TAX COURT OPINION

Case: John Carter
Docket Number: 30786-09
Judge: Gustafson
Opinion Type: bench
Filed: 12/05/2012
Pages: 36

UNITED STATES TAX COURT WASHINGTON, DC 20217 RMM JOHN CARTER, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 30786-09. ) ) ) ) O R D E R Pursuant to the opinion of the Court as set forth in the pages of the transcript of the proceedings before Judge David Gustafson at Boston, Massachusetts, on October 18, 2012, containing his oral findings of fact and opinion, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Gustafson at Boston, Massachusetts, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) David Gustafson Judge Dated. Washington, D.C. December 5, 2012 SERVED Dec 05 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 IN THE UNITED STATES TAX COURT 1 JOHN CARTER, Petitioner, v. In the Matter of: ) ) ) ) )Docket No. 30786-09 ) ) ) COMMISSIONER OF INTERNAL REVENUE,) ) ) Respondent. Room 5 John W. McCormack Post Office & Courthouse 5 Post Office Square Boston, MA 02109 Thursday October 18, 2012 1 2 3 4 5 6 7 8 9 10 11 12 13 14 The above-entitled matter came on for bench 15 opinion, pursuant to notice, at 11:34 a.m. BEFORE: HONORABLE DAVID GUSTAFSON Judge APPEARANCES: For the Petitioner: (No appearance.) For the Respondent: -- (Nu appeat a . ) Coul n D Cowv, pD IQD 16 17 18 19 20 21 22 23 2 4 25 (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 P R Ö C E E D I N G S 2 (11:34 a.m.) THE CLERK: All rise. THE COURT: You may be seated. Please call the case. THE CLERK: Calling from the calendar, docket number 30786-09, John Carter. (Whereupon, a bench opinion was rendered.) // // // / / // // // // // // // / / // / / / / / / / / (866) 448 - DEPO www.CapitalReportingCompany.com 2012 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Capital Reporting Company Carter Bench Opinion 10-18-2012 3 1 Bench Opinion by Judge David Gustafson 2 October 18, 2012 3 4 5 6 7 8 John Carter Docket No. 30786-09 The Court has decided to render the following, as its oral Findings of Fact and Opinion in this case. It shall not be relied on as precedent in any other case. This Bench Opinion is made pursuant to the 9 authority granted by section 7459 (b) of the Internal 10 Revenue Code (26 U.S.C.), and Rule 152 of the Tax 11 Court Rules of Practice and Procedure. 12 13 14 By a Notice of Deficiency dated October 20, 2009 (Ex. 1-J), the Internal Revenue Service (IRS) determined against petitioner John Carter 15 deficiencies of Federal income tax and fraud 16 penalties for the nine years 1997 through 2005. Mr. 17 Carter timely filed his petition in this Court, 18 seeking review of the IRS's adverse determination. 19 At that time he resided in Massachusetts. 20 21 Trial of this case was conducted on October 16, 2012, at FMC Devens prison in Ayer, 22 Massachusetts, during a regular Boston trial session 23 of the Court. Petitioner represented himself, and 24 respondent was represented by Carina J. Campobasso 25 and Derek E. Kelley. The witnesses who testified (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 4 1 were John Brady (current CEO of Independence Seaport 2 Museum), Douglas N. Hylan (proprietor of D.N. Hylan & 3 Associates, Inc.), Internal Revenue Agent Patricia 4 Taylor, and Mr. Carter. The parties' Stipulation of 5 Facts, with Exhibits 1-J through 26-J, was admitted 6 7 8 into evidence, as were additional exhibits offered by the parties during the trial. The IRS's adjustments reflected in the 9 notice of deficiency are tabulated in an "Attachment 10 to RAR" (Ex. 24-J) that consists of a spreadsheet 11 with 49 separate items, some of which have entries in 12 multiple years. Of those 49 items, seven (i.e., 13 14 items 1, 2, 4, 5, 6, 43, and 44) relate to expenditures for vessels. Of the remaining 42 items, 15 Mr. Carter disputes only five (i.e., items 3, 21, 28, 16 47, and 48) and concedes the remaining 37 items. In 17 dispute are those five non-vessel items, the seven 18 vessel-related items, and the fraud penalty asserted 19 on any resulting underpayment of tax. 20 21 22 23 24 FINDINGS OF FACT I. Mr. Carter's role at ISM From about 1989 to his termination in April 2006, Mr. Carter was the President and CEO of the Independence Seaport Museum (ISM), and its 25 predecessor entity, located in Philadelphia, (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 5 1 Pennsylvania.(Stip. 4.) Mr. Carter was a voting 2 member of ISM's Board of Directors. (Stip. 5.) 3 Mr. Carter's permanent residence was in 4 Osterville, Massachusetts; but while he served as 5 ISM's President and Chief Executive Officer, Mr. 6 Carter was provided with the free use of an ISM- 7 purchased townhouse, located on Spruce Street in 8 Philadelphia, Pennsylvania. (Stip. 6.) ISM also 9 provided him with the use of an automobile. (The IRS 10 11 12 does not contend that these arrangements resulted in taxable income to Mr. Carter.) The parties have stipulated that "[b]etween 1997 and 13 April 2006, petitioner engaged in a scheme to defraud 14 the ISM. " (Stip. 28 . ) However, the precise amounts 15 and dates of Mr. Carter's fraudulent activity are not 16 all stipulated. 17 18 II. Mr. Carter's use of ISM credit cards ISM authorized Mr. Carter to use several 19 different business credit cards issued to ISM.(Stip. 20 21 22 7.) Between approximately 2001 and 2006, petitioner used ISM's credit cards to make numerous purchases of services and merchandise for his own personal 23 benefit. (Stip. 7-8.) In order to avoid paying for 24 25 the purchases out of his own funds, petitioner routinely submitted the credit card statements to (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 6 1 2 3 4 5 ISM's accounting department for payment and fraudulently misrepresented the nature and the purpose of the transactions. (Stip. 9.) Most of the five non-conceded, non-vessel- related items on the "Attachment to RAR" (Ex. 24-J) 6 were presumably paid for by these credit cards. (If 7 not, then they were paid by ISM's check or otherwise 8 paid for by ISM funds, and the particular means is 9 not material. ) 10 11 12 13 14 15 A. Personal expenditures In the case of 3 of those five disputed items, Mr. Carter used ISM funds to pay for his own personal expenditures: 1. ICMM. For an item described as 16 "International Congress of Maritime Museum" and "trip 17 18 19 20 21 to France & England" (item 3), Mr. Carter put on no substantive testimony or other evidence, so we find the expenditure personal. 2. Books. Mr. Carter used ISM funds to purchase books from Rizzoli Bookstore in New 22 York City at a cost of $307 in 2004 and $632 in 2005 23 24 (item 28). The books included cookbooks and a restaurant guide. Although it is not inconceivable 25 that the books might have been usable for ISM (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 1 purposes, they were books of the sort that one would 2 also keep in his home for personal use, and we find 3 that the purchases were personal. However, the books 4 were kept in ISM's Spruce Street residence and 5 6 7 8 9 10 11 reverted to ISM when Mr. Carter left in 2006. He therefore returned the property to ISM in 2006 (a year not in suit here) and presumably should receive tax benefit in that year for returning the property-- an issue that is not before us in this suit. 3. Painting. Mr. Carter owned an 1830 painting that his Aunt (an antique dealer) had 12 given to him when he was in college. He put on no 13 proof of her cost to acquire the painting nor of its 14 15 16 17 18 value when he acquired it. He admits that in 2003 he used the painting to commit this fraud: He prepared phony appraisals of the painting, represented that the owner was David Manning, and then induced ISM to purchase the painting by check for $210,000 payable 19 to David Manning (item 47). In fact, Mr. Manning was 20 building a carriage house (i.e., a three-car garage 21 with guest quarters overhead) at Mr. Carter's 22 Osterville residence. Thus, Mr. Carter did sell the 23 painting to ISM, and his $210,000 was capital gain, 24 25 and not ordinary income (and the parties' Rule 155 computation should take that correction into r (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 8 1 2 3 account ) . Mr. Carter explicitly admits that this scheme was fraudulent, but he argues that his gain 4 derived from the fraud should be reduced by the value 5 of the painting that he did in fact convey to ISM, 6 albeit fraudulently. However, we have no evidence of 7 8 the value of the painting (other than Mr. Carter's phony appraisals); and Mr. Carter's gain would be 9 offset not by the value of the painting but by his 10 basis in it. That would apparently be a carryover of 11 his Aunt's basis, see sec. 1015(a)--presumably, her 12 cost--but we have no evidence of her basis in the 13 painting. Thus, we find that Mr. Carter derived 14 15 16 17 18 19 $210,000 of (unreported) capital gain from this fraudulent transaction. B. Non-personal expenditures We find that two of the five non-conceded, non- vessel-related items on the "Attachment to RAR" (Ex. 24-J) were not for Mr. Carter's personal 20 expenditures. Near his home in Massachusetts he did 21 22 purchase a piece of furniture for $3,075 (item 21) and an eagle sculpture (item 48) for $80,960. 23 However, he purchased them as furnishings for ISM's 24 Spruce Street property and delivered them there, 25 where they remained until he left in 2006 (and left (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 them behind). (Cf. Ex. 15-J at 115-21 (hearsay).) These purchases therefore did not constitute income 9 to Mr. Carter. III. Mr. Carter's conduct regarding ISM's vessels As Mr. Carter stipulated, "During his tenure as ISM's president, between 1997 and 2006, 1 2 3 4 5 6 7 petitioner engaged in fraudulent conduct regarding 8 several boats that he used for his personal pleasure 9 at ISM expense." (Stip. 12.) 10 11 12 A. The Albacore (items 1, 2, 4) The vessel Albacore had been donated to ISM in 1996, but Mr. Carter arranged for its transfer to 13 himself. In April 1997 Mr. Carter formed a Delaware 14 15 16 17 18 corporation, Nantucket Sound Boatworks, Inc. (NSB). (Stip. 13.) Mr. Carter, and not ISM, was the sole shareholder of NSB. Mr. Carter used his home address in Osterville, Massachusetts, as the address for the corporation. (Stip. 14.) In May 1997 ISM conveyed 19 title to the Albacore to NSB for total consideration 20 of one dollar. (Stip. 17.) Mr. Carter argues that 21 the creation of NSB and its ownership of the Albacore 22 was not unusual, since he had formed at least three 23 Delaware Corporations, each to own a vessel donated 24 to or purchased by ISM. This corporate structure, he 25 argues, was used in order to limit ISM's liability (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 10 1 2 3 4 5 6 7 8 for damages incurred during the operation of the vessels and to facilitate registration of the vessels. However, not ISM but Mr. Carter personally owned NSB, and his subsequent conduct shows that he fraudulently intended to benefit personally from owning the vessel through NSB. Between 1997 and 2004, the Albacore underwent extensive restoration and refurbishment 9 work at Benjamin River Marine and D.N. Hylan and 10 Associates. (Stip. 19.) We sometimes refer to these 11 collectively as "the boatyards", and they are located 12 adjacent to one another in Brooklin, Maine. Both 13 specialize in the refurbishment of antique wooden 14 boats. (Stip. 16.) D.N. Hylan, formed January 1, 15 1999, is owned by Douglas Hylan, who before that date 16 was a co- owner of Benjamin Marine. When he severed 17 18 from Benjamin Marine on December 31, 1998, Mr. Hylan took some of that firm's business and records with 19 him to D.N. Hylan. The mislabeling of vendors in 20 some of the documents in our record is explained by 21 22 23 24 25 this relationship and, contrary to Mr. Carter's arguments, does not affect the credibility of the documents. The boatyards were paid a total of $400,650.65 toward the renovation, repair, and (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 11 1 maintenance of the Albacore (see Ex. 24-J, items 1 2 and 2). From his own funds Mr. Carter paid $14,921 3 of those payments in 1997, $50,243, in 1998, $9,167 4 in 1999, and $26,155 in 2000, totaling $100,651 (see 5 part III of the Opinion below). The remaining 6 $300,000 (see Ex. 26-J at 8) was paid for Mr. 7 Carter's benefit from ISM funds. In August 2004, Mr. 8 Carter sold the Albacore to a third party purchaser 9 for a total of $190,000 and wrongfully retained all 10 of the proceeds of the sale for himself.(Stip. 21.) 11 12 (The sale proceeds are not included in Mr. Carter's income in the notice of deficiency, and we do not 13 revisit that issue.) 14 15 B. The Sadie (item 1) In June 2005 Mr. Carter signed a letter 16 agreement with D.N. Hylan to build a vessel called 17 18 the Sadie. Mr. Carter signed the agreement "J. Carter for ISM" (Ex. 38-P), but Mr. Carter intended the 19 vessel for himself. Mr. Carter fabricated D.N. Hylan 20 21 invoices for work supposedly done on other boats owned by ISM and used those invoices to obtain 22 payments totaling $40,729 that D.N. Hylan unwittingly 23 applied to pay the bill for the Sadie. (See Exs. 30- 24 R, 31-R.) Notwithstanding the fact that the Sadie was 25 not finished by the time Mr. Carter left ISM in 2006, (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 12 1 2 and ISM acquired possession of the Sadie soon thereafter, the $40,729 expended by ISM on the Sadie 3 was for Mr. Carter's personal benefit in 2005, and 4 constitutes income to him. Any "credit" that Mr. 5 Carter should receive for tax purposes for ISM's 6 acquisition of the Sadie in that post-suit year is 7 not before us. 8 Mr. Carter seems to argue that the IRS's 9 adjustments relating to the Albacore and the Sadie 10 presume payments to the boatyards that exceed the 11 actual total that they report receiving. However, 12 the Albacore-related receipts of $400,651 plus the 13 Sadie- related receipts of $40,729 total only 14 $441,380--well under the $538,861 aggregate that the 15 boatyards reported having received for ISM work (see 16 Ex. 40-R). (Amounts related to the Kiah/Cyrene, 17 discussed below, were paid to other vendors, and not 18 to Benjamin Marine or D.N. Hylan.) At trial the 19 Court specifically invited Mr. Carter to show 20 21 22 evidence of other projects whose payments would have taken the boatyards' supposed receipts above the aggregate that they reported having received, since 23 such evidence might suggest that the Albacore- and/or 24 Sadie-related amounts were overstated. The only 25 evidence he cited was cross-examination of an FBI (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 13 1 2 3 4 agent at Mr. Carter's sentencing hearing (Ex. 15-J at 254-262), by which his attorney attempted to make just this point. However, while that testimony confirms aggregate reported receipts by the boatyards 5 of "$537,000" (sic) and does refer to the boatyards' 6 work on other ISM vessels--the Nellie (for $164,000), 7 the Enticer (for $3,700), and the Principia (for an 8 unstated amount)--the testimony gives no information 9 about the relevant dates of the work nor (more 10 important) whether the invoices were ever paid. 11 Moreover, the testimony is simply the agent's 12 responses to questions about what an "Exhibit 41", 13 which is not in our record, states about such work 14 and those amounts. The agent did not verify or 15 affirm "Exhibit 41", and--more important--we do not 16 have it in our record, to determine whether it really 17 presents information that is inconsistent with the 18 notice of deficiency. Moreover, Mr. Carter has 19 previously argued that the evidence does not show 20 whether the $538,861 is really all of the ISM-related 21 payments made to the boatyards. (See petitioner's 22 1/30/2012 motion for summary judgment at 8.) Thus, 23 this evidence does not carry Mr. Carter's burden to 24 disprove the amounts that ISM paid the boatyards for 25 the Albacore and the Sadie. (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 14 1 2 C. The Kiah/Cyrene (items 4,5,6,43,44) In August 2002, at the direction of Mr. 3 Carter, ISM purchased for $275,000 a luxury power 4 boat referred to as the Kiah. (Stip. 22; item 6 on 5 Ex. 24-J).) In April 2003 its name was changed to 6 the Cyrene (Stip. 27), so we refer to it as the 7 Kiah/Cyrene. This purchase transaction was not 8 9 submitted to ISM's board of directors for consideration and approval, and was completed solely 10 at the direction of Mr. Carter. (Stip. 23) For the 11 next four years, Mr. Carter docked, maintained, and 12 13 14 15 upgraded the Kiah/Cyrene with ISM funds paid to various vendors totaling $179,487--i.e., $27,003 in 2002, $61,685 in 2003, $47,375 in 2004, and $43,424 in 2005. (Ex. 24-J; Ex. 15-J at 7-50, 200-251.) Mr. 16 Carter does not dispute the Kiah/Cyrene purchase 17 price nor the fact of these maintenance expenditures; 18 rather the dispute is about the nature of his 19 possession and use of the vessel. The IRS says he 20 misappropriated it and used it as his own; he says he 21 22 used it consistent with his role at ISM. It is undisputed that in January 2003 Mr. 23 Carter transferred title of the Kiah/Cyrene to NSB, 24 his own corporation (Stip. 25), so that he and not 25 ISM owned it. However, he argues that this fact is (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 15 1 not significant, and he insists (without 2 documentation) that another ISM vessel (the 3 Sequester/Cyrene) was also owned by NSB and, when it 4 was sold in 2002, the proceeds went to ISM, not to 5 himself. However, the suggestion that he would have 6 given to ISM the proceeds of an eventual sale of the 7 Kiah/Cyrene is seriously undercut by the admitted 8 fact that, when he sold the Albacore, he pocketed the 9 proceeds. Mr. Carter did not show a consistent 10 practice of respecting ISM's ownership of vessels 11 12 purchased with its funds. But even if we discount the significance of 13 Mr. Carter's ownership of the Kiah/Cyrene via NSB, we 14 15 16 are left with the facts of his possession and use of the vessel. The boat was docked for this entire four- year period not anywhere near ISM's 17 headquarters in Philadelphia but instead at a marina 18 near Mr. Carter's residence in Osterville, near 19 Hyannis Port. Mr. Carter alleges (without any 20 corroboration) that he used it to host outings for 21 potential ISM donors, estimating that he hosted such 22 events 10 to 15 times in 2003 to 2004. While he 23 named one celebrity (a close neighbor, in fact) whom 24 he allegedly hosted as a potential donor, Mr. Carter 25 offered no detail whatsoever about his solicitation (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 16 1 of donations, and he named no donor who ever made a 2 contribution as a result of these supposed outings. 3 We are not persuaded that his use of the boat was 4 5 6 7 8 conditioned in any way by the thought of fund-raising for ISM. Rather, he enjoyed having and using a boat for himself and his friends. One argument Mr. Carter makes against the idea that he misappropriated the Kiah/Cyrene is the 9 observation that personal use of museum property was 10 epidemic among officers and directors, and he seems 11 12 13 14 to argue that ISM itself traded on its tax-exempt status to enable its patrons, members, and personnel to facilitate and reduce the cost of their sailing hobbies. In this context, he suggests, his use of 15 the Kiah/Cyrene was not unusual. On this point he 16 was contradicted by another witness, and we have 17 insufficient corroboration to be persuaded by Mr. 18 Carter's argument; but in any event we note that 19 whether his use of the vessel was a theft from ISM is 20 an issue distinct from whether his use of the vessel 21 was income to himself. Even if ISM had been 22 complicit in his acquiring the Kiah/Cyrene as his 23 personal boat at ISM expense, that fact would not 24 change the character of his accession to wealth from 25 his acquisition of that vessel. Mr. Carter was (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 17 1 enriched by the acquisition of the Kiah/Cyrene at a 2 cost of $275,000 of ISM's funds and by ISM's payment 3 of $179,487 to maintain and upgrade it. 4 5 6 (In the post-suit year 2006, the vesse as sold for $275,000--the same as the purchase price four years earlier, despite the substantial 7 expenditures that had been incurred in the meantime. 8 Mr. Carter argues that this was a deflated sale price 9 that deprived him of adequate "credit" in ax 10 11 year 2006. To bolster this contention, Mr. Carter argues that the 2002 acquisition of the Kiah/Cyrene 12 was a bargain sale, so that its value in 2002 was 13 higher and the sale price in 2006 should likewise 14 15 have been higher. The issue of credit for the 2006 sale is outside the scope of this suit, so the 16 contention of a deflated 2006 sale price is 17 18 immaterial here--and the contention might also be counter-productive: If the Kiah/Cyrene was worth 19 more than $275,000 in 2002, then Mr. Carter's income 20 21 22 23 24 from misappropriating it would be even larger. But since the IRS has not made this contention, we do not consider it further.) IV. Mr. Carter's criminal conviction Sometime in or about November 2006, agents 25 of the FBI and IRS removed tax and financial records (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 18 1 2 3 4 5 6 from petitioner's house. (Ex. 15-J at 67-68, 185- 86.) On May 21, 2007, Mr. Carter was criminally charged in the case United States v. John S. Carter in the Eastern District of Pennsylvania, with two counts of mail fraud in violation of 18 U.S.C. section 1341 and one count of tax evasion in 2003 in 7 violation of 26 U.S.C.section 7201. (Stip. 29.) On 8 May 22, 2007, a guilty plea agreement was filed in 9 the criminal case. (Stip. 30, Ex. 12-J.) 10 Sometime after the conclusion of the 11 criminal trial, Mr. Carter's documents taken from his 12 13 14 house were destroyed and thus are no longer in the government's possession, and could not be offered into evidence at the trial of this case. (Stip. 45.) 15 V. The IRS's examination and Mr. Carter's petition 16 For each of the years 1997 through 2005, 17 Mr. Carter had timely filed a joint Federal income 18 tax return with his then-wife (Stip. 3); but he had 19 not reported on those returns the amounts he had 20 21 fraudulently obtained from ISM. Internal Revenue Agent Patricia A. Taylor 22 attended Mr. Carter's sentencing hearing. Thereafter 23 she prepared proposed adjustments to Mr. Carter's 24 income tax liability based on information obtained in 25 the criminal case. Respondent issued a notice of (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 1 deficiency to petitioner for the years 1997 through 2 2005 on October 20, 2009. (Stip. 2, Ex. 1-J.) Mr. 3 Carter timely filed his petition in this suit on 4 December 28, 2009. At that time he resided at FMC 5 Devens, a prison in Massachusetts. 19 6 7 8 9 I. Statute of limitations OPINION As a threshold matter, we must determine whether the IRS timely issued the notice of deficiency from which 10 Mr. Carter timely filed a petition for 11 redetermination. The IRS issued the notice of 12 deficiency on October 20, 2009, more than 3 years 13 after the timely filing of the latest return at issue 14 here--Mr. Carter's 2005 return apparently filed on or 15 before the due date in April 2006. Generally, the 16 IRS must assess a deficiency within 3 years of the 17 18 date of filing of the tax return. Sec. 6501(a). If that general rule applied, then the IRS would have 19 failed to assess the deficiencies within the period 20 of limitations and would be barred from assessing and 21 collecting any of the deficiencies or penalties for 22 23 24 25 the years in issue. However, section 6501(c) provides exceptions to the general rule, including: (1) False return.--In the case of a false (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time. 20 The period for assessing Mr. Carter's liability for a 1 2 3 4 5 6 deficiency determined in this case remains open if he 7 8 filed "a false or fraudulent return with the intent to evade tax" for the year of the deficiency; if he 9 did, then the exception provided in section 10 11 12 13 14 15 6501(c) (1) permits the IRS to assess the tax for that year "at any time . " For the reasons we set out below in part IV, Mr. Carter fraudulently failed to report income in six of the years in issue, and his intent was to evade tax. Accordingly, the statute of limitations 16 does not bar assessment for those six years; rather, 17 18 the exception provided in section 6501(c) (1) applies, and the IRS may assess at any time. However, fraud 19 is not established for 1997, 1999, and 2000, so that 20 21 the statute of limitations does not permit assessment, and fraud penalty will not be sustained, 22 for those three years. 23 24 25 II. Burden of Proof A. Generally The Commissioner's determinations set forth (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 21 1 in a notice of deficiency are presumed correct, and 2 generally speaking the taxpayer bears the burden of 3 4 showing the determinations are in error. Rule 142(a). (The different burden of proof for fraud is 5 discussed below in part II.C.) Deductions and 6 credits are a matter of legislative grace, and the 7 taxpayer bears the burden of proving that he is 8 entitled to any income adjustment, deduction, or 9 credit claimed. Rule 142 (a) . This includes the 10 11 12 13 14 burden of substantiation. Hradesky v. Commissioner, 65 T.C. 87 (1975), aff'd per curiam, 540 F.2d 821 (5th Cir. 1976). B. Shifting the burden Under certain circumstances, the burden of 15 proof as to factual matters may shift pursuant to 16 section 7491(a) from the taxpayer to the 17 Commissioner, but only if the taxpayer introduces 18 credible evidence regarding a factual matter 19 affecting his liability and only if he has complied 20 with substantiation requirements, has maintained all 21 22 required records, and has cooperated with the IRS's reasonable requests. Sec. 7491(a) (1) and (2). 23 Generally speaking, Mr. Carter has not introduced 24 25 credible evidence raising factual questions about his liabilities, and he has not argued for such a shift. (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 1 Accordingly, where Mr. Carter would normally have the 22 2 3 burden of proof, it has not shifted. Mr. Carter has argued that the FBI's 4 destruction of his documents has disabled him from 5 proving his case and has understandably complained 6 7 8 that this results in an injustice. If this amounts to a contention that the burden of proof has shifted, then that contention must fail. We have denied a 9 motion to shift the burden where the petitioner 10 11 12 complained of document destruction but could not show a "due process" violation based on "intentional, reckless, or grossly negligent" conduct. See 13 Garavaglia v. Commissioner, T.C. Memo. 2011-228 14 15 16 17 (opinion, part VIII). Even in a criminal case, a "due process" violation will not be found absent a showing that the Government agent who destroyed the evidence "was motivated by malice or bad faith in 18 authorizing the destruction". United States v. 19 Garza, 435 F.3d 73, 75-76 (1st Cir. 2006). Mr. 20 Carter made no such showing, so his burden has not 21 shifted. See also Malinowski v. Commissioner, 71 22 T . C. 1120, 1125 (1979) ("the inability to produce a 23 record which is unintentionally lost, whether by the 24 petitioner, the Commissioner, or by a third party, 25 alters the type of evidence which may be offered to (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 1 establish a fact, but the rule does not affect the 23 2 3 burden of proving a fact") . However, we observe two points in Mr. 4 Carter's favor: 5 6 7 First, it is well established that, under the rule of Cohan v. Commissioner, 39 F.2d 540, 543- 544 (2d Cir.1930), if a taxpayer establishes that a 8 deductible expense has been incurred but cannot 9 establish the precise amount of the deductible 10 11 12 13 14 expense (as Mr. Carter cannot show the precise amounts he paid to the boatyards out of his own funds), then the Court should estimate the amount. In making the estimate, the Court "bear[s] heavily if it chooses upon the taxpayer whose inexactitude is of 15 his own making". Id. at 544. Where Mr. Carter lacks 16 optimal proof, we may, and will, make an estimate 17 based on alternative proof-- especially since, to the 18 extent the FBI destroyed the documents on which he 19 would have relied, the "inexactitude" is not of Mr. 20 Carter's "own making". 21 Second, where the IRS has the burden of 22 proof (i.e., on the issue of fraud, discussed below), 23 but the Government has destroyed some of the evidence 24 that would show fraud (or might have disproved it), 25 we face a different issue entirely. In that context, (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 24 1 2 the fact of the absence of the best evidence will bear against the Government. See Wichita Terminal 3 Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 4 5 6 (1946), aff'd, 162 F.2d 513 (10th Cir. 1947). C. Fraud The Commissioner has the burden of proof 7 with respect to the issue of fraud with intent to 8 9 10 11 12 13 evade tax, and that burden of proof must be carried by clear and convincing evidence. Sec. 7454 (a); Rule 142 (b) . He must establish each element of fraud by clear and convincing evidence for each of the years at issue. See Smith v. Commissioner, 926 F.2d 1470, 1475 (6th Cir. 1991), aff'g T.C. Memo. 1989-171. 14 Section 6663(b) provides that a determination that 15 16 17 18 19 any portion of an underpayment is attributable to fraud results in the entire underpayment's being treated as attributable to fraud, except any portion the taxpayer proves is not so attributable. Thus respondent must show not only that Mr. Carter 20 underpaid his taxes for each year at issue but also 21 that some part of his underpayment for each year is 22 23 due to fraud. See DiLeo v. Commissioner, 96 T.C. 858, 873 (1991), aff'd, 959 F.2d 16 (2d Cir. 1992). 24 Therefore, if respondent proves that any of Mr. 25 Carter's deficiency for a particular year is due to (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 25 1 2 3 4 fraud, then Mr. Carter will owe the fraud penalty on the entire deficiency, except to the extent that he shows that a given component was not due to fraud. Thus, the burden is initially on the 5 Commissioner to show fraud as to some of the 6 7 8 9 10 11 12 13 underpayment for each year; and if he satisfies that burden as to even part of the underpayment, then the burden will shift to Mr. Carter to demonstrate that any part of the underpayment is not due to fraud. III. Income Gross income under section 61 "encompass[es] all 'accessions to wealth, clearly realized, and over which the taxpayers have complete 14 dominion'", James v. United States, 366 U.S. 213, 219 15 (1961) (quoting Commissioner v. Glenshaw Glass Co., 16 348 U. S. 426, 431 (1955) ) including "wrongful 17 appropriations". Id. 18 Mr. Carter does not dispute these 19 principles, nor does he deny that ISM's money that he 20 diverted to his personal expenditures is income to 21 him. His dispute is the factual contention that the 22 notice of deficiency overstated the amounts of his 23 wrongful appropriations from ISM. In general, we hold 24 25 in favor of the IRS on this factual dispute; and we accept Mr. Carter's contention only in part-- (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 2 6 1 regarding (1) furnishings he purchased for ISM's 2 Spruce Street residence (for the reasons discussed 3 4 above in part II.B.), (2) the character (capital, rather than ordinary) of the money ISM paid for his 5 painting (for the reasons discussed above in part 6 7 8 9 II.A.3.), and (3) the amount that ISM paid to the shipyards for work on the Albacore, for the reasons we discuss now: From November 1997 through 2005, the 10 boatyards were paid a total of $400,650.65 toward the 11 12 renovation, repair, and maintenance of the Albacore (see Ex. 24-J, items 1 and 2), all of which the IRS 13 treated as payments by ISM for Mr. Carter's benefit. 14 However, the record does not show the amounts and 15 16 sources of the' payments. (Cf. Ex. 15-J at 88 (hearsay) . ) Mr. Carter estimates that he paid as 17 much as $150,000 of that amount (in which event his 18 personal benefit over the four years would have been 19 only about $250,000), but since the FBI destroyed his 20 financial records, he cannot show the payments he 21 made. However, an analysis by a forensic accountant 22 concluded that "Carter spent almost $300, 000 in 23 Museum funds for restoration and maintenance" of the 24 Albacore. (Ex. 26-J at 8.) In the absence of 25 detailed proof, we accept that conclusion of the (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Cornpany Carter Bench Opinion 10-18-2012 27 1 accountant and find that Mr. Carter spent on the 2 Albacore $300,000 of ISM's funds (not the $400,651 3 that the IRS determined, nor the $250,000 he 4 estimated). Consequently, the remaining $100,651 5 paid to the boatyards (rather than the $150,000 he 6 alleged) consisted of Mr. Carter's own money. 7 8 9 10 11 The IRS is unable to show with documentary evidence in which years Mr. Carter made his own payments and for what precise amounts. Since the IRS has the burden to show fraud in each year, and since, for three of the years, the adjustments in the notice 12 of deficiency consist solely of Albacore amounts that 13 14 15 total less than the $100,651 Mr. Carter paid--i.e., 1997 ($14,921), 1999 ($9,167), and 2000 ($26,155), totaling $50,243 (see Ex. 24-J)--we cannot say that 16 in those years the IRS has shown by clear and 17 18 convincing evidence that Mr. Carter committed fraud in those years by using ISM funds to pay Albacore 19 expenses for his own benefit. The Government 20 destroyed some of the evidence that might have made 21 such a showing possible (i.e., Mr. Carter's financial 22 records), so it is especially appropriate to hold the 23 24 IRS to its high burden of proof. Consequently, we find that Mr. Carter used 25 his own funds to pay the $50,243 of Albacore expenses (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 28 1 2 3 4 in 1997, 1999, and 2000; and we hold that the IRS therefore did not prove unreported income, did not prove an underpayment, and did not establish fraud in those three years by clear and convincing evidence. 5 Of the total of $100,651 of his own funds that he 6 7 8 9 10 spent, we allocate the remainder--$50,408--to 1998, the year in which more than half of the Albacore expenses were paid and therefore the likeliest year in which Mr. Carter would have made his own payments. In the year 1998, on the other hand, Mr. 11 Carter induced ISM to pay almost $200,000 on a boat 12 13 14 15 16 17 18 that he used as his own and admits that he then sold in 2004, keeping the proceeds for himself. (Stip. 21.) Surely this falls within his stipulation that "between 1997 and 2006, petitioner engaged in fraudulent conduct regarding several boats that he used for his personal pleasure at ISM expense." (Stip. 12.) Bolstered by this stipulation, and given 19 the clear indication that Mr. Carter used substantial 20 21 ISM money for the Albacore in 1998, the IRS carried its burden to prove fraud in 1998 by clear and 22 convincing evidence. 23 24 IV. Fraud penalty Section 6663 (a) provides, "If any part of 25 any underpayment of tax required to be shown on a (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 29 1 2 3 4 5 return 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. " As we have already stated, the Commissioner has the burden of proving fraud by clear and convincing 6 evidence. As we have also stated, that burden is 7 8 9 largely met here: Mr. Carter generally admits he committed fraud over the nine-year period (Stip. 7-9, 12, 21, 28), and he candidly admitted at trial that 10 he failed to report amounts that he knew he should 11 12 13 14 15 have reported on his tax returns. However, he stops short of admitting fraud in each year, so we have considered whether the Commissioner has proved fraud by clear and convincing evidence for each of the nine years at issue, and we hold that fraud has been 16 established in six of the years (1998 and 2001 17 18 19 20 through 2005) and not in the other three (1997, 1999, and 2000) . A. 2001-2005 Having been convicted (pursuant to a guilty 21 plea) under section 7201 of attempting to evade tax 22 for 2003, Mr. Carter is collaterally estopped from 23 denying that he committed fraud in that year (though 24 he may dispute the specific amounts of tax due in 25 that year). Anderson v. Commissioner, T.C. Memo. (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 30 1 2 3 4 5 6 7 8 9 2009-44, aff'd, No. 11-1704 (3d Cir. Sep. 12, 2012). In addition, he admits 37 of the 49 adjustments on the IRS Agent's chart, thereby admitting multiple instances of fraud in each of the five years 2001 through 2005 (see also Stip. 7-9), leaving only the four years 1997 through 2000 for consideration. B. 1997-2000 In these four years, all the amounts at issue concern payments by ISM to the boatyards for 10 expenditures related to the Albacore. We have held 11 that Mr. Carter's inducement of those payments for 12 his own benefit was indeed fraudulent, so to the 13 extent the IRS has shown, by clear and convincing 14 evidence, that Mr. Carter had an underpayment of tax 15 because ISM made payments for his benefit to the ¼)bÖ Y. CD C(cid:0)570fNnM n6 (cid:16)254Å#D CC(cid:16)040bf L 16 boatyards in any of those years, ^ then fraud is 17 established for that year. Holding the IRS to that 18 burden of proof, we·have found that fraud is 19 established for only one of those years--i.e., 1998-- 20 21 22 23 24 and not for 1997, 1999, or 2000. Since fraud is thus established for 1998 and 2001 through 2005, the statute of limitations does not bar assessment, and it was incumbent upon 25 Mr. Carter to prove whether any portion of any (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 31 1 2 3 underpayment was not attributable to fraud. Sec. 6663(b). He did not attempt such proof, and the record shows that all the adjustments in the notice 4 of deficiency relate to the well-established pattern 5 of fraud in this case. Therefore, for each of the six 6 7 8 9 years 1998 and 2001 through 2005, Mr. Carter is liable for the 75-percent fraud penalty on the underpayment that results from the determinations in this opinion. 10 V. Collateral matters 11 12 A. Insufficient examination Mr. Carter argues that the notice of 13 deficiency is flawed, because it was based on the IRS 14 Agent's uncritical acceptance of distorted and 15 unsubstantiated assertions made in connection with 16 his sentencing (which, he contends, was also 17 excessive for the same reasons). A taxpayer may 18 certainly prevail on an issue by showing that the 19 notice of deficiency is in error on some particular-- 20 but such a showing is made with evidence. If a 21 taxpayer simply proves, instead, that an examining 22 agent was lazy, inattentive, credulous, unfair, or 23 sloppy, proof of such a fact will, in itself, 24 25 accomplish nothing. The taxpayer has the burden not just to show that the IRS erred but also to show what (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 1 2 the actual facts are. It is inconsequential--it is in fact reasonable--if an agent conducting a civil 32 3 audit bases proposed adjustments on prior 4 determinations in criminal proceedings. 5 6 All that section 6212(a) requires of the IRS is that it determine that a deficiency exists 7 before issuing a notice of deficiency. As we 8 9 observed in Campbell v. Commissioner, 90 T.C. 110, 113 (1988), if "the notice of deficiency does not 10 reveal on its face that the Commissioner failed to 11 make a determination, a presumption arises that there 12 was a deficiency determination." This presumption is 13 made "conclusive" upon the presentation of further 14 evidence that ties the calculations in the notice of 15 deficiency to the taxpayer who is named in the 16 notice. See id. There is no question that the notice 17 of deficiency in this case tied its amounts to Mr. 18 Carter. The purpose of a notice of deficiency is 19 simply to inform a taxpayer that a deficiency has 20 been determined, to specify the year for which the 21 deficiency is determined, and to state the amount of 22 23 24 the deficiency in unequivocal terms, all in a communication sent to the right taxpayer at his last known address. There is no question that the notice 25 of deficiency in this case accomplished that purpose. (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 33 1 B. Criminal proceedings 2 Mr. Carter states that he has pending in district 3 4 5 court various motions to revise his criminal sentence, and he often articulated his positions in this case by reference to those criminal proceedings. 6 We therefore emphasize that this Court has no 7 jurisdiction over, nor any occasion to comment on, 8 Mr. Carter's criminal sentence; we have before us 9 only the matter of Mr. Carter's civil tax liability. 10 We do not face the issue of harm to ISM but only of 11 12 13 14 15 16 17 18 income to Mr. Carter. We did not have ISM as a party to this case to resist Mr. Carter's contentions about and against it. We did not have before us all the documents that were placed in evidence at his sentencing hearing; and we make our determination on the basis of only the evidence in our record. CONCLUSION In sum, we hold that the IRS's deficiency 19 determination is upheld in part, to the extent set 20 out above, for each of the years 1998 and C000 7LC 21 through 2005; and Mr. Carter is liable for the fraud 22 penalty on the resulting underpayments. 23 24 At the conclusion of trial, respondent requested the opportunity for post-trial briefing. 25 However, the parties had previously filed substantial (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 34 1 pretrial memoranda; and the Court therefore declined 2 3 4 5 to order the filing of post-trial briefs, because it appears that the case was susceptible of being decided by way of a bench opinion. If upon seeing the Court's opinion a party believes that the Court 6 substantially erred, he should note the deadline of 7 Rule 161. 8 The parties will be ordered to comply with 9 Rule 155 to calculate the deficiencies. 10 This concludes the Court's oral Findings of 11 Fact and Opinion in this case. 12 (Whereupon, at 12:15 p.m., the bench 13 opinion in the above-entitled matter was concluded.) 14 15 16 17 18 19 20 21 22 23 24 25 (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Carter Bench Opinion 10-18-2012 CERTIFICATE OF TRANSCRIBER AND PROOFREADER 35 CASE NAME: John Carter v. Commissioner of Internal Revenue DOCKET No.: 30786-09 We, the undersigned, do hereby certify that the foregoing pages, numbers 1 through 35, inclusive, are the true, accurate and complete transcript prepared from the verbal recording made by electronic recording by Catherine Burns, on October 18, 2012, 1 2 3 4 5 6 7 8 9 10 before the United States Tax Court at its session in 11 Boston, Massachusetts, in accordance with the 12 applicable provisions of the current verbatim reporting contract of the Court, and have verified the accuracy of the transcript by comparing the typewritten transcript against the verbal recording. 13 14 15 16 17 18 19 Valori Weber October 20, 2012 (Transcriber) (Date) onda D. W e Oc ber 20, 2012 (Proofreader) (Date) 20 21 22 23 24 25 (866) 448 - DEPO www.CapitalReportingCompany.com 2012