Court Opinion

ID: 4484096
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:16:30.664462+00
Date Added: 2024-06-11T07:58:23.438855
License: Public Domain

Chabot, J., dissenting: Petitioner was indicted on five counts of extortion and three counts of willfully filing false Federal income tax returns (sec. 7206(1)1). Nine months later, he “copped a plea”; he pled guilty on the three false return counts. Four months after that, all five extortion counts were dismissed and petitioner got probation and a $2,000 fine. On the basis of the foregoing, the majority refuse to allow petitioner to deny that his tax return for each of the years before the Court was false and “fraudulent,” within the meaning of section 6653(b).2 Having thus foreclosed petitioner from denying fraud and omission of substantial amounts of income, the majority then conclude that petitioner is liable for the civil fraud addition to tax for each of the 3 years. From this conclusion I respectfully dissent, because— (1) Petitioner’s conviction under section 7206(1) was not a conviction of “fraud”; (2) Collateral estoppel is not applicable; and (3) In the absence of collateral estoppel, respondent has not borne his heavy burden of proving petitioner’s liability for civil tax fraud. (1) Petitioner Was Not Convicted of Fraud The question before us is whether respondent has carried his burden3 of proving by clear and convincing evidence4 that petitioner has committed civil tax fraud. In Amos v. Commissioner, 43 T.C. 50 (1964), affd. 360 F.2d 358 (4th Cir. 1965), we held that criminal “tax evasion” under section 72015 was equivalent to civil tax fraud under section 6653(b), even though the word “fraud” does not appear in section 7201. The majority in the instant case conclude that petitioner’s conviction under section 7206(1) estops him from denying that his returns were fraudulent. In Amos, we held there was sufficient identity between the requirements of section 7201 and those of section 6653(b) to warrant application of collateral estoppel as to fraud. Section 7206(1), on the other hand, falls far short of this identity. In particular, a conviction under section 7206(1) does not require a showing that petitioner willfully attempted to evade tax (Gaunt v. United States, 184 F.2d 284 (1st Cir. 1950);6 United States v. Lodwick, 410 F.2d 1202, 1205-1206 (8th Cir. 1969)), nor does it even require a showing of an understatement of income (United States v. DiVarco, 484 F.2d 670 (7th Cir. 1973)). It may be that the evidence (or the charge in the indictment) in the prior action is sufficient to prove an intent to evade or defeat the payment of taxes — i.e., the equivalent of the intent component of fraud.7 However, collateral estoppel applies only if the matter was “essential to the judgment * * * in the first tax proceeding.” Commissioner v. Sunnen, 333 U.S. 591, 601 (1948). See United States v. Colacurcio, 514 F.2d 1, 6-7 (9th Cir. 1975). It is not essential, for a conviction under section 7206(1), to prove an intent to evade or defeat the payment of taxes. Gaunt v. United States, 184 F.2d at 288. From the foregoing, it is evident that petitioner’s prior conviction under section 7206(1) is not a proper basis for use to estop him, in the instant case, from denying that his returns were “fraudulent.” The majority follow Considine v. Commissioner, 68 T.C. 52 (1977), on the basis of which they conclude that “the willful subscribing to a false return is the filing of a fraudulent return” (p. 224 supra). I do not agree with this conclusion and believe Considine should be overruled. Considine included the following analysis: (1) “Willfully” has the same meaning in section 7206 as it has in section 7201. United States v. Pomponio, 429 U.S. 10 (1976); United States v. Bishop, 412 U.S. 346 (1973). Considine v. Commissioner, 68 T.C. at 59. (2) “Willfully” in section 7201 “has authoritatively been defined in prior judicial decisions to encompass all of the elements of fraud which are envisioned by the civil penalty described in section 6653(b).” Amos v. Commissioner, 43 T.C. at 55. Considine v. Commissioner, 68 T.C. at 59. (3) Therefore, “willfully” in section 7206(1) encompasses all the elements of fraud in section 6653(b) (except that the latter provision requires a showing of an underpayment of tax). Considine v. Commissioner, 68 T.C. at 60. In order to show under section 7206(1) that a taxpayer willfully makes a return which he does not believe tó be true and correct as to every material matter, it is necessary to establish, that the return as filed is not correct in a material respect, that the taxpayer at the time of filing the return did not believe it to be correct in every material respect, and that he subscribed to the return “willfully.” “Willfully,” in the context of section 7206, simply means a voluntary, intentional violation of a known legal duty. United States v. Pomponio, 429 U.S. 10 (1976).8  In order to show under section 6653(b) that a taxpayer is liable for the fraud addition to tax, it is necessary to establish that there was an underpayment due to fraud. Fraud is an actual intentional wrongdoing, and the intent required is the specific purpose to evade a tax believed to be owing. E.g., Webb v. Commissioner, 394 F.2d 366, 377 (5th Cir. 1968), affg. a Memorandum Opinion of this Court;9 Powell v. Granquist, 252 F.2d 56, 60 (9th Cir. 1958); Wiseley v. Commissioner, 185 F.2d 263, 266 (6th Cir 1950), revg. 13 T.C. 253 (1949); Estate of Pittard v. Commissioner, 69 T.C. 391, 400 (1977); McGee v. Commissioner, 61 T.C. 249, 256 (1973), affd. 519 F.2d 1121 (5th Cir. 1975). Therefore, in order to prove an underpayment due to fraud under section 6653(b), respondent must prove that there was an underpayment of tax, that petitioner had the specific purpose and intent to evade a tax believed to be owing, and that the underpayment was due to or caused by the purpose and intent to evade tax. In short, the quoted language of Amos, relied upon in Considine and by the majority in the instant case, was elliptical. The essential equivalent of section 6653(b) “fraud” is not the one word “willfully”; it is rather the section 7201 phrase “willfully attempts * * * to evade * * * tax.” Amos v. Commissioner, 43 T.C. at 55. Considine, then, is inconsistent with both the Supreme Court’s analysis in Pomponio and our analysis in Amos. Considine should be overruled. (2) Collateral Estoppel Is Not Applicable The Congress has not commanded the courts concerning the doctrine of collateral estoppel in tax cases. The doctrine has been developed by the courts and results in a party to a case being forbidden to dispute a matter which is otherwise properly before the court in that case. In The Evergreens v. Commissioner, 47 B.T.A. 815 (1942), a Board-reviewed opinion, we applied the doctrine in determining 'the _tax basis of property sold by a cemetery corporation in 1934 and 1935. All issues in that case had been settled by stipulation, except for the March 1, 1913, value10 of those lots that had been owned by the cemetery corporation on the latter date. The Commissioner had determined that the March 1, 1913, fair market value of all the lots, both those that were improved and those not improved, was $0.30 per square foot. The cemetery corporation pointed out that, in an earlier case, the Board had determined that all the improved land had a March 1, 1913, fair market value of $1.55 per square foot; the corporation argued that that earlier determination settled the matter as to the improved land for the second case. The corporation maintained that the $1.55 value was also an appropriate starting point for determining the March 1, 1913, fair market value of the unimproved land; it argued that that land should be valued at the improved land value less the cost of the improvements (for a net value of $1.35 to $1.47 per square foot). The Board was unanimous in agreeing with the cemetery corporation that, as to the improved land, the value determined in the earlier suit was conclusive. As the Board noted, on this point the earlier determination was not to be reexamined “for, if necessary, that ‘decision makes white black; black, white; the crooked, straight; the straight, crooked.’ Bouvier, Law Dictionary.” (47 B.T.A. at 825.) However, with two dissents, the Board concluded that it could ignore the earlier determination in deciding on the value of the unimproved land. Accordingly, the Board rejected the cemetery corporation’s above-described approach as to the unimproved land. After analyzing the matter, the Board concluded that $0.35 per square foot was the appropriate March 1,1913, fair market value for the unimproved land. The Board’s holding was approved on appeal. The Evergreens v. Nunan 141 F.2d 927 (2d Cir. 1944). In approving the position the Board had adopted, the Court of Appeals pointed out that the collateral estoppel doctrine does not mean that every matter necessary to the result in the first case is conclusively established between the parties in all future suits (141 F.2d at 929), but only those matters which are “ultimate facts” in the future suits (141 F.2d at 931). This view of the limitation of collateral estoppel has been adopted by the Supreme Court (Yates v. United States, 354 U.S. 298, 338 (1957)11), by this Court (Amos v. Commissioner, 43 T.C. at 54;12 Gammill v. Commissioner, 62 T.C. 607, 616 (1974)), and by the American Law Institute’s Restatement of Judgments (sec. 68, comment p13). Notwithstanding the American Law Institute’s description of the ultimate fact-mediate data distinction as “a clear and workable definition,” in many situations the distinction has not been applied or is difficult to apply. Happily, we need not search far for guidance in applying this distinction in civil tax fraud cases, for the point was set down as follows in Amos v. Commissioner: In the instant case imposition of the civil penalty prescribed by section 6653(b) depends upon a determination of the ultimate fact that petitioner’s underpayment of tax for the years 1955 through 1958 was due to fraud. This ultimate fact for determination herein is the same ultimate fact which was determined adversely to petitioner in the prior criminal proceeding. It is therefore our decision that petitioner is conclusively bound, under the doctrine of collateral estoppel, by that prior adverse determination. Tomlinson v. Lefkowitz, 334 F.2d 262 (C.A. 5,1964), affirming an unreported case (S.D. Fla. 1962). [43 T.C. at 55-56; emphasis added.] a “mediate” fact within this context would be a fact merely tending to establish an essential element of the offense, rather than the essential element itself. [43 T.C. at 55, n. 6; emphasis in original.] The willful filing of an income tax return omitting income is a fact which if true may, together with further facts, be a basis from which an intent to evade tax may be inferred. It is not an “ultimate” fact in a section 6653(b) proceeding. The majority correctly recognize that, in order for the judgment in the prior proceeding to be given conclusive effect, it must establish one of the ultimate facts (as defined in The Evergreens v. Nunan, supra) in issue in the subsequent proceeding, page 225 supra. The majority then state “A conclusion that a taxpayer has filed a false and fraudulent return from which substantial income is omitted is a finding of an ultimate fact” in a section 6653(b) proceeding, page 226 supra. The latter statement may well be the law, but its application here is based on the assumption that the fact essential to the section 7206(1) proceeding (the willful subscribing to a return from which substantial amounts of income have been omitted) is a conclusion that petitioner has filed a fraudulent return. As indicated above (section (1) of this dissenting opinion) that assumption is unfounded. Therefore, I would hold that collateral estoppel does not apply to estop petitioner from denying fraud, nor from denying he willfully filed income tax returns from which substantial amounts of income have been omitted for the years before the Court. (3) Analysis of the Evidence On the basis of the record as a whole, including the demeanor of the witnesses and the evidence relied upon by respondent (see n. 7 supra), although the issue is not free from doubt, I would conclude that respondent has failed to bear his heavy burden of proving fraud by clear and convincing evidence. Testimony of payors. — In the instant case, petitioner claims he was an agent for the Democratic Club. Although respondent presented witnesses who testified petitioner made it known to them that they would have to make contributions to the Democratic Club in order to get the township’s business and who testified that they made actual cash payments to petitioner, this evidence does not conflict with petitioner’s explanation. Several of respondent’s witnesses testified they understood they were making contributions to the Democratic Club. None testified he or she understood the money was a kickback to petitioner rather than a payment to petitioner as an agent of the Democratic Club. Payments in cash. — That the kickbacks were made in cash is consistent with fraud, as asserted by respondent, but it also is consistent with petitioner’s explanation. A substantial portion of the Democratic Club’s checking account deposits were in the form of cash (table IV supra). Also, most of the acknowledgment letters used by respondent’s employees in preparing their worksheets were acknowledgments of cash (table III supra). Clearly, the practice of making cash payments to the Democratic Club was not unusual at the times and place involved herein. Large transfers of cash may have afforded opportunities for improprieties, but a showing of tax fraud by petitioner requires evidence far clearer and more convincing than this. Letters of acknowledgment. — The lack of letters of acknowledgment, too, does little to bolster respondent’s case. Even the few letters of which there is evidence show that each of the people who apparently paid petitioner, except Lynn Equipment Co. (see tables II and III supra), received at least one acknowledgment letter at some time during the years before the Court. Respondent indicated that the acknowledgment letters that had been used in preparing the notice of deficiency appear to have disappeared while in the custody of a Department of the United States Government. Respondent has not shown that no other letters existed. Respondent has not shown why acknowledgment letters would be sent sometimes and not other times. Respondent has not explained why a “skimming” operation, such as respondent would have us believe was in effect, would call attention to the possibility of “sticky fingers” by sending written acknowledgments sometimes and not other times. On balance, the evidence presented as to the acknowledgment letters seems to cast as much doubt on respondent’s case as it does on petitioner’s case. Unexplained deposit. — Respondent presented evidence of an unexplained deposit of $2,240 in cash to petitioner’s savings account on August 1,1969. Respondent would have us infer that the source of the unexplained deposit was the $2,355 payment from Colonial Garage made August 1,1969.1 do not believe that one unexplained cash deposit is an indicium of tax fraud. See York v. Commissioner, 24 T.C. 742 (1955). Therefore, I would conclude that respondent has failed to prove by clear and convincing evidence that petitioner is liable for an addition to tax for fraud under section 6653(b) for any of the 3 years before the Court. An additional comment may be in order. Under Arctic Ice Cream Co. v. Commissioner, 43 T.C. 68 (1964), a guilty plea in a criminal tax case can be the basis for collateral estoppel. However, in a civil tax case— (1) If petitioner had conceded the matter out of court, then there would be no collateral estoppel; (2) If petitioner had contested the matter, but stipulated as to a point, then there would be no collateral estoppel as to that point (United States v. International Building Co., 345 U.S. 502, 505 (1953)); and (3) If petitioner had contested the matter and had gone to trial, but conceded the matter on brief, then there would be no collateral estoppel (Coors v. Commissioner, 60 T.C. 368, 389-392 (1973), affd. 519 F.2d 1280, 1283 (10th Cir. 1975)). I find it hard to distinguish between the civil cases and the matter now before us. A wag has defined the law as “common sense, as modified by the legislature.” But nothing in the statute commands the results reached by the majority.14 The concept — and the distinctions drawn by the foregoing cases — have been designed by the courts in part for the convenience of the courts. At least as to the distinctions discussed above, the modifications of commonsense may not properly be charged to the legislature. Nims, J., agrees with this dissenting opinion.  SEC 7206. FRAUD AND FALSE STATEMENTS. Any person who— (1) Declaration under penalties of perjury. — Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; * * * [[Image here]] shall be guilty of a felony and, upon conviction thereof, shall be fined not more than $5,000, or imprisoned not more than 3 years, or both, together with the costs of prosecution.   SEC. 6653. FAILURE TO PAY TAX. (b) Fraud. — If any part of any underpayment (as defined in subsection (c)) of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 50 percent of the underpayment. * * *   SEC. 7454. BURDEN OF PROOF IN FRAUD, FOUNDATION MANAGER, AND TRANSFEREE CASES. (a) Fraud. — In any proceeding involving the issue whether the petitioner has been guilty of fraud with intent to evade tax, the burden of proof in respect of such issue shall be upon the Secretary. (This language reflects several amendments since 1968 which have no effect on the instant case.)   Rule 142(b), Tax Court Rules of Practice and Procedure. E.g., Stone v. Commissioner, 56 T.C. 213, 220 (1971); Otsuki v. Commissioner, 53 T.C. 96, 105 (1969).   SEC. 7201. ATTEMPT TO EVADE OR DEFEAT TAX. Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than 5 years, or both, together with the costs of prosecution.   “The defendant’s argument rests upon the fallacious premise that an indictment under § 145(b) [I.R.C. 1939, predecessor of sec. 7201] charging the filing of a false and fraudulent return as the manner of attempting to evade or defeat payment of income taxes defines a crime the elements of which are identical with the crime defined and made punishable by § 145(c) [I.R.C. 1939, predecessor of sec. 7206(1)]. It seems to us clear that the latter subsection makes it a felony merely to make and subscribe a tax return without believing it to be true and correct as to every material matter, whether or not the purpose in so doing was to evade or defeat the payment of taxes. That is to say, it seems to us that the subsection’s purpose is to impose the penalties for perjury upon those who wilfully falsify their returns regardless of the tax consequences of the falsehood. Whereas subsection 145(b) condemns as felonious wilful attempts to evade or defeat taxes ‘in any manner’, and one manner, certainly, is by the wilful filing of a return known to be false in some material respect. Thus while the proof of an offense under subsection 145(b) may incidentally also prove an offense under § 145(c), it must in addition indicate an intent in some manner to evade or defeat a tax which is due. In brief, it seems to us evident that the scope of the two subsections is different with respect to an attempt to evade or defeat taxes, and certainly the language of § 145(b) is broad enough to include the filing of a false and fraudulent return as a punishable manner of attempted tax evasion. * * * [184 F.2d at 288.]”   Note that respondent does not rely upon petitioner’s conviction or guilty plea as evidence in the instant case; respondent relies upon them only as elements of his collateral estoppel argument.   In Pomponio, the Supreme Court stated as follows: In Bishop we held that the term “willfully” has the same meaning in the misdemeanor and felony sections of the Revenue Code, and that it requires more than a showing of careless disregard for the truth. We did not, however, hold that the term requires proof of any motive other than an intentional violation of a known legal duty. We explained the meaning of willfulness in §7206 and related statutes: “The Court, in fact, has recognized that the word ‘willfully’ in these statutes generally connotes a voluntary, intentional violation of a known legal duty. It has formulated the requirement of willfulness as ‘bad faith or evil intent,’ [United States v.] Murdock, 290 U.S. [389,] 398, or ‘evil motive and want of justification in view of all the financial circumstances of the taxpayer,’ Spies [v. United States], 317 U.S. [492,] 498, or knowledge that the taxpayer ‘should have reported more income than he did.’ Sansone [v. United States], 380 U.S. [343,] 353. See James v. United States, 366 U.S. 213, 221 (1961); McCarthy v. United States, 394 U.S. 459, 471 (1969).” 412 U.S., at 360. Our references to other formulations of the standard did not modify the standard set forth in the first sentence of the quoted paragraph. On the contrary, as the other Courts of Appeals that have considered the question have recognized, willfulness in this context simply means a voluntary, intentional violation of a known legal duty. * * * [429 U.S. at 12; fn. ref. omitted.]    T.C. Memo. 1966-81.   See sec. 1053 and its predecessors.   “The normal rule is that a prior judgment need be given no conclusive effect at all unless it establishes one of the ultimate facts in issue in the subsequent proceeding. So far as merely evidentiary or “mediate” facts are concerned, the doctrine of collateral estoppel is inoperative. The Evergreens v. Nunan, 141 F.2d 927; Restatement, Judgment §68, comment p. * * *” The dissenting Justices in Yates stated their agreement with the Court majority on the collateral estoppel issue (354 U.S. at 350).   The rule governing the application of collateral estoppel to tax litigation has been stated by the Supreme Court to be as follows: “where a question of fact essential to the judgment is actually litigated and determined in the first tax proceeding, the parties are bound by that determination even though the cause of action is different.” Commissioner v. Sunnen, 333 U.S. 591 (1948). To this must be added the observation that collateral estoppel is not applicable to every fact which may have been determined in the first suit, or which may be an issue in the second suit. Rex v. Duchess of Kingston, 20 How. St. Tr. 355, 538 (H.L. 1776). For the estoppel to apply to conclusively establish a fact in question, determination of that fact must have been necessary or essential to the result in the first suit and the fact in question must be an “ultimate” fact for determination in the second suit. For this purpose, “ultimate facts” are “those facts upon whose combined occurrence the law raises the duty or right in question,” as distinguished from “evidentiary facts” or “mediate datum,” which are those facts “from whose existence may be rationally inferred the existence of” an ultimate fact. The Evergreens v. Nunan, 141 F.2d 927, 928 (C.A.2,1944), certiorari denied 323 U.S. 720. [Emphasis in original.]   In its 1948 Supplement to the Restatement of the Law (p. 336), the American Law Institute revised comment p to sec. 68 of the Restatement of Judgments (relating to collateral estoppel as to questions of fact) to read as follows: "p. Evidentiary facts. The rules stated in this Section are applicable to the determination of facts in issue, i.e., those facts upon whose combined occurrence the law raises the duty or the right in question, but not to the determination of merely evidentiary or mediate facts, even though the determination of the facts in issue is dependent upon the determination of the evidentiary or mediate facts.” The institute explained (1948 Supp. at 337) its action as follows: “Change: Original Comment p has been revised. “Reason for Change: In Evergreens v. Nunan, 1944,141 F.2d 927,152 A.L.R. 1187, Judge Learned Hand defined facts in issue as those facts upon whose combined occurrence the law raises the duty or the right in question and has referred to merely evidentiary facts as mediate data. This seems to be a clear and workable definition of the two classes of facts. Comment p has been amplified so as to include Judge Hand’s terminology.” No subsequent change has been made by the institute on this point.   The term “collateral estoppel” appears neither in the Internal Revenue Code nor in any other part of the United States Code that provides the Congress’ instructions to the courts as to the Internal Revenue Code.