1(c)(1).               This
    rule        is    modified    in      situations        involving    donations      of
    appreciated property.          In those circumstances, the amount of any
    charitable contribution is reduced by the amount of gain that
    would       not    have   qualified    as    long-term     capital     gain   if   the
    property had been sold by the taxpayer at its fair market value,
    determined as of the time of the contribution.                         
    26 U.S.C. § 170
    (e)(1)(A).           In other words, section 170(e)(1)(A) permits the
    deduction         of   long-term   capital       gain   appreciation    but   if   the
    property is not long-term capital gain property, the charitable
    contribution deduction is limited to the taxpayer’s basis at the
    time of the contribution.              Long-term capital gain is defined as
    gain from the sale or exchange of a capital asset 10 held for more
    than one year.            
    26 U.S.C. § 1222
    (3).            The taxpayer bears the
    burden of proving he is entitled to a charitable deduction in
    the amount of the fair market value of the donated property.
    See INDOPCO, Inc. v. Comm’r, 
    503 U.S. 79
    , 84 (1992).
    B.
    The issue to be resolved is whether Williams held the art
    in question for more than one year before donating it.                              “In
    common understanding to hold property is to own it.                     In order to
    10
    The art in question qualifies as a capital asset pursuant
    to 
    26 U.S.C. § 1221
    (a).
    23
    own or hold one must acquire.             The date of acquisition is, then,
    that from which to compute the duration of ownership or the
    length    of    holding.”       McFeely      v.      Comm’r,   
    296 U.S. 102
    ,    107
    (1935).        Williams    argues     that     he     acquired   the     art    when    he
    executed      the   Art   Purchase    Agreement         in    December     1996.       The
    Commissioner asserts that Williams did not acquire the art until
    he paid for it, which in each case was within a year of the
    donation.
    In determining the date of acquisition of property:
    [N]o hard-and-fast rules of thumb can be used, and no
    single factor is controlling.   “Ownership of property
    is not a single indivisible concept but a collection
    or bundle of rights with respect to the property;”
    consequently, we must examine the transaction in its
    entirety.   The date of the passage of legal title is
    not the sole criteria; the date on which “the benefits
    and burdens or the incidents of ownership of the
    property” were passed must also be considered, and the
    legal consequence of particular contract provisions
    must be examined in the light of the applicable State
    law.
    Hoven    v.    Comm’r,    
    56 T.C. 50
    ,      55    (1971)    (internal       citations
    omitted).
    The Tax Court did not look to state law in resolving this
    issue, however, and the Commissioner insists that state law has
    no applicability here.          Both the Commissioner and the Tax Court
    cite United States v. Heller, 
    866 F.2d 1336
    , 1341 (11th Cir.
    1989),    for   the   proposition      that         “federal   tax   law    disregards
    transactions lacking an economic purpose which are undertaken
    24
    only to generate a tax savings.                   Federal tax law is concerned
    with the economic substance of the transaction under scrutiny
    and not the form by which it is masked.”                           Indeed, the Fifth
    Circuit       has         recognized       that     “[t]he         application          and
    interpretation        of    the    Internal      Revenue    Code    is   a    matter      of
    federal law.         The form of a document and its effect under state
    law     are        therefore       not     controlling        in     these         federal
    determinations.”           Deshotels v. United States, 
    450 F.2d 961
    , 964
    (5th Cir. 1972).           The Fifth Circuit found it appropriate to look
    to Louisiana law in Deshotels, however, in order to understand
    the   agreement       at    the    heart    of    the    parties’     dispute.           
    Id.
    Williams argues we should do the same here and look to New York
    law 11 in interpreting the Art Purchase Agreement, and he cites to
    our   decision       in    Volvo   Cars    of    North   America,     LLC     v.   United
    States,      
    571 F.3d 373
        (4th    Cir.    2009),    in     support      of     that
    contention.
    In that case, Volvo had written-off excess inventory that
    it purportedly sold to a warehouser pursuant to the terms of a
    1983 contract, thereby reducing its taxable income for the 1983
    tax year.      The IRS found these were not bona fide sales because
    Volvo      retained    control     over    the    inventory    even      after     it   was
    11
    The parties do not dispute that if state law is to be
    invoked in the context of this analysis, New York law applies
    per the terms of the Agreement.
    25
    transferred.          Volvo brought suit seeking a refund of the tax
    paid due to the disallowed write-offs, and the jury returned a
    verdict in Volvo’s favor.                   The district court entered judgment
    notwithstanding the verdict as to transfers of inventory made
    prior to execution of the 1983 contract, finding as a matter of
    law   that     the     contract       did    not   address    inventory     previously
    transferred to the warehouser.                  Volvo appealed.         In determining
    whether        the     1983     contract        covered      inventory      previously
    transferred, we looked to state law “because ‘in the application
    of a federal revenue act, state law controls in determining the
    nature    of    the    legal    interest       which   the    taxpayer    had   in   the
    property.’”          
    Id.
     at 378 (citing United States v. Nat’l Bank of
    Commerce,      
    472 U.S. 713
    ,    722    (1985)).       As   the   Supreme   Court
    stated in National Bank, “[t]his follows from the fact that the
    federal statute ‘creates no property rights but merely attaches
    consequences, federally defined, to rights created under state
    law.’”    
    472 U.S. at 722
     (quoting United States v. Bess, 
    357 U.S. 51
    , 55 (1958)).
    To be sure, the economic substance of the transaction is
    the primary concern in the instant case.                          We need not accept
    that the parties contracted for the sale of art simply because
    their signatures appear on a document entitled “Art Purchase
    Agreement.”          Even if we look to state law to help determine the
    nature    of    the    legal     interest       conveyed     by   the   Agreement,    as
    26
    Williams urges us to do, we remain convinced that the Tax Court
    correctly       determined      that       Williams’     charitable        contribution
    deduction is limited to his basis in the donated art.
    C.
    The Tax Court examined the rights, duties and obligations
    the     parties    assumed      when       they    executed       the     Art   Purchase
    Agreement and concluded that by signing the Agreement and paying
    $3,600 up front, Williams purchased an option to buy art.                         Under
    New York law, “whether an agreement is a binding contract or an
    option is to be determined like any other issue of contract
    interpretation          from    all    four       corners    of     the     agreement.”
    Interactive       Prop.    Corp.      v.    Blue    Cross    &    Blue     Shield,    
    450 N.Y.S.2d 1001
    , 1002 (1982).                Although a “contract for sale” can
    encompass both a present sale of goods and a contract to sell
    goods at a future time, a “sale” requires the passing of title
    from the seller to the buyer for a price, 
    N.Y. U.C.C. Law § 2
    -
    106, and “[t]itle to goods cannot pass under a contract for sale
    prior to their identification to the contract,” 
    id.
     at § 2-
    401(1).        Indeed, “title passes to the buyer at the time and
    place     at    which     the   seller       completes      his    performance       with
    reference to the physical delivery of the goods . . . even
    though a document of title is to be delivered at a different
    time or place. . . .”           Id. at § 2-401(2).
    27
    An option contract, on the other hand, “is an agreement to
    hold     an     offer     open;      it     confers       upon     the         optionee,      for
    consideration         paid,    the    right    to    purchase        at    a    later       date.”
    Kaplan v. Lippman, 
    75 N.Y.2d 320
    , 324 (1990).                                   “[U]ntil the
    optionee gives notice of his intent to exercise the option, the
    optionee is free to accept or reject the terms of the option.”
    
    Id. at 325
    .      The    contract      ripens       into   a    fully       enforceable
    bilateral contract once the optionee gives notice of his intent
    to exercise the option in accordance with the agreement.                                      
    Id.
    The following leads us to believe the Tax Court correctly
    concluded that the Art Purchase Agreement is not a contract for
    sale that triggered the holding period required for long-term
    capital gain. 12
    1.
    Title     to     the    art    did   not     pass    upon      execution         of     the
    Agreement in 1996, and delivery was not made.                             In fact, the art
    in question was not even identified in the Agreement.                                   Rather,
    “[t]he      specific     items       purchased      by    the    Client        [were    to]       be
    described in written appraisals” and given to Williams once he
    received       physical       possession      of    the    art   or   donated          it    to   a
    12
    We note that paragraph 12 of the Agreement provides that
    it is “the entire agreement between the respective parties
    hereto   and  there   are  no   other  provisions,   obligations,
    representations, oral or otherwise, of any nature whatsoever.”
    28
    charitable institution.        This could not occur, pursuant to the
    Agreement’s    terms,      until   Williams    paid   the    balance   of    the
    purchase price.      While he asserts art was segregated for him in
    Abbey Art’s warehouse, Williams does not have an inventory of
    this segregated art, nor did he ever visit the warehouse to view
    it.
    2.
    The Agreement provides that $3,600, five percent of the
    total agreed purchase price of the art ($72,000), was to be paid
    up front and would be held in escrow pending satisfaction of the
    Agreement’s provisions.        The balance of the purchase price was
    due at the time Williams received physical possession of the art
    or when it was donated, an act which was to occur in the future
    but at no specified time.
    Aside   from   the    initial   $3,600   payment,     Williams   had    no
    obligation    to   perform   under    the   contract.       Williams   was   not
    required to follow through with the purchase, and Abbey Art had
    no right to require specific performance of the full balance of
    the purchase price.         Its sole remedy for Williams’ non-payment
    was to retain as liquidated damages any monies that Williams had
    paid towards the purchase of the art and to reclaim ownership
    over it.
    Indeed, Abbey Art bore all of the expense and all of the
    risk in this transaction.          It was responsible for selecting and
    29
    paying       the    appraiser,     packaging      and    shipping      the   art,   and
    completing all the necessary paperwork.                       Even in storing the
    art, Abbey Art bore the risk of loss.                    See 
    N.Y. U.C.C. Law § 2
    -
    509.        Moreover, if the fair market value of the art fell below
    what was reflected in the appraisal, reducing the tax benefit to
    Williams,          Abbey   Art    was   required        to    refund   Williams     the
    percentage of his dollars paid for each dollar in reduction of
    the fair market value.
    3.
    The Agreement provides that the total purchase price of the
    art would not exceed 24% of the cumulative appraised fair market
    value of the art purchased. 13              The purchase price set forth in
    the agreement is $72,000, which is 24% of $300,000.                          Thus, the
    Agreement contemplates $300,000 worth of art would be purchased.
    Yet the fair market value of the first art donation Williams
    made ($425,625) far exceeded that amount.                        Arguably, even if
    title did pass for $300,000 worth of art upon execution of the
    Agreement in 1996, it still would not account for the extra
    $125,000 worth of art donated to Drexel University in 1997, the
    $250,525       worth       of    art    donated    to        Florida    International
    13
    It goes without saying that the appreciation guaranteed
    to Williams by virtue of this Agreement is suspect, to say the
    least. The Commissioner has not challenged the valuation of the
    art, however, and that issue is not before us.
    30
    University in 1999, and the $98,900 worth of art donated to
    Drexel in 2000.
    D.
    In sum, the 1996 Art Purchase Agreement was not a contract
    for sale.       Therefore, Williams’ holding period for purposes of
    the long-term gain calculation did not begin until he paid for
    and acquired a present interest in the art.                   In each instance,
    this occurred less than one year from the date of his donation.
    Williams       paid   for    the    December      1997     donation     to    Drexel
    University in December 1997.                He paid for the December 1999
    donation to Florida International University in December 1999.
    And he paid for the October 2000 donation to Drexel in full in
    December of that same year.           For these reasons, we find the Tax
    Court    did    not   err    in    concluding     that     Williams’    charitable
    contribution deduction is limited to his basis in the art.
    V.
    Because      Williams    has    not    met   his    burden   of   proving   the
    Commissioner’s notice of deficiency is erroneous, we affirm.
    AFFIRMED
    31
    

Document Info

Docket Number: 11-1804

Citation Numbers: 498 F. App'x 284

Judges: Wilkinson, Thacker, Urbanski, Western, Virginia

Filed Date: 12/4/2012

Precedential Status: Non-Precedential

Modified Date: 11/6/2024

Authorities (23)

McFeely v. Commissioner , 56 S. Ct. 54 ( 1935 )

United States v. International Building Co. , 73 S. Ct. 807 ( 1953 )

United States v. Edward H. Heller and Robert M. Adler , 866 F.2d 1336 ( 1989 )

Shirley S. Henson v. Liggett Group, Incorporated, D/B/A ... , 61 F.3d 270 ( 1995 )

laurie-w-tomlinson-district-director-of-internal-revenue-for-the-district , 334 F.2d 262 ( 1964 )

United States v. Bess , 78 S. Ct. 1054 ( 1958 )

Kaplan v. Lippman , 75 N.Y.2d 320 ( 1990 )

nora-l-collins-widow-of-johnnie-j-collins-v-pond-creek-mining-company , 468 F.3d 213 ( 2006 )

Joseph R. Dileo, Mary A. Dileo, Walter E. Mycek, Jr., ... , 959 F.2d 16 ( 1992 )

O. H. Deshotels, Jr., and Fay C. Deshotels v. United States , 450 F.2d 961 ( 1972 )

Jay N. Karpa Elizabeth J. Karpa v. Commissioner of Internal ... , 909 F.2d 784 ( 1990 )

McHan v. Commissioner , 558 F.3d 326 ( 2009 )

Montana v. United States , 99 S. Ct. 970 ( 1979 )

Indopco, Inc. v. Commissioner , 112 S. Ct. 1039 ( 1992 )

Lucas v. Earl , 50 S. Ct. 241 ( 1930 )

United States of America, in 91-1201 v. Thomas L. McGill Jr.... , 964 F.2d 222 ( 1992 )

United States v. Leon Wight, A/K/A Leon Wight Ramazanoff , 839 F.2d 193 ( 1988 )

Moline Properties, Inc. v. Commissioner , 63 S. Ct. 1132 ( 1943 )

Welch v. Helvering , 54 S. Ct. 8 ( 1933 )

Nelson M. Blohm and Joann M. Blohm v. Commissioner of ... , 994 F.2d 1542 ( 1993 )

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