T.C. Memo. 1997-139
UNITED STATES TAX COURT
CHARLES McHAN AND MARTHA McHAN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 550-92. Filed March 18, 1997.
Charles McHan, pro se.
Eric B. Jorgensen, for respondent.
MEMORANDUM OPINION
PANUTHOS, Chief Special Trial Judge: This matter is
before the Court on petitioner Charles McHan's Motion for
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Summary Judgment.1 As explained in greater detail below, we
shall deny petitioner's motion.
Background2
On September 13, 1990, petitioner was charged in a 17-count
superseding bill of indictment with various drug trafficking
charges, filing false tax returns, engaging in a continuing
criminal enterprise, and criminal forfeiture, relating to his
involvement in an illegal scheme to distribute marijuana from
1984 to 1988. Petitioner pleaded guilty in the U.S. District
Court for the Western District of North Carolina to a number of
the charges and was convicted with respect to the remaining
charges in July 1992 following a jury trial.
1
Although the petition in this case is a joint petition by
Charles McHan and his wife, Martha McHan, the latter did not join
in the filing of the motion that is the subject of this opinion.
Consequently, references to petitioner in the singular are to
Charles McHan. Because petitioner's motion does not address all
of the issues to be decided in this case, petitioner's motion is
more appropriately viewed as a motion for partial summary
judgment.
Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
2
The following is a summary drawn from the entire record
of the relevant facts that do not appear to be in dispute. These
facts are stated solely for purposes of deciding the pending
motion. Fed. R. Civ. P. 52(a); Sundstrand Corp. v. Commissioner,
98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994).
Additional background discussion can be found in McHan v.
Commissioner, T.C. Memo. 1996-12 (denying petitioner's motion for
summary judgment that the notice of deficiency is invalid). See
also United States v. McHan, 101 F.3d 1027 (4th Cir. 1996).
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In a Memorandum of Decision and Order entered December 10,
1993, the District Court also entered an order of criminal
forfeiture against petitioner in the amount of $395,670. In
reaching its decision on the forfeiture count, the District Court
ruled that the Government bears the burden of proof with respect
to criminal forfeiture, that the degree of proof is beyond a
reasonable doubt, and that the amount subject to criminal
forfeiture is limited to the profits as opposed to the gross
proceeds from the criminal enterprise.3
Petitioner appealed his various convictions and the
Government filed a cross-appeal with respect to the District
Court's holding limiting the amount of the criminal forfeiture to
petitioner's profits from the enterprise. In United States v.
McHan, 101 F.3d 1027 (4th Cir. 1996), the U.S. Court of Appeals
for the Fourth Circuit affirmed petitioner's convictions but
reversed the District Court on the ground that the amount subject
to criminal forfeiture extends to the proceeds from a criminal
enterprise.
Previously, on November 15, 1991, respondent issued a notice
of deficiency to petitioners determining deficiencies in and
additions to their taxes for 1985 and 1986 as follows:
3
The District Court found that the proceeds from
petitioner's criminal activities totaled $1,252,700, but that
petitioner's gross profits were only $395,670 after accounting
for the cost of goods sold and the share of the proceeds
distributed to petitioner's partner.
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Additions to Tax
Sec. Sec. Sec. Sec.
Year Deficiency 6653(b)(1) 6653(b)(2) 6653(b)(1)(A) 6653(b)(1)(B)
1985 $329,911 $164,956 50% of in- --- --- $8
terest due
on $305,762
1986 $90,590 --- --- $52,226 50% of inter- $1
est due on
$69,635
The notice of deficiency includes an explanation of the adjustments
which states in pertinent part:
1(A) It is determined that you received unreported income in the
amounts of $1,311,670.00, $252,800.00 and $266,400.00, which was
not reported on your income tax return for the years 1985, 1986,
and 1987, respectively. Therefore, your taxable income is
increased in the amounts of $1,311,670.00, $252,800.00 and
$266,400.00 for the tax years ended December 31, 1985, December
31, 1986, and December 31, 1987, respectively.
1(B) It is determined that you are allowed the cost of sale of
drugs in the amounts of $689,410.00, $159,525.00 and $65,490.00
for the years 1985, 1986, and 1987, respectively. Therefore, your
taxable income is decreased in the amounts of $689,410.00,
$159,525.00 and $65,490.00 for the tax years ended December 31,
1985, December 31, 1986, and December 31, 1987, respectively.
1(C) It is determined that you are allowed a net operating loss
carryback in the amount of $0.00 rather than $122,352.00 and
$180,687.00 as reported on your tax return for the years 1985 and
1986, respectively. Therefore, your taxable income is increased
in the amounts of $122,352.00 and $180,687.00 for the tax years
ended December 31, 1985 and December 31, 1986, respectively.
The notice of deficiency states that the 1987 year is included
in the notice for information purposes only.
Petitioners invoked the Court's jurisdiction by filing a
timely imperfect petition for redetermination, followed by an
amended petition.4
Petitioner now moves for summary judgment with respect to
the following issues: (1) The addition to tax for substantial
4
At the time that the petition was filed, petitioner was
incarcerated in Estill, South Carolina.
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understatement under section 6661 for 1985 is computed based upon
10 percent of the underpayment as opposed to the 25-percent rate
used in the notice of deficiency; (2) respondent is collaterally
estopped in this case from litigating a second time the issue
resolved by the District Court in petitioner's criminal case
concerning the amount of petitioner's profits from his illegal
activities; (3) petitioner is not required to substantiate the
amount of the net operating loss (NOL) reported in his 1987 tax
return and carried back to 1985 and 1986 on the ground that the
period of limitations with respect to 1987 has expired; (4) the
NOL that petitioner reported in his 1987 tax return accrued on
December 31, 1987; and (5) consistent with the holding of the
District Court in the criminal case, petitioner did not earn
profits from his criminal enterprise in 1986 and 1987.
Respondent filed an objection to petitioner's motion. In
particular, respondent contends that she properly computed the
addition to tax under section 6661 based upon 25 percent of the
underpayment (rather than 10 percent) because the 1986 amendment
to section 6661 increasing the rate from 10 percent to 25 percent
is effective with respect to assessments made after enactment of
the amendment. In addition, respondent maintains that
petitioner's motion should be denied to the extent that
petitioner asserts that respondent is barred by the doctrine of
collateral estoppel from contesting the District Court's findings
in the criminal case inasmuch as the District Court's decision
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was reversed.5 Respondent further contends that, because she
disallowed the NOL carrybacks that petitioner claimed for the
years in issue, petitioner is required to substantiate the NOL
reported in his 1987 tax return notwithstanding whether the
period of limitations for 1987 has expired. Assuming that
petitioner can substantiate the NOL for 1987, respondent would
agree that the NOL accrued no later than December 31, 1987.
Discussion
Summary judgment is intended to expedite litigation and
avoid unnecessary and expensive trials. Florida Peach Corp. v.
Commissioner, 90 T.C. 678, 681 (1988). Summary judgment may be
granted with respect to all or any part of the legal issues in
controversy "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); 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);
Naftel v. Commissioner, 85 T.C. 527, 529 (1985). The moving
party bears the burden of proving that there is no genuine issue
5
Respondent also contends that petitioner failed to
properly plead collateral estoppel. See Rule 39. To the
contrary, petitioner was granted leave to, and filed an amendment
to the petition on Dec. 20, 1996, which includes allegations in
support of petitioner's contention that the doctrine of
collateral estoppel is applicable in this case.
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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).
1. Computation of the Additions to Tax Under Section 6661
Section 6661, originally added to the Code by section 323(a)
of the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L.
97-248, 96 Stat. 324, 613, provides for an addition to tax if
there is a substantial understatement of tax liability for any
taxable year. Section 6661 was amended in the Omnibus Budget
Reconciliation Act of 1986 (OBRA), Pub. L. 99-509, sec. 8002(a),
100 Stat. 1874, 1951, by increasing the rate at which the
addition to tax is computed from 10 percent to 25 percent of the
amount of the underpayment.6 OBRA section 8002(b) provides that
the amendment to section 6661 is applicable to penalties assessed
after the date of enactment of the Act, i.e., October 21, 1986.
Considering the effective date of the amendment to section
6661, petitioner's assertion that a 10-percent rate should be
applied to compute the additions to tax is incorrect. The
additions to tax that respondent determined in the notice of
6
The Omnibus Budget Reconciliation Act of 1986, Pub. L.
99-509, sec. 8002(b), 100 Stat. 1951, included a repeal of an
amendment to sec. 6661 included in the Tax Reform Act of 1986,
Pub. L. 99-514, sec. 1504(a), 100 Stat. 2085, 2743, which amended
sec. 6661 to increase the rate on which the addition to tax is
computed from 10 percent of the underpayment to 20 percent of the
underpayment. See Pallottini v. Commissioner, 90 T.C. 498, 501-
503 (1988).
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deficiency have not been assessed, and may not be assessed until
the decision in this case is final. Sec. 6213(a). Because the
amendment to section 6661 set forth in OBRA is effective with
respect to assessments made after October 21, 1986, it follows
that the additions to tax at issue in this case will be computed
based upon 25 percent of the underpayment, if any. See DiLeo v.
Commissioner, 96 T.C. 858, 878 (1991), affd. 959 F.2d 16 (2d Cir.
1992) (rejecting the taxpayers' contention that the OBRA
amendment to section 6661 violates the ex post facto clause of
the U.S. Constitution). The question of petitioner's liability
for the additions to tax under section 6661 is a factual matter
that will be decided at trial.
2. Collateral Estoppel
Under the doctrine of collateral estoppel, or issue
preclusion, a final judgment on the merits in a prior lawsuit
precludes, in a later lawsuit involving a separate cause of
action, litigation of issues actually litigated and necessary to
the outcome of the first action. See United States v. Mendoza,
464 U.S. 154, 158 (1984); Parklane Hosiery Co. v. Shore, 439 U.S.
322, 326 (1979); Meier v. Commissioner, 91 T.C. 273, 283 (1988);
Amos v. Commissioner, 43 T.C. 50 (1964), affd. 360 F.2d 358 (4th
Cir. 1965). In Meier v. Commissioner, supra at 283-286, we held
that collateral estoppel may be utilized in connection with
matters of law, matters of fact (whether ultimate facts or
evidentiary facts), and mixed matters of law and fact. However,
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it is well settled that the doctrine of collateral estoppel does
not apply where the degree of proof in the earlier proceeding is
higher than the degree of proof in the later proceeding. See
Helvering v. Mitchell, 303 U.S. 391 (1938); Neaderland v.
Commissioner, 52 T.C. 532, 541-542 (1969) (acquittal on charge of
criminal tax fraud does not estop the Commissioner from later
attempting to prove the taxpayer's liability for civil tax
fraud), affd. 424 F.2d 639 (2d Cir. 1970).
Consistent with the preceding discussion, it is evident that
petitioner's reliance on the doctrine of collateral estoppel is
misplaced. The District Court's findings respecting the amounts
of petitioner's proceeds and profits from his illegal activities
do not work an estoppel in the present action because the
Government was required to prove its criminal forfeiture case
beyond a reasonable doubt, whereas petitioner bears the burden of
proving the amount of his taxable income for the years in issue
in this civil proceeding by a preponderance of the evidence.
3. Substantiation of Net Operating Loss
Petitioner contends that, because the period of limitations
has expired with respect to the 1987 taxable year, the Court
should find as a matter of law that petitioner is not required to
substantiate the NOL reported in his 1987 tax return and carried
back to the taxable years 1985 and 1986. We disagree.
Section 6214(b) provides in pertinent part:
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(b) Jurisdiction Over Other Years and Quarters.--
The Tax Court in redetermining a deficiency of income
tax for any taxable year * * * shall consider such
facts with relation to the taxes for other years * * *
as may be necessary correctly to redetermine the amount
of such deficiency, but in so doing shall have no
jurisdiction to determine whether or not the tax for
any other year * * * has been overpaid or underpaid.
In sum, the Court may consider facts relating to taxes for years
that are not otherwise within the Court's jurisdiction where
necessary correctly to redetermine the amount of the tax
deficiency for any year properly before the Court.
It is well settled that in redetermining the amount of a
deficiency for a taxable year before the Court, we may determine
the correct amount of a NOL carryover or carryback claimed with
respect to the year in issue, notwithstanding that the loss
arises in a year that is not within the Court's jurisdiction and
for which the period of limitations has expired. Phoenix Coal
Co. v. Commissioner, 231 F.2d 420 (2d Cir. 1956), affg. T.C.
Memo. 1955-28; Calumet Indus., Inc. v. Commissioner, 95 T.C. 257,
274-275 (1990). This is true even if it would involve
recomputing the tax liability in the other year to determine
whether a loss would be carried over or back. See State Farming
Co. v. Commissioner, 40 T.C. 774, 782-783 (1963); see also Hill
v. Commissioner, 95 T.C. 437, 441-442 (1990), and cases cited
therein.
The notice of deficiency in this case explains that
respondent disallowed the NOL carrybacks that petitioner reported
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for 1985 and 1986. Consistent with the principles discussed
above, it follows that petitioner is required to substantiate the
amount of the NOL that he reported in his 1987 return and then
carried back to 1985 and 1986. See O'Connor v. Commissioner,
T.C. Memo. 1992-544.
Respondent concedes that, if petitioner substantiates the
NOL reported in his 1987 return, the NOL accrued no later than
December 31, 1987. In light of our holding that petitioner must
substantiate the NOL reported in 1987, we see no reason to
consider the matter further.
In sum, we shall deny petitioner's Motion for Summary
Judgment. To reflect the foregoing,
An order will be issued
denying petitioner's Motion
for Summary Judgment.