Montalbano v. Comm'r

T.C. Memo. 2007-349
UNITED STATES TAX COURT
CARMELO MONTALBANO, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13873-05. Filed November 26, 2007.
James A. Bruton III and Stephen A. Beck, for petitioner.
Scott A. Hovey, for respondent.
MEMORANDUM OPINION
THORNTON, Judge: This case is before us on the parties’
cross-motions for summary judgment. The sole issue for decision
is whether petitioner is liable for the section 6663 fraud
- 2 -
penalty for 1994.1 When the petition was filed, petitioner
resided in Florida.2
Background
On January 18, 2000, a Federal grand jury in the U.S.
District Court for the District of New Jersey returned a two-
count indictment against petitioner. The first count of the
indictment charged that petitioner had knowingly and willfully
attempted to evade and defeat income tax due and owing by him for
1994 in violation of section 7201. The second count charged
petitioner with filing a false Federal income tax return for 1995
in violation of 18 U.S.C. section 2 (1994).
By plea agreement dated July 13, 2000, petitioner agreed to
plead guilty to the count for tax evasion, and the U.S. Attorney
agreed to bring no further charges against petitioner for related
crimes. In the plea agreement, the parties stipulated that at
the time of the offense petitioner was suffering from “a
diminished mental capacity” due to his bipolar disorder and that
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
2
Rule 34(b) requires a petition to contain a noncorporate
petitioner’s legal residence. The petition in this case does not
expressly state petitioner’s legal residence but lists a mailing
address in Florida “c/o Mary Montalbano”. Pursuant to the
convention reflected on Form 1, Petition (Other Than In Small Tax
Case), which requires a statement of legal residence “if
different from the mailing address”, we treat petitioner’s legal
residence as being the same as this Florida mailing address.
- 3 -
a downward departure from the sentencing guidelines was therefore
appropriate.
On July 19, 2000, petitioner appeared before the U.S.
District Court for the District of New Jersey and pleaded guilty
to violating section 7201 with respect to his 1994 return. In
sworn testimony, petitioner gave the following factual basis for
his guilty plea. During 1994 and 1995, petitioner was president
and owner of an S corporation known as BHN Corp. (BHN), which was
engaged in providing computer software-related products to the
Dreyfus Corporation. In 1994, petitioner traveled to the Cayman
Islands and opened a bank account at the Guardian Bank and Trust
(Cayman) in the name of the Cooper Corp. (Cooper). During 1994,
he diverted about $651,000 of taxable income from BHN by causing
the funds to be deposited into the Cooper account and his
personal bank account in New Jersey. Petitioner caused BHN to
file a Federal tax return that omitted the $651,000 of income.
Petitioner also intentionally failed to include the $651,000 of
income on his 1994 personal Federal income tax return, in a
knowing and willful attempt to evade and defeat a substantial
part of the income tax due and owing to the United States for
1994.
The District Court accepted petitioner’s guilty plea and
entered judgment finding him guilty of willfully attempting to
evade or defeat tax in violation of section 7201 and 18 U.S.C.
- 4 -
section 2 (1994). The District Court fined petitioner $30,000
and sentenced him to 3 years’ probation. In its judgment, the
District Court imposed the maximum fine indicated under the
applicable sentencing guideline range ($3,000 to $30,000) but
departed from the guideline imprisonment range (12 to 18 months)
“based on diminished capacity due to the defendant’s bipolar
disorder.”
Subsequently, petitioner consented to respondent’s
assessment of $224,455 underlying tax liability for 1994 but
disputed respondent’s proposed imposition of a section 6663 civil
fraud penalty. By notice of deficiency, respondent determined
that pursuant to section 6663, petitioner is liable for a fraud
penalty of $167,918 for 1994.
Discussion
Respondent has moved for summary judgment on the ground that
petitioner’s criminal conviction under section 7201 collaterally
estops him from contesting his liability for the fraud penalty
under section 6663(a). Petitioner contends that a finding of
fraud under section 6663 is negated because in his criminal
proceeding the sentencing court found and the Government
stipulated that petitioner committed the offense while suffering
from a diminished mental capacity. On this ground, petitioner
opposes respondent’s motion for summary judgment and has cross
moved for summary judgment.
- 5 -
Summary judgment is intended to expedite litigation and
avoid unnecessary and expensive trials. Fla. Peach Corp. v.
Commissioner, 90 T.C. 678, 681 (1988). Summary judgment may be
granted where there is no genuine issue of any material fact, and
a decision may be rendered as a matter of law. Rule 121(a) and
(b); see Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520
(1992), affd. 17 F.3d 965 (7th Cir. 1994); Zaentz v.
Commissioner, 90 T.C. 753, 754 (1988). The moving party bears
the burden of proving that there is no genuine issue of material
fact, and factual inferences will be read in a manner most
favorable to the party opposing summary judgment. Dahlstrom v.
Commissioner, 85 T.C. 812, 821 (1985); Jacklin v. Commissioner,
79 T.C. 340, 344 (1982). When a motion for summary judgment is
made and properly supported, the adverse party may not rest upon
mere allegations or denials of the pleadings but must set forth
specific facts showing that there is a genuine issue for trial.
Rule 121(d).
Collateral estoppel precludes relitigation of any issue of
fact or law that was actually litigated and necessarily
determined by a valid and final judgment. Montana v. United
States, 440 U.S. 147, 153 (1979). It is well established that a
final criminal judgment for tax evasion under section 7201
collaterally estops relitigation of the issue of fraudulent
intent in a subsequent proceeding over the civil fraud penalty.
- 6 -
See, e.g., Gray v. Commissioner, 708 F.2d 243, 246 (6th Cir.
1983), affg. T.C. Memo. 1981-1; Amos v. Commissioner, 360 F.2d
358 (4th Cir. 1965), affg. 43 T.C. 50 (1964); Tomlinson v.
Lefkowitz, 334 F.2d 262 (5th Cir. 1964); DiLeo v. Commissioner,
96 T.C. 858, 885-886 (1991), affd. 959 F.2d 16 (2d Cir. 1992);
Arctic Ice Cream Co. v. Commissioner, 43 T.C. 68 (1964); cf.
Worcester v. Commissioner, 370 F.2d 713, 718 (1st Cir. 1966)
(improper inducement of defendant’s waiver of right to appeal
criminal judgment tainted the judgment’s finality for collateral
estoppel purposes), affg. in part and vacating in part T.C. Memo.
1965-199.
Petitioner cites no judicial precedent to the contrary;
rather, he acknowledges, in understated fashion, that the
judicial precedents are “fairly well settled” in this regard.
Furthermore, petitioner acknowledges that “Normally, the
sentencing guideline determination of a District Court that
accepts a section 7201 plea will have no bearing on the outcome
of a civil fraud penalty case under I.R.C. section 6663”.
Petitioner suggests, however, that the application of collateral
estoppel against him is inappropriate in this proceeding because
the downward departure from the imprisonment guideline in his
criminal proceeding “implies” that the District Court and U.S.
attorney found it “appropriate and necessary substantially to
mitigate the severity of the criminal penalties that would have
- 7 -
been applicable in the absence of petitioner’s ‘substantially
diminished mental capacity.’”
Assuming, for sake of argument, that petitioner has
correctly assessed the implications of his criminal sentence
(notwithstanding that the District Court imposed against him the
maximum fine for his offense under the sentencing guidelines),
this does not alter the fact of his criminal conviction, which
conclusively established that he willfully attempted to evade
tax.
For purposes of both the section 7201 offense and the civil
fraud penalty, the requisite wrongful intent is the intent to
evade tax. Mitchell v. Commissioner, 118 F.2d 308 (5th Cir.
1941), revg. 40 B.T.A. 424 (1939); DiLeo v. Commissioner, 96 T.C
at 874; Amos v. Commissioner, 43 T.C. 55.3 The only practical
difference between the constituent elements of criminal tax
evasion under section 7201 and civil fraud is the “larger quantum
of proof required in a criminal evasion case”. Moore v. United
3
The statutory predecessor of sec. 6663, sec. 293(b) of the
1939 Internal Revenue Code, specifically referred to “fraud with
intent to evade tax”. Although this language was omitted from
subsequent versions of the civil fraud penalty, this change was
not intended to alter the coverage of the statute or the burden
of proof necessary to establish fraud. See Goodwin v.
Commissioner, 73 T.C. 215, 227 (1979); Bittker & Lokken, Federal
Taxation of Income, Estates and Gifts, par. 114.6, at 114-57 n.16
(2d ed. 1992). This conclusion is buttressed by sec. 7454(a),
which continues to provide, as did its predecessor statute in the
1939 Code, that respondent bears the burden to prove that
petitioner “has been guilty of fraud with intent to evade tax”.
- 8 -
States, 360 F.2d 353, 355 (4th Cir. 1965). Hence, the criminal
conviction necessarily established the requisite wrongful intent
for purposes of the civil sanction. Amos v. Commissioner, supra;
see also Tomlinson v. Lefkowitz, supra at 265.
Under well-established judicial precedents, for purposes of
applying collateral estoppel, it is immaterial that petitioner’s
conviction resulted from a plea of guilty to the criminal charges
brought against him rather than from a trial on the merits after
a plea of not guilty. “A guilty plea is as much a conviction as
a conviction following jury trial.” Gray v. Commissioner, supra
at 246. A guilty plea constitutes an admission of all the
elements of the criminal charge. McCarthy v. United States, 394
U.S. 459, 466 (1969). “Once accepted by a court, it is the
voluntary plea of guilt itself, with its intrinsic admission of
each element of the crime, that triggers the collateral
consequences attending that plea.” Blohm v. Commissioner, 994
F.2d 1542, 1554 (11th Cir. 1993), affg. T.C. Memo. 1991-636; see
Manzoli v. Commissioner, 904 F.2d 101, 105 (1st Cir. 1990), affg.
T.C. Memo. 1989-49 and T.C. Memo. 1988-299; Ivers v. United
States, 581 F.2d 1362, 1367 (9th Cir. 1978); Brazzell v. Adams,
493 F.2d 489, 490 (5th Cir. 1974); Plunkett v. Commissioner, 465
F.2d 299, 307 (7th Cir. 1972), affg. T.C. Memo. 1970-274; Metros
v. U.S. Dist. Ct., 441 F.2d 313, 317 (10th Cir. 1970); DiLeo v.
- 9 -
Commissioner, supra at 885; Stone v. Commissioner, 56 T.C. 213
(1971).
Petitioner urges us to depart from these well-established
judicial precedents because of “practical exigencies” that he
contends induced him to enter the plea agreement. Petitioner
suggests that he was induced to enter the guilty plea because the
Government agreed to stipulate for purposes of sentencing that
petitioner suffered from a diminished mental capacity. Moreover,
petitioner suggests, in deciding to enter the guilty plea, he was
influenced by his assessment of the operation of the Insanity
Defense Reform Act, 18 U.S.C. section 17(a) (2000).4 He asserts
that this provision would have precluded him from mounting a
“full scale ‘diminished capacity’ defense” in the criminal
proceeding even though he “might have been able to introduce some
evidence relating to his mental condition”.5
4
The Insanity Defense Reform Act, 18 U.S.C. sec. 17(a)
(2000), provides:
Affirmative Defense.--It is an affirmative defense to a
prosecution under any Federal statute that, at the time of the
commission of the acts constituting the offense, the defendant,
as a result of a severe mental disease or defect, was unable to
appreciate the nature and quality or the wrongfulness of his
acts. Mental disease or defect does not otherwise constitute a
defense.
5
Petitioner suggests that the United States agreed to
accept the guilty plea because of concerns about petitioner’s
mental health. Although petitioner does not raise this point,
the record also suggests that the United States accepted the
(continued...)
- 10 -
Petitioner does not suggest, however, that the plea
agreement was wrongfully induced or that there was otherwise any
irregularity or unfairness in the criminal proceeding leading to
the guilty plea. To the contrary, petitioner states that he “has
no desire to disavow the guilty plea--it is a fact--in this
case.” Moreover, petitioner does not dispute that he in fact
committed the offense charged in the criminal proceeding.
Petitioner’s explanations as to why he and the Government
entered the plea agreement are irrelevant under the doctrine of
collateral estoppel. See Manzoli v. Commissioner, T.C. Memo.
1989-94, affd. 904 F.2d 101 (1st Cir. 1990); see also Blohm v.
Commissioner, supra at 1555-1556; Stone v. Commissioner, supra at
221; Boettner v. Commissioner, T.C. Memo. 1998-359; Hull v.
Commissioner, T.C. Memo. 1982-577. Moreover, we reject any
suggestion that collateral estoppel is inappropriate because
petitioner’s purported “diminished capacity” defense was
purportedly restricted by the Insanity Defense Reform Act in the
criminal proceeding. For the reasons previously discussed,
petitioner’s criminal conviction necessarily established that he
had the requisite wrongful intent, and hence the requisite mental
capacity, for imposition of the civil fraud penalty. To conclude
otherwise would be to assume, contrary to basic principles, that
5
(...continued)
guilty plea partly because petitioner agreed to assist the
Government in the criminal prosecution of other parties.
- 11 -
a more exacting showing is required to establish the requisite
wrongful intent in this civil proceeding than in the criminal
proceeding. See Moore v. United States, 360 F.2d at 356 (“the
first proceeding being criminal in nature, it follows that the
burden of proof met by the Government there was more exacting
than that required of it in this civil case”).
In conclusion, the issue of petitioner’s fraudulent intent
under section 6663(a) is foreclosed by collateral estoppel.
Petitioner does not dispute the underlying tax underpayment. We
are satisfied that there is no genuine issue of fact requiring a
trial in this case. Accordingly, we hold that imposition of the
section 6663(a) fraud penalty is proper. We shall grant
respondent’s motion for summary judgment and deny petitioner’s
cross-motion for summary judgment.
An appropriate order
and decision will be entered.