McGee v. Commissioner , 80 T.C.M. 438 ( 2000 )

T.C. Memo. 2000-308
UNITED STATES TAX COURT
CHARLES A. MCGEE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 9302-97, 5434-98. Filed September 28, 2000.
Charles A. McGee, pro se.
Marshall R. Jones and Shuford A. Tucker, Jr., for
respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GERBER, Judge: In notices of deficiency addressed to
petitioner, respondent determined deficiencies in and additions
to Federal income tax as follows:1
1
Respondent seeks additions to tax in amounts greater than
those set forth in the notices of deficiency under sec. 6214(a).
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In Docket No. 9302-97:
Accuracy
-related
Additions to Tax Penalties
Sec. Sec. Sec. Sec. Sec.
Year Deficiency 6651(a)(1) 6653(a)(1) 6653(b)(1) 6663 6662(a)
1988 $146,963 $10,062 $2,743 $75,364 --- ---
1989 39,772 9,943 --- --- $20,069 $2,208
1990 224,046 56,011 --- --- 91,597 20,383
In Docket No. 5434-98:
Additions to Tax
Sec. Sec. Sec. Sec. Sec.
Year Deficiency 6651(a)(1) 6653(a)(1)(A) 6653(a)(1)(B) 6653(b)(1)(A)
6653(b)(1)(B)
1 2
1987 $334,292 $11,533 $2,660 $210,818
1
50% of the interest due on the portion of the underpayment attributable
to negligence.
2
50% of the interest due on the portion of the underpayment attributable
to fraud.
After concessions,2 the issues for our consideration are:
(1) Whether petitioner’s 1987, 1988, and 1989 income tax returns
are valid returns of petitioner; (2) whether petitioner is liable
for increased deficiencies under section 6214(a)3 for his 1987,
1988, and 1989 tax years; (3) whether petitioner’s Schedule C,
Profit or Loss From Business, income was understated for the
1987, 1988, 1989, and 1990 tax years; (4) whether petitioner
2
Respondent has conceded that petitioner is entitled to the
itemized deductions claimed on Schedule A, Itemized Deductions,
of petitioner’s 1990 tax return. Respondent has also proposed to
increase the deductions for wages on petitioner’s Schedules C.
The parties have also stipulated that petitioner incurred a
capital loss of $9,844 on the sale of stock during 1990.
3
Unless otherwise indicated, all section references are to
the Internal Revenue Code for the years in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
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failed to report interest income for the 1987, 1988, 1989, and
1990 tax years; (5) whether petitioner is entitled to claim
losses for the 1987, 1988, 1989, and 1990 tax years attributable
to farming activities and for the 1990 tax year attributable to
“harness racing”; (6) whether petitioner failed to report capital
gain income for his 1988, 1989, and 1990 tax years; (7) whether
1990 gains and losses of McGee Landscaping are reportable on
petitioner’s 1990 individual income tax return; (8) whether
petitioner is liable for the failure to file addition and or the
negligence penalty for the 1987, 1988, and 1990 tax years; (9)
whether petitioner is liable for the civil fraud penalty for the
1987, 1988, and 1990 tax years; (10) whether petitioner is liable
for fraudulently failing to file a tax return for the 1989 tax
year;4 (11) whether the period for assessment has expired with
respect to the tax years under consideration; and (12) whether
the doctrine of double jeopardy, res judicata, or collateral
estoppel bars assessment for any of the years at issue.
4
Pursuant to sec. 6664(b), the penalties for fraud under
sec. 6663 and for negligence under sec. 6662 as determined in the
notice of deficiency do not apply for 1989 because petitioner
filed no return for that year. Rather the issue is whether the
penalty under sec. 6651(f) for fraudulent failure to file is
applicable for 1989. In the other years for which respondent has
determined penalties for both fraud and negligence, the
determinations are not duplicative because the determinations are
with respect to separate portions of the deficiencies in each
year. For example, the fraud penalty is determined for
unreported Schedule C income, and the negligence penalty is
determined for Schedule F, Profit or Loss From Farming, losses.
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FINDINGS OF FACT5
When his petitions were filed, petitioner Charles A. McGee
resided in Alabama. At all pertinent times petitioner was a
self-employed attorney authorized to practice law in Alabama.
Petitioner received Bachelor of Arts and Juris Doctor degrees
from the University of Alabama in 1972 and 1975, respectively.
Petitioner’s law school work included a course in Federal income
taxation.
During 1987, 1988, 1989, and 1990, petitioner was married to
Karen McGee. From 1981 through 1990, petitioner filed only two
Federal individual income tax returns: A joint 1980 income tax
return with Karen McGee, filed on March 18, 1983, and a joint
1986 income tax return with Karen McGee, filed on October 15,
1987.
Petitioner’s Tax Returns
On November 27, 1990, respondent notified petitioner’s
representative of the initiation of an examination of
petitioner’s 1981, 1982, 1983, 1984, 1985, 1987, and 1988 tax
years. The scope of the audit was later broadened to include the
1989 and 1990 tax years. On February 12, 1991, respondent
received documents purporting to be petitioner’s Federal income
tax returns for the 1981, 1982, 1983, 1984, 1985, 1987, 1988, and
5
The stipulation of facts and the attached exhibits are
incorporated by this reference.
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1989 tax years. Respondent received petitioner’s 1990 Federal
income tax return on June 26, 1992.
These documents were all prepared by Harold E. Grierson
(Grierson). Grierson asked petitioner to furnish him with
information and records concerning all of petitioner’s income for
1987, 1988, 1989, and 1990. Petitioner provided Grierson with
filled-out Federal tax forms (prior-year forms with the
preprinted years crossed out), and Grierson copied the amounts
that petitioner had entered on these forms in preparing the
documents. Petitioner did not provide Grierson with any
supporting documentation for the amounts shown on the filled-out
tax forms he gave to Grierson. Grierson did not verify the
figures and computations on the filled-out forms but instead
reviewed them only for internal consistency or placement on the
form.
Petitioner did not sign the documents purporting to be his
1987, 1988, and 1989 individual Federal income tax returns.
Instead, petitioner’s employee, Merle Wilson (Wilson), signed
petitioner’s name on the documents. Wilson routinely handled
banking transactions for petitioner, including the signing of his
checks and the endorsement of his deposits. Wilson had never
signed petitioner’s tax returns before signing the 1987, 1988,
and 1989 tax returns. Petitioner and Wilson did not discuss
Wilson’s signing the documents prior to her doing so, and
petitioner did not authorize Wilson to sign them.
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Petitioner’s Criminal Tax Proceedings
On November 27, 1996, petitioner was indicted in Federal
District Court for the Northern District of Alabama for one count
of willfully making and subscribing to an individual Federal
income tax return which he did not believe to be true and
correct. On March 3, 1997, petitioner’s criminal trial began,
and on March 7, 1997, the jury returned a guilty verdict. On
April 8, 1997, petitioner filed a Motion for New Trial, which was
granted on May 8, 1997. On July 14, 1997, petitioner’s second
criminal trial began, and on July 21, 1997, the jury returned a
verdict of not guilty.
McGee Landscaping, Inc.
McGee Landscaping, Inc. (McGee Landscaping), was
incorporated in DeKalb County, Alabama, on March 27, 1986. No
election under section 1362 was filed with respect to McGee
Landscaping. During the years at issue, petitioner was the sole
owner of McGee Landscaping. On his financial statement dated
July 27, 1989, petitioner represented himself as the president
and the owner of the stock of McGee Landscaping. On his
financial statement dated July 31, 1989, petitioner represented
his ownership of McGee Landscaping as the ownership of
“Securities & Investments”. McGee Landscaping had three separate
bank accounts.
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Petitioner’s Bank Accounts
During the years at issue, petitioner maintained a clients’
trust account, numbered 055-0086-9 (Trust Account 1), at First
State Bank of DeKalb County (First State) in connection with his
law practice. During the years at issue, petitioner maintained a
clients’ trust account, number 035-3980-6 (Trust Account 2), at
Central Bank (now known as Compass Bank) in connection with his
law practice. During the years at issue, petitioner maintained a
business checking account, numbered 055-0374-4 (the Business
Account), at First State in connection with his law practice.
During 1987, 1988, and 1989, petitioner maintained a checking
account, numbered 056-0531-8 (the Personal Account), at First
State. During 1989 and 1990, a checking account, numbered 055-
0820-7, was maintained in connection with the business of McGee
Landscaping (the McGee Landscaping Account), at First State.
1987 Deposits
On April 22, 1987, the law firm of Hare, Wynn, Newell and
Newton issued check number 1295 payable to petitioner in the
amount of $305,270 as a referral fee. On May 7th or 8th, 1987,
$233,210 of the proceeds from check number 1295 was deposited
into the Personal Account by Wilson, $2,500 of the proceeds was
received in cash by Wilson, and $69,560 of the proceeds was used
by Wilson to purchase a cashier’s check payable to the Tennessee
Valley Authority. This cashier’s check was not delivered to the
payee but instead was deposited into the Personal Account on
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August 3, 1987. Petitioner did not report the proceeds of check
number 1295 on his 1987 tax return.
On August 28, 1987, the DeKalb County, Alabama Circuit Clerk
issued check number 1883 payable to petitioner in the amount of
$50,000 as a fee earned in connection with the settlement of a
case. On November 10, 1987, check number 1883 was deposited by
Wilson into petitioner’s Personal Account. Petitioner did not
report the proceeds of check number 1883 on his 1987 tax return.
On August 28, 1987, the Alabama Circuit Clerk issued check
number 1886 payable to petitioner in the amount of $278,982 as a
fee earned in connection with the settlement of a case. Wilson
endorsed petitioner’s name to check number 1886 and gave it to
petitioner’s mother. Petitioner did not report the proceeds of
check number 1886 on his 1987 tax return.
During 1987, unexplained deposits of $95,855 were made to
petitioner’s bank accounts and were not reported on his 1987 tax
return. During 1987, petitioner deposited $331,575 into the
Business Account. Petitioner reported gross receipts of $314,424
on his 1987 Schedule C.
1988 Deposits
Respondent determined that during 1988 petitioner made
withdrawals totaling $749,227 by and for the benefit of himself
from Trust Account 1 and Trust Account 2. Respondent also
determined that petitioner redeposited $185,992 of these
withdrawals back into Trust Accounts 1 and 2 during 1988.
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During 1988, $367,895 was deposited into the Business
Account. Of this amount, $202,266 represented transfers from
Trust Account 1 and Trust Account 2. Petitioner reported gross
receipts of $327,852 on his 1988 Schedule C.
1989 Deposits
Respondent determined that during 1989 petitioner made
withdrawals from Trust Account 1 and Trust Account 2 totaling
$269,191. Respondent also determined that during 1989, $190,860
of these withdrawals was redeposited into Trust Account 1 and
Trust Account 2.
During 1989, $505,464 was deposited into the Business
Account. Petitioner reported gross receipts of $287,986 on his
1989 Schedule C.
1990 Deposits
During 1990, petitioner earned a fee of $100,000 for
representing Marvin Barron in certain legal matters. Of this
amount, $6,504 was deposited into the Business Account. Of the
remaining $93,496, $12,000 was deposited in the McGee Landscaping
Account, $40,000 was used to make a repayment on a loan owed by
petitioner, and $41,496 was used to make a repayment on another
loan owed by petitioner.
During 1990, $1,135,338 was deposited into the Business
Account. Petitioner reported gross receipts of $711,960 on his
1990 Schedule C.
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During the years at issue, petitioner did not receive any
inheritances, legacies, or devises.
Interest Income
Petitioner sold property to Randy Weldon and Faust Daniels
and took back a note and mortgage on the property. Respondent
determined that petitioner received interest from the following
sources during the years at issue.
1987 1988 1989 1990
Faust Daniels $1,724 $5,165 $5,151 $5,134
Randy Weldon 5,188 5,179 5,170 5,159
Bill Doufexius 1,703
Total 8,615 10,344 10,321 10,293
Petitioner reported interest income of $5,247, $5,195,
$5,136, and $10,072 on his 1987, 1988, 1989, and 1990 tax
returns.
Sale of Property
Trucks
In 1988, petitioner purchased 50 trucks used to haul and
spread salt. Twenty-five of the trucks were used to haul salt
and had dump beds. The remaining 25 trucks were spreader trucks
that were used to spread salt on the roads. The trucks that
contained dump beds cost $3,500 more apiece than the unbedded
trucks. Petitioner paid $411,984 for the trucks, and incurred
fix-up costs of $28,775 in 1988 and $120,230 in 1989.
Petitioner sold some of the trucks during 1988, 1989, and
1990. Petitioner sold 12 trucks with dump beds in 1988 for
$137,285. Petitioner’s basis in the 12 trucks was $126,780. In
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1989, petitioner sold 13 trucks for $187,661. Twelve of the
thirteen trucks sold in 1989 had beds. Petitioner’s basis in the
13 trucks sold in 1989 was $174,977. Petitioner’s 1989 tax
return, however, reflected the sale of only 9 trucks. In 1990,
petitioner sold two unbedded trucks for $21,818. Petitioner’s
basis in the two trucks sold in 1990 was $20,458. Petitioner’s
1990 tax return, however, did not report any truck sales.
Respondent verified the unreported truck sales by personal
contact with the parties who purchased the trucks.
Sipsey Harbor
In 1986, petitioner purchased real property located on the
Sipsey River in Winston County, Alabama (Sipsey Harbor). Sipsey
Harbor consisted of 41 lots. On August 28, 1988, petitioner
issued an undated warranty deed for Sipsey Harbor to Ann M.
Burdick and Tarrie H. Hyche. Tarrie Hyche paid off his debt to
petitioner in 1991.
Petitioner was the grantor on deeds to two Sipsey Harbor
lots, which were recorded in the Winston County property records
in 1989, and was the grantor on deeds to four Sipsey Harbor lots,
which were recorded in 1990. On petitioner’s financial
statements dated July 27, 1989 and July 31, 1989, petitioner
represented himself as the owner of 30 Sipsey Harbor lots worth
$450,000.
On April 17, 1990, petitioner executed a real estate
mortgage with respect to Sipsey Harbor, which covered all but six
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of the Sipsey Harbor lots. Under the real estate mortgage,
petitioner was indebted to First State Bank of DeKalb County for
$150,000.
During 1989, petitioner received $30,000 from the sale of
the two Sipsey Harbor lots. Petitioner’s basis in the two Sipsey
Harbor lots sold in 1989 was $6,394. During 1990, petitioner
received $70,000 from the sale of the four Sipsey Harbor lots.
Petitioner’s basis in the four Sipsey Harbor lots sold in 1990
was $15,985. No information concerning Sipsey Harbor or any
Sipsey Harbor lot is included on petitioner’s 1987, 1988, 1989,
or 1990 tax return.
Farming and Harness-Racing Activities
For each of the years at issue, petitioner claimed
substantial losses relating to a farm whose principal product was
grain. Petitioner and his family performed most of the labor at
his farm. Petitioner himself did the planting and plowing.
Each Schedule F, Profit or Loss From Farming, bearing
petitioner’s name and reflecting the periods from 1981 through
1990 claimed a net loss. The aggregate claimed net losses
totaled $984,221. For 1982, 1983, 1984, 1985, 1986, and 1987,
the claimed net losses from farming exceeded the net profit
reported from petitioner’s law practice.
In 1990, petitioner also claimed losses relating to harness
racing. Petitioner claimed breeding fees, dues, stakes,
harnesses, and entry fees as expenses.
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Notices of Deficiency
Respondent determined petitioner’s gross receipts from his
law practice for the 1987, 1988, 1989, and 1990 tax years by
using the bank deposits method and by adding various specific
items. Specifically, respondent included (1) deposits to the
Business Account; (2) certain withdrawals from Trust Account 1
and Trust Account 2; and (3) certain specific items of unreported
income that were not deposited to the Business Account, Trust
Account 1, or Trust Account 2. Respondent’s analysis showed
that, for each of the years, petitioner had substantial deposits
in excess of the income that he reported on his return.
Respondent issued notices of deficiency to petitioner with
respect to his 1987, 1988, 1989, and 1990 tax years. In the
notices of deficiency, respondent determined that petitioner had
deficiencies in tax for the 1987, 1988, 1989, and 1990 tax years
in the amounts of $334,292, $146,963, $39,772, and $224,046,
respectively. Respondent also determined additions to tax or
penalties for fraud, negligence, and failure to file.
OPINION
We note at the outset that petitioner did not file a post-
trial brief in this case. Rule 151(a) provides, in part, that
“Briefs shall be filed after trial or submission of a case,
except as otherwise directed by the presiding Judge.” This Court
has long recognized the importance of filing a brief. See Klein
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v. Commissioner, 6 B.T.A. 617 (1927); Stringer v. Commissioner,
84 T.C. 693 (1985), affd. 789 F.2d 917 (4th Cir. 1986).
The importance of a brief is underscored in a case such as
the one currently before us where the contentions advanced by
petitioner are ill-defined and his testimony is vague and largely
unhelpful. At the close of the trial, petitioner was
specifically requested by the Court to include and explain in his
opening brief each item that respondent used in reconstructing
petitioner’s income with which he disagreed. Petitioner,
however, failed to file a brief.6 When a party fails to file a
brief altogether, such failure has been held by this Court to
justify the dismissal of all issues as to which the nonfiling
party has the burden of proof. See Stringer v. Commissioner,
supra. While we are unwilling to enter a default judgment
against petitioner in this case for failure to file a brief, we
view his failure as an indication of petitioner’s tenuous
position with regard to the issues in question.
A. Validity of Petitioner’s Tax Returns
Section 6061 requires that an individual income tax return
be signed “in accordance with forms or regulations prescribed by
the Secretary.” In order for an agent to sign an individual
income tax return for a taxpayer, it must be done in a manner
authorized by U.S. Treasury Regulations. See sec. 1.6061-1(a),
6
As an experienced trial attorney, petitioner’s failure to
file a brief is especially egregious.
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Income Tax Regs. A duly authorized agent may sign a return if
the taxpayer is prevented from doing so by reason of disease or
injury, continuous absence from the United States, or upon
written request to the local Internal Revenue Service (IRS)
District Director, if the District Director determines that good
cause exists for permitting the agent to make the return. See
sec. 1.6012-1(a)(5), Income Tax Regs.
In the present case, petitioner did not sign his 1987, 1988,
or 1989 tax returns. Instead, Wilson, petitioner’s employee,
signed the returns. Wilson was not authorized by petitioner to
sign the returns. Furthermore, even if she had been so
authorized, none of the circumstances enumerated in sec. 1.6012-
1(a)(5), Income Tax Regs., existed. Thus, she could not validly
sign petitioner’s individual income tax returns. Therefore,
because the 1987, 1988, and 1989 returns were not signed by
petitioner or an authorized agent pursuant to sec. 1.6061-1(a),
Income Tax Regs., they do not constitute returns of petitioner.7
B. Jurisdiction To Determine an Increased Deficiency Under
Section 6214(a)
Respondent treated petitioner’s 1987, 1988, and 1989 tax
returns as valid returns of petitioner at the time the notices of
7
Although we have found that the 1987, 1988, and 1989
returns were not proper returns that would begin the period
within which respondent could assess tax, nevertheless the
returns are evidence of what petitioner represented to his return
preparer. In that regard, petitioner stipulated these documents
and did not object to their being part of the record. As such,
the returns constitute admissions.
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deficiency were issued. Accordingly, the 1987, 1988, and 1989
deficiencies were computed giving petitioner credit for reporting
certain amounts of income. Evidence during trial, however,
established that the documents were never signed by petitioner
and were not valid returns. After determining that petitioner
did not file returns in 1987, 1988, and 1989, however, respondent
contends that petitioner’s deficiencies for the 1987, 1988, and
1989 tax years are greater than those determined in the notices
of deficiency due to petitioner’s failure to file returns for
those years. Thus, respondent seeks increased deficiencies and
additions to tax in greater amounts than those set forth in the
notices of deficiency.
Section 6214(a) provides that this Court shall have
jurisdiction to redetermine the correct amount of the deficiency
even if the amount so redetermined is greater than the amount
determined by the Commissioner in the notice of deficiency if the
Commissioner asserts a claim at or before the hearing or
rehearing. Consistent with the general mandate of section
6214(a), this Court generally will only exercise its jurisdiction
over an increased deficiency where the matter is properly
pleaded. See Estate of Petschek v. Commissioner, 81 T.C. 260,
271-272 (1983), affd. 738 F.2d 67 (2d Cir. 1984); Markwardt v.
Commissioner, 64 T.C. 989, 997 (1975).
Rule 41(b)(1), however, provides that when an issue not
raised in the pleadings is tried with the express or implied
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consent of the parties, that issue is treated in all respects as
if it had been raised in the pleadings. Thus, where respondent
raises an issue that could result in an increased deficiency
without formally amending his pleading and that issue is tried
with petitioner’s express or implied consent, the requirement in
section 6214(a) that respondent make a claim for the increased
deficiency is satisfied. See Woods v. Commissioner, 91 T.C. 88,
93 (1988).
In his trial memorandum, respondent asserted a claim for
amounts greater than those stated in the notices of deficiency,
based on his belief that petitioner did not sign his tax returns
and therefore did not file valid returns. A relatively large
portion of petitioner’s trial testimony addressed this issue.
Thus, petitioner was aware that respondent disagreed with
petitioner’s position regarding the validity of his tax returns.
Petitioner could have raised an objection to respondent’s
assertion either in his trial memorandum, during trial, or in his
posttrial brief. He did not, however, submit a trial memorandum
or file a posttrial brief, and he did not raise any objection
during trial.
Under the foregoing circumstances, we do not believe
petitioner was either surprised or disadvantaged by respondent’s
claim that petitioner is liable for increased deficiencies.
Thus, we conclude that respondent has asserted a claim for an
increased deficiency as required by section 6214(a).
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C. Unreported Schedule C Income
Every taxpayer is required to maintain adequate records of
taxable income. See sec. 6001. When respondent audited
petitioner’s 1987, 1988, 1989, and 1990 income tax returns,
petitioner failed to provide sufficient records from which a
determination could be made of petitioner’s gross receipts. In
the absence of adequate records, respondent performed a bank
deposits analysis, under which he determined that petitioner had
made deposits in excess of the reported gross receipts.
In cases where taxpayers have not maintained business
records or where their business records are inadequate, the
courts have authorized the Commissioner to reconstruct income by
any method that, in the Commissioner’s opinion, clearly reflects
income. See sec. 446(b); Parks v. Commissioner, 94 T.C. 654, 658
(1990). The Commissioner’s method need not be exact but must be
reasonable. See Holland v. United States, 348 U.S. 121 (1954).
The bank deposits method for computing unreported income has
long been sanctioned by the courts. See Factor v. Commissioner,
281 F.2d 100, 116 (9th Cir. 1960), affg. T.C. Memo. 1958-94;
DiLeo v. Commissioner, 96 T.C. 858, 867 (1991), affd. 959 F.2d 16
(2d Cir. 1992). Bank deposits are prima facie evidence of
income. See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).
Where the taxpayer has failed to maintain adequate records as to
the amount and source of his or her income and the Commissioner
has determined that the deposits are income, the taxpayer must
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show that the determination is incorrect. See Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933).
In calculating petitioner’s income using the bank deposits
method, respondent considered deposits to the Business Account
and made a downward adjustment for any withdrawals from the Trust
Accounts that were deposited to the Business Account in order to
prevent duplication.8 Respondent’s method of computing
petitioner’s law practice income insured that petitioner was not
taxed on receipts that constituted loan proceeds or other
nontaxable receipts by eliminating such deposits from the
computation. Respondent’s method further insured that petitioner
was not taxed twice on receipts that were properly reportable at
places on petitioner’s returns other than on the law practice
Schedule C.
Petitioner admitted both in his pleadings and during trial
that some income had been unreported. In all of the tax years at
issue, there were discrepancies between what was deposited into
petitioner’s Business Account and what was reported as gross
receipts on petitioner’s tax returns. During 1987, 1988, 1989,
and 1990, the amounts of gross deposits to the Business Account
were $331,575, $367,895, $505,464, and $1,135,338, respectively.
8
For example, in 1988 respondent made a $749,227 upward
adjustment to petitioner’s 1988 income for certain withdrawals
from the Trust Accounts. That adjustment, however, was offset by
two downward adjustments: One in the amount of $202,266 for
interaccount transfers and one in the amount of $185,992 for
repayments to the Trust Accounts.
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The amounts of gross receipts reflected on the Schedules C
attached to the 1987, 1988, 1989, and 1990 returns were $314,424,
$327,852, $287,986, and $711,960, respectively.
In addition to these discrepancies, other items of income
were not disclosed to petitioner’s return preparer and were not
reflected on any tax returns. First, during 1988, 1989, and
1990, certain withdrawals were made from Trust Accounts 1 and 2
that represented taxable income to petitioner. Second, during
1987 and 1990, certain fees earned by petitioner were not
deposited into any of the accounts maintained by petitioner in
connection with his law practice. During 1987 alone, the
unreported specific items total $634,252, while petitioner
reported only $314,424 of gross receipts.
Petitioner admits to receiving the unreported income, yet
alleges that the 1987 unreported income items were subsequently
deposited into the Business Account. Petitioner, however,
presented no evidence supporting this allegation. In addition,
these items that were allegedly deposited into petitioner’s
Business Account were never entered into the receipt books of
petitioner’s law practice. Furthermore, petitioner offered no
credible evidence that any of the unexplained deposits were from
a nontaxable source. In short, petitioner has not shown that
respondent’s income reconstruction is incorrect. Accordingly,
respondent’s determinations are sustained.
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D. Interest Income
Under section 61, interest income is includable in income.
See sec. 61(a)(4). Respondent determined that during 1987, 1988,
1989, and 1990, petitioner received interest income in amounts
that exceeded what was reflected on his tax returns. Petitioner
admitted that he did not reflect interest income received from
Faust Daniels for the 1988 and 1989 tax years. Petitioner,
however, alleged that some of the interest income that he failed
to reflect was actually included in the gross receipts of his law
practice. Petitioner further alleged that his secretary
inadvertently included the entire payment--principal and
interest--as taxable income, and therefore his income was
overstated.
As an initial matter, we note that petitioner has failed to
present any evidence that interest income was actually reported
on Schedule C. If, however, interest income was reported on
Schedule C, a separate adjustment for interest income could
result in petitioner’s being taxed twice on the same income.
Respondent’s method of computing petitioner’s correct Schedule C
income, however, eliminated the possibility of such duplication
by subtracting interest income from the computation of law
practice income. We further note that the only evidence that
both principal and interest were included in taxable income is
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petitioner’s own testimony, which we find to be self-serving and unconvincin
Accordingly, interest income in the amounts of $8,615,
$10,344, $10,321, and $10,293 is includable in petitioner’s
income for the 1987, 1988, 1989, and 1990 tax years,
respectively.
E. Net Loss Deductions for Farming and Harness-Racing Activities
Section 183(a) provides that if a taxpayer’s activity
constitutes an activity not engaged in for profit, expenses
arising out of the activity are allowed as deductions only as
provided in section 183(b). Section 183(c) defines an activity
not engaged in for profit as “any activity other than one with
respect to which deductions are allowable for the taxable year
under section 162 or under paragraph (1) or (2) of section 212.”
The test for determining whether an individual is carrying
on a trade or business under section 183 is whether the
taxpayer’s actual and honest objective in engaging in the
activity is to make a profit. See Dreicer v. Commissioner, 78
T.C. 642, 645 (1982), affd. without opinion 702 F.2d 1205 (D.C.
Cir. 1983); sec. 1.183-2(a), Income Tax Regs.
Section 1.183-2(b), Income Tax Regs., sets forth a
nonexclusive list of factors to be considered in determining
whether an activity is engaged in for profit. The relevant
factors are: (1) The manner in which the taxpayer carries on the
activity; (2) the expertise of the taxpayer or his advisers; (3)
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the time and effort expended by the taxpayer in carrying on the
activity; (4) the expectation that assets used in the activity
may appreciate in value; (5) the success of the taxpayer in
carrying on other similar or dissimilar activities; (6) the
taxpayer’s history of income or losses with respect to the
activity; (7) the amount of occasional profits, if any, which are
earned; (8) the financial status of the taxpayer; and (9) the
presence of elements of personal pleasure or recreation. Not all
of these factors are applicable in every case, and no one factor
is controlling. See sec. 1.183-2(b), Income Tax Regs. Although
these factors are helpful in ascertaining a taxpayer’s objective
in engaging in the activity, no single factor, nor the existence
of even a majority of the factors, is controlling. See Keanini
v. Commissioner, 94 T.C. 41, 46 (1990). We now apply these
factors to petitioner’s farming and harness-racing activities.
Farming Activities
Petitioner did not present any evidence regarding the manner
in which he operates his farm. He generally stated that he did
the plowing and the planting, and that while he did have some
help, he and his family did almost all of the labor in what he
described as an “extensive farming operation that didn’t turn out
to be very profitable.” He did not present any explicit evidence
regarding how much time he spent on his farming activities,
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though he did say that he was too busy with other activities to
take care of the farm.
Each Schedule F from 1981 to 1990 reflected a net loss,
totaling $984,221. While petitioner stated that he has always
farmed and that “this wasn’t a hobby farm like a lot of people”,
we have been unable to find any evidence establishing that
petitioner engaged in the farming activities with the intention
of making a profit.
During trial, petitioner alluded to the fact that the IRS
wrote to him or Mr. Grierson, his return preparer, stating that
$455,000 worth of Schedule F losses could be used for the first
year that there was taxable income. Neither petitioner nor Mr.
Grierson, however, was able to produce any document from the IRS
regarding the availability of any Schedule F losses. Indeed, Mr.
Grierson admitted that the conversation regarding the Schedule F
losses may have been between himself and petitioner rather than
between himself and the IRS.
Based on petitioner’s testimony and the lack of any evidence
regarding the manner in which he conducted his activity, we find
that petitioner has not established that making a profit was his
primary objective. Furthermore, petitioner has also failed to
substantiate the claimed losses. Accordingly, we sustain
respondent’s determinations regarding petitioner’s Schedule F net
loss deductions for the 1987, 1988, 1989, and 1990 tax years.
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Harness Racing
Petitioner’s testimony regarding harness racing consisted of
the following:
This horse thing was a matter of--I wanted to grow
colts. I ended up having to pull * * * some horses--
these were harness horses too, by the way; they’re not
thoroughbreds. They’re like the old fairs that people
used to have. You might be familiar with the Ohio
Fair, which has got the little brown jug, and all the
farmers would have harness horses that pulled the carts
to go. That’s the kind of horses that I had, and
started out trying to have a brood mare band and of
course, that didn’t fare very well either. * * *
Other than this testimony, petitioner alluded to the death
of a horse and some insurance payment. However, in the absence
of any explanation by petitioner elaborating on this, we are
unable to determine what, if anything, this has to do with his
harness-racing activities. In short, petitioner failed to
present any evidence that he engaged in the activity for profit.
Furthermore, petitioner also failed to substantiate the claimed
losses. Accordingly, respondent’s determinations with respect to
petitioner’s claimed “harness-racing” losses for 1990 are
sustained.
F. Capital Gain
Gains on the sale of property are taxable under section 61,
and the gain is computed by reference to the excess of the amount
realized over the adjusted basis provided in section 1011. See
sec. 1001. We must determine whether petitioner reported the
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correct amount of capital gain on the sale of Sipsey Harbor lots
and the sale of trucks.
Sipsey Harbor
Petitioner contends that he sold Sipsey Harbor in one
transaction, while respondent contends that the Sipsey Harbor
lots were disposed of in several transactions.
Sipsey Harbor consisted of 41 lots. In 1988, petitioner
issued an undated warranty deed for Sipsey Harbor to Ann Burdick
and Tarrie Hyche. Yet on his financial statements dated July 27,
1989 and July 31, 1989, petitioner represented himself as the
owner of 30 Sipsey Harbor lots worth $450,000. Thus, despite the
warranty deed issued by petitioner to Tarrie Hyche in 1988,
petitioner still considered himself the owner of 30 Sipsey Harbor
lots in July 1989.
In 1989, petitioner was the grantor on deeds to two Sipsey
Harbor lots, which were recorded in the Winston County property
records. In 1990, petitioner was the grantor on deeds to four
Sipsey Harbor lots, which were recorded in the Winston County
property records. Thus, rather than disposing of Sipsey Harbor
in one transaction, petitioner disposed of his interest in two
Sipsey Harbor lots in 1989 and four Sipsey Harbor lots in 1990.
No sales are reflected on petitioner’s 1989 or 1990 return, nor
is there any evidence to corroborate petitioner’s alleged
disposition of petitioner’s entire interest in Sipsey Harbor.
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Petitioner contends that the sale was not reported on any
returns because it was an installment sale that was not
completely paid off until 1991. We disagree with petitioner’s
characterization and treatment of the transaction. Petitioner
produced no evidence that the sale of any Sipsey Harbor lot was
structured as an installment sale. Petitioner failed to
introduce any type of mortgage note between himself and Ann
Burdick or Tarrie Hyche evidencing payments for the Sipsey Harbor
lots. Petitioner failed to elaborate on the sale of the six lots
in 1989 and 1990. Petitioner also failed to explain why no
portion of any proceeds of the sales of those six lots or any
other lots were reported on any of his returns. In short,
petitioner offered no explanation for his complete failure to
report any Sipsey Harbor transaction. Accordingly, we sustain
respondent’s determination with regard to petitioner’s capital
gain from the sale of Sipsey Harbor.
Trucks
Petitioner sold several trucks during the years in issue.
Respondent verified the number of sales of petitioner’s trucks by
contacting the parties who purchased the trucks. Respondent
determined that petitioner sold 13 trucks in 1989, but
petitioner’s 1989 return reflects the sale of only 9 trucks.
Respondent determined that petitioner sold two trucks in 1990,
but petitioner’s 1990 return did not reflect any truck sales.
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Petitioner failed to offer any explanation as to why he
failed to report the sale of four trucks in 1989 and two trucks
in 1990. Accordingly, we sustain respondent’s determinations
regarding petitioner’s capital gains from the sale of trucks in
1989 and 1990.
G. McGee Landscaping
The resolution of whether petitioner is allowed to report
the 1990 gains and losses of McGee Landscaping on his individual
return depends on whether the corporate form of McGee Landscaping
is respected for Federal income tax purposes. Generally, the
gains and losses of a corporation which has not filed an election
under section 1362 are not reportable on the shareholder’s
individual income tax return.
Petitioner must show that his landscaping business was not
operated as a corporation. See Brints v. Commissioner, T.C.
Memo. 1989-457. Courts have observed that taxpayers are free to
organize their affairs as they choose, but that those tax
consequences must be accepted regardless of whether their choice
precluded the benefit of some other route that they might have
chosen to follow but did not. See Commissioner v. National
Alfalfa Dehydrating & Milling Co., 417 U.S. 134 (1974).
McGee Landscaping was incorporated in DeKalb County,
Alabama, in 1986. During the years at issue, petitioner was the
sole owner of McGee Landscaping. Petitioner chose to conduct the
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business in a corporate form and chose not to file an election
for S corporation treatment under section 1362. McGee
Landscaping was held out as a corporation, and petitioner
presented no evidence that McGee Landscaping was, in fact,
petitioner’s alter ego.
While a taxpayer may challenge the form of a transaction if
necessary to avoid unjust results, we can find no injustice in
characterizing McGee Landscaping as a corporation and not as a
sole proprietorship or passthrough entity. See Spector v.
Commissioner, 641 F.2d 376 (5th Cir. 1981), revg. 71 T.C. 1017
(1979). Indeed, the Supreme Court has established a general rule
that the separate existence of a corporation is to be respected
for tax purposes. See Moline Properties v. Commissioner, 319
U.S. 436 (1943).
Petitioner was free to run McGee Landscaping as he saw fit
and chose to operate it as a separate corporate entity.
Petitioner simply cannot retrospectively disavow the form in
which he chose to operate his landscaping business in order to
obtain certain tax benefits. Petitioner has failed to present
any evidence indicating that McGee Landscaping did not possess a
separate existence. Accordingly, we decline to disregard the
corporate form of McGee Landscaping. Therefore, the gains and
losses of McGee Landscaping are not reportable on petitioner’s
individual income tax return.
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H. Additions to Tax and Penalties
Failure To File
Section 6651(a)(1) provides for an addition to tax of 5
percent of the tax required to be shown on the return for each
month or fraction thereof for which there is a failure to file,
not to exceed 25 percent.
To avoid the additions to tax for filing late returns, a
taxpayer must show (1) that the failure to file did not result
from willful neglect, and (2) that the failure to file was due to
reasonable cause. See United States v. Boyle, 469 U.S. 241, 245
(1985). If the taxpayer does not meet his burden, the imposition
of the addition to tax is mandatory. See Heman v. Commissioner,
32 T.C. 479 (1959), affd. 283 F.2d 227 (8th Cir. 1960).
Petitioner failed to file returns for 1987 and 1988, and
petitioner’s 1990 return was filed more than 4 months late, which
would result in the imposition of the maximum 25-percent rate for
1987, 1988, and 1990. Petitioner stated that Mr. Perry handled
the bank records and checks associated with his law practice but
that Mr. Perry’s office burned down, and he died in either 1988
or 1989. Therefore, petitioner claims he had trouble
reconstructing the records. Petitioner, however, failed to
present any evidence that a fire destroyed petitioner’s records,
preventing him from filing returns. Accordingly, we view
petitioner’s testimony as self-serving and unconvincing and find
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that petitioner has not presented evidence that he had a
reasonable cause for not filing his 1987, 1988, and 1990 returns.
Furthermore, petitioner has not shown that his failure to file
was not due to willful neglect. Accordingly, we sustain
respondent’s determination with respect to the section 6651(a)
additions to tax.9
Fraud
Respondent determined that petitioner is liable for
additions to tax for fraud under sections 6653(b), 6651(f), and
6663. Respondent seeks to apply (1) the section 6653(b)(1)(A)
and (B) additions to the 1987 adjustment for unreported gross
receipts; (2) the section 6653(b)(1) addition to the 1988
adjustments for unreported gross receipts, unreported capital
gains and unreported interest income; (3) the section 6651(f)
addition for the 1989 fraudulent failure to file an income tax
return;10 and (4) the section 6663 addition for the 1990
adjustments for unreported gross receipts, unreported capital
gains, and unreported interest income.
9
Respondent concedes that no addition to tax under sec.
6651 for the 1987 and 1988 tax years will be assessed with
respect to the portion of the underpayment that is attributable
to fraud. See sec. 6653(d).
10
Under sec. 6664(b), the civil fraud penalty of sec. 6663
determined in the notice of deficiency does not apply because
petitioner did not file a 1989 return. Rather, the fraud
delinquency penalty of sec. 6651(f) applies.
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For 1987, section 6653(b)(1)(A) imposes an addition to tax
if any part of an underpayment of tax required to be shown on a
return is due to fraud, in the amount of 75 percent of the
portion of the underpayment which is attributable to fraud.
Section 6653(b)(1)(B) imposes an addition to the tax in the
amount of 50 percent of the interest due with respect to the
portion of the underpayment which is attributable to fraud.
Section 6663(a), as applicable for 1990, provides that if any
part of an underpayment 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. Section 6651(f), as
applicable for 1989, imposes an addition to the tax for the
fraudulent failure to file an income tax return. The addition to
the tax is 15 percent initially and an additional 15 percent for
each portion of a month thereafter, up to a maximum of 75
percent. To determine whether petitioner’s failure to file his
return was fraudulent, we apply the same elements used when
considering the imposition of the addition to tax and the penalty
for fraud under section 6653(b)(1) and section 6663(a). See
Clayton v. Commissioner, 102 T.C. 632, 653 (1994).
Fraud is defined as an intentional wrongdoing designed to
evade tax believed to be owing. See Edelson v. Commissioner, 829
F.2d 828, 833 (9th Cir. 1987), affg. T.C. Memo. 1986-223.
Respondent bears the burden of proving fraud and must establish
- 33 -
it by clear and convincing evidence. See Rule 142(b). Thus, we
do not bootstrap a finding of fraud upon a taxpayer’s failure to
disprove the Commissioner’s deficiency determination. See Parks
v. Commissioner, 94 T.C. 654, 660-661 (1990).
In order to satisfy this burden, respondent must show (1)
that an underpayment exists, and (2) that the taxpayer intended
to evade taxes known to be owing by conduct intended to conceal,
mislead, or otherwise prevent the collection of taxes. See id.
The existence of fraud is a question of fact to be resolved
upon consideration of the entire record. See DiLeo v.
Commissioner, 96 T.C. 858, 874 (1991). Fraud is never presumed
and must be established by independent evidence of fraudulent
intent. See Edelson v. Commissioner, supra. Fraud may be shown
by circumstantial evidence because direct evidence of the
taxpayer’s fraudulent intent is seldom available. See Gajewski
v. Commissioner, 67 T.C. 181, 199 (1976), affd. without published
opinion 578 F.2d 1383 (8th Cir. 1978). The taxpayer’s entire
course of conduct may establish the requisite fraudulent intent.
See Stone v. Commissioner, 56 T.C. 213, 224 (1971).
To decide whether the fraud penalty is applicable, courts
consider several indicia of fraud, or “badges of fraud”, which
include: (1) Understatement of income; (2) inadequate books and
records; (3) failure to file tax returns; (4) implausible or
inconsistent explanations of behavior; (5) concealment of assets;
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(6) failure to cooperate with tax authorities; (7) filing false
Forms W-4; (8) failure to make estimated payments; (9) dealing in
cash; (10) engaging in illegal activity; and (11) attempting to
conceal illegal activity. See Bradford v. Commissioner, 796 F.2d
303, 307 (9th Cir. 1986), affg. T.C. Memo. 1984-601; Recklitis v.
Commissioner, 91 T.C. 874, 910 (1988). This list is
nonexclusive. See Miller v. Commissioner, 94 T.C. 316, 334
(1990).
With regard to whether respondent has shown that an
understatement exists, petitioner himself admitted that certain
items of income were not reported on his tax returns. In
addition, clear and convincing evidence establishes that
petitioner underreported his gross receipts, interest income, and
capital gains. Accordingly, we find that respondent has met his
burden of proving an underpayment by clear and convincing
evidence.
In this case, petitioner has willfully failed to file timely
tax returns for the 1987, 1988, 1989, and 1990 taxable years. At
the time the audit commenced in late 1990, petitioner had not
filed returns for the 1981, 1982, 1983, 1984, 1985, 1987, 1988,
or 1989 tax years. This is persuasive evidence of fraud. See
Marsellus v. Commissioner, 544 F.2d 883 (5th Cir. 1977), affg.
T.C. Memo. 1975-368.
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Petitioner was fully aware of his obligation to file tax
returns. His only apparent explanation for his delinquency in
filing returns for the years at issue is that he believed that
his Schedule F losses would completely offset his taxable income
for all of those years. This explanation lacks credibility.
Petitioner, although currently unlicensed,11 is an experienced
attorney who studied Federal income taxation in law school. We
find it totally unbelievable that an experienced attorney such as
petitioner who was engaged in several businesses (law practice,
McGee Landscaping, etc.) did not know of his legal duty to file
accurate and timely returns. The fact that petitioner filed only
one timely return during the 1980’s establishes a long pattern of
substantial and consistent underreporting of income.
Petitioner also actively concealed his income by routing
several unusually large fees around his receipt books and
business bank accounts. He also failed to deposit many items
into any account, business or personal. Petitioner contends that
the omissions were accidental and that there was no fraudulent
intent involved. We would be more apt to believe petitioner if
the omissions had a random quality to them. However, this is
simply not the case. The fees that petitioner failed to record
in his business records or deposit in his Business Account were
11
On Jan. 29, 1999, the Alabama Supreme Court suspended
petitioner from the practice of law in the courts of Alabama for
a period of 3 years.
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in the amounts of $305,270, $50,000, $278,982, and $100,000. We
think it is unlikely that petitioner “accidentally” routed only
his largest fees around his Business Account. The sheer size of
the omissions for all years supports a finding that the omissions
were intentional rather than accidental. The fact that
petitioner deposited these checks into personal accounts or
endorsed them over to family members made it difficult for
respondent to trace the proceeds to petitioner and is indicative
of an intent to evade taxes. Petitioner’s attempt to blame his
office staff and former return preparer for these omissions of
income is weak and implausible.
Furthermore, petitioner failed to provide any explanation
for the underreporting of interest income and capital gains.
With regard to petitioner’s capital gains adjustment relating to
the Sipsey Harbor transactions, the evidence supports the finding
that six lots of Sipsey Harbor were sold in 1989 and 1990.
Petitioner argued that he disposed of Sipsey Harbor in a single
transaction and that he was reporting the sale under the
installment method. Petitioner, however, did not report the
Sipsey Harbor transaction on any tax return. Regardless of which
accounting method petitioner chose to utilize regarding the
transaction, petitioner offered no explanation for his complete
failure to report any Sipsey Harbor transaction. Petitioner also
- 37 -
neglected to explain why he failed to report interest income and
the sale of trucks.
We agree with respondent that the failure to file a 1989
return and the underreporting of gross receipts, interest income,
and/or capital gains in 1987, 1988, and 1990 is attributable to
fraud. The record shows that petitioner engaged in a pattern of
failing to file returns and underreporting income. Petitioner
failed to keep adequate records and concealed income by routing
large checks into personal accounts or endorsing them and giving
them to family members. Petitioner, as an experienced attorney,
possessed sufficient education and knowledge of his duty to file
tax returns and report income. He provided implausible
explanations and failed to present any credible evidence that the
omissions of income were accidental.
Based on the foregoing, we hold that respondent has
established by clear and convincing evidence that petitioner’s
underpayments due to the underreporting of gross receipts,
interest income and capital gains for the 1987, 1988, and 1990
tax years, and his failure to file a return for 1989, are
attributable to fraud with the intent to evade tax. Accordingly,
respondent’s determination that petitioner is liable for the
additions to tax under section 6653(b)(1)(A) and (B) for the 1987
taxable year, section 6653(b)(1) for the 1988 taxable year,
- 38 -
section 6651(f) for the 1989 taxable year, and section 6663 for
the 1990 taxable year is sustained.
Negligence
Respondent contends that the negligence addition to tax
under section 6653(a) for the 1987 and 1988 taxable years and the
negligence penalty under section 6662(a) for the 1990 taxable
year apply to the portions of the deficiencies in tax that are
not subject to the fraud addition to tax (namely, the Schedule F
losses, the underreported interest income in 1987, and the
Schedule C landscaping and harness-racing losses in 1990).12 The
portions of the deficiencies against which the negligence
additions to tax and negligence penalty were determined relate
primarily to unsubstantiated claimed Schedule C and Schedule F
expenses.
Section 6653(a)(1)(A) and (a)(2), as applicable for 1987,
imposes an addition to tax if any part of an underpayment of tax
required to be shown on a return is due to negligence or
disregard of rules or regulations in the amount of 5 percent of
the portion of the underpayment which is not attributable to
fraud. Section 6653(a)(1)(B) imposes an addition to the tax in
the amount of 50 percent of the interest due with respect to the
portion of the underpayment which is attributable to negligence
12
Under sec. 6664(b), the negligence penalty determined in
the notice of deficiency does not apply for 1989 because
petitioner did not file a 1989 tax return.
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and not attributable to fraud. Section 6662(a) and (b)(1), as
applicable for 1990, imposes a penalty of 20 percent on the
portion of an underpayment of tax required to be shown on a
return which is attributable to negligence or disregard of rules
or regulations.
Negligence is the lack of due care or failure to do what a
reasonable and ordinarily prudent person would do under the
circumstances. See Neely v. Commissioner, 85 T.C. 934, 947
(1985). The negligence addition to tax and the negligence
penalty will apply if, among other things, the taxpayer fails to
maintain adequate books and records with regard to the items in
question. See Crocker v. Commissioner, 92 T.C. 899, 917 (1989).
Petitioner claimed Schedule F and Schedule C loss deductions with
respect to activities which he could not establish he engaged in
for profit. He also failed to produce records substantiating the
expenses which allegedly produced the losses. Because of
petitioner’s failure to maintain such records, we conclude that
petitioner is liable for the negligence additions to tax and
negligence penalty relating to the above items.
I. Petitioner’s Legal Arguments
Statute of Limitations
The notice of deficiency that relates to petitioner’s 1988,
1989, and 1990 tax years was issued on February 7, 1997. The
notice of deficiency that relates to petitioner’s 1987 tax year
- 40 -
was issued on December 19, 1997. As discussed above, petitioner
failed to sign his tax returns and filed no valid returns for the
1987, 1988, or 1989 tax years. In addition, we have found fraud
for portions of the 1987 and 1988 deficiencies and all of the
1989 deficiency. Therefore, under section 6501(c)(1) and (3),
respondent was not barred by the statute of limitations from
issuing the notices of deficiency with respect to those years.
With respect to the 1990 tax year, petitioner’s underpayments for
that year were fraudulent, to the extent determined above.
Accordingly, respondent was not barred by the statute of
limitations with respect to the 1990 tax year under section
6501(c)(1).
Double Jeopardy, Res Judicata, and Collateral Estoppel
In his pleadings, petitioner argues that the determinations
for each year are barred by double jeopardy, res judicata, and
collateral estoppel. We find petitioner’s arguments to be wholly
without merit. Petitioner’s acquittal on a criminal section
7206(1) charge does not preclude, under the doctrines of double
jeopardy, res judicata, or collateral estoppel, respondent from
litigating petitioner’s civil liability for a deficiency in tax
and additions to tax for failure to file, negligence, and fraud
with respect to the same tax years.
There is a higher standard of proof in criminal proceedings
(beyond a reasonable doubt) than there is in the civil proceeding
- 41 -
(preponderance of the evidence or clear and convincing evidence),
so that failure of proof in the criminal proceeding does not
necessarily lead to the conclusion that there will be a failure
of proof herein. See Kenney v. Commissioner, 111 F.2d 374 (5th
Cir. 1940); Traficant v. Commissioner, 89 T.C. 501, 510-511 n.9
(1987), affd. 884 F.2d 258 (6th Cir. 1989). Accordingly, the
affirmative defenses of res judicata and collateral estoppel are
unavailable to petitioner. In addition, there is no double
jeopardy in determining a civil addition to tax for fraud even
though a person has been indicted and tried for tax evasion. See
Ianniello v. Commissioner, 98 T.C. 165, 183-185 (1992).
We have considered all other arguments of the parties, and
to the extent not addressed herein we find them to be either
moot, meritless, or irrelevant.
To reflect concessions of the parties,
Decisions will be entered
under Rule 155.