Court Opinion

ID: 4336844
Source: CourtListenerOpinion
Date Created: 2018-11-14 03:02:26.282246+00
Date Added: 2024-06-11T14:47:11.314425
License: Public Domain

T.C. Memo. 2007-349

                      UNITED STATES TAX COURT

                CARMELO MONTALBANO, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

     Docket No.   13873-05.             Filed November 26, 2007.

     James A. Bruton III and Stephen A. Beck, for petitioner.

     Scott A. Hovey, for respondent.

                        MEMORANDUM OPINION

     THORNTON, Judge:   This case is before us on the parties’

cross-motions for summary judgment.    The sole issue for decision

is whether petitioner is liable for the section 6663 fraud
                               - 2 -

penalty for 1994.1   When the petition was filed, petitioner

resided in Florida.2

                             Background

     On January 18, 2000, a Federal grand jury in the U.S.

District Court for the District of New Jersey returned a two-

count indictment against petitioner.     The first count of the

indictment charged that petitioner had knowingly and willfully

attempted to evade and defeat income tax due and owing by him for

1994 in violation of section 7201.     The second count charged

petitioner with filing a false Federal income tax return for 1995

in violation of 18 U.S.C. section 2 (1994).

     By plea agreement dated July 13, 2000, petitioner agreed to

plead guilty to the count for tax evasion, and the U.S. Attorney

agreed to bring no further charges against petitioner for related

crimes.   In the plea agreement, the parties stipulated that at

the time of the offense petitioner was suffering from “a

diminished mental capacity” due to his bipolar disorder and that

     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
     2
       Rule 34(b) requires a petition to contain a noncorporate
petitioner’s legal residence. The petition in this case does not
expressly state petitioner’s legal residence but lists a mailing
address in Florida “c/o Mary Montalbano”. Pursuant to the
convention reflected on Form 1, Petition (Other Than In Small Tax
Case), which requires a statement of legal residence “if
different from the mailing address”, we treat petitioner’s legal
residence as being the same as this Florida mailing address.
                               - 3 -

a downward departure from the sentencing guidelines was therefore

appropriate.

     On July 19, 2000, petitioner appeared before the U.S.

District Court for the District of New Jersey and pleaded guilty

to violating section 7201 with respect to his 1994 return.    In

sworn testimony, petitioner gave the following factual basis for

his guilty plea.   During 1994 and 1995, petitioner was president

and owner of an S corporation known as BHN Corp. (BHN), which was

engaged in providing computer software-related products to the

Dreyfus Corporation.   In 1994, petitioner traveled to the Cayman

Islands and opened a bank account at the Guardian Bank and Trust

(Cayman) in the name of the Cooper Corp. (Cooper).   During 1994,

he diverted about $651,000 of taxable income from BHN by causing

the funds to be deposited into the Cooper account and his

personal bank account in New Jersey.   Petitioner caused BHN to

file a Federal tax return that omitted the $651,000 of income.

Petitioner also intentionally failed to include the $651,000 of

income on his 1994 personal Federal income tax return, in a

knowing and willful attempt to evade and defeat a substantial

part of the income tax due and owing to the United States for

1994.

     The District Court accepted petitioner’s guilty plea and

entered judgment finding him guilty of willfully attempting to

evade or defeat tax in violation of section 7201 and 18 U.S.C.
                                - 4 -

section 2 (1994).   The District Court fined petitioner $30,000

and sentenced him to 3 years’ probation.      In its judgment, the

District Court imposed the maximum fine indicated under the

applicable sentencing guideline range ($3,000 to $30,000) but

departed from the guideline imprisonment range (12 to 18 months)

“based on diminished capacity due to the defendant’s bipolar

disorder.”

     Subsequently, petitioner consented to respondent’s

assessment of $224,455 underlying tax liability for 1994 but

disputed respondent’s proposed imposition of a section 6663 civil

fraud penalty.   By notice of deficiency, respondent determined

that pursuant to section 6663, petitioner is liable for a fraud

penalty of $167,918 for 1994.

                              Discussion

     Respondent has moved for summary judgment on the ground that

petitioner’s criminal conviction under section 7201 collaterally

estops him from contesting his liability for the fraud penalty

under section 6663(a).   Petitioner contends that a finding of

fraud under section 6663 is negated because in his criminal

proceeding the sentencing court found and the Government

stipulated that petitioner committed the offense while suffering

from a diminished mental capacity.      On this ground, petitioner

opposes respondent’s motion for summary judgment and has cross

moved for summary judgment.
                               - 5 -

     Summary judgment is intended to expedite litigation and

avoid unnecessary and expensive trials.     Fla. Peach Corp. v.

Commissioner, 90 T.C. 678, 681 (1988).    Summary judgment may be

granted where there is no genuine issue of any material fact, and

a decision may be rendered as a matter of law.    Rule 121(a) and

(b); see Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520

(1992), affd. 17 F.3d 965 (7th Cir. 1994); Zaentz v.

Commissioner, 90 T.C. 753, 754 (1988).    The moving party bears

the burden of proving that there is no genuine issue of material

fact, and factual inferences will be read in a manner most

favorable to the party opposing summary judgment.     Dahlstrom v.

Commissioner, 85 T.C. 812, 821 (1985); Jacklin v. Commissioner,

79 T.C. 340, 344 (1982).   When a motion for summary judgment is

made and properly supported, the adverse party may not rest upon

mere allegations or denials of the pleadings but must set forth

specific facts showing that there is a genuine issue for trial.

Rule 121(d).

      Collateral estoppel precludes relitigation of any issue of

fact or law that was actually litigated and necessarily

determined by a valid and final judgment.     Montana v. United

States, 440 U.S. 147, 153 (1979).   It is well established that a

final criminal judgment for tax evasion under section 7201

collaterally estops relitigation of the issue of fraudulent

intent in a subsequent proceeding over the civil fraud penalty.
                              - 6 -

See, e.g., Gray v. Commissioner, 708 F.2d 243, 246 (6th Cir.

1983), affg. T.C. Memo. 1981-1; Amos v. Commissioner, 360 F.2d
358 (4th Cir. 1965), affg. 43 T.C. 50 (1964); Tomlinson v.

Lefkowitz, 334 F.2d 262 (5th Cir. 1964); DiLeo v. Commissioner,

96 T.C. 858, 885-886 (1991), affd. 959 F.2d 16 (2d Cir. 1992);

Arctic Ice Cream Co. v. Commissioner, 43 T.C. 68 (1964); cf.

Worcester v. Commissioner, 370 F.2d 713, 718 (1st Cir. 1966)

(improper inducement of defendant’s waiver of right to appeal

criminal judgment tainted the judgment’s finality for collateral

estoppel purposes), affg. in part and vacating in part T.C. Memo.

1965-199.

     Petitioner cites no judicial precedent to the contrary;

rather, he acknowledges, in understated fashion, that the

judicial precedents are “fairly well settled” in this regard.

Furthermore, petitioner acknowledges that “Normally, the

sentencing guideline determination of a District Court that

accepts a section 7201 plea will have no bearing on the outcome

of a civil fraud penalty case under I.R.C. section 6663”.

Petitioner suggests, however, that the application of collateral

estoppel against him is inappropriate in this proceeding because

the downward departure from the imprisonment guideline in his

criminal proceeding “implies” that the District Court and U.S.

attorney found it “appropriate and necessary substantially to

mitigate the severity of the criminal penalties that would have
                                - 7 -

been applicable in the absence of petitioner’s ‘substantially

diminished mental capacity.’”

       Assuming, for sake of argument, that petitioner has

correctly assessed the implications of his criminal sentence

(notwithstanding that the District Court imposed against him the

maximum fine for his offense under the sentencing guidelines),

this does not alter the fact of his criminal conviction, which

conclusively established that he willfully attempted to evade

tax.

       For purposes of both the section 7201 offense and the civil

fraud penalty, the requisite wrongful intent is the intent to

evade tax.    Mitchell v. Commissioner, 118 F.2d 308 (5th Cir.

1941), revg. 40 B.T.A. 424 (1939); DiLeo v. Commissioner, 96 T.C

at 874; Amos v. Commissioner, 43 T.C. 55.3    The only practical

difference between the constituent elements of criminal tax

evasion under section 7201 and civil fraud is the “larger quantum

of proof required in a criminal evasion case”.    Moore v. United

       3
       The statutory predecessor of sec. 6663, sec. 293(b) of the
1939 Internal Revenue Code, specifically referred to “fraud with
intent to evade tax”. Although this language was omitted from
subsequent versions of the civil fraud penalty, this change was
not intended to alter the coverage of the statute or the burden
of proof necessary to establish fraud. See Goodwin v.
Commissioner, 73 T.C. 215, 227 (1979); Bittker & Lokken, Federal
Taxation of Income, Estates and Gifts, par. 114.6, at 114-57 n.16
(2d ed. 1992). This conclusion is buttressed by sec. 7454(a),
which continues to provide, as did its predecessor statute in the
1939 Code, that respondent bears the burden to prove that
petitioner “has been guilty of fraud with intent to evade tax”.
                               - 8 -

States, 360 F.2d 353, 355 (4th Cir. 1965).    Hence, the criminal

conviction necessarily established the requisite wrongful intent

for purposes of the civil sanction.    Amos v. Commissioner, supra;

see also Tomlinson v. Lefkowitz, supra at 265.

     Under well-established judicial precedents, for purposes of

applying collateral estoppel, it is immaterial that petitioner’s

conviction resulted from a plea of guilty to the criminal charges

brought against him rather than from a trial on the merits after

a plea of not guilty.   “A guilty plea is as much a conviction as

a conviction following jury trial.”     Gray v. Commissioner, supra

at 246.   A guilty plea constitutes an admission of all the

elements of the criminal charge.     McCarthy v. United States, 394
U.S. 459, 466 (1969).   “Once accepted by a court, it is the

voluntary plea of guilt itself, with its intrinsic admission of

each element of the crime, that triggers the collateral

consequences attending that plea.”     Blohm v. Commissioner, 994
F.2d 1542, 1554 (11th Cir. 1993), affg. T.C. Memo. 1991-636; see

Manzoli v. Commissioner, 904 F.2d 101, 105 (1st Cir. 1990), affg.

T.C. Memo. 1989-49 and T.C. Memo. 1988-299; Ivers v. United

States, 581 F.2d 1362, 1367 (9th Cir. 1978); Brazzell v. Adams,

493 F.2d 489, 490 (5th Cir. 1974); Plunkett v. Commissioner, 465
F.2d 299, 307 (7th Cir. 1972), affg. T.C. Memo. 1970-274; Metros

v. U.S. Dist. Ct., 441 F.2d 313, 317 (10th Cir. 1970); DiLeo v.
                              - 9 -

Commissioner, supra at 885; Stone v. Commissioner, 56 T.C. 213

(1971).

     Petitioner urges us to depart from these well-established

judicial precedents because of “practical exigencies” that he

contends induced him to enter the plea agreement.   Petitioner

suggests that he was induced to enter the guilty plea because the

Government agreed to stipulate for purposes of sentencing that

petitioner suffered from a diminished mental capacity.   Moreover,

petitioner suggests, in deciding to enter the guilty plea, he was

influenced by his assessment of the operation of the Insanity

Defense Reform Act, 18 U.S.C. section 17(a) (2000).4   He asserts

that this provision would have precluded him from mounting a

“full scale ‘diminished capacity’ defense” in the criminal

proceeding even though he “might have been able to introduce some

evidence relating to his mental condition”.5

     4
       The Insanity Defense Reform Act, 18 U.S.C. sec. 17(a)
(2000), provides:

     Affirmative Defense.--It is an affirmative defense to a
prosecution under any Federal statute that, at the time of the
commission of the acts constituting the offense, the defendant,
as a result of a severe mental disease or defect, was unable to
appreciate the nature and quality or the wrongfulness of his
acts. Mental disease or defect does not otherwise constitute a
defense.

     5
       Petitioner suggests that the United States agreed to
accept the guilty plea because of concerns about petitioner’s
mental health. Although petitioner does not raise this point,
the record also suggests that the United States accepted the
                                                   (continued...)
                              - 10 -

     Petitioner does not suggest, however, that the plea

agreement was wrongfully induced or that there was otherwise any

irregularity or unfairness in the criminal proceeding leading to

the guilty plea.   To the contrary, petitioner states that he “has

no desire to disavow the guilty plea--it is a fact--in this

case.”   Moreover, petitioner does not dispute that he in fact

committed the offense charged in the criminal proceeding.

     Petitioner’s explanations as to why he and the Government

entered the plea agreement are irrelevant under the doctrine of

collateral estoppel.   See Manzoli v. Commissioner, T.C. Memo.

1989-94, affd. 904 F.2d 101 (1st Cir. 1990); see also Blohm v.

Commissioner, supra at 1555-1556; Stone v. Commissioner, supra at

221; Boettner v. Commissioner, T.C. Memo. 1998-359; Hull v.

Commissioner, T.C. Memo. 1982-577.     Moreover, we reject any

suggestion that collateral estoppel is inappropriate because

petitioner’s purported “diminished capacity” defense was

purportedly restricted by the Insanity Defense Reform Act in the

criminal proceeding.   For the reasons previously discussed,

petitioner’s criminal conviction necessarily established that he

had the requisite wrongful intent, and hence the requisite mental

capacity, for imposition of the civil fraud penalty.    To conclude

otherwise would be to assume, contrary to basic principles, that

     5
     (...continued)
guilty plea partly because petitioner agreed to assist the
Government in the criminal prosecution of other parties.
                              - 11 -

a more exacting showing is required to establish the requisite

wrongful intent in this civil proceeding than in the criminal

proceeding.   See Moore v. United States, 360 F.2d at 356 (“the

first proceeding being criminal in nature, it follows that the

burden of proof met by the Government there was more exacting

than that required of it in this civil case”).

     In conclusion, the issue of petitioner’s fraudulent intent

under section 6663(a) is foreclosed by collateral estoppel.

Petitioner does not dispute the underlying tax underpayment.      We

are satisfied that there is no genuine issue of fact requiring a

trial in this case.   Accordingly, we hold that imposition of the

section 6663(a) fraud penalty is proper.    We shall grant

respondent’s motion for summary judgment and deny petitioner’s

cross-motion for summary judgment.

                                           An appropriate order

                                     and decision will be entered.