Opinion ID: 608149
Heading Depth: 2
Heading Rank: 2

Heading: The Kickback Schemes.

Text: 28 The Blohms mount a double-barrelled attack on the Tax Court's judgment. First, they challenge the Tax Court's legal analysis and fact findings as to the Cayman Islands kickback scheme. Second, they attack the credibility of the evidence against Blohm as to the Kitchen Table kickback, primarily the evidence given by Stickelber and Ritchey. 29 Gross income includes all income from whatever source derived. 26 U.S.C. § 61(a)(1). Kickbacks are taxable income. See, e.g., Bragg v. Commissioner, 856 F.2d 163, 165 (11th Cir.1988); United States v. Sallee, 984 F.2d 643, 647 (5th Cir.1993). Income is taxed to the party who earns it. Commissioner v. Bollinger, 485 U.S. 340, 346, 108 S.Ct. 1173, 1177, 99 L.Ed.2d 357 (1988). A taxpayer is not relieved of the obligation to pay taxes on earned income merely by a transfer of that income to another party. United States v. Basye, 410 U.S. 441, 449-51, 93 S.Ct. 1080, 1085-86, 35 L.Ed.2d 412 (1973). Thus, if the evidence supports a finding that Blohm participated in either kickback scheme, then all income attributable to him is to be taxed. We must, therefore, determine whether the evidence supports the Tax Court's conclusion that Blohm participated in both kickback schemes, and by so doing, earned the proceeds derived from them. 30
31 The Tax Court held that Blohm earned the Cayman Islands kickback by participating in Marion's purchase of the Jourdanton Prospect leases and directing that his share of the kickback proceeds be paid to St. Lucy, the corporation he formed with Stickelber and Ritchey for the sole purpose of receiving illegal kickback proceeds. 62 T.C.M. at 1593. 32 The Blohms argue that the Tax Court erred in concluding that the proceeds of the Cayman Islands kickback were income taxable to them. Their arguments emanate from the bedrock assertion that Blohm took no part in the Cayman Islands kickback scheme. In fact, Blohm testified that he knew nothing of the Cayman Islands corporations until 1985. (R.II-279.) He further claims that he was never a shareholder in either the San Pedro or St. Lucy corporations. (R.II-256-57.) He testified that he had no recollection of signing the various documents relevant to the forming and dismantling of San Pedro or St. Lucy. (R.II-257-59.) He claims that if he did sign those documents, he did so without reading them because, as president of Marion, he signed many documents. Blohm further testified that Stickelber canceled his debt to the Stickelber Trust not in exchange for his share of the Cayman Islands kickback proceeds but to entice Blohm to remain with Marion after Blohm threatened to resign. (R.II-267-68.) According to Blohm, Stickelber's testimony that he kept Blohm's share of the Cayman Islands kickback proceeds in exchange for cancellation of Blohm's debt to the Stickelber Trust was simply a lie, as was all of Stickelber and Ritchey's testimony linking him to the Cayman Islands kickback scheme. In short, the Blohms assert that no plausible evidence links Blohm to knowledge of and participation in the Cayman Islands kickback scheme. Therefore, they claim, because Blohm neither knew of nor benefitted from the Cayman Islands scheme, any proceeds from that illicit transaction cannot be attributed to them as gross income. 33 These contentions, however, fail to prove the Tax Court's conclusions arbitrary or erroneous. Gold Emporium, 910 F.2d at 1378. The Tax Court's conclusions are amply supported by the evidence. Stickelber testified that he presented the Cayman Islands kickback proposal to Blohm, who agreed to participate in it: 34 A. (Stickelber) Mr. Ritchey brought the project to me, and I concurred that they could do it--that we would handle it through the Cayman Island--the coal company group and that the share of their half of the lease bonus would be divided two-thirds to them and one-third to whomever. And that whomever is defined as one-third to me, one-third to Mr. Blohm, and one-third to Mr. Ritchey. 35 Q. Okay. When this offer was made by the Texas Group, did you tell Mr. Blohm? 36 A. I did. 37 Q. How did you tell him? 38 A. Well, I just told him that this was the proposition, and this is the way it would--to use the vernacular, this is the way it was going to come down. And that was the proposal on their part. They were willing to share their part of the profit with us. And we would do it through the Cayman Islands centrum. 39 .... 40 Q. (The Court) Well, I want to know what was your impression as to his reaction. 41 A. My impression is that his reaction is that he concurred with the transaction that we presented--that I presented. 42 (R.II-320-24.) Stickelber further testified that Blohm authorized him to represent Blohm's interests in the Cayman Islands transactions. (R.II-354.) 43 Ritchey testified that the terms of the Cayman Islands kickback were discussed with Blohm, including Blohm's one-third share in its proceeds:Q. How were the [Cayman Islands] rebate monies to be divided? 44 A. A third, a third, a third, with a third to Mr. Stickelber, a third to Mr. Blohm, and a third to myself. 45 Q. Was that division communicated to Mr. Blohm? 46 A. Yes, it was. 47 Q. When--how was it--when was it communicated to him? 48 A. Well, as I stated previously, in a conversation in Mr. Stickelber's office. 49 Q. Was that prior to the--to February--to your trip to the Cayman Islands? 50 .... 51 A. Yes, it was. 52 (R.III-468.) 53 Furthermore, documentary evidence supported the conclusion that Blohm owned one-third of St. Lucy. Blohm, as a beneficial owner of San Pedro and St. Lucy, signed several indemnity agreements in favor of Cayhaven. Blohm's personal secretary at the time, Dorothy Franco, notarized these agreements and testified that she never notarized unsigned documents. (R.III-448.) As a beneficial owner of St. Lucy, Blohm also signed an affidavit to dissolve St. Lucy; that affidavit was also notarized by Ms. Franco. 54 The Tax Court also noted the circumstantial evidence against Blohm. The Jourdanton Prospect purchase was the single largest purchase made by Marion at that time. The Tax Court found that Blohm, as president of Marion and a director, would almost certainly have been thoroughly familiar with the transaction, including the payment through Marion Coal in the Cayman Islands and Marion Coal's taking title to one-half interest in the Jourdanton Prospect. Moreover, the Tax Court found implausible Blohm's assertion that he unwittingly signed the affidavit dissolving St. Lucy. Blohm signed that affidavit in his individual capacity, and not as president of Marion. 55 Although not necessary to its holding, the Tax Court's conclusion that Blohm applied his proceeds to cancel his debt to the Stickelber Trust was also supported by the evidence. Stickelber testified that he used Blohm's share of the Cayman Islands kickback ($143,268) to cancel the balance of Blohm's debt of $282,750 out of a sense of obligation arising from a separate transaction in which Blohm unfairly lost a business opportunity. (R.II-384.) This testimony supports the Tax Court's explanation as to why there are no known bank documents evidencing disbursements from the Cayman Islands accounts to Blohm. The promissory notes help explain why no funds went to Blohm directly. Moreover, Stickelber testified that in early 1982 he canceled the promissory notes and back-dated the cancellation to December 1977 at Blohm's request to create the impression that the notes were canceled before the Cayman Islands kickback occurred. (R.II-366-67.) 56 We agree with the Tax Court's conclusion that Blohm knew of and participated in the Cayman Islands kickback scheme. The Tax Court's fact findings resulted from careful consideration of the evidence and were based upon reasonable credibility choices among persons of dubious virtue. The court's findings were not clearly erroneous. In short, the evidence amply supports the view that Blohm acceded to the Cayman Islands kickback scheme ahead of time and directed that his share of the proceeds be paid to St. Lucy, one of two shell corporations set up for the sole purpose of harboring the kickback funds and in which he held beneficial ownership. One-third of the proceeds of the Cayman Islands kickback scheme was therefore income earned by Blohm and taxable to him as a one-third owner of St. Lucy.
57 The Blohms also attack the Tax Court's fact findings regarding the Kitchen Table kickback as clearly erroneous. They argue that the testimony of Stickelber and Ritchey, upon which the Tax Court relied, is inconsistent, contrary to agreed upon stipulations, and self-contradictory. 58 Their strongest salvos are aimed at Ritchey, who the Blohms claim is a crook and therefore unreliable. The former is clear; the latter is not. The Blohms correctly state that Ritchey gave evidence not presently available to the Grand Jury in exchange for immunity from prosecution. They claim that Ritchey was forced to create false evidence against Blohm to save himself from prosecution. That Ritchey agreed to provide new evidence does not, alone, make him inherently incredible. See, e.g., United States v. Greenwood, 974 F.2d 1449, 1457 (5th Cir.1992). Indeed, while the Tax Court found Ritchey to be unsavory, it nonetheless credited his testimony: 59 We hold no esteem for Ritchey, who appears to be the instigator of this insidious, nefarious, and reprehensible scheme as far as the Marion group was concerned, and we consider it anomalous that Ritchey might bear less a brunt or taint than the others of the consequences of this evil plot. Nevertheless, while we do not find Ritchey to be an ideal witness, we find his testimony plausible in context with the testimony of Stickelber and all the circumstances extant. 60 62 T.C.M. at 1592. Ritchey's character and the extent of his cooperation with the government were well known to the Tax Court; his motives and credibility were for it to consider in its role as fact finder. See Amadeo v. Zant, 486 U.S. 214, 223, 108 S.Ct. 1771, 1777, 100 L.Ed.2d 249 (1988). We find no clear error. 61 The Blohms also challenge the Tax Court's fact findings as to the specific dollar amount of the proceeds of the Kitchen Table kickback. No paperwork documented the transaction. Blohm's memory regarding the Kitchen Table kickback was hazy. He testified that Stickelber and Ritchey came to his home one evening and that he remembered a lot of drinking of alcohol. (R.II-282.) He testified that he had no recollection of what was said that evening beyond Ritchey saying something about a Texas Santa Claus when he was bringing money into the house. Id. Blohm further testified that he found a brown sack the next morning containing a few thousand dollars on a counter, and that he put the money into his car trunk and kept it for at least a week before returning the money to Ritchey. (R.II-284.) 62 The Tax Court discounted Blohm's testimony, relying in large part upon the testimony of Stickelber. As noted by the Tax Court: 63 [Blohm] testified that there were a few thousand dollars in the sack [left on the counter after the kickback money was divided]. However, we find his version of this to be incredible, including the aspect where he supposedly put the few thousand dollars in his car truck for several days to a week. [Blohm] did not introduce any other evidence regarding the amount of the Kitchen Table Kickback. Stickelber testified that it was $300,000 plus in total, and Ritchey testified that it was $377,000. They both testified that the cash was in denominations ranging from $20 bills to $100, and that the total was divided equally among the three. On cross-examination, Stickelber acknowledged that in his letter to the Internal Revenue Service he indicated that the amount of his share of the Kitchen Table Kickback was at least $75,000, and that in a deposition taken in a civil lawsuit by Marion against the Texas Group, Stickelber, Ritchey and [Blohm], he testified that the total was $210,000 and his share was $70,000. 64 62 T.C.M. at 1594. The Tax Court found Blohm's version of the Kitchen Table kickback to be evasive, implausible, and incredible. Id. It concluded that since Blohm failed to present credible evidence regarding the amount of the Kitchen Table kickback, he failed to show that the determination in the notice of deficiency of his share of the Kitchen Table kickback of $125,767 was incorrect. Id. at 1595. The Tax Court's fact findings were not clearly erroneous. Accordingly, we agree with its conclusion that the proceeds derived by Blohm from the Kitchen Table kickback scheme were income taxable to him.