Toushin v. Commissioner

T.C. Memo. 1995-573

UNITED STATES TAX COURT

STEVEN H. TOUSHIN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 21724-92. Filed November 30, 1995.

Angelo Ruggiero and Michael R. Esposito, for petitioner.

Karen P. Wright and Donna C. Hansberry, for respondent.

MEMORANDUM OPINION

DEAN, Special Trial Judge: This case was assigned pursuant

to section 7443A(b)(4) of the Code and Rules 180, 181, and 183.1

1
All Rule references are to the Tax Court Rules of Practice
and Procedure. All section references are to the Internal
Revenue Code as amended and in effect during the years in issue.
 - 2 -

The case is before the Court on petitioner's motion for partial

summary judgment filed March 10, 1995, pursuant to Rule 121.

Respondent determined deficiencies in petitioner's Federal

income tax and additions to tax as follows:

Additions to Tax
Year Deficiency Sec. 6653(b) Sec. 6661
1980 $25,265 $16,983 --
1981 34,220 25,018 --
1982 21,196 10,598 $5,299

The statutory notice in this case was issued on July 1,

1992. Petitioner's motion is directed only to the deficiency and

additions to tax determined under the notice for the year 1982.

The "normal" 3-year statute of limitations under section 6501(a)

has expired for taxable year 1982. Based upon the allegations in

respondent's amended answer, the deficiency and additions to tax

determined by respondent for the year 1982 may only be assessed

if the "fraud" exception of section 6501(c)(1) applies. In his

motion, petitioner alleges that based upon the affidavits

submitted, the facts stipulated by the parties, and the pleadings

and attachments thereto, respondent as a matter of law cannot

meet her burden of proving fraud, and the Court must enter

summary judgment in favor of petitioner for the year 1982.

For the reasons set out below, we find that there is a

genuine issue of material fact as to whether there is an

understatement of tax due to fraud with respect to petitioner's

tax return for the year 1982.
 - 3 -

Background

The facts set forth below are based on the stipulation of

facts with attached exhibits, first supplemental stipulation of

facts with attached exhibits, and the affidavits submitted by the

parties.2

Petitioner resided in Chicago, Illinois, at the time the

petition in this case was filed.

Operation of the Businesses

From May of 1978 through December of 1982 petitioner was

president and owner of 100 percent of the stock of Entertainment

& Amusement, Inc., an Illinois corporation (hereinafter referred

to as E & A of Illinois). E & A of Illinois operated a business

known as the Bijou Theatre, located in Chicago, Illinois. The

Bijou Theatre exhibited movies, sold video cassettes, and

beginning in 1981, sold other items in the lobby of a building

located on North Wells Street in Chicago.

On October 1, 1981, a business by the name of Entertainment

& Amusement, Inc. was incorporated in the State of California (E

& A of California). E & A of California changed its name to

2
On April 11, 1995, 2 days prior to the hearing on this
motion, respondent filed a response to petitioner's reply to
respondent's objection to petitioner's motion for partial summary
judgment, attaching an affidavit from Special Agent James McGuire
and a transcript of the record of the proceedings in United
States v. Toushin, No. 87 CR 206-1 (N.D. Ill. verdict rendered
October 27, 1988), reversed and remanded 899 F.2d 617 (7th Cir.
1990). We have not found it necessary to rely on the transcript
submitted by respondent in reaching our decision on this motion.
 - 4 -

Savage Management, Inc. (Savage) on September 1, 1982. On

corporation papers filed with the State, the president of E & A

of California and later of Savage was listed as Walter Killeen.

Two hundred shares of stock of E & A of California were issued in

the name of Walter Killeen on August 10, 1982.3 E & A of

California, and subsequently Savage, operated under the name of

"The Screening Room".4

From May 1981 through March of 1982, checking account number

332-232 in the name of Walter Killeen Company was maintained at

Oak Trust & Savings Bank (Oak Trust) in Chicago. Petitioner was,

along with Walter Killeen, a signatory on this account.5

From 1978 through the year 1982 petitioner also maintained his

personal checking account, number 501-344, at Oak Trust.6

Petitioner was a signatory on other Oak Trust checking

accounts held in the names of E & A of Illinois, Toushin &

3
On the Savage Form 1120, U.S. Corporation Income Tax
Return, filed May 31, 1983, there are attached schedules
declaring petitioner to be the sole shareholder of the reporting
corporation for fiscal year ending September 30, 1982. See infra
note 11.
4
Fictitious Business Name Statements were filed with the San
Francisco County Superior Court first by E & A and then by
Savage.
5
Based upon a visual examination of copies of canceled
checks that are exhibits stipulated by the parties, all the
checks written on this account appear to be signed by petitioner.
6
The parties have stipulated and attached as exhibits copies
of bank statements, cancelled checks, deposit slips, and
associated miscellaneous items for this account for the years
1978 through 1982.
 - 5 -

Company, Real Estate Management, Gold Distribution Company, and

Walter Killeen Company.7

In addition to the various Oak Trust accounts, petitioner

was signatory on a checking account in the name of Anthony J.

Medina, Jr. Co. at Northern Trust Company in Chicago and for part

of the year 1982 had signature authority on a checking account in

the name of Toushin & Company at Chemical Bank in New York City.8

Petitioner's Cash Transactions

On his individual Federal income tax return, Form 1040,

filed for the year 1982, petitioner reported income from wages,

capital gains from the sale of films, and rental income.9 During

1982, E & A of Illinois loaned $11,110 in cash to petitioner.

The parties have stipulated that "petitioner wrote no checks to

cash" during 1982, cashed no salary checks during that year, and

"received no cash back on deposits" in 1982.

Despite the apparent paucity of sources of cash, during the

year 1982 petitioner came into possession of relatively large

amounts of currency. He deposited $3,260 in cash into his

7
The parties have stipulated copies of various bank records
as exhibits associated with these respective checking accounts.
8
The parties have stipulated copies of various bank records
as exhibits associated with these respective checking accounts.
9
We have determined from the stipulation that petitioner's
wages were paid by check. Since petitioner has raised no
argument to the contrary, for purposes of this motion, we will
assume that the other income items reported on the return were
also paid by check.
 - 6 -

personal checking account, $2,100 in cash into the Walter Killeen

checking account, and currency in the amount of $12,285 into the

Anthony J. Medina, Jr. Co. account. In addition, petitioner made

various expenditures of cash for personal items during 1982, and

purchased with currency 232 personal money orders totaling

$82,477.89 from Oak Trust10.

Of the 232 personal money orders purchased by petitioner

during the year 1982, 65 money orders totaling $29,585.51 were

used to pay expenses of Savage, and another 49 were deposited

into accounts of Savage Management, Inc. With the exception of a

de minimis amount, the funds deposited into the Walter Killeen

Co. account during 1981 and 1982 were used to pay expenses of

Savage. Also, with the exception of a de minimis amount, the

funds deposited in the Northern Trust account in the name of

Anthony J. Medina, Jr. Co. in 1981 and 1982 were used to pay

expenses of Savage.

The Criminal Investigation and Subsequent Proceedings

Sometime in the year 1982, petitioner came under

investigation by the Criminal Investigation Division of the IRS.

10
The parties have stipulated as an exhibit a copy of a
document containing pages pertinent to the year 1982. The pages
are separately titled, "Personal Money Orders Purchased With Cash
By Steven Toushin At The Oak Bank and Trust" and "Personal Money
Orders Purchased With Cash By Steven Toushin At The Oak Bank and
Trust [,] Handwriting Examined". Also stipulated are exhibits
consisting of photocopies of money orders and other associated
materials.
 - 7 -

On January 6, 1983, Special Agents of the IRS served petitioner

with a subpoena related to the investigation.

On May 31, 1983, Savage (formerly E & A of California) filed

a Form 1120, U.S. Corporation Income Tax Return, for the fiscal

year ending (FYE) September 30, 1982. Petitioner signed the

return as "Pres."11 Included in the gross receipts reported on

the return of Savage were all currency and money order deposits

to the Killeen and Medina accounts12 and all expenditures by

money order for corporate expenses13.

On March 23, 1987, petitioner was indicted in the United

States District Court for the Northern District of Illinois on 3

counts of violations of section 7206(1).14 In the indictment,

petitioner was accused of filing false individual income tax

returns which understated his taxable income for each of the

11
Petitioner dated his signature as 6/1/83. On Schedule J
of the return, line H(2) indicates that an individual or entity
owns 100% of the voting stock of Savage, the reporting
corporation. Also attached to the return is a schedule entitled,
"Other Business Deductions" on which it is noted that the
individual with 100% ownership of Savage voting stock is "Steven
Toushin". The record contains no documentation on the change of
corporate presidency or nominal ownership of Savage stock from
Mr. Killeen to petitioner.
12
Reported gross receipts of Savage also included deposits
of money orders into various bank accounts at the "Hibernia Bank"
held in the name of either E & A of California or Savage.
13
The corporate expenses were deducted at the appropriate
place on the Form 1120.
14
United States v. Toushin, No. 87CR206-1 (N.D. Ill. filed
Mar. 26, 1987).
 - 8 -

years 1980, 1981, and 1982. After a jury trial, petitioner was

convicted on all counts. He appealed his convictions, see United

States v. Toushin, 899 F.2d 617 (7th Cir. 1990), and the case was

reversed and remanded by the Court of Appeals.

On August 8, 1991, petitioner signed a "Plea Agreement" with

the Government. In the agreement he acknowledged that during the

year 1980 he received income from skimming cash proceeds from

E & A of Illinois. Petitioner further acknowledged that he knew

he was required to report as income, but knowingly did not

include, the skimmed proceeds on his joint individual tax return

for the year 1980. The District Court accepted petitioner's

plea, entered judgment against him on count one and dismissed

counts two and three concerning the years 1981 and 1982.

In her notice of deficiency, respondent determined that

petitioner had unreported income for the years 1980, 1981, and

1982 attributable to funds diverted from E & A of Illinois.

Further, respondent affirmatively alleges in her amended answer

that petitioner in all 3 years received and fraudulently failed

to report income in the form of "diverted receipts or, in the

alternative, constructive dividends" from E & A of Illinois.

Discussion

Arguments Of The Parties

In support of his motion for partial summary judgment,

petitioner argues that, as a matter of law, respondent cannot
 - 9 -

show fraud for the year 1982 because: (a) Respondent cannot show

an understatement of tax for the year;15 and (b) if there is an

understatement of tax, respondent cannot show that it is due to

petitioner's fraud.

Of the $101,838 total cash expenditures ascribed to him in

1982, petitioner argues that $57,981 was from sources reported on

his return, leaving respondent with $43,857 of "excess"

expenditures to treat as unreported income.16 He relies on the

filing of the Savage return in 1983 to explain the source of

these funds. Petitioner argues that the "correct" analysis

requires that the amounts reported on Savage's return be

"removed" from respondent's cash expenditures analysis for 1982.

Petitioner then would have nontaxable sources in excess of cash

expenditures. Respondent can prove that petitioner understated

his income in 1982, "only if respondent can persuade this Court

that petitioner, and not Savages [sic] or even Entertainment &

Amusement, Inc., should have reported the cash", contends

petitioner.

15
Although this argument is raised in the "Relevant Facts"
portion of petitioner's motion rather than that part denominated
"Law and Argument", we shall, nevertheless, treat it as if it
were legal argument.
16
The cash expenditures respondent computed for petitioner
include the deposits to the Killeen and Medina accounts and cash
expenditures for money orders which were reported on Savage's FYE
9/30/82 return.
 - 10 -

Petitioner further argues that even if the Court is

persuaded that he understated his income, reporting the income on

the Savage return negates, as a matter of law, fraudulent intent

on his part.

Respondent's argument in reply does not address petitioner's

allegation that there is no understatement of tax. She frames

the question to be decided solely as an issue of intent.

According to respondent, there is a genuine issue of material

fact as to petitioner's fraudulent intent in filing his 1982 Form

1040. Since intent is at issue, respondent concludes that the

matter is not appropriate for summary judgment.

Standard for Granting Summary Judgment

The standard for granting a motion for summary judgment

under Rule 121 is stated in the rule itself.

A decision shall * * * be rendered if the pleadings,
answers to interrogatories, depositions, admissions,
and any other acceptable materials, together with the
affidavits, if any, show that there is no genuine issue
as to any material fact and that a decision may be
rendered as a matter of law. * * * [Rule 121(b).]17

The moving party has the burden of "showing" the absence of

a genuine issue as to any material fact. See Espinoza v.

Commissioner, 78 T.C. 412, 416 (1982) and cases cited therein.

17
Rule 121 is derived from Fed. R. Civ. P. 56. Therefore,
authorities interpreting the latter will be considered by the
Court in applying our Rule. Espinoza v. Commissioner, 78 T.C.
412, 415-416 (1982).
 - 11 -

In Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986), the

Supreme Court described the "showing" that must be made by the

moving party:

a party seeking summary judgment always bears
the initial responsibility of informing the
* * * court of the basis for its motion, and
identifying those portions of "the pleadings,
depositions, answers to interrogatories, and
admissions on file, together with the
affidavits, if any," which it believes
demonstrate the absence of a genuine issue of
material fact. * * *

In Celotex, the Supreme Court held that the moving party in

a summary judgment action need not in all cases introduce

evidence negating an essential element of the opponent's claim in

order to prevail on the motion. If the moving party, after

adequate time for discovery, can make a "showing" from the record

of "a complete failure of proof concerning an essential element

of the nonmoving party's case" and on which the nonmoving party

will bear the burden of proof at trial, there can be "'no genuine

issue as to any material fact,'" with respect to that claim. Id.

at 322-323.18

Petitioner at pages 4 and 5 of his reply to respondent's

objection to petitioner's motion, attempts to bring his case

18
See also Fontenot v. Upjohn Co., 780 F.2d 1190, 1195 (5th
Cir. 1986), a case cited by the Court in Celotex Corp. v.
Catrett, 477 U.S. 317 (1986), wherein it is stated: "If the
moving party can show that there is no evidence whatever to
establish one or more essential elements of a claim on which the
opposing party has the burden of proof, trial would be a bootless
exercise, fated for an inevitable result".
 - 12 -

within the rule of Celotex,19 by arguing that "respondent has

offered not a shred of evidence to oppose petitioner's motion".

Petitioner's assertion that at trial respondent must prove

fraud by clear and convincing evidence is correct. Rule 142(b);

sec. 7454(a); Stone v. Commissioner, 56 T.C. 213, 220 (1971).

Furthermore, petitioner is correct in stating that unless

respondent proves petitioner's fraud, the statute of limitations

precludes the assessment of any deficiency for tax year 1982.

Sec. 6501(a), (c)(1). It is also true that as part of her burden

in the trial of a fraud case, respondent must first prove an

underpayment of some amount of tax. Sec. 6653(b). As this Court

has recognized, "Absent an underpayment, there is nothing to

which the fraud addition may attach." Apothaker v. Commissioner,

T.C. Memo. 1985-445; Hebrank v. Commissioner, 81 T.C. 640, 642

(1983) (first element to be established is an underpayment of

tax). In opposing this motion, respondent stressed the intent

element and ignored the underpayment element of fraud.

Nevertheless, respondent and petitioner have filed with the Court

stipulated facts and documents related to both elements.20

19
See also Anderson v. Liberty Lobby, Inc., 477 U.S. 242
(1986) for a description of the nonmoving party's burden of proof
once the moving party has made a proper showing under the rule of
Celotex Corp v. Catrett, supra.
20
Petitioner's written submissions and oral argument at the
hearing on this motion suggest that the documents and facts
stipulated by the parties are not to be considered as "evidence"
or "facts" presented by respondent. Petitioner cannot seriously
(continued...)
 - 13 -

Showing of a Genuine Issue of Material Fact

The underpayment element of fraud

In its present state, the record shows that petitioner used

$82,477 in cash to purchase 232 money orders in 1982. In

addition, the parties have stipulated to certain cash

expenditures for personal items by petitioner and his deposits of

currency to accounts he controlled during 1982. Petitioner has

admitted by way of stipulation that he wrote no checks to cash in

1982, got no cash back from deposits in 1982, and was paid only

$11,110 in cash (as a loan) by E & A of Illinois in 1982. An

examination of his individual tax return for the year reveals no

apparent source of cash receipts. Thus, petitioner has

unexplained currency expenditures for the year 1982 and the

record in its present state is devoid of any evidence of

nontaxable sources of cash except for the above noted loan.

The record suggests that the amount by which petitioner's cash

expenditures21 exceed his known sources of income for 1982 is

taxable income. See Meier v. Commissioner, 91 T.C. 273 (1988);

20
(...continued)
argue that stipulations do not fall into the category of
"pleadings, answers to interrogatories, depositions, admissions,
and any other acceptable materials", Rule 121(b). Under our
Rules "A stipulation shall be treated * * * as a conclusive
admission by the parties to the stipulation", Rule 91(e),
emphasis supplied. See, e.g., Noneman v. Commissioner, T.C.
Memo. 1978-283.
21
Cash bank deposits are another form of cash expenditure.
Meier v. Commissioner, 91 T.C. 273, 295 n.28 (1988).
 - 14 -

Salls v. Commissioner, T.C. Memo. 1992-547, affd. without

published opinion 26 F.3d 1120 (11th Cir. 1994).

The intent element of fraud

The parties have stipulated for the years 1980 and 1981

facts similar to those of 1982. These facts show an apparent

pattern of unexplained (at this point in the proceedings) cash

expenditures and deposits by petitioner.

Petitioner makes much of the stipulation that certain cash

amounts possessed by petitioner in 1982 were "reported as income"

on the return of Savage. According to petitioner, these cash

amounts were "earned" by Savage,22 and since the cash was

Savage's income, petitioner had no duty to report it.23

Petitioner concludes that he therefore could not have committed

fraud, and if he did have a duty to report additional income on

22
This argument is without evidence in the record other than
the reporting position of Savage on the FYE 1982 return. This
return position is not binding on the Court. "In answering the
question of who earned income, it is our task to consider what
was actually done, rather than simply the declared purpose of the
participants". Shaw v. Commissioner, 59 T.C. 375, 383 (1972).
23
Petitioner comes to the erroneous legal conclusion that
amounts reported as income by a corporation, Savage, cannot have
been income to another party, i.e., himself. We will not attempt
to catalog all the situations which contradict such a conclusion
but cite for consideration, Truesdell v. Commissioner, 89 T.C.
1280 (1987) (amounts diverted from taxpayer's corporation and
used for expenses for another business owned by taxpayer were
taxable income to taxpayer); Burke v. Commissioner, T.C. Memo.
1987-434, affd. without published opinion sub nom. New Resources
v. Commissioner, 857 F.2d 1471 (5th Cir. 1988). (taxpayer's use
of corporate funds as capital investment in new corporation,
stock of which was held in his own name, was income to him as a
constructive dividend).
 - 15 -

his personal return, his failure to do so was an honest mistake.

Respondent views differently the same evidence.

Respondent argues that the cash amounts represent earnings

of E & A of Illinois skimmed by petitioner as "diverted

receipts", or constructive dividends, that petitioner should have

reported as taxable income on his personal return. Respondent

argues that the Savage return only reported the disputed amounts

after petitioner discovered he was under criminal investigation

by the IRS and is itself an act in continuation of petitioner's

fraud for the year 1982.

Even where the nonmoving party on a motion for summary

judgment would have the burden of proof at trial on an issue, she

is entitled to have the most favorable inferences drawn in her

behalf and to be given the benefit of favorable legal theories

invoked by the evidence. Anderson v. Liberty Lobby, Inc., 477

U.S. 242, 255 (1986); Charbonnages de France v. Smith, 597 F.2d

406, 414 (4th Cir. 1979).

The present record indicates a 3-year pattern of unexplained

excess cash expenditures by petitioner as well as extensive uses

of currency. In addition, we cannot overlook petitioner's

stipulation to pleading guilty to the criminal violation of

filing a false individual income tax return for the year 1980.

In a signed plea agreement with the Government, petitioner

admitted receiving income from "skimming cash proceeds from
 - 16 -

Entertainment & Amusement, Inc." which he knew he was required to

report but nevertheless did not.24

Finally, we have previously described other facts in the

record from which a trier of fact might infer attempts by

petitioner to conceal assets. These are all potential "badges of

fraud".25

Conclusion

Petitioner seems to believe that factual ambiguities in the

record require a decision in his favor on this motion. However,

when considering a motion for summary judgment, "the judge's

function is not himself to weigh the evidence and determine the

truth of the matter but to determine whether there is a genuine

issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242,

249 (1986); accord Shiosaki v. Commissioner, 61 T.C. 861, 862

(1974).

Petitioner has neither produced evidence negating an

essential element of respondent's case, nor has he shown a

24
Petitioner's criminal conviction for 1980 is admissible
and may be relevant to prove "motive, opportunity, intent,
preparation, plan, knowledge, identity, or absence of mistake or
accident". Fed. R. Evid. 404(b).
25
See Bradford v. Commissioner, 796 F.2d 303, 307 (9th Cir.
1986), affg. T.C. Memo. 1984-601 (recites a nonexclusive list of
"badges of fraud"); Padow v. Commissioner, T.C. Memo. 1987-250,
affd. without published opinion 843 F.2d 1388 (4th Cir. 1988).
(prior conviction for criminal tax violation for first of 3 years
was evidence of fraudulent intent for remaining 2 years), citing
Farber v. Commissioner, 43 T.C. 407, 421 n.10, modified 44 T.C.
408 (1965).
 - 17 -

"complete failure of proof" in the record on an essential element

of respondent's case. Petitioner has failed to make the initial

showing required by Rule 121(b) and Celotex Corp. v. Catrett, 477

U.S. 317 (1986). We, as a result, find that petitioner has

failed to show that there is no genuine issue as to any

materialfact and that a decision may be rendered as a matter of

law as to the deficiency and additions to tax for the year 1982.

We therefore deny petitioner's motion for partial summary

judgment.

An appropriate order

will be issued.