T.C. Memo. 1995-609
UNITED STATES TAX COURT
ERIC WYNN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16914-91. Filed December 27, 1995.
Eric Wynn, pro se.
Frank A. Racaniello and William F. Halley, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
BEGHE, Judge: Respondent determined the following
deficiencies in and additions to petitioner's Federal income tax:
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Additions to Tax
Sec. Sec. Sec.
Year Deficiency 6653(b)(1) 6653(b)(2) 6661
1983 $79,722 $39,861 1 $19,931
1984 39,785 19,982 1 9,946
1
The addition to tax under sec. 6653(b)(2) is 50 percent of
the interest payable under sec. 6601 with respect to the portion
of the underpayment that is attributable to fraud.
All section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
Petitioner has conceded an increased deficiency of $27,199
for 1983, with corresponding additions to tax for fraud under
section 6653(b)(1) and (2) and for substantial understatement
under section 6661.
After other concessions by the parties, the following issues
remain for decision: (1) Whether and in what amount petitioner
is liable for the fraud additions under section 6653(b)(1) and
(2) for 1983; (2) whether and in what amount petitioner is liable
for the fraud additions under section 6653(b)(1) and (2) for
1984; (3) whether and in what amounts petitioner had unreported
embezzlement income for the years in issue and unreported
consulting income for 1984; (4) in the alternative to the fraud
additions, whether petitioner is liable for additions to tax for
negligence under section 6653(a)(1) and (2) for 1983 and 1984;
(5) whether petitioner is liable for the addition to tax for
substantial understatement under section 6661 for 1983 and 1984;
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and (6) in the alternative to the fraud additions for 1984,
whether petitioner is also liable for an addition to tax for late
filing under section 6651(a).
We hold that: (1) For 1983, petitioner is collaterally
estopped from denying that he committed fraud and is liable for
the section 6653(b)(1) fraud addition because of his guilty plea
to criminal tax fraud, but that petitioner is not liable for the
section 6653(b)(2) fraud addition, except with respect to two
items as to which he both pleaded guilty to criminal tax fraud
and has otherwise conceded; (2) for 1984, petitioner is not
liable for any section 6653(b)(1) or (2) fraud additions; (3)
respondent's deficiency determinations are upheld for both 1983
and 1984; (4) petitioner is liable for additions to tax for
negligence for 1984; (5) petitioner is liable for additions to
tax for substantial understatement for 1983 and 1984; and (6)
petitioner is liable for an addition to tax for late filing for
1984.
FINDINGS OF FACT
The parties have stipulated some of the facts, and the
stipulations of fact and attached exhibits are incorporated in
this opinion. Petitioner resided in Bradford, Pennsylvania, when
he filed his petition.
During the years in issue petitioner was the president of
Renaissance Enterprises, Inc. (Renaissance). Renaissance was
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incorporated by petitioner under Delaware law in 1983 with the
ostensible primary purpose, as stated in its original certificate
of incorporation, of manufacturing and selling jewelry.
Renaissance had an underwritten initial public offering of common
stock that raised $750,000, which was placed in escrow.
Petitioner signed the joint authorization with the president of
the underwriter to pay the net proceeds of the offering,
amounting to $636,631, into a Renaissance bank account.
In 1988, a Federal grand jury returned a 12-count indictment
against petitioner, Mrs. Wynn, and Francis S. LaMagra, alleging,
among other things, criminal tax evasion under section 7201 for
1983 and 1984 and interstate transportation of stolen property
under 18 U.S.C. section 2314 (1988). Petitioner pleaded guilty
to tax evasion under section 7201 with respect to his personal
income tax return for 1983, and to interstate transportation of
stolen property under 18 U.S.C. section 2314 (1988). Petitioner,
in his guilty plea, admitted that he had omitted $85,000 in
taxable income for 1983 with intent to evade tax. The parties
have stipulated that the income petitioner failed to report on
his 1983 tax return included the following corporate funds of
Renaissance that petitioner converted to his personal use: (1)
$54,400 that petitioner transferred by wire from Renaissance to
Major Findings, Inc., on September 22, 1983, resulting in the
increased deficiency and additions that petitioner has conceded;
and (2) a check dated December 16, 1983, drawn on Renaissance's
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checking account made payable to Joe Bass in the amount of
$31,115. Neither of those adjustments is at issue in this case.
Four sets of transactions remain in issue: (A) Funds paid
into a bank account in the name of "Ron Gelfman" in 1983; (B)
Renaissance's purchase of jewelry items from Faleck & Margolies,
Inc., in 1983 and 1984; (C) Renaissance checks made payable to
Weinstock & Yeager in 1983 and 1984; and (D) payments by a
brokerage house, at petitioner's request, into a bank account in
the name of "Joe Bass" in 1984.
A. Ron Gelfman
On September 29, 1983, a person not identified in the record
opened a checking account at the Union City branch of the Trust
Company of New Jersey (the Trust Co.), in the name of Ron Gelfman
(Gelfman account).1 On October 31, 1983, a Renaissance check in
the amount of $68,200 was deposited in the Gelfman account. The
parties have stipulated that Renaissance's corporate records
contain what purports to be a receipt from Ron Gelfman
Associates, dated October 28, 1985,2 reflecting the sale of 14K
"gold findings" to Renaissance in the amount of $68,200.
1
The record is replete with references to the names Ron or
Ronnie Gelfman, Gelman, and Geleman. These are all different
spellings of the same name, and for simplicity we will use
Gelfman to represent all three spellings.
2
Neither party addressed the fact that the receipt was
dated 2 years after the check. This apparent discrepancy does
not affect our decision.
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On November 2, 1983, at petitioner's request, Martin Klein,
an employee of Faleck & Margolies, Inc. (F&M), a jewelry
manufacturer selling at both wholesale and retail, issued an F&M
check for $10,755 to Ron Gelfman. The check bears the printed
statement: "This check is delivered for payment on the following
accounts". Beneath this statement is the handwritten notation
"Gold purchase". This check was deposited in the Gelfman account
at the Trust Co. Mr. Klein has never met a Ron Gelfman and only
made the check payable to him on petitioner's request.
On December 16, 1983, another Renaissance check, in the
amount of $45,000, was deposited in the Gelfman account. The
parties have stipulated that Renaissance's corporate records
contain what purports to be a receipt from Ron Gelfman
Associates, dated December 16, 1983, reflecting the sale of 14K
gold findings to Renaissance at a price of $45,000.
Petitioner opened a brokerage account at Walter Capital
Corp., a securities brokerage firm, in the name of Ron Gelfman.
Petitioner routinely traded in and for this account. Walter
Capital allowed petitioner to use its facilities to trade in
discretionary accounts because it had developed a relationship
with petitioner in which petitioner brought in brokerage business
rather than just acting as a client. This relationship enabled
petitioner to open and trade in discretionary accounts for
others.
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Ron Gelfman Associates is not known in the local jewelry
industry, and the name is not in the IRS computer database for
the greater New York area by either name or employee
identification number (EIN). The Social Security number for Ron
Gelfman on the Trust Co. signature card has never been used on
any Federal tax return filed in the New York/New Jersey
metropolitan area.3
B. Faleck & Margolies, Inc.
F&M operated a retail jewelry division known as "Designs by
Maurice" during the years in question. Occasionally, Maurice
Goldstein, the employee of F&M who operated "Designs by Maurice",
would write receipts on F&M invoices for its retail sales of
personal jewelry.
Petitioner had a close relationship with F&M. Petitioner,
prior to organizing Renaissance, worked with F&M as a contractor,
setting and manufacturing jewelry for F&M. F&M also bought
jewelry items from petitioner. After forming Renaissance,
petitioner continued to do business with F&M, purchasing jewelry
items from F&M until 1985.
3
A Ron Gelfman testified at the criminal trial of Francis
LaMagra. Mr. Gelfman, who lived on the West Coast at the time of
his testimony, testified that he did not have a bank account at
the Trust Co. and that the Social Security number on the account
was not his. He also testified that he was acquainted with
petitioner from high school days, but that he had not seen or
heard from petitioner in over 15 years.
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On or about December 21, 1983, a check in the amount of
$18,077 made payable to F&M was drawn on the Renaissance bank
account. On or about December 21, 1983, a handwritten F&M
receipt dated January 5, 1984, was prepared reflecting the sale
of "assorted jewelry items" in the amount of $18,077 and showing
Renaissance as the purchaser. "Assorted jewelry items" is a term
sometimes used by F&M to describe retail personal jewelry items
and one-of-a-kind pieces. The parties have stipulated that
Renaissance's corporate records contain what purports to be a
duplicate receipt, dated December 12, 1983, reflecting the
purchase of $18,077 worth of 14K gold watch cases. At the time,
F&M did not sell 14K gold watch cases, and the invoice form is
not the usual form used by F&M.
On or about February 11, 1984, a check made payable to F&M
in the amount of $6,750 was drawn on the Renaissance bank
account. On or about February 11, 1984, an F&M receipt was
prepared reflecting the sale of "assorted jewelry items" in the
amount of $6,750 and showing Renaissance as the purchaser. This
receipt has the same form and handwriting as the handwritten
receipt issued in January. Both receipts are the type of invoice
form usually used by F&M. As with the December 1983 transaction,
Renaissance's corporate records contain a duplicate receipt dated
February 1, 1984, for $6,750, for 14K "gold findings". Although
F&M sold gold findings, this invoice form is not the usual form
used by F&M.
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C. Weinstock & Yeager
Weinstock & Yeager (W&Y) is a jewelry firm located in the
Manhattan jewelry district. The parties have stipulated that the
corporate records of Renaissance contain what purports to be a
receipt from W&Y, dated September 13, 1983, reflecting the sale
of 14K gold watch cases to Renaissance in the amount of $1,650.
The parties have stipulated that the corporate records of
Renaissance contain what purports to be a receipt from W&Y, dated
April 15, 1984, reflecting the sale of 14K gold findings to
Renaissance in the amount of $7,050.
D. Joe Bass
On September 14, 1983, petitioner brought in a new checking
account to the Weehawken branch of the Trust Co. for a Joe Bass.
John Schlitt, the branch manager of the Trust Co. who opened the
account, does not recall ever having met anyone named Joe Bass.
As with Ron Gelfman, the Social Security number for Joe Bass on
the Trust Co. signature card has never been used on any Federal
tax return filed in the New York/New Jersey metropolitan area.
In addition to trading securities in accounts at Walter
Capital, see supra p. 6, petitioner did consulting and referral
work for Walter Capital. On March 14, 1984, the manager of
Walter Capital, Frank Grillo, drew a check on Walter Capital's
checking account for $25,000. At petitioner's request, Mr.
Grillo made the check payable to Joe Bass. The check was
deposited in the Joe Bass account at the Trust Co. On April 2,
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1984, Mr. Grillo drew another check on Walter Capital's checking
account to Joe Bass, also at petitioner's request. This check,
for $30,000, was deposited in the Joe Bass account at the Trust
Co. Mr. Grillo never met anyone named Joe Bass, and no one named
Joe Bass ever worked for Walter Capital. The Walter Capital
checks to Joe Bass were not for services rendered directly by
anyone named Joe Bass.
OPINION
Respondent alleges that petitioner embezzled funds from
Renaissance by drawing Renaissance checks (and causing F&M to
issue a check) to a bank account in the name of Ron Gelfman and
failed to report these funds as income on his 1983 Federal income
tax returns. Respondent also alleges that petitioner embezzled
Renaissance funds by drawing Renaissance checks to W&Y and to F&M
in payment for personal jewelry. Finally, respondent claims that
petitioner failed to include fee income that Walter Capital paid
to Joe Bass. The following schedule lists the amounts still in
issue:
1983 1984
Renaissance to Ron Gelfman $68,200 ---
" " " " 45,000 ---
F&M to Ron Gelfman 10,755 ---
Renaissance to F&M 18,077 $6,750
Renaissance to W&Y 1,650 7,050
Walter Capital payments to Joe Bass --- 30,000
" " " " " " --- 25,000
Total: 143,682 68,800
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Respondent has the burden of proof, by clear and convincing
evidence, on the fraud issue; petitioner has the burden of proof,
by a preponderance of the evidence, on the deficiencies and non-
fraud additions. The sparse record of events described in our
findings of fact does not compel a holding in favor of either
party's contentions. Cf. Ishijima v. Commissioner, T.C. Memo.
1994-353. For the reasons described below, we find that
respondent has not proven fraud by clear and convincing evidence
beyond what necessarily flows from petitioner's guilty plea in
the criminal case and his concessions in the case at hand with
respect to the year 1983. Because petitioner offered no proof,
he has not borne his burdens of disproving the deficiencies and
the nonfraud additions.
Issue 1: 1983--Section 6653(b)(1) and (2)
A. Section 6653(b)(1). Section 6653(b)(1) imposes an
addition to tax of 50 percent of the underpayment of tax required
to be shown on the return if any part of the underpayment is due
to fraud. Respondent bears the burden of proving by clear and
convincing evidence that (1) petitioner has an underpayment for
the taxable year, and (2) that some part of the underpayment is
due to fraud. Sec. 7454(a); Rule 142(b); DiLeo v. Commissioner,
96 T.C. 858, 873 (1991), affd. 959 F.2d 16 (2d Cir. 1992); Stone
v. Commissioner, 56 T.C. 213, 220 (1971).
Conviction of criminal tax evasion under section 7201
collaterally estops a taxpayer from denying that the fraud
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addition under section 6653(b)(1) applies to the determined
deficiency. Gray v. Commissioner, 708 F.2d 243 (6th Cir. 1983),
affg. T.C. Memo. 1981-1; Plunkett v. Commissioner, 465 F.2d 299,
305 (7th Cir. 1972), affg. T.C. Memo. 1970-274; Arctic Ice Cream
Co. v. Commissioner, 43 T.C. 68 (1964); Harrison v. Commissioner,
T.C. Memo. 1993-587; Mazzocchi Bus Co. v. Commissioner, T.C.
Memo. 1993-43, affd. 14 F.3d 923 (3d Cir. 1994). The elements of
criminal tax evasion under section 7201 are similar to the
elements of civil tax fraud under section 6653(b), and a guilty
plea is equivalent to a conviction after trial for the purpose of
collateral estoppel. Gray v. Commissioner, supra at 246; Arctic
Ice Cream Co. v. Commissioner, supra at 75.
In 1989, petitioner pleaded guilty to, and was convicted of,
criminal tax evasion for 1983 under section 7201. Therefore,
petitioner is collaterally estopped to deny fraud for 1983, and
petitioner is liable for the section 6653(b)(1) addition to tax
for the entire deficiency for that year.
B. Section 6653(b)(2). Section 6653(b)(2) imposes an
addition to tax of 50 percent of the interest payable under
section 6601 on the part of the underpayment due to fraud. As
with section 6653(b)(1), respondent bears the burden of proving,
by clear and convincing evidence, that petitioner has an
underpayment for the taxable year and that the underpayment is
due to fraud. Sec. 7454(a); Rule 142(b); DiLeo v. Commissioner,
supra; Stone v. Commissioner, supra. However, the interest-
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sensitive addition of section 6653(b)(2) is imposed only on the
portion of the deficiency shown by respondent to be due to fraud.
Therefore, petitioner is collaterally estopped from denying the
interest-sensitive fraud addition only with respect to the
portion of the 1983 deficiency attributable to items that he
admitted in his guilty plea in the criminal trial and conceded in
this case. For any remaining portion of the deficiency,
respondent must prove: (1) That there is an underpayment of tax
and (2) what part of the underpayment is due to fraud. Sec.
7454(a); Rule 142(b); DiLeo v. Commissioner, supra at 873; Stone
v. Commissioner, supra.4
In order to prove an underpayment, the Commissioner cannot
rely on the presumption of correctness of the statutory notice
for deficiency purposes. See DiLeo v. Commissioner, supra at
873. Fraud is never presumed; even if a taxpayer's testimony is
incredible, we may still be left with no more than a suspicion of
fraud. Rinehart v. Commissioner, T.C. Memo. 1983-184.
Suspicion, even a strong suspicion, of fraud will not sustain the
Commissioner's determination.5 See Drieborg v. Commissioner, 225
The Court of Appeals for the Third Circuit has stated that
4
evidence must be so "'clear, direct, weighty and convincing as to
enable the * * * [fact finder] to come to a clear conviction,
without hesitancy, of the truth of the precise facts in issue'".
United States Fire Ins. Co. v. Royal Ins. Co., 759 F.2d 306, 309
(3d Cir. 1985), quoting In re Estate of Fickert, 337 A.2d 592,
594 (Pa. 1975).
See Balter, Tax Fraud and Evasion, par. 8.03[9][a], at 8-
5
71 (1983 & 1994 Supp.).
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F.2d 216, 219-220 (6th. Cir. 1955), affg. in part, revg. and
remanding in part a Memorandum Opinion of this Court; Axelrod v.
Commissioner, T.C. Memo. 1982-92, affd. without published opinion
711 F.2d 1062 (9th Cir. 1983).
Most of the underpayment determined by respondent for 1983
arises from alleged embezzlement income. Embezzled funds, once
reduced to a taxpayer's complete dominion and control, are income
to the taxpayer. James v. United States, 366 U.S. 213 (1961).
However, as we have said:
The Supreme Court's decision in James v. United
States, supra, firmly established the principle that
embezzled funds are income to the embezzler. That
decision, however, does not stand for the proposition
that all misappropriated funds are gross income of the
person who illegally misapplied the funds. The
decision necessarily confines taxation of an embezzler
to circumstances where the embezzler receives a
sufficiently cognizable benefit under the normal
principles of income taxation.
The Court referred to its oft-quoted language
describing the breadth of Congress' intent regarding
the statutory definition of gross income: all
"'accessions to wealth, clearly realized, and over
which the taxpayers have complete dominion and
control'." James v. United States, supra at 219
(quoting Commissioner v. Glenshaw Glass Co., 348 U.S.
426, 431 (1955)). The Court refined this definition by
noting that such gain exists when the "recipient has
such control over it that, as a practical matter, he
derives readily realizable economic value from it."
James v. United States, supra at 219 (quoting Rutkin v.
United States, 343 U.S. 130, 137 (1952)). [Hobson v.
Commissioner, T.C. Memo. 1992-312.]
Jewelry Purchased From F&M
Respondent has not persuaded us by proffering clear and
convincing evidence that the Renaissance payment to F&M was not
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for corporate purposes of Renaissance. Respondent's only witness
to this transaction was Mr. Klein. Mr. Klein testified that the
"assorted jewelry items" on the F&M receipts probably referred to
personal jewelry items; i.e., one-of-a-kind creations. He also
testified that the receipt dated December 12, 1983, listing the
purchase as "14K gold watch cases" was not the usual type of
invoice form used by F&M and that F&M did not sell watch cases.
This testimony, without more, is not clear and convincing
evidence of diversion of corporate funds by petitioner. Even if
the payment was for personal jewelry items, petitioner contends
that they were business gifts on behalf of Renaissance. Mr.
Klein testified that it is common practice in the jewelry
industry to give personal jewelry items as business gifts and
that petitioner sometimes picked up jewelry items for other
people. If the items were Renaissance business gifts, then the
corporate funds used to pay for them were not diverted for
noncorporate purposes, and petitioner would have no embezzlement
income with respect to them.
One way to prove that the payment was not for corporate
purposes is to show that Renaissance received no value in return
for the payment. However, respondent presented no evidence to
show this. Another way to show that petitioner diverted
corporate funds for noncorporate purposes is to show that
Renaissance public shareholders took legal action against him for
the misappropriation. However, respondent also offered no
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evidence that any outside shareholder brought legal action
against petitioner for the F&M payment. There is an indication
in the record that the SEC took some action against petitioner,
but there is no evidence of why it did or the outcome of the
proceeding. Respondent has not proven, by clear and convincing
evidence, that petitioner diverted the F&M payment from
Renaissance for noncorporate purposes. In addition, respondent
has offered no proof that the jewelry items gave petitioner any
economic benefit or accession to wealth. Respondent offered no
testimony that petitioner later sold these items or even that he
or his wife ever received or possessed any of the items.
Respondent also offered no evidence that petitioner ever gave any
of these items as personal gifts on his own behalf. See Estate
of Geiger v. Commissioner, 352 F.2d 221, 231 (8th Cir 1965),
affg. T.C. Memo. 1964-153 (holding that gifts of embezzled funds
evidenced sufficient control to establish an accession to wealth
and taxable income to the embezzling donor). Although we suspect
that petitioner may have acquired control of these items and
appropriated them to his own use, our suspicion, without more, is
no substitute for clear and convincing evidence. Respondent has
failed to carry her burden of proving that the jewelry items
purchased from F&M came under petitioner's control so as to
create income to him that resulted in an underpayment of tax.
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W&Y Payment
We are satisfied that W&Y is a legitimate firm in the
jewelry business. Respondent offered no evidence that the
Renaissance payment to W&Y was not for legitimate corporate
purchases. Nor did respondent offer evidence that the amounts
paid to W&Y or the items purchased from W&Y came under
petitioner's control. Respondent has not proven by clear and
convincing evidence any underpayment of tax resulting from the
W&Y payment.
Payments to Ron Gelfman
Respondent has also failed to prove an underpayment arising
from the payments into the Ron Gelfman checking account at the
Trust Co. There is no evidence, much less clear and convincing
evidence, that these payments were for noncorporate purposes.
Renaissance's corporate records contain receipts from Ron Gelfman
Associates, showing the payments to be for business purchases.
Respondent presented no contrary evidence that these were not
actual Renaissance purchases. Respondent never showed that
Renaissance did not receive value in exchange for the payments.
The facts that the Social Security number on the Gelfman bank
account was not in the Internal Revenue Service computer data
base for the New York metropolitan area and that Ron Gelfman
Associates is not known in the jewelry business may raise
suspicions that someone diverted Renaissance funds for
noncorporate purposes. These facts, however, without more, are
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not clear and convincing evidence that Renaissance funds were
actually so diverted by petitioner.
Moreover, there is no convincing evidence that petitioner
received any accession to wealth from the funds that Renaissance
deposited in the Ron Gelfman bank account. Respondent has not
proven that petitioner controlled the Gelfman bank account. Cf.
Beasley v. Commissioner, T.C. Memo. 1989-173 (holding that
corporate funds diverted into controlled nominee bank accounts
for noncorporate purposes were income).
The only evidence linking petitioner with the Gelfman
account is a notation "I.D. by Eric Wynn" on the bottom of a
check with three endorsements by a Ron Gelfman cashed against the
Gelfman account. This "I.D. by Eric Wynn" does not prove that
petitioner controlled the account or any of the funds deposited
in the Gelfman account. Respondent's witness, Mr. Schlitt,
testified that when a check is endorsed three times it probably
means that the first endorsement is made outside of the bank, the
second is in front of the teller, and the third is in front of a
bank officer. Mr. Schlitt also testified that two people would
have been present for the check to have a triple endorsement and
a second identification. This testimony indicates that someone
signed this check as Ron Gelfman in the presence of a bank teller
and officer. Although we believe that this person was not the
Ron Gelfman who testified at the criminal trial, it is possible
that the person who signed the checks and the signature card
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received the funds. But respondent's proof fails to persuade us
that petitioner was that person or that petitioner actually
received any accession to wealth from the funds. Respondent has
not proven by clear and convincing evidence an underpayment
resulting from the Ron Gelfman payments.
The F&M check to Ron Gelfman also does not help respondent's
case. Mr. Klein testified that he thought the check was for
money that he or F&M owed to petitioner. Even if that is true,
there is no clear and convincing evidence that the payment
resulted in taxable income to petitioner. It could have been
repayment on a loan, in which case, even if petitioner received
the money, it would not be taxable income to him.
Finally, respondent alleges that petitioner's trading in the
Ron Gelfman brokerage account at Walter Capital proves that the
account was a nominee account, and therefore, that the Ron
Gelfman bank account was also a nominee account. This argument
does not rise to the level of clear and convincing evidence.
Respondent's witness, Mr. Grillo, testified that it could have
been an account for an actual customer over which petitioner had
discretionary trading authority. Respondent has failed to prove
by clear and convincing evidence that petitioner received the Ron
Gelfman funds, or acquired any accession to wealth that resulted
in an omission of income and an underpayment of tax.
Respondent has not proven that petitioner had signature
control over the Ron Gelfman bank account. Similarly, respondent
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has not proven that petitioner was more than a mere conduit for
someone else or that he ever received any of the funds at issue
and used them for personal purposes. Nor has respondent
proffered persuasive third-party testimony, as she did in Beasley
v. Commissioner, supra, linking petitioner with the receipt and
use of the diverted corporate funds. Respondent's evidence in
this case, unlike that in Beasley, does not clearly and
convincingly prove embezzlement income. Cf. Roberts v.
Commissioner, T.C Memo. 1993-98 (finding fraud from embezzlement
income where taxpayer used corporate funds to build and improve
personal residences); Hobson v. Commissioner, T.C. Memo. 1992-312
(finding embezzlement income where funds were diverted into
taxpayer's own bank accounts); Davis v. Commissioner, T.C. Memo.
1991-333 (finding embezzlement income where taxpayer used
diverted funds to buy horse for daughter, cars for self and
family, and contributed remaining funds to family owned
corporation).
We need not reach the question of fraudulent intent for 1983
with respect to the unconceded items because respondent has
failed to prove an underpayment for 1983 with respect to any of
those items. Ishijima v. Commissioner, T.C. Memo. 1994-353. We
therefore reject respondent's determination of section 6653(b)(2)
additions for 1983, except with respect to the underpayment
arising from petitioner's concession that he received unreported
income during that year. See supra p. 2.
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Issue 2: 1984--Section 6653(b)(1) and (2)
A. Section 6653(b)(1). Because there was no conviction or
admission for 1984, respondent must prove fraud in order to
sustain the addition to tax for fraud under section 6653(b)(1).
See Drieborg v. Commissioner, 225 F.2d at 219-220 (holding that
the Commissioner's proof of fraud for one year will not sustain
the Commissioner's burden for another year). The F&M and W&Y
transactions are subject to the same analysis for this addition
and year as they are for the 6653(b)(2) addition for 1983. For
the reasons set out supra pp. 14-16 with respect to 1983, we find
that respondent has failed to carry her burden of proving an
underpayment concerning the F&M and W&Y transactions for 1984.
The final items for 1984 are the checks that Walter Capital
made to the order of Joe Bass. These transactions are subject to
traditional analysis used to determine whether there is income:
did petitioner receive the funds so as to have an accession to
wealth, Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955),
or did petitioner earn the fees, Lucas v. Earl, 281 U.S. 111
(1930)?
Although respondent has presented a stronger case on these
transactions than she did on the alleged embezzlement
transactions, she has failed to prove by clear and convincing
evidence that petitioner received the Walter Capital payments.
Respondent put all her effort at trial into trying to show that
the Joe Bass bank account was petitioner's nominee account.
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Respondent's evidence that the Joe Bass account at the Trust
Company was petitioner's nominee account does not rise to the
level of clear and convincing.6 Respondent offered no
handwriting expert to show that the Joe Bass signature was
petitioner's. Indeed, the Government's handwriting expert
testified at the criminal trial that the comparison of
petitioner's handwriting exemplar with the Joe Bass signature was
inconclusive. Also, respondent offered no evidence that
petitioner ever withdrew any funds from the Joe Bass account.
Respondent has also failed to prove by clear and convincing
evidence that the check payments to the order of Joe Bass
represent consulting fees earned by petitioner. Respondent's
only witness concerning these transactions, Mr. Grillo, could not
remember what, if any, services were performed for these
payments. However, he also testified that petitioner helped
secure loans for Walter Capital. Mr. Grillo's equivocal
testimony leaves us unpersuaded that respondent has sustained her
burden. Mr. Grillo further testified that Walter Capital did
issue a Form 1099 regarding these payments and that it would
indicate the reason for the payments and the person receiving
them. Mr. Grillo testified that he believed that the Form 1099
6
Petitioner did plead guilty in the criminal case, and has
stipulated in this case, to receiving the Renaissance check to
Joe Bass for $31,115 during 1983, and its inclusion in his
income. This does not, however, constitute clear and convincing
proof that other funds paid into the Joe Bass account went to or
were under the control of petitioner.
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was included with the records turned over to the U.S. attorney's
office for the criminal trial. However, respondent has failed to
produce any Form 1099.
The facts of this case raise the suspicion that petitioner
earned and received fees from Walter Capital that were paid in
the form of checks to the order of Joe Bass. However,
respondent's reliance on one witness who could not recollect the
events surrounding the payments and her failure to provide any
additional documentary evidence, in the form of the Form 1099,
does not elevate our suspicion to the level of certitude required
by the clear and convincing standard. Respondent has failed to
persuade us that there is any underpayment with respect to the
Walter Capital checks to the order of Joe Bass.
We need not reach the question of fraudulent intent for 1984
because respondent has failed to prove an underpayment for 1984.
Because respondent has failed to prove by clear and convincing
evidence that petitioner had an underpayment resulting from the
F&M jewelry purchase, the purchase from W&Y, or the Walter
Capital payments, we find no section 6653(b)(1) addition to tax
for fraud for 1984.
B. Section 6653(b)(2). Nor do we uphold a section
6653(b)(2) addition to tax for 1984. By dint of the foregoing
section 6653(b)(1) analysis, we have concluded that respondent
has not carried her burden of proving by clear and convincing
evidence that there is any underpayment for 1984 that was due to
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fraud. We therefore reject respondent's determination of a
section 6653(b)(2) addition to tax for 1984.
Issue 3(a): Deficiencies Attributable to Embezzlement Income7
Respondent's deficiency determinations are presumed to be
correct; petitioner bears the burden of proving by a
preponderance of the evidence that they are incorrect. Rule
142(a); Welch v. Helvering, 290 U.S. 111 (1933).
The evidence proffered by respondent on the underpayments
for fraud purposes was pretty thin gruel; less nourishing to the
point of nonexistence is the case that petitioner presented.
Petitioner failed to carry the burden of overturning the
deficiencies determined by respondent. Petitioner did not prove
that any of the payments to Ron Gelfman, F&M, or W&Y was for a
corporate purpose of the payor. There was no proof that any
Renaissance checks to Ron Gelfman or W&Y were supported by any
actual purchases of jewelry or supplies by Renaissance. The
checks to F&M do reflect actual purchases, but they are purchases
of personal jewelry items, and petitioner did not show what
happened to those items. Petitioner did not prove that the
7
Respondent also determined that petitioner overstated his
itemized deductions for 1984 in the amount of $17,905.
Petitioner presented no evidence at trial on this issue and did
not mention it in his brief. Therefore, petitioner is deemed to
have conceded this issue. In his petition, petitioner argues
that his earlier guilty plea to tax evasion was in full
settlement of all tax liabilities, criminal and civil.
Petitioner has shown no evidence that the plea had any such
effect; we find this contention to be without merit and likewise
conceded because it was not argued at trial.
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jewelry items were business gifts. Petitioner did not provide
any explanation or evidence to show that the preparation of the
duplicate receipts for the F&M transactions did not amount to a
falsification of documents for the purpose of concealing
diversions of corporate funds. Petitioner has not sustained his
burden of proving that any of the payments in question were not
includable in his gross income.
Although respondent offered no clear and convincing proof
that the funds or jewelry came under petitioner's control or
created an accession to petitioner's wealth, petitioner offered
no proof to the contrary, which it was his burden to do in order
to overturn respondent's deficiency determinations. Petitioner
also failed to provide any evidence to show that the F&M payment
to Ron Gelfman was not income to him. Petitioner has failed to
carry his burden of proof. We uphold respondent's determinations
that petitioner had unreported embezzlement income for 1983 and
1984.
Issue 3(b): Walter Capital Payments
Petitioner offered no proof that he did not receive the
Walter Capital payments to the order of "Joe Bass" in 1984.
Petitioner opened the bank account at the Trust Co. in the name
of Joe Bass. He told Mr. Grillo to make the checks payable to
Joe Bass. Petitioner called no witness at trial that knew or
knew of Joe Bass and presented no evidence other than his self-
serving assertions that he did not receive these funds, while
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there is contrary evidence that petitioner did work for Walter
Capital that was a likely source of income from services
rendered. Cf. Armes v. Commissioner, 448 F.2d 972 (5th Cir
1971), affg. in part, revg. and remanding in part T.C. Memo.
1969-181. Petitioner's self-serving testimony is insufficient to
carry the day for the purpose of disproving respondent's
deficiency determination. Tokarski v. Commissioner, 87 T.C. 74,
77 (1986). Petitioner has failed to meet his burden of proving
that he did not receive the amounts paid to the Joe Bass account
by Walter Capital and that they did not constitute income to him.
We uphold respondent's 1984 deficiency determinations with
respect to the Joe Bass items.
Issue 4: Section 6653(a)(1) and (2)--Negligence
Section 6653(a) provides for an addition to tax if any part
of the underpayment is due to negligence or intentional disregard
of rules and regulations. Section 6653(a)(1) provides for an
addition of 5 percent on the entire deficiency if any part of the
deficiency is due to negligence or intentional disregard of rules
and regulations, and section 6653(a)(2) provides for an addition
equal to 50 percent of the interest due on any part of the
deficiency due to negligence. Sec. 6653(a)(1) and (2). However,
section 6653(b)(3) obviates the addition under this subsection
when there is an addition for fraud under subsection (b) for the
same year. Miller v. Commissioner, 94 T.C. 316, 332 (1990).
Because the fraud addition arising from petitioner's guilty pleas
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and concessions obviates the negligence addition for 1983, we
need only address section 6653(a) for the year 1984.
For the purpose of section 6653(a), negligence has been
defined as the failure to do what a reasonable and ordinarily
prudent person would do under the circumstances. Emmons v.
Commissioner, 92 T.C. 342, 349 (1989), affd. 898 F.2d 50 (5th
Cir. 1990); Neely v. Commissioner, 85 T.C. 934, 947 (1985).
Petitioner has the burden of proving by a preponderance of the
evidence that he did not act negligently or with intentional
disregard of rules and regulations. Rule 142(a); Luman v.
Commissioner, 79 T.C. 846, 860-861 (1982); Bixby v. Commissioner,
58 T.C. 757, 791 (1972).
The evidence supports the conclusions that petitioner acted
negligently and intentionally disregarded the rules and
regulations for 1984. Petitioner failed to submit any evidence
to show that he had any reasonable basis for the substantial
omissions from his income tax return for 1984. Petitioner has
not carried his burden of proving that he acted reasonably or
prudently with respect to his income tax obligations for 1984.
Therefore, we hold that petitioner is liable for the
additions to tax under section 6653(a)(1) and (2) for negligence
or intentional disregard of rules and regulations.
Issue 5: Section 6661 Additions--Substantial Understatement
Respondent also determined additions to tax for substantial
understatement of income tax under section 6661. For the years
- 28 -
1983 and 1984, section 6661(a) imposes an addition to tax equal
to 10 percent of the underpayment attributable to the
understatement for that year. An understatement is substantial
if it exceeds the greater of 10 percent of the tax required to be
shown or $5,000. Sec. 6661(b)(1)(A). An "understatement" is
defined as the excess of the tax required to be shown on the
return over the tax actually shown on the return, but the
understatement is reduced if and to the extent that the taxpayer
either had substantial authority for, or adequately disclosed,
the tax treatment shown on the return. Sec. 6661(b)(2).
Respondent's determination of the addition is presumed to be
correct, and petitioner bears the burden of proving that he is
not liable for the addition. Rule 142(a).
If the taxpayer shows that there was reasonable cause for
the understatement and that he acted in good faith, the Secretary
may waive all or any part of the addition to tax under section
6661(a). Sec. 6661(c). In this Court, the taxpayer must prove
that the Secretary abused his discretion by denying the waiver of
the section 6661(a) addition to tax. Mailman v. Commissioner, 91
T.C. 1079, 1083-1084 (1988). To carry this burden petitioner
must show (I) that he requested a waiver under section 6661(c),
Klieger v. Commissioner, T.C. Memo. 1992-734, (ii) that
respondent refused the request, id., and (iii) that respondent's
refusal to waive the addition to tax was arbitrary, capricious,
- 29 -
or without sound basis in fact, Mailman v. Commissioner, supra at
1084.
Petitioner did not provide any evidence to show that he had
authority for the understatements of income on his 1983 and 1984
income tax returns. Petitioner did not disclose any part of the
underpayments for these years. Petitioner did not provide any
evidence that he requested a waiver or that respondent denied any
such request. Even if petitioner had requested a waiver, the
lack of evidence in the record indicates that he would not have
been able to show reasonable cause for the understatements or
that he acted in good faith. Respondent's determinations of
section 6661(a) additions to tax for 1983 and 1984 will be
sustained, subject to recomputation under Rule 155.
Issue 6: Section 6651(a)--Late Filing
Section 6651(a) provides for an addition to tax where a
taxpayer files a tax return after the due date. The addition is
equal to 5 percent of the underpayment for every month the return
is late, with a maximum of 25 percent. If the Commissioner
determines this addition in the deficiency notice, the taxpayer
bears the burden of proving that the return was timely filed, or
that his failure to file was due to reasonable cause and not
willful neglect. Rule 142(a); United States v. Boyle, 469 U.S.
241, 245 (1985); Wm. J. Lemp Brewing Co. v. Commissioner, 18 T.C.
586, 591-592 (1952).
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Respondent determined in her notice of deficiency that
petitioner is liable for additions to tax under section 6651(a)
in amounts equal to 25 percent of the underpayments for 1983 and
1984. In her answer, respondent conceded that this addition was
not due for 1983. On brief, respondent conceded that if we
determine that petitioner is not liable for the addition to tax
for fraud under section 6653(b) for 1984, then petitioner is
liable for no more than a 10-percent addition to the underpayment
under section 6651(a).
Petitioner offered no proof that he timely filed his return
for 1984, or that the late filing was due to reasonable cause and
not willful neglect. Petitioner has not carried his burden. We
therefore sustain respondent's determination that petitioner is
liable for the 10 percent addition to tax under section 6651(a)
for 1984.
To reflect the foregoing,
Decision will be entered under
Rule 155.