MacIel v. Cir ( 2007 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
GEORGE MACIEL, 
Petitioner-Appellant, No. 04-75716
v.
 Tax Ct. No.
7802-00
COMMISSIONER OF INTERNAL
REVENUE, OPINION
Respondent-Appellee.

Appeal from a Decision of the
United States Tax Court
Argued and Submitted
October 19, 2006—San Francisco, California
Filed June 7, 2007
Before: Susan P. Graber, William A. Fletcher, and
Richard C. Tallman, Circuit Judges.
Opinion by Judge William A. Fletcher
6925
6928 MACIEL v. CIR
COUNSEL
David M. Kirsch, San Jose, California, for the petitioner-
appellant.
Frank P. Cihlar and Bethany B. Hauser, Tax Division, U.S.
Department of Justice, Washington D.C., for the respondent-
appellee.
OPINION
W. FLETCHER, Circuit Judge:
George Maciel appeals from a decision of the United States
Tax Court, which upheld an Internal Revenue Service (“IRS”)
Notice of Deficiency for the 1990, 1991, and 1992 tax years.
In a separate proceeding, Maciel pled guilty to criminal tax
charges. As part of its sentencing decision in that case, the
federal district court found that Maciel had not fraudulently
intended to evade the payment of taxes. Maciel contends that,
under the doctrine of collateral estoppel, the sentencing
court’s finding should have precluded relitigation of the fraud
issue before the tax court. Further, Maciel contends that, even
if relitigation is not precluded, the tax court erred in finding
that he acted fraudulently when he failed to report income
from a 1990 business sale. Finally, Maciel challenges the tax
court’s denial of various business deductions. We reject Mac-
iel’s preclusion and fraud claims, but we hold that he is enti-
tled to deduct certain bona fide business expenses.
I. Background
During a routine audit in 1994, the IRS determined that
Maciel had significantly understated his income on several tax
MACIEL v. CIR 6929
returns. The agency referred Maciel’s case for criminal prose-
cution. After initially charging Maciel with two felony counts
of tax evasion in violation of 26 U.S.C. § 7201, the govern-
ment filed a superseding information on September 23, 1998,
charging Maciel with two felony counts of willfully filing a
false return in violation of 26 U.S.C. § 7206(1). Unlike
§ 7201, which requires proof that the defendant “willfully
attempt[ed] . . . to evade or defeat” the payment of tax,
§ 7206(1) requires only proof that the defendant “[w]illfully
make[ ] and subscribe[ ]” a materially false return. 26 U.S.C.
§§ 7201, 7206(1); see also United States v. Boulware, 384
F.3d 794, 810 (9th Cir. 2004); Considine v. United States, 683
F.2d 1285, 1287 (9th Cir. 1982).
Maciel entered a plea agreement with the government in
which he pled guilty to both § 7206(1) counts and admitted
signing tax returns he knew to be inaccurate for both the 1991
and 1992 tax years. The plea agreement stated that one of two
Sentencing Guidelines calculations would apply. The first
provided for a base offense level of ten “if the offense was
committed in order to facilitate evasion of a tax.” U.S.S.G.
§§ 2T1.3(a)(1), 2T4.1 (1992). The second provided for a base
offense level of six if “otherwise.” Id. § 2T1.3(a)(2). In either
case, the government agreed to include a two-point reduction
for acceptance of responsibility, resulting in an adjusted
offense level of either eight or four. The government also
agreed to “recommend that any sentence imposed be satisfied
by home detention and electronic monitoring.”
The presentence report (PSR) subsequently concluded that
Maciel had intended to evade taxation and therefore was sub-
ject to the higher § 2T1.3(a)(1) sentencing guideline. The
PSR, however, determined that Maciel’s adjusted offense
level was nine, rather than eight as calculated in the plea
agreement, because it considered Maciel’s conduct not only in
1991 and 1992 — the tax years covered by the plea agreement
— but also in 1990. Maciel’s total underpayment during those
three years increased his offense level by one point.
6930 MACIEL v. CIR
At his April 13, 1999, sentencing hearing, Maciel urged the
district court to reject the PSR’s conclusion that he had fraud-
ulently intended to evade taxation or, in the alternative, to
consider only the tax losses from 1991 and 1992. The govern-
ment responded, without significant elaboration, that there
appeared to be “some intent on [Maciel’s] part to do some-
thing.” The government, however, agreed with Maciel that,
consistent with the plea agreement, Maciel’s adjusted offense
level should be no higher than eight. Neither Maciel nor the
government attempted to call witnesses or introduce evidence
on the question of intent to evade. Instead, both sides agreed
that “the Court has all the information it needs in order to
make the [sentencing] determination.”
The district court announced its decision at the conclusion
of the sentencing hearing. With respect to Maciel’s intent, the
court explained:
I think on balance I am satisfied that the intent
here was not primarily to avoid payment of tax. I
think the intent may well have been to divert corpo-
rate money to personal use which is not a good thing
and certainly is not something that the Court should
countenance and particularly since it did have a con-
sequence in terms of the accuracy of Mr. Maciel’s
tax returns.
But I don’t think that the conduct looked at in its
totality suggests that the reason Mr. Maciel diverted
the money was to avoid paying money to the Internal
Revenue Service. I think that’s the finding that the
Court would have to make. So I think we’re looking
at the lower of the two calculations.
Based on the government’s recommendation, the court sen-
tenced Maciel to three months of home detention. The court
also imposed three years of probation, noting that Maciel had
not yet “worked out the matters with the IRS.” As a special
MACIEL v. CIR 6931
condition of his probation, Maciel was required to “comply
and cooperate with the Internal Revenue Service in a good
faith effort to pay any outstanding tax liability including any
assessed penalty and interest . . . not limited to the two tax
years that are charged in the information.”
The IRS informed Maciel of his outstanding liability in a
Notice of Deficiency sent on June 13, 2000. According to the
IRS, Maciel owed more than $300,000 in back taxes for 1990-
92 and nearly $250,000 in civil penalties pursuant to 26
U.S.C. § 6663. Section 6663 imposes penalties when “any
part of any underpayment of tax required to be shown on a
return is due to fraud.”
Maciel took issue with the Commissioner’s Notice of Defi-
ciency and petitioned the tax court for a redetermination. He
subsequently filed a motion for summary judgment, asserting
that the IRS was estopped from relitigating “the issue of fraud
or intent to evade tax by factual determination by the District
Court at [Maciel’s] sentencing hearing and the judgment of
the District Court based on those factual determinations.”
According to Maciel, absent a showing of fraud, the statute of
limitations barred the IRS from assessing back taxes for the
years at issue. See 26 U.S.C. § 6501(a), (c)(2). The tax court
denied Maciel’s motion without opinion, and a two-day bench
trial followed on December 12 and 13, 2001.
In an opinion filed February 4, 2004, the tax court generally
affirmed the deficiencies and penalties levied against Maciel.
See Maciel v. Comm’r, 87 T.C.M. 881 (2004), avail-
able at 2004 WL 205819. The court found “clear and con-
vincing evidence that [Maciel] underpaid his income taxes
due and owing for the years at issue,” and that he “fraudu-
lently intended to evade the payment of his tax liabilities.”
2004 WL 205819, at *15, *7. In support of its fraud finding,
the court relied on the collective weight of a number of fac-
tors. For example, Maciel regularly commingled funds among
his various businesses, engaged in large unexplained cash
6932 MACIEL v. CIR
transactions, mislabeled certain transactions as loans, failed to
report any earnings from certain unincorporated business ven-
tures, failed to keep adequate business records, and failed to
inform his accountants and bookkeeper of his activities. Id. at
*16-17.
II. Preclusion
[1] Maciel maintains that the doctrine of collateral estoppel
(issue preclusion) required the tax court to adopt the finding
of the district court at Maciel’s criminal sentencing hearing
that Maciel did not intend to evade taxation. We consider de
novo the availability of collateral estoppel. See Littlejohn v.
United States, 321 F.3d 915, 919 (9th Cir. 2003). This circuit
has not expressly decided whether, or under what circum-
stances, the parties to a civil suit should be bound by findings
previously made at a criminal sentencing hearing. Following
the Second Circuit, we now hold that it is presumptively
improper for a court to give preclusive effect to the findings
of a sentencing court during subsequent civil litigation.
[2] The doctrine of collateral estoppel promotes judicial
economy and protects parties from the burden of successive
litigation by barring the relitigation of issues in certain cir-
cumstances. See Parklane Hosiery Co. v. Shore, 439 U.S.
322, 326 (1979). For example, when an issue is “actually liti-
gated and necessarily decided, after a full and fair opportunity
for litigation, in a prior proceeding,” a court’s decision is
binding in a subsequent action between the parties (or those
in privity with the parties). Shaw v. Hahn, 56 F.3d 1128, 1131
(9th Cir. 1995); see also Restatement (Second) of Judgments
§ 27 (1982). The key question in this case is whether the par-
ties had “a full and fair opportunity to litigate the merits of
[the fraud] issue” during the sentencing hearing. Littlejohn,
321 F.3d at 923; see also Allen v. McCurry, 449 U.S. 90, 95
(1980) (noting that “the Court has repeatedly recognized . . .
that the concept of collateral estoppel cannot apply when the
party against whom the earlier decision is asserted did not
MACIEL v. CIR 6933
have a ‘full and fair opportunity’ to litigate [an] issue in the
earlier case”).
[3] In deciding whether an opportunity to litigate is “full
and fair,” a court must make a practical judgment based on at
least two considerations. First, the court must compare the
procedures in the prior and subsequent actions. If “procedural
opportunities unavailable in the first action . . . could readily
cause a different result” in the second action, then the results
of the first action generally should not be given preclusive
effect. Parklane Hosiery, 439 U.S. at 331 & n.15; see also
Montana v. United States, 440 U.S. 147, 164 n.11 (1979)
(“Redetermination of issues is warranted if there is reason to
doubt the quality, extensiveness, or fairness of procedures fol-
lowed in prior litigation.”). Second, the court must consider
the parties’ incentives to litigate in the two actions. If a party
had good reason not to contest an issue vigorously during the
first action and did not, in fact, vigorously contest the issue,
that party generally should be entitled to relitigate the issue
during the second action. See 18 Charles Alan Wright et al.,
Federal Practice and Procedure § 4423, at 612 (2d ed. 2002)
(“The most general independent concern reflected in the limi-
tation of issue preclusion by the full and fair opportunity
requirement goes to the incentive to litigate vigorously in the
first action.”); see also Parklane Hosiery, 439 U.S. at 330
(noting that incentive problems sometimes arise when the sec-
ond action was not reasonably foreseeable at the time of the
first action).
[4] We agree with the Second Circuit that findings made in
a criminal sentencing proceeding ordinarily should not have
preclusive effect in a subsequent civil case. In SEC v. Mon-
arch Funding Corp., 192 F.3d 295 (2d Cir. 1999), the Second
Circuit rejected the SEC’s attempt to preclude a civil defen-
dant from relitigating a sentencing judge’s finding that the
defendant had committed securities fraud. In a prior criminal
trial, the defendant had been convicted on obstruction of jus-
tice charges but had been acquitted on charges related to
6934 MACIEL v. CIR
securities fraud. The sentencing judge nevertheless concluded,
following “extensive” post-trial litigation, that the defendant
was subject to a sentencing enhancement because he “had
committed securities fraud ‘by at least a preponderance of the
evidence.’ ” Id. at 299-300. The Second Circuit observed that
“a plenary civil trial affords a defendant procedural opportuni-
ties that are unavailable at sentencing and that could com-
mand a different result.” Id. at 305. For example, “[u]nlike a
civil litigant, a criminal defendant’s opportunities to take dis-
covery may be limited for sentencing purposes.” Id. The court
also noted that “the incentive to litigate a sentencing finding
is frequently less intense, and certainly more fraught with
risk, than it would be for a full-blown civil trial.” Id.
The Second Circuit has not confined Monarch’s reasoning
to situations in which the government seeks to apply a favor-
able sentencing decision in subsequent civil litigation. In
United States v. U.S. Currency in the Amount of $119,984,
304 F.3d 165 (2d Cir. 2002), that court rejected a former
criminal defendant’s attempt to invoke collateral estoppel
against the government. The court held that the U.S. Customs
Service could pursue a civil forfeiture action despite a sen-
tencing judge’s previous finding that the currency at issue had
been lawfully obtained. Id. at 168-70. According to the court,
the government had not had “a sufficiently ‘fair’ opportunity
to litigate the relevant issues” because “procedural mecha-
nisms crucial to the Government’s ability to gather probative
evidence in the civil forfeiture action were either not avail-
able, or were available to a lesser degree, in the sentencing
proceedings.” Id. at 176. The government, for example, had
not “ha[d] recourse [at sentencing] to the full array of civil
discovery procedures” and could not have compelled the
defendant to testify. Id. at 177. The court did note, however,
that the government in that case had an adequate incentive to
litigate “in order to ensure that [the defendant] received pun-
ishment commensurate to his offense.” Id. at 176.
The decisions in Monarch and $119,984 considered effi-
ciency as well as fairness. The Second Circuit concluded that
MACIEL v. CIR 6935
giving preclusive effect to sentencing findings would be
unlikely to produce meaningful judicial economy benefits.
Indeed, the opposite might well be true. Anticipating the pos-
sibility of preclusion in future civil litigation, parties would
have an incentive to conduct lengthy mini-trials on tangential
issues, producing “sentencing proceedings of mushrooming
complexity” and delaying the resolution of criminal cases.
Monarch, 192 F.3d at 306; see also $119,984, 304 F.3d at
174; 18 Wright et al. § 4423, at 613 (“Even if later claims
involving the same issues are foreseeable, it may not be wise
to augment the stakes of the first litigation.”).
The Second Circuit’s approach is entirely consistent with
this circuit’s decision in Allen v. City of Los Angeles, 92 F.3d
842 (9th Cir. 1996), overruled on other grounds by Acri v.
Varian Assocs., Inc., 114 F.3d 999 (9th Cir. 1997) (en banc).
Maciel relies on Allen to support his position that sentencing
findings should have collateral estoppel effect, but we dis-
agree with his view of that case. In Allen, we considered
whether the criminal conviction of police officers involved in
the beating of Rodney King precluded the defendants in a
subsequent civil suit from arguing that the officers had acted
without “actual malice.” We concluded that the criminal
jury’s verdict necessarily meant that the jury had found actual
malice. We remarked that “the district court’s sentencing
opinion add[ed] additional support to the criminal jury find-
ings” and held that “both the criminal verdict and the sentenc-
ing opinion are a basis for collateral estoppel on the issue.” Id.
at 850. If these statements are read in context, it is clear that
we did not mean that the sentencing decision alone would
have justified preclusion absent the jury’s corroborating find-
ing of actual malice. At most, Allen, like Monarch and
$119,984, indicates that a sentencing finding may be entitled
to collateral estoppel effect in subsequent civil litigation when
fairness and efficiency considerations support preclusion.
[5] In this case, we conclude that Maciel has failed to over-
come the presumption against giving collateral estoppel effect
6936 MACIEL v. CIR
to a sentencing finding. Maciel’s argument that the govern-
ment was not, in fact, prejudiced by the procedural differ-
ences in the sentencing and civil contexts is unpersuasive. The
parties understood that the criminal and civil actions against
Maciel were proceeding on separate tracks, with the Depart-
ment of Justice spearheading the criminal prosecution and the
IRS determining Maciel’s civil liability. Both Maciel and the
government recognized that the IRS would have an opportu-
nity after the criminal proceedings concluded to investigate
Maciel’s conduct and assess civil penalties. In his plea agree-
ment, Maciel expressly agreed to pay “all taxes . . . and penal-
ties that may be due, as finally determined by an Internal
Revenue Service audit process and any administrative or judi-
cial process.” During the sentencing hearing itself, Maciel’s
counsel acknowledged that the issue of Maciel’s outstanding
tax liability and penalties remained “pending on the civil
level.”
[6] Moreover, it is apparent that the government had virtu-
ally no incentive to litigate the fraud issue at sentencing. In
some cases, the government’s obligation to seek a sentence
consonant with a criminal defendant’s culpability will be
incentive enough to ensure that relevant issues are litigated
vigorously. See $119,984, 304 F.3d at 176 (noting that the
government’s “desire to impose appropriate punishment” on
a criminal defendant should be “at least as great” as its desire
to add funds to the U.S. Treasury (internal quotation marks
omitted)). In this case, however, the government’s incentive
to prove fraud was minimal. The plea agreement provided that
Maciel was subject either to an adjusted offense level of four
(the applicable level without a showing of fraud) or eight (the
applicable level with a showing of fraud). See U.S.S.G.
§ 2T1.3 (1992). Under the Guidelines, an offense level of
eight would have subjected Maciel to a longer sentence than
an offense level of four only if Maciel’s criminal history cate-
gory was II or more. Because the PSR placed Maciel in crimi-
nal history category I, both offense levels produced the same
sentencing range of 0-6 months.
MACIEL v. CIR 6937
[7] Maciel contends that the situation is somewhat more
complicated because the PSR, after concluding that Maciel
committed fraud and including his 1990 underpayment in its
“tax loss” calculation, ultimately recommended an adjusted
offense level of nine rather than eight, resulting in a sentenc-
ing range of 4-10 months rather than 0-6 months. In Maciel’s
view, the PSR’s calculation gave the government an adequate
incentive to litigate the fraud issue since a finding of fraud
would have subjected Maciel to a lengthier sentence. The
government, however, properly recognized that pressing for a
longer sentence would have been inconsistent with the terms
of the plea agreement. Had the government strenuously
argued that Maciel had acted fraudulently, knowing that a
finding of fraud could have subjected Maciel to an adjusted
offense level of nine, Maciel legitimately could have cried
foul. Under these circumstances, giving preclusive effect to
the sentencing court’s finding would effectively punish the
government for honoring its plea agreement. We decline to
endorse such a counterintuitive result.
III. Omission of Income from Sale of M&V Investments
Maciel insists that even if it was proper for the tax court to
allow relitigation of the fraud issue, the court erred when it
found fraud in his failure to report income from the sale of
one of his business enterprises, M&V Investments. Maciel
and a partner, Peter Viviano, formed M&V Investments in
1987. Shortly thereafter, M&V Investments acquired two
businesses: a corporation named Newark Wreckers, Inc.,
which was purchased for $50,000 cash, and an unincorporated
business named Tri-City Truck Parts, which was purchased
for $150,000 cash plus a $200,000 note. In 1990, Maciel sold
his 50% stake in M&V Investments to Viviano, apparently
after the two men had a falling out. The price was $200,000,
which Maciel received from Viviano in the form of three
cashier’s checks for $100,000, $75,000, and $25,000. As part
of the sale agreement, Viviano discharged Maciel from his
obligation to repay the outstanding note.
6938 MACIEL v. CIR
Maciel failed to report income from the M&V Investments
sale on his 1990 income tax return. However, Maciel’s
accountant attached the following statement to Schedule K-1
of the return:
The above named taxpayer was involved in a part-
nership for part of the 1990 tax year. The partnership
was Tri-City Truck Parts. The taxpayer did not
receive his Schedule K-1 (share of partnership
income & deductions) for 1990. Several attempts
were made to reach the designated partner of Tri-
City Truck Parts (Peter Viviano). All attempts were
uns[u]ccessful. As a result the above named taxpayer
was unable to report his share of the partnership’s
activity for the 1990 tax year.
According to Maciel, this disclosure statement provides clear
proof that he did not commit fraud with respect to his income
from the sale of M&V Investments.
[8] We have defined tax fraud as “ ‘intentional wrongdoing
on the part of the taxpayer with the specific intent to avoid a
tax known to be owing.’ ” Estate of Trompeter v. Comm’r,
279 F.3d 767, 773 (9th Cir. 2002) (quoting Conforte v.
Comm’r, 692 F.2d 587, 592 (9th Cir. 1982)). In a civil tax
case, the Commissioner of Internal Revenue bears the burden
of proving fraud by clear and convincing evidence. See Brad-
ford v. Comm’r, 796 F.2d 303, 307 (9th Cir. 1986). The exis-
tence of fraud need not be shown by direct evidence; instead,
a court may infer fraud from “the existence of certain ‘badges
of fraud.’ ” Estate of Trompeter, 279 F.3d at 773; see also
Bradford, 796 F.2d at 307. By statute, once the Commissioner
“establishes that any portion of an underpayment [in a given
year] is attributable to fraud, the entire underpayment shall be
treated as attributable to fraud, except with respect to any por-
tion of the underpayment which the taxpayer establishes (by
a preponderance of the evidence) is not attributable to fraud.”
26 U.S.C. § 6663(b).
MACIEL v. CIR 6939
[9] To the extent Maciel challenges the tax court’s interpre-
tation of the law, our review is de novo. Specifically, we
review de novo Maciel’s contention that a taxpayer who dis-
closes information about an omitted item of income cannot be
found to have acted fraudulently as a matter of law. Maciel
relies principally on the Eighth Circuit’s decision in Benderoff
v. United States, 398 F.2d 132, 137 (8th Cir. 1968). Bender-
off, however, merely held that the IRS could not collect taxes
beyond the usual statute of limitations when the taxpayer’s
failure to report an item of income was apparent “on the face
of the return.” Id. at 136 (internal quotation marks omitted).
Benderoff did not involve allegations of fraud, and we decline
Maciel’s invitation to extend Benderoff’s reasoning to this
case. The fact that a taxpayer provides the IRS with a hint
about omitted income does not automatically preclude a court
from finding that the taxpayer acted with an intent to evade
taxes. To hold otherwise would encourage unscrupulous tax-
payers and their agents to make partial or opaque disclosures
designed to avoid taxation without risking fraud penalties.
This is the sort of conduct we sought to prevent in Estate of
Trompeter. In that case, we “reject[ed] the [taxpayer’s] sug-
gestion that blind reliance on an accountant’s valuation is suf-
ficient per se to avoid fraud” based on our concern that
“experts for hire would serve as an ironclad defense in tax
fraud cases.” Estate of Trompeter, 279 F.3d at 774.
Because Maciel’s disclosure did not preclude a finding of
fraud as a matter of law, we review for clear error the tax
court’s factual determination that Maciel intended to evade
taxation. See, e.g., id. at 770 (“We review the Tax Court’s
factual determinations, including . . . findings regarding fraud-
ulent behavior, for clear error.”). Under the clear error stan-
dard, we will reverse the tax court only when we are “left
with the definite and firm conviction that there was no clear
and convincing evidence of fraud.” Akland v. Comm’r, 767
F.2d 618, 621 (9th Cir. 1985) (citation omitted); see also
Bradford, 796 F.2d at 307. We find no clear error here.
6940 MACIEL v. CIR
[10] As the tax court noted, Maciel’s disclosure statement
was “at the very least vague and ill-informing.” Maciel, 2004
WL 205819, at *17 n.53. Significantly, the statement does not
mention M&V Investments or Newark Wreckers by name,
nor does it explain that Maciel sold his partnership share dur-
ing the tax year and earned a profit on the transaction. Maciel
asserts that the IRS could have inferred the existence of a sale
from his declaration that he “was involved in a partnership for
part of the tax year.” (Emphasis added.) That passage, how-
ever, does not necessarily indicate an income-generating sale;
it could simply mean that Maciel had relinquished his partner-
ship interest or that the partnership had dissolved. Although
Maciel’s accountant testified that he intended to give the IRS
notice of the sale, the tax court was not required to credit that
testimony, particularly given the existence of other indicia of
fraud. For example, as the tax court noted, Maciel never
amended his return to report the sale of M&V Investments.
Moreover, the tax court was entitled to evaluate Maciel’s
intent with respect to the M&V Investments sale in light of
Maciel’s “ ‘[c]onsistent, substantial understatements of
income for several years.’ ” Baumgardner v. Comm’r, 251
F.2d 311, 322 (9th Cir. 1957) (quoting Kurnick v. Comm’r,
232 F.2d 678, 681 (6th Cir. 1956) (per curiam)). In sum,
given the evidence before the tax court, it was reasonable for
the court to conclude that Maciel acted fraudulently when he
failed to report income from the sale of M&V Investments.
IV. Deductions for Newark T&B and Alviso Racing
Finally, Maciel contends that the tax court erred when it
refused to permit deductions associated with two of Maciel’s
unincorporated businesses, Newark Truck and Body
(“Newark T&B”) and Alviso Rock/HK Racing (“Alviso Rac-
ing”). Maciel did not report any income from these businesses
for the 1990-92 tax years. He claims that, in calculating his
taxable income and tax liability from these business activities,
the tax court should have offset certain bona fide expenses.
With respect to Newark T&B, Maciel seeks a depreciation
MACIEL v. CIR 6941
deduction of $3,813 per year and a deduction of $2,621.43 for
utilities expenses incurred in 1992. With respect to Alviso
Racing, Maciel seeks to deduct $17,847.23 of expenses for
1990, $15,065.23 for 1991, and $30,283.07 for 1992.
It is the taxpayer’s burden to substantiate claimed deduc-
tions. See Boyd Gaming Corp. v. Comm’r, 177 F.3d 1096,
1098 (9th Cir. 1999); Rapp v. Comm’r, 774 F.2d 932, 935
(9th Cir. 1985); see also 26 U.S.C. § 274(d). We review for
clear error the tax court’s factual determination that a tax-
payer has failed to produce sufficient evidence to support a
deduction. See Schachter v. Comm’r, 255 F.3d 1031, 1033
(9th Cir. 2001); Boyd Gaming Corp., 177 F.3d at 1098. The
tax court, however, “is obligated to detail its reasoning.”
Estate of Trompeter, 279 F.3d at 770. We hold that it was
clearly erroneous for the tax court to deny some, though not
all, of the claimed deductions at issue here.
It is undisputed that Newark T&B conducted its business at
a property that Maciel purchased in 1990 for $200,000.
According to Maciel’s documentary evidence, when the
County of Alameda assessed this property, it allocated
$80,900 of the purchase price to land and the remaining
$119,100 to “improvements” (i.e., the buildings out of which
Newark T&B operated). Maciel also provided evidence of his
closing costs. Because the land itself is not depreciable, Mac-
iel’s total depreciable basis in the property—consisting of
improvements and a portion of the closing costs—was
$120,121. Using the applicable straight-line method for
depreciating real property over a useful life of 31.5 years,
Maciel calculated depreciation deductions of approximately
$3,800 per year. See 26 U.S.C. §§ 167-168 (1992). The record
indicates that Maciel did not claim these depreciation deduc-
tions in his 1990-92 personal or corporate income tax returns.
[11] The tax court’s opinion does not expressly consider
Maciel’s depreciation-related documents. Instead, the tax
court’s analysis of the issue consists of a single line in a foot-
6942 MACIEL v. CIR
note: “[T]here is insufficient evidence in the record with
which we can calculate any depreciation to which [Maciel]
might be entitled.” Maciel, 2004 WL 205819, at *12 n.42.
Given the uncontroverted documentary evidence establishing
Maciel’s depreciable basis in the property, and given the con-
clusory nature of the tax court’s reasoning, we conclude that
it was clear error to deny a depreciation deduction for Newark
T&B. Although Maciel is entitled to the full amount of this
deduction for 1991 and 1992, his deduction for 1990 must be
prorated because the property was not purchased until May of
that year.
[12] Maciel points to similar documentary evidence of his
1992 utility expenses for Newark T&B. The problem here,
however, is that the record does not exclude the possibility
that Maciel has already claimed these deductions. Because
Maciel had commingled the assets of his businesses and failed
to respect corporate formalities, the tax court was rightly con-
cerned that Maciel had included Newark T&B’s utility
expenses on another return. See id. at *12. The 1992 corporate
tax return for Alviso Rock, Inc., and George Maciel Trucking,
Inc., deducts more than $50,000 in utilities expenses. These
expenses are not itemized by type or location. Consequently,
the tax court did not clearly err when it denied the deduction
for Newark T&B’s utilities expenses.
[13] With respect to Alviso Racing, Maciel offers a number
of account statements, invoices, and bank records to establish
his deductible expenses. The documents show, for example,
that Maciel regularly purchased racing equipment from Kaed-
ing Performance, Inc., as well as from Shaver Specialty, Inc.,
a supplier of racing engines. The tax court concluded that it
was “unable to determine whether the expenses detailed in the
invoices were for the benefit of petitioner’s racing business or
for one of his related businesses.” Id. at *13. The court noted
that most of the invoices were made out to “Alviso,” which
could have referred to Maciel’s trucking corporation, Alviso
Rock, Inc., rather than to Maciel’s racing business. Id. at *13
 MACIEL v. CIR 6943
n.44. It is clear, however, that Maciel was purchasing racing
equipment rather than trucking equipment and that Maciel
paid for the equipment using checks drawn on Maciel’s “Al-
viso Rock/HK Racing” bank account. Furthermore, there is no
indication that Maciel deducted these expenses on his corpo-
rate tax returns. We therefore conclude that the tax court
clearly erred when it denied Maciel’s claimed deductions for
Alviso Racing.
Conclusion
We hold that the tax court properly refused to give preclu-
sive effect to the sentencing court’s fraud finding, and we
affirm on the merits the tax court’s determination that Maciel
acted fraudulently when he failed to report income from the
sale of M&V Investments. We reverse the tax court’s finding
that Maciel was not entitled to deductions for depreciation
and for expenses associated with his racing business. The
Commissioner is directed to permit those deductions and to
adjust Maciel’s total liability accordingly.
AFFIRMED in part; REVERSED in part. Each side to
bear its own costs.