Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-88-02914/USCOURTS-ca10-88-02914-0/pdf.json

Parties Involved:
Commissioner of Internal Revenue
Appellee
E. Lawrence Price
Appellant

Document Text:

.. FI LED 

Unircd Scares Court of Appeals 

T~nth Circuit 

UNITED STATES COURT OP APPEALS 

POR 'rHE TBN'l'H CIRCUIT 

OCT 2 3 1990 

ROBERT L. HOECKER 

Clerk 

E. LAWRENCE PRICE, 

Petitioner-Appellant, 

v. 

COMMISSIONER OF INTERNAL 

REVENUE, 

Respondent-Appellee. 

) 

) 

) 

) 

) No. 88-2914 

) (U.S. T.C. No. 35647-83) 

) 

) 

) 

ORDER AND JUDGHElff* 

Submitted on the Briefs: 

Before MOORE and BARRETT, Circuit Judges, and BRIMMER, Chief 

District Judge.** 

Mr. Lawrence Price appeals the Tax Court's holding that he 

fraudulently underpaid his taxes in 1979. Price v. Commissioner. 

88 T.C. 860 (1987). He argues that the holding is both factually 

*This order and judgment has no precedential value and shall not 

be cited, or used by any court within the Tenth Circuit, except 

for purposes of establishing the doctrines of the law of the case, 

res judicata, or collateral estoppal. 10th Cir. R. 36.3. 

**The Honorable Clarence A. Brimmer, United States Chief District 

Judge for the District of Wyoming, sitting by designation. 

Appellate Case: 88-2914 Document: 010110064902 Date Filed: 10/26/1990 Page: 1 
.. 

and legally incorrect. Alternatively, he seeks a remand because 

the Tax Court's findings of fact do not provide an adequate basis 

for review. Based on our review of the Tax Court's opinion and 

the record, we affirm the Tax Court's holding. 

According to the record, Mr. Price organized two partnerships 

in 1978, Price & Co. and Newcomb Government Securities. The two 

partnerships engaged in Treasury bill straddles financed through 

repurchase agreements. Price & Co. traded with dealers for its 

own account in 1978. Newcomb traded with dealers and also 

performed straddles for customers in 1978 and 1979. Mr. Price 

claimed tax deductions in both years for the losses and interest 

expenses which purportedly resulted from these transactions. 

In a typical dealer trade, Mr. James Ruffalo, a small 

government securities dealer, contacted dealers and "worked out 

the numbers." Mr. Joe Mandarino, as the head of Newcomb's trading 

department, handled day-to-day affairs in the office. In July 

1979, Newcomb set up an account with a bank to clear transactions 

over the "Fed wire." In December, the bank closed the account 

based on concerns about the size of the transactions relative to 

Newcomb's capital and the net clearing procedures requested by 

Newcomb. 

The Tax Court held that all of these transactions were shams, 

involving fictitious securities. The court also determined that 

the consequent tax deficiencies were the result of fraud. Mr. 

Price challenges the holding that he committed fraud in 1979, but 

raises no questions about the same holding for 1978. 

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Appellate Case: 88-2914 Document: 010110064902 Date Filed: 10/26/1990 Page: 2 
I. Adequacy of Findings for Purposes of Review 

Mr. Price argues that the Tax Court did not make adequate 

findings of fact on the fraud issue for purposes of review. 

Findings of fact are sufficient if they provide the appellate 

court with a clear understanding of the basis for the Tax Court's 

decision. Sochin v. Commissioner, 843 F.2d 351, 354-55 (9th Cir. 

1988). 

The Tax Court provides several 

that Mr. Price committed fraud. 

reasons for its conclusion 

First, it found that Mr. Price 

"knew of, and was intimately involved in" the sham transactions, 

even though Mr. Ruffalo "masterminded" them. 88 T.C. at 887-88. 

Mr. Price complains that the Tax Court simply imputed Mr. 

Ruffalo's conduct to him without articulating any facts about his 

knowledge or conduct. However, the Tax Court provided several 

pages of factual findings about Newcomb's actions, in particular 

noting that Mr. Price founded Newcomb and maintained a 96% 

interest until June 1979 when he shifted part of his interest to 

his wife and brother. Second, the Tax Court relied on Mr. Price's 

involvement in other similar transactions to conclude that he knew 

about Newcomb's 1979 dealer trades. Mr. Price conducted Price & 

Co.'s first deal and most of Newcomb's customer trades without Mr. 

Ruffalo's help. Third, the Tax Court was impressed by Mr. Price's 

sophisticated understanding of these types of transactions, in 

contrast to that of his brother, whom the Tax Court found innocent 

of fraud. Given these grounds for its decision, the Tax Court did 

not have to discuss explicitly the credibility of Mr. Price's 

testimony that he did not know the securities were fictitious. 

Sochin, 843 F.2d at 351. 

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1r 

The basis for the Tax Court's decision is clear. we 

conclude, therefore, that it is unnecessary to remand for further 

findings of fact on the fraud issue. 

II. Factual Basis for Fraud 

The Tax Court's findings of fact are reversible 

clearly erroneous. Merchants Nat'l Bank of 

Commissioner, 554 F.2d 412, 415 (10th Cir. 1977). The 

only if 

Topeka v. 

appellate 

court must be convinced the trial court made a mistake. United 

States v. Gypsum, 333 U.S. 364, 395 (1948). 

The IRS has the burden of proof in tax fraud cases. I.R.C. 

§ 7454(a) (1954). It must prove "actual, intentional wrongdoing, 

and the intent required is the specific purpose to evade a tax 

believed to be owing." Zell v. Commissioner, 763 F.2d 1139, 1142-

43 (10th Cir. 1985). The trier of fact must have clear and 

convincing evidence of fraud, id. at 1142, not just a suspicion. 

Katz v. Commissioner, 90 T.C. 1130, 1144 (1988). Strong 

circumstantial evidence, however, can be clear and convincing 

proof of fraudulent intent, since direct proof is rarely 

available. Id. at 1143. Finally, the IRS need only prove that 

part of the underpayment is due to fraud. Akland v. Commissioner, 

767 F.2d 618, 621 (9th Cir. 1985). 

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ll 

A. Fraudulent Intent 

The Tax Court's conclusion that Mr. Price was "intimately 

involved" in the sham transactions is not clearly erroneous. Mr. 

Price argues that Mr. Ruffalo deceived him into thinking that the 

transactions were real. He asserts that his actions in setting up 

the clearing account with instructions to clear all trades over 

the "Fed wire" establish his honest intent. Mr. Ruffalo testified 

that he told the bank, without consulting Mr. Price, to simply net 

the transactions. The Tax Court, however, heard contrary 

testimony from Mr. James Slesser, the bank official in charge of 

Newcomb's accounts, that Mr. Price knew about the netting 

procedure. Moreover, Mr. Price continued to be involved in 

similar transactions after the bank told him it was closing the 

clearing account because of the irregular clearing procedures and 

the large size of the transactions relative to Newcomb's capital. 

Mr. Price also contends that he "would not have been in a 

position to realize that something may have gone awry" because Mr. 

Mandarino was responsible for Newcomb's daily affairs. The record 

shows that Mr. Price and Mr. Mandarino had discussions every day. 

They usually discussed general firm policy and risk management 

strategies which the Tax Court could reasonably conclude 

encompassed an understanding of the underlying nature of the 

transactions. 

Finally, Mr. Price asserts that the IRS has not proven that 

he committed any affirmative acts of fraud. However, the Tax 

Court did not clearly err in deciding that as organizer and 

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I 

managing partner of Newcomb, Mr. Price was necessarily involved in 

carrying out the transactions. The record shows that he discussed 

in detail Newcomb's business with Mr. Ruffalo, Mr. Mandarino, bank 

officials, and accountants. 

The record supplies sufficient evidence that Mr. Price fully 

understood Mr. Ruffalo's and Mr. Mandarino's actions and 

participated in them. Mr. Price had researched Treasury bill 

transactions extensively and had frequent contact with both men. 

He was also involved in other transactions similar to the ones in 

this appeal. 

before Mr. 

handled most 

In 1978, Price & Co. engaged in one set of straddles 

Price had even met Mr. Ruffalo; in 1979, Newcomb 

of its customer trades without Mr. Ruffalo's 

involvement; Mr. Price also held a 7.6% interest in Magna & Co., a 

partnership organized by his brother, which conducted a similar 

straddle transaction in 1979. Considering all these 

circumstances, the Tax Court's conclusion that Mr. Price 

participated in and intended to carry out the sham transactions is 

not clearly erroneous. In substance, Mr. Price's arguments are 

directed to the credibility and weight of the testimony. These 

issues were resolved by the trier of fact, and there is sufficient 

evidence in the record to support that resolution. 

B. Fictitious Securities 

Mr. Price contends that the Tax Court's speculation that 

securities did not exist cannot provide the basis for fraud. 

However, the Tax Court did more than speculate; it specifically 

held that the securities did not exist. 

The Tax Court's holding on this question is not clearly 

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I 

erroneous. Although Mr. Price asserts transactions which do not 

clear the "Fed wire" can be bona fide, that assertion does not 

prove they were in this case. Nor does the mere presence of 

dealer confirmation slips conclusively establish the existence of 

securities. Mr. Price also argues the margin requirements did not 

violate any clear industry standard, but the requirements were 

undeniably very small relative to the size of the transactions. 

That relationship presented a circumstance from which the Tax 

Court could properly draw an inference of fraud. The Tax Court 

reasonably concluded that the securities were fictitious based on 

the combined force of the predetermined nature of the 

transactions, and the small amounts of the margin deposits and 

dealer capital relative to the size of the transactions. 

III. Legal Basis for Fraud 

Mr. Price claims that the Tax Court made a legal error by 

holding him guilty of fraudulent intent when the 1979 tax law on 

government securities was uncertain. When the law is unclear, 

taxpayers cannot have the specific intent to violate it. United 

States v. Vreeken, 803 F.2d 1085, 1091 (10th Cir. 1987). Mr. 

Price argues that the law in 1979 did not clearly disallow losses 

from government security straddle transactions. The argument 

rings hollow, however, because the fraud charge is based not on 

the use of straddle transactions but on the use of fictitious 

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Appellate Case: 88-2914 Document: 010110064902 Date Filed: 10/26/1990 Page: 7 
securities in such transactions. The illegality of using sham 

trades for tax purposes has never been uncertain. 

AFFIRMED. 

Entered for the Court 

John P. Moore 

Circuit Judge 

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