DocketNumber： Docket No. 1405-91
Judges： HAMBLEN
Filed Date： 4/7/1993
Status： Non-Precedential
Modified Date： 11/21/2020
*154 Decision will be entered under Rule 155.
MEMORANDUM FINDINGS OF FACT AND OPINION
HAMBLEN,
| Additions to Tax | ||||
| Year | Deficiency | Sec. 6653(b)(1) | Sec. 6653(b)(2) | Sec. 6654 |
| 1983 | $ 294,971 | $ 147,486 | $ 18,051 | |
All section references are to the Internal Revenue Code in effect for the taxable year at issue. References to
*156 FINDINGS OF FACT
Some of the facts have been stipulated and are found accordingly. The stipulation of facts, the supplemental stipulation of facts, and the second stipulation of facts are incorporated herein by this reference.
Petitioner resided in Austin, Texas, at the time he filed his petition in this case. He is an enrolled member of the Potawatomi Citizens Band Tribe of Oklahoma. His enrollment number is 3989. Petitioner has not been issued a certificate of competency by the Secretary of Interior.
Petitioner earned his undergraduate degree in accounting. He is not a certified public accountant. In approximately 1972, petitioner was employed by the IRS as a revenue agent. He served as a revenue agent for 9 months prior to becoming a special agent with the IRS. Petitioner was employed as a special agent with the IRS in Oklahoma City, Oklahoma, for approximately 6 years.
After leaving the IRS due to a physical disability, petitioner, who had earned a law degree while working as a special agent, began practicing law in Oklahoma City, Oklahoma. While practicing law, petitioner held himself out to the public as a tax lawyer, although he did not have any particular type*157 of certification in tax law from the Oklahoma Bar. Petitioner incorporated his law practice and was the sole shareholder and employee of John O. Hornung, P.C. (the P.C.).
During 1983, three checks in the total amount of $ 2,409 were made payable to petitioner on the P.C.'s checking account. Petitioner's wife, Patti Janese Hornung Parker (Ms. Parker), drafted these checks payable to petitioner, signed the checks in her name, and then deposited the amounts in an Oklahoma account. The notation on the checks indicated "salary" from January through March, a time during which petitioner was not in Oklahoma. Petitioner did not receive the proceeds from any of the checks.
Petitioner and his law partner, Jay McCown (Mr. McCown), were shareholders of Torque Master, Inc., along with other investors. Torque Master, Inc., was an Oklahoma corporation engaged in an oil drilling related operation. During 1983, three checks were made payable to petitioner from Torque Master, Inc., in the following amounts: $ 942.63, $ 3,664.07, and $ 11,889.25. The check in the amount of $ 11,889.25 was written on a Kemper Money Market Account.
During January 1983, petitioner separated from his wife. The*158 couple divorced on October 9, 1984. In May 1983, petitioner executed a power of attorney to Ms. Parker. Ms. Parker prepared and filed her and petitioner's 1982 joint Federal income tax return. She also prepared and filed returns for petitioner's professional corporation, including a return for the 1983 taxable year. Ms. Parker requested an extension of time for filing petitioner's individual 1983 return. She did not actually file a 1983 Federal income tax return for petitioner. Ms. Parker filed a separate tax return in 1983. She did not include any amounts from the checks which she drew on the P.C.'s account as income.
In 1985, at petitioner's request, Ms. Parker mailed the 1983 tax return which she had prepared and her workpapers to petitioner's attorney, William Kirksey (Mr. Kirksey), in Jackson, Mississippi, where petitioner was being held in Federal custody. IRS Agent Bill Gibson (Agent Gibson) checked petitioner out of the Jackson city jail on February 14, 1985, and brought him to Mr. Kirksey's office. At that point, Agent Gibson was presented with the 1983 return, which Ms. Parker had prepared for petitioner.
Petitioner began preparing Robert and Linda Schaffer's *159 (Mr. and Mrs. Schaffer) Federal income tax returns in approximately 1978. From 1976 until his death in October 1982, Mr. Schaffer was involved in the smuggling of illegal narcotics into the United States. Mr. Schaffer, a pilot, started by flying small, single-engine aircraft across the U.S. border into Mexico and bringing back marijuana. Several years later, the Schaffers moved to Oklahoma and they started flying from Florida to South America. Mrs. Schaffer was also a pilot, and although she did not actually accompany her husband on flights, she assisted Mr. Schaffer in the drug smuggling endeavors.
On October 18, 1982, Mr. Schaffer and his brother, Stanley Gene Schaffer, were flying a load of narcotics from South America to the United States to be dropped by parachute to an individual named Paul Gonzales. Both Mr. Schaffer and his brother were killed when the plane they were flying crashed somewhere in the State of Mississippi.
Mrs. Schaffer and Mr. Stanley Schaffer's wife, Donna Strange (Ms. Strange), were in an apartment in Florida on October 18, 1982. Paul Gonzales' father (Mr. Gonzales) went to the Florida apartment on the date of the crash and told Mrs. Schaffer and Ms. *160 Strange that their husbands had been involved in a plane crash. Shortly after receiving news of the crash, Mrs. Schaffer contacted petitioner. Mrs. Schaffer then returned to Oklahoma City, Oklahoma. As of October 15, 1982, petitioner began representing Mrs. Schaffer with regard to the drug trafficking activities.
After Mrs. Schaffer returned to Oklahoma, petitioner and two of the Schaffers' friends, John Price and Billy Howell, flew a helicopter to Mississippi to inspect the crash site. Petitioner initially went to the crash site with Mr. Gonzales. Mr. Gonzales showed petitioner the wreckage while the bodies were still in the plane. Shortly thereafter, petitioner returned to the crash site with Mr. Price and Mr. Howell, removed Mr. Schaffer's body from the cockpit of the plane, and buried it.
Mrs. Schaffer and Ms. Strange received a total of $ 380,000 for the narcotics that were dropped during the flight in which their husbands were killed. Upon receiving the money, Mrs. Schaffer counted the money from the last flight and the money already in her home. Mrs. Schaffer then took the money and stored it at her home in a safe built into the floor of the basement. Mrs. Schaffer*161 also had an additional $ 200,000 in the safe which was money accumulated from prior drug flights. Mrs. Schaffer had other money during the latter part of 1982 which was stored at her father-in-law's home.
Throughout the fall of 1982, Mrs. Schaffer was concerned about the $ 580,000 of drug money being stored in her home for three reasons: First, the airplane crash was being actively investigated; second, her deceased husband had previously been investigated by a grand jury; and third, she was concerned about a search warrant regarding her home. Petitioner was Mrs. Schaffer's attorney at this point, and Mrs. Schaffer sought petitioner's advice regarding what to do with the cash stored in her home. Petitioner advised Mrs. Schaffer to put the money in a safe-deposit box.
On December 3, 1982, petitioner and Mrs. Schaffer opened a safe-deposit box at the Southwestern Bank & Trust Co. in Oklahoma City, Oklahoma (the Southwestern Bank safe-deposit box). The safe-deposit box was styled "John Hornung Attorney Trustee for Linda Schaffer." Both petitioner and Mrs. Schaffer were authorized to enter the safe-deposit box. Mrs. Schaffer placed approximately $ 540,000 in the safe-deposit box. *162 Prior to depositing the money, Mrs. Schaffer counted the money in an effort to account for the portion which belonged to Ms. Strange. Mrs. Schaffer and Ms. Strange were to split the proceeds from the last drug trafficking operation approximately 60 percent to Mrs. Schaffer and the remainder to Ms. Strange. Petitioner's own records indicated that on December 3, 1982, $ 500,000 was placed into the Southwestern Bank safe-deposit box.
During the latter part of 1982, Mrs. Schaffer's father-in-law wanted Mrs. Schaffer to move the money that she kept at his home. Mrs. Schaffer sought petitioner's advice regarding where to store the money. Petitioner advised her that she could store the money in a safe-deposit box that was already being rented by petitioner's grandmother. Mrs. Schaffer moved the money from her father-in-law's house to a safe-deposit box in the name of petitioner's grandmother. Mrs. Schaffer's name was added to the safe-deposit box prior to putting the cash into the box. This money was not placed into the Southwestern Bank safe-deposit box because there was not enough room in the box to allow for all of the cash.
Mrs. Schaffer did not give petitioner the right to*163 use the money that was placed in either of the safe-deposit boxes. Moreover, Mrs. Schaffer did not at any time loan or discuss loaning any of the money to petitioner. Neither petitioner nor Mrs. Schaffer entered the Southwestern Bank safe-deposit box in December 1982 other than when the safe-deposit box was opened on December 3, 1982.
On January 5, 1983, Mrs. Schaffer appeared before a grand jury in Oklahoma City, Oklahoma, concerning Mr. Schaffer, the drug smuggling activities, and the investigation of the plane crash in Mississippi. Petitioner and his law partner, Mr. McCown, represented Mrs. Schaffer during her appearance before the grand jury.
In early January 1983, petitioner informed Mrs. Schaffer that he felt the money in the Southwestern Bank safe-deposit box was not safe due to the continuing criminal investigation and that the money should be moved to another location. Petitioner and Mrs. Schaffer determined that the money should be moved to a safe-deposit box in Dallas, Texas. On January 11, 1983, petitioner, with Mrs. Schaffer's knowledge, removed the $ 540,000 from the Southwestern Bank safe-deposit box and gave Mrs. Schaffer $ 40,000 for living expenses. Mrs. *164 Schaffer only wanted $ 40,000 at that time for living expenses because she did not want the rest of the cash in her house.
On January 12, 1983, petitioner opened a safe-deposit box at the Union National Bank in Chandler, Oklahoma. Petitioner placed most of the money removed from the safe-deposit box at Southwestern Bank into the safe-deposit box at the Union National Bank, but without Mrs. Schaffer's knowledge.
In late January 1983, Mr. McCown informed Mrs. Schaffer that petitioner was missing. At this point, Mrs. Schaffer did not know where either petitioner or her money was located. This is when she first believed her money had been misappropriated. Prior to this, Mrs. Schaffer was not concerned about the whereabouts of her money. Within 1 or 2 weeks after petitioner disappeared, Mrs. Schaffer received a letter from petitioner and $ 6,000 cash to make payments on a helicopter.
Mrs. Schaffer reported a theft loss of $ 263,000 on her 1982 Federal income tax return. Mrs. Schaffer claimed the loss based on an accountant's advice and based on her belief that since she received the income from drug trafficking during 1982 and the loss was related to that source of income, the*165 loss should be reported in 1982.
Petitioner did not report any of the money which he removed from the Southwestern Bank safe-deposit box as income for the 1983 taxable year. During 1983, petitioner knew that income from embezzlement was taxable, that income from illegal sources was taxable, and that if a taxpayer stole money from someone, it was taxable income.
Petitioner left Oklahoma City, Oklahoma, on January 27, 1983, and went to Texas. Petitioner testified that he left Oklahoma because he feared for his life. The Federal Government had offered petitioner defendant/witness protection. After arriving in Austin, petitioner wrote a personal note in his journal stating: "There is so much right you wonder why its wrong." Petitioner did not work and had no other sources of income from January 28, 1983, until he was arrested in Austin, Texas, in 1985. When petitioner left Oklahoma in January 1983 he had at least $ 100,000 in cash plus some amount of silver and gold from non-Schaffer sources.
Shortly after arriving in Austin, petitioner purchased a house for $ 57,018.15 cash and invested $ 84,775.31 in cash on repairs to the house. During 1984 petitioner compiled a list of his*166 assets which included the following items and his determination of correlative values: $ 15,000, 1983 Datsun 280ZX; $ 10,000, 1983 Datsun pickup; $ 20,000, 1983 Chevrolet motor home; $ 2,000, 1982 Yamaha motorcycle; $ 100,800, gold; $ 25,000, silver; $ 3,000, Ultralight airplane; and $ 6,100, loan to Mr. T.J. Palmer. The Datson 280ZX was purchased in a nominee name, Ken Copeland, to conceal ownership. Petitioner also had $ 122,000 in cash at the time the list was prepared.
After arriving in Austin, Texas, petitioner decided to change his identity and made various notes to himself regarding the steps which needed to be accomplished to change his name. In March 1983, petitioner legally changed his name from John O. Hornung to John O. Green in a county court in Travis County, Texas.
Petitioner was indicted by the grand jury of the Western District of Oklahoma on November 6, 1985, for two counts of willfully and knowingly aiding and assisting in the preparation of a false income tax return, in violation of section 7206(2), one count of conspiring to defraud the United States by concealing taxable income, in violation of
A grand jury began investigating the Schaffers and their drug trafficking activities during 1981. Petitioner was implicated during 1982.
Special Agent Kemp was assigned to assist the grand jury in Oklahoma, and he collected information obtained through a grand jury subpoena on behalf of the grand jury. In February 1983 he testified before the grand jury concerning petitioner. While assisting the grand jury investigation in the Western District of Oklahoma, Special Agent Kemp, pursuant to a valid search warrant, searched*168 petitioner's residence in Austin, Texas, and seized various documents. The search warrant was issued by the U.S. District Court for the Western District of Texas on February 14, 1985, and authorized the search of petitioner's residence at 5708 Beacon Drive, Austin, Texas. The materials procured through the search were stored in Jackson, Mississippi.
The following evidence was seized during the execution of the search warrant and was later introduced into evidence at petitioner's criminal trial: three pages from a black, three-ringed notebook which include a list prepared by petitioner in 1984 of the fair market value of all the assets is his possession; and a daily calendar for 1982 with an entry reflecting that $ 500,000 was moved into the Southwestern Bank safe-deposit box on December 3, 1982.
The following evidence was also seized pursuant to the above-mentioned search warrant: two handwritten records maintained by petitioner, one labeled "Inventory-Safe Deposit"; and ten pages taken from a brown, mini-spiral notebook which included change of identity information and his master plan. The evidence attained through the search warrant was presented to the grand jury.
In the *169 stipulation of facts, petitioner reserved objections to the following exhibits on the basis that such exhibits constituted grand jury material which were improperly used without a
Agent DeShazo spent approximately half a day going through each box of records and making copies of some of the documents. The grand jury material was identifiable because it was in folders that had plastic labels which stated "grand jury material". Agent DeShazo skimmed through all of the materials and prepared a list of all the documents which he examined. The list which he prepared contains grand jury exhibits, grand jury transcripts, and other documents. Although Agent DeShazo read materials which were grand jury materials, he did not intentionally use the information during the civil examination.
Agent DeShazo also*171 had access to Federal Bureau of Investigation (FBI) records in Jackson, Mississippi, in performing the civil examination. The materials consisted of eight boxes of records seized from petitioner's residence during the execution of the search warrant mentioned above. Agent DeShazo was instructed that none of the material was grand jury information and was allowed to copy any information which he thought would be useful.
Prior to the trial in this case, respondent provided petitioner with the following information: The list prepared by Agent DeShazo noting the existence of grand jury material; Agent DeShazo's workpapers; and some materials used by him during his examination, which included grand jury material. District counsel for respondent refused to stipulate any grand jury material and refused to disclose any additional grand jury material on the ground that it was not disclosable without a
The list of materials reviewed by Agent DeShazo also identifies in box 6 of the documents a request for grand jury authorization. Respondent never advised this Court that there had been a prior request for the release of grand jury information. No order was ever entered*172 pursuant to
On February 14, 1992, petitioner filed a motion for default judgment and for suppression of all evidence for abuse of grand jury process. This Court took petitioner's motion under advisement.
OPINION
Section 6501(a), as a general rule, bars the assessment and collection of a deficiency in tax unless it is assessed within 3 years after the return was filed. Petitioner contends that he filed his tax return in February 1985, and that the 3-year statute of limitations therefore bars assessment in this case. Petitioner argues that the presentation of his tax return to an agent of the IRS in Jackson, Mississippi, on February 14, 1985, in the presence of his attorney, while he was in Federal custody, is sufficient to satisfy the filing requirements. Petitioner's contentions fail for two reasons: First, petitioner did not establish that he filed a 1983 Federal income tax return; and second, as discussed below, respondent carried her burden of proof with respect to the fraud penalty against petitioner, and therefore the 3-year statute of limitations is not applicable in this case.
Pursuant *173 to section 6501(c)(3), when a taxpayer fails to file a tax return, the tax may be assessed at any time. See
In addition, section 6501(c)(1) provides that in the case of a false or fraudulent return with the intent to evade the payment of tax, the tax may be assessed at any time. See
Petitioner is a member of the Potawatomi Citizens Band Tribe of Oklahoma and contends that because of his Indian status he is not liable for Federal income taxes. Petitioner relies primarily on the Treaty with the Potawatimies, Sept. 8, 1815, art. 2, 7 Stat. 131, and
Petitioner's contentions fail for three reasons. First, Indians, like other citizens, *175 are subject to Federal income taxation unless clearly exempted by statute or treaty.
Second, the U.S. treaty with the Potawatomi guaranteed to the Potawatomi "all the possessions, rights, and privileges, which they enjoyed, or were entitled to" in 1811. This treaty does not represent a recognition of immunity of tribal Potawatomi from Federal taxation. As explained in the Handbook of Indian Law: The Supreme Court has held that in their "ordinary affairs" Indians are subject to the federal income tax to the same extent as other persons. Congress has specified that certain Indian income arising out of the trust relationship with the United States is exempt*176 from the tax. The most important provisions relate to payments of judgments against the United States based on claims for land takings or other unfair dealings occurring many years before the payments. [Cohen, Handbook of Federal Indian Law 387, 391 (1982 ed.); fn. refs. omitted.] There is no legal reason why this type of income should escape taxation while all other taxpayers, including Indians who work and operate businesses off the reservation, must pay their fair share of taxes. [
Finally, petitioner erroneously interprets
Petitioner contends that Agent DeShazo looked at grand jury material made available to him by Special Agent Kemp in violation of
Additionally, petitioner contends that the statutory notice of deficiency*179 should be invalidated due to the alleged violation of even assuming the illegality of respondent's use of the grand jury materials in this case, such use does not render the statutory notices null and void, requiring invalidation of the statutory notices. Since petitioners have conceded the deficiencies and fraud additions absent invalidation of the statutory notices, we leave to another day the determination of the appropriate remedy in this Court where respondent has improperly used grand jury materials in preparing a statutory notice of deficiency. We simply hold that invalidation of the statutory notice is not that remedy. [Fn. refs. omitted.]
Petitioner seeks suppression of specific items of evidence allegedly used in violation of
First we address the evidence which was introduced at petitioner's criminal trial. Evidence which is presented at a criminal trial is not protected by the guarantees of secrecy surrounding grand jury investigations, but rather is a matter of public record. E.g.,
Petitioner also seeks suppression*184 of the boxes of evidence seized at his Texas residence pursuant to a valid search warrant. Respondent contends that the boxes of material seized by the FBI from petitioner's residence do not constitute grand jury matter. Respondent relies on
The critical factor in both of the cases on which respondent relies was not the fact that the information was obtained by a search warrant, but rather that disclosure of the documents would not reveal what occurred before the grand jury. In other words, the information did not constitute grand jury matter. See
The Supreme Court has not addressed the issue of what constitutes grand jury matter for purposes of
In answering*187 the question of whether the documents constitute grand jury matter, we are guided by the fact that the policy of grand jury secrecy is not absolute and that
We now address whether the documents obtained through the search warrant and the grand jury subpoena are grand jury matters such that respondent's alleged use of the information violated
In this case, we are not dealing with traditional business documents, but rather the documents are petitioner's personal notes. These documents were prepared independently of the grand jury's investigation. Petitioner has offered no reason for us to believe that respondent's alleged use of the documents revealed any aspects of the deliberations of the grand jury. The grand jury focus was on the Schaffers' drug trafficking activities. Petitioner was indicted due to his involvement in preparing the Schaffers' income tax return. No indictments were made regarding petitioner's own underreporting of income. Looking at the record as a whole we are convinced that respondent did not use the evidence to learn about the deliberations of the grand jury.
Petitioner relies on
We conclude that the documents at issue do not constitute grand jury matter under
Since we have concluded that there was no violation of
A.
Section 61 provides that except as otherwise provided in the Internal Revenue Code, gross income includes income from whatever source derived. It is well settled that income from embezzlement is includable in gross income in the year of embezzlement.
*193 Under the claim of right doctrine, a taxpayer who receives income under a claim of right that is free of restrictions must include that amount in income for the year of receipt.
In applying the claim of right doctrine to illegally obtained income, the Supreme Court, in When a taxpayer
Here, petitioner did not acquire any funds until 1983. Moreover, in order for the claim of right doctrine to apply, the taxpayer must treat the income as belonging to the taxpayer, i.e., under a claim of right.
Rather than relying on the claim of right doctrine, we look to the indisputable facts of this case. The facts demonstrate that petitioner held Mrs. Schaffer's money for her in 1982, keeping it in two separate bank safe-deposit boxes in Oklahoma with her knowledge and consent. In January 1983, petitioner embezzled the funds from Mrs. Schaffer, removed*195 them from the Oklahoma bank, and transferred them to Texas, where he deposited them to his own account. Mrs. Schaffer's testimony was clear that petitioner was acting as her attorney at the time the money was removed from the safe-deposit box, and that she did not loan the money to him or give him the money as a gift. The embezzlement or conversion in this case occurred in January 1983 when petitioner first exerted control over the money inconsistent with his fiduciary capacity.
B.
Having concluded that the money which petitioner embezzled from Mrs. Schaffer constitutes 1983 taxable income, we now turn to the question of the amount of money which was embezzled. After a careful review of the entire record, we are convinced that petitioner embezzled at least $ 494,000 from Mrs. Schaffer. In reaching this result, we rely primarily on Mrs. Schaffer's testimony which establishes that $ 540,000 was placed into the Southwestern Bank safe-deposit box in December 1982. The money had been stored in a safe in the floor of her house and represented $ 380,000 which she and Ms. Strange received for the drugs which were dropped during the final airplane flight*196 of their husbands and $ 200,000 which had accumulated from prior flights. Mrs. Schaffer testified that she knew how much money was placed in the safe-deposit box because she counted the money prior to depositing it. We observed her demeanor, and we found her to be a credible and forthright witness who was doing her best to remember specific information.
The record is clear that petitioner removed the entire contents of the Southwestern Bank safe-deposit box on January 11, 1983. He immediately gave Mrs. Schaffer $ 40,000 for living expenses, and after leaving Oklahoma City sent approximately $ 6,000 of the remaining $ 500,000 to Mrs. Schaffer for her to make a payment on a helicopter. The $ 494,000 that was remaining was converted by petitioner and used by petitioner to purchase numerous assets and pay for his support. In addition, the fact that at least $ 500,000 was placed in the safe-deposit box on December 3, 1982, is further corroborated by petitioner's own pocket calendar which contains an entry on December 3, 1982: "Meet Linda Schaffer & moved money $ 500,000 to SW Bk."
Petitioner did not work and had no sources of income from January 27, 1983, until he was arrested in*197 1985. During such time, however, petitioner invested $ 141,793.46 in cash in a house, and made numerous cash expenditures on cars, a motorcycle, gold, and silver. Petitioner's own list stated that the value of these assets was approximately $ 323,693. In addition to the above expenditures, petitioner had at least $ 122,000 in cash after making the above expenditures. Even allowing for the cash which petitioner took to Texas which was unrelated to the embezzlement, respondent has substantiated a substantial portion of the amount determined in the notice of deficiency. This further corroborates Mrs. Schaffer's testimony and supports our conclusion that petitioner embezzled $ 494,000 from Mrs. Schaffer in 1983.
In the notice of deficiency, respondent determined that petitioner received unreported income from Torque Master, Inc., during 1983 in the amount of $ 64,607. Respondent conceded this adjustment except to the extent of $ 16,495.95, which represents three checks from Torque Master, Inc., to petitioner made payable during 1983. The three checks were in the amounts of $ 942.63, $ 3,664.07, and $ 11,889.25. The check in the amount of $ 11,889.25*198 was written on a Kemper Money Market Account.
In his petition, petitioner denies that he received any of these checks and the funds derived therefrom. Petitioner has failed to meet his burden of proof with respect to this issue. Rule 142(a). The exhibits which petitioner introduced as support for his contention are not legible. Moreover, during the trial of this case, petitioner abandoned his contention that he did not receive the checks. Therefore, we have no basis to conclude that petitioner did not receive the checks at issue.
At trial, petitioner argued the majority of Torque Master, Inc. income was constructively received in 1982. He contends that Torque Master, Inc., gave him a salary of $ 2,000 per month, plus $ 5,000 per month as discretionary funds to do with as he pleased. Petitioner testified that he used the $ 5,000 per month to establish a Kemper Money Market Account in the name of Torque Master, Inc., with petitioner as the only signatory on the account. Petitioner thus argues that he should have reported the $ 5,000 per month as his income at that point, and the distributions from the Kemper Money Market Account to him in 1983 should be nontaxable. Petitioner*199 did not pursue this matter in his brief.
Petitioner has failed to meet his burden of demonstrating that any of the $ 16,495.95 constituted income during 1982. With respect to the Kemper Money Market account check, the evidence in the record is insufficient to support petitioner's contentions. All that petitioner has established is that the Kemper Money Market Account was opened by Torque Master, Inc., during 1982, that Torque Master, Inc., accumulated money in that account during 1982, and that money from that account was paid to petitioner during 1983. However, there is nothing in the record, other than petitioner's self-serving testimony, to establish that petitioner had the discretion to withdraw the $ 5,000 per month during 1982. See
In the notice of deficiency, respondent determined that petitioner received unreported income from John O. Hornung, P.C., during 1983 in the amount of $ 2,409. This adjustment*200 was derived from three checks, each in the amount of $ 803, from John O. Hornung, P.C., to petitioner during 1983. The checks were drafted in February and March of 1983.
At trial, petitioner testified that after he fled to Texas, his wife drafted these checks payable to petitioner, signed the checks in her name, and then deposited the amounts in an Oklahoma account. Copies of these checks were introduced into evidence which clearly indicate that Ms. Parker signed the checks and deposited them in an account which petitioner did not have access to since he was no longer living in Oklahoma. We are convinced that petitioner never received any benefit from the said funds and had no knowledge that his wife has forged the checks. Consequently the funds derived from the checks did not constitute taxable income to petitioner in 1983.
Respondent determined that petitioner was liable for additions to tax under section 6653(b)(1) and (2) for fraudulently understating his income in 1983. Section 6653(b)(1), in effect for 1983, provides for an addition to tax of 50 percent of the underpayment if any part of any underpayment of tax required to be shown on*201 a return is due to fraud. Section 6653(b)(2) provides an addition to tax equal to 50 percent of the interest payable on the portion of the understatement attributable to fraud.
For purposes of section 6653(b)(1), respondent has the burden of proving two elements by clear and convincing evidence: First, that an underpayment exists, and second, that some part of the underpayment is due to fraud. Sec. 7454(a); Rule 142(b);
In establishing that an underpayment exists, respondent may not rely merely upon the taxpayer's failure to carry the burden of proof as to the underlying deficiency.
To establish that the taxpayer had the requisite fraudulent intent necessary to impose additions for fraud, respondent must show that the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of such taxes.
The existence of fraud is a question of fact to be resolved upon consideration of the entire record.
Courts have relied on a number of indicia of fraud in deciding section 6653(b)(1) cases. Such "badges of fraud" include: Failing to report substantial portions of income which the taxpayer knew to be taxable, inadequate records, failure to file tax returns, implausible or inconsistent explanations of behavior, concealment of assets, failure to cooperate with tax authorities, engaging in illegal activities, attempting to conceal illegal activities, dealing in cash, and failing to make estimated payments. See
Respondent contends that the combination of the following acts demonstrates petitioner's intent to evade paying Federal income tax: There was an understatement of income; petitioner failed to file a return for 1983; petitioner's entire course of conduct was designed to conceal his assets and activities -- he fled from Oklahoma to Texas and changed his name in an effort to conceal his activities and identity; before changing his name, petitioner purchased a car in the name of a nominee (Ken Copeland) to conceal the ownership; and finally, petitioner engaged in illegal activities, namely the conversion of funds from his client, Mrs. Schaffer.
It is well established that while a taxpayer's failure to file a tax return is an indication of fraud, it does not, standing alone, establish fraud.
The evidence shows that petitioner substantially understated his income in 1983. Petitioner embezzled almost $ 500,000 from Mrs. Schaffer during 1983. Petitioner testified that he knew embezzled funds constituted taxable income. There is no evidence in the record that suggests that petitioner believed that he was exempt from taxation at the time he failed to file his 1983 return. To the contrary, petitioner asked this Court to find as a matter of fact that he gave his wife a power of attorney so that she could file returns on his*207 behalf, and that she filed a 1984 return and other returns on his behalf. These actions are inconsistent with petitioner's current contention that he did not have the requisite fraudulent intent because he believed himself exempt from taxation based on his Indian status.
The fact that the unreported income was derived from an illegal activity, which petitioner attempted to conceal by fleeing from Oklahoma and changing his name, is a circumstance which may be considered in the overall evaluation of petitioner's fraudulent intent.
In determining the presence of fraud, we must also consider the training, experience, and education of petitioner.
Petitioner, in his defense, contends that he made provisions for timely filing his 1983 tax return, that he made substantial payments of tax in 1983, that he maintained adequate records which he offered to respondent during the audit in this case, and that his reliance on
Petitioner also relies on
Based on the fact that petitioner failed to report substantial portions of his income in 1983 which he knew to be taxable, that there was a large understatement of income, that petitioner failed to file a return, and that petitioner engaged in illegal activities, we conclude that petitioner acted fraudulently in underreporting his taxable income for 1983. Consequently, the addition to tax under 6653(b)(1) is sustained.
Section 6653(b)(2) provides an addition to tax equal to 50 percent of the interest payable on the understatement attributable*211 to fraud. Respondent must establish the specific portion of the underpayment of tax which is attributable to fraud by clear and convincing evidence. Sec. 7454(a); Rule 142(b); see
Respondent also determined that petitioner is liable for an addition*212 to tax for failure to pay estimated income tax under section 6654. Petitioner contends that he is not liable for the addition to tax under section 6654 due to his tax-exempt status as a Potawatomi Indian and because there is no evidence of an underpayment of tax.
Initially we note that additions to tax under section 6654 are mandatory absent a showing by petitioner that one of the exceptions provided in section 6654(d) is applicable.
To reflect the foregoing,
1. 50 percent of interest due on the portion of the underpayment due to fraud.↩
1. Respondent conceded on answer a $ 24,447 adjustment identified in the notice of deficiency as capital gains and losses. Respondent also conceded in her opening brief the $ 12,441 Government disability annuity adjustment and $ 48,111.05 of the $ 64,607 adjustment in the notice of deficiency relating to unreported income from Torque Master, Inc.↩
2. Petitioner presented this document to respondent and requested that it be included in the stipulation of facts. Respondent did not utilize this exhibit in any way and does not object to deleting it from the stipulation of facts.↩
3. Three of the Exhibits which petitioner contends are grand jury matters he relied upon in presenting his case: Joint Exhibit 35-AI; Joint Exhibit 34-AX; and Joint Exhibit 50-AX. The documents were stipulated and admitted into evidence. Moreover, petitioner attempted to impeach Mrs. Schaffer at the trial of this case by using her grand jury testimony. We conclude that since petitioner has introduced these exhibits into the public record, he waives his
4. There are three types of dangers involved in disclosure of grand jury matter to Government attorneys for use related to civil proceedings: 1. Disclosure increases the risk of inadvertent or illegal further release of information to unauthorized persons and thus may threaten the willingness of witnesses to testify fully and candidly; 2. A threat to the integrity of the grand jury process itself if there is a tendency for the government to abuse the grand jury process; and
3. Possible subversion of the limits otherwise placed on the Government's investigative and discovery powers in the civil context. [
5. (2) General Rule of Secrecy. A grand juror, an interpreter, a stenographer, an operator of a recording device, a typist who transcribes recorded testimony, an attorney for the government, or any other person to whom disclosure is made under paragraph (3)(A)(ii) of this subsection shall not disclose matters occurring before the grand jury, except as otherwise provided for in these rules. No obligation of secrecy may be imposed on any person except in accordance with this rule. A knowing violation of
(3) Exceptions. * * * (C) Disclosure otherwise prohibited by this rule of matters occurring before the grand jury may also be made -- (i) when so directed by a court preliminarily to or in connection with a judicial proceeding;↩
6. The Supreme Court in
7. In general, the burden is on the taxpayer to prove that respondent's notice of deficiency is incorrect. Rule 142(a);
Arguably, this exception is applicable to this case as respondent contends that petitioner failed to report income which he embezzled from Mrs. Schaffer. Here, however, respondent presented evidence, through the testimony of Mrs. Schaffer and joint exhibits, demonstrating the manner in which petitioner embezzled the funds, the amount of embezzled funds, the use of the embezzled funds, and the fact that the funds were not reported as income for 1983. Consequently, respondent has made a sufficient threshold showing to support her determination, and petitioner bears the burden of demonstrating the notice of deficiency is incorrect.↩
Helvering v. Mitchell ( 1938 )
In Re Grand Jury Matter. Appeal of Nicholas Catania ( 1982 )
Gerald J. Rapp and Mary H. Rapp v. Commissioner of Internal ... ( 1985 )
Condor Merritt v. Commissioner of Internal Revenue ( 1962 )
James v. United States ( 1961 )
Thomas Worcester v. Commissioner of Internal Revenue ( 1966 )
United States v. Interstate Dress Carriers, Inc. ( 1960 )
United States v. Amy T. Critzer ( 1974 )
in-re-grand-jury-investigation-t-bertram-lance-v-the-united-states ( 1980 )
James W. Sisk v. Commissioner of Internal Revenue ( 1986 )
In Re Grand Jury Investigation. Appeal of New Jersey State ... ( 1980 )
Luther R. Patton v. Commissioner of Internal Revenue ( 1986 )
Joseph R. Dileo, Mary A. Dileo, Walter E. Mycek, Jr., ... ( 1992 )
Mitchell v. Commissioner of Internal Revenue ( 1941 )
In Re Grand Jury Subpoena. (Four Cases) United States of ... ( 1990 )
Philip R. Simms and Nettie E. Simms v. Commissioner of ... ( 1970 )
Spies v. United States ( 1943 )
WH Hill Co. v. Commissioner of Internal Revenue ( 1933 )
united-states-of-america-ex-rel-duane-woodard-attorney-general-of-the ( 1985 )