T.C. Memo. 1997-566
UNITED STATES TAX COURT
GERALD HICKMAN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 27499-96. Filed December 23, 1997.
Joseph Falcone and Brian H. Rolfe, for petitioner.
Meso T. Hammoud, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
LARO, Judge: In the statutory notice dated September 27,
1996, respondent determined deficiencies and additions to
petitioner's income tax as follows:
- 2 -
Additions to Tax
Sec. Sec. Sec. Sec. Sec. Sec.
Year Deficiency 6651(a)(1) 6653(a)(1) 6653(a)(2) 6653(a)(1)(A) 6653(a)(1)(B) 6654
1
1984 $3,727 $932 $186 --- --- $234
1
1985 8,362 2,091 418 --- --- 479
1
1986 10,690 2,673 --- --- $535 514
1
1987 17,884 4,471 --- --- 894 967
1988 19,350 4,838 968 --- --- --- 1,237
1
50 percent of the interest due on $3,727, $8,362, $10,690, and $17,884, respectively, for 1984
through 1987.
The determination is based on petitioner's failure to file
Federal income tax returns and report income earned in his
capacity as an independent contractor.1
Petitioner, while a resident of Clarkston, Michigan,
petitioned the Court on December 26, 1996, to redetermine
respondent's determination of deficiencies and additions to tax.
Petitioner concedes that he is liable for the tax deficiencies
and additions to tax for the 1984 through 1985 tax years. The
1986 through 1988 tax years remain in issue, and we must decide
the following:
1. Whether respondent is collaterally estopped from
asserting income tax deficiencies against petitioner for the 1986
through 1988 tax years. We hold that respondent is not
collaterally estopped from litigating this issue and that
petitioner is liable for the entire deficiency determination.
1
Unless otherwise indicated, section references are to the
Internal Revenue Code applicable to the years in issue. Rule
references are to the Tax Court Rules of Practice and Procedure.
- 3 -
2. Whether res judicata bars respondent from asserting
additions to tax for the 1986 through 1988 tax years. We hold
that it does not.
a. Whether petitioner is liable under section 6651 for
failing to file his 1986 through 1988 Federal income tax returns.
We hold that he is.
b. Whether petitioner is liable under section 6653 for
the negligence addition to tax. We hold that he is.
c. Whether petitioner is liable under section 6654 for
failing to pay estimated income tax for 1986 through 1988. We
hold that he is.2
FINDINGS OF FACT
The case was submitted to the Court fully stipulated on
October 9, 1997. The stipulations of fact, with accompanying
exhibits, are incorporated herein by reference.3 During 1984
2
In his petition, petitioner argues that expiration of the
statutory period of limitations bars assessment and collection of
deficiencies in income tax for the years in issue. Respondent
contends that petitioner failed to file returns for the 1986
through 1988 tax years, and therefore the income tax deficiencies
for those years may be assessed at any time under sec.
6501(c)(3). Generally, assessment must be made within 3 years
after the filing of a return. Sec. 6501(a). However, in the
case of failure to file a return, the tax may be assessed at any
time. Sec. 6501(c)(3). The parties have stipulated that
petitioner did not file Federal income tax returns for 1986
through 1988; consequently, the period of limitations is not a
consideration in this case.
3
Respondent objects to petitioner's Exhibit 7 on the grounds
of relevancy. Petitioner's Exhibit 7 is a copy of a "Release of
(continued...)
- 4 -
through 1988, petitioner worked as a design engineer/draftsman on
an independent contractor basis. During 1986, petitioner worked
for Utica Machine, Stellar Engineering, and Bernal Rotary, and
from them, respectively, received compensation in the amounts of
$18,400, $5,475, and $6,377. During 1987, petitioner worked for
Bernal Rotary and received compensation in the amount of $49,324.
And during 1988, petitioner worked for Bernal Rotary and received
compensation in the amount of $56,638. Petitioner did not file
Federal income tax returns for 1986 through 1988.
On April 14, 1993, petitioner, pursuant to section 7203, was
indicted on three counts of willfully failing to file Federal
income tax returns for the tax years 1986 through 1988. Count
one of the Indictment charged that petitioner received gross
income in the amount of $30,252 during the 1986 tax year, and by
reason of such income petitioner was required to file a Federal
income tax return for that year on or before April 15, 1987.
3
(...continued)
Abstract of Judgment" which petitioner submits as proof that he
fulfilled all conditions of the U.S. District Court for the
Eastern District of Michigan's order of judgment, including a
restitution payment to the Internal Revenue Service. Fed. R.
Evid. 401, a rule that applies to this Court under Rule 143(a),
Tax Court Rules of Practice and Procedure, provides broadly that
evidence is "relevant" if it has "any tendency to make the
existence of any fact that is of consequence to the determination
of the action more probable or less probable than it would be
without the evidence." We find that Exhibit 7 is relevant and is
therefore admissible. See Estate of Scanlan v. Commissioner,
T.C. Memo. 1996-331, affd. without published opinion 116 F.3d
1476 (5th Cir 1997).
- 5 -
Count two of the Indictment charged that petitioner received
gross income in the amount of $49,324 during 1987, and by reason
of such income petitioner was required to file a Federal income
tax return for that year on or before April 15, 1988. Count
three of the Indictment charged that petitioner received gross
income in the amount of $56,504 during 1988, and by reason of
such income was required to file a Federal income tax return for
that year on or before April 15, 1989. Each count further
charged that petitioner "wilfully and knowingly" failed to file
these requisite returns.
On or around July 9, 1993, petitioner was tried on all three
counts before a jury in the U.S. District Court for the Eastern
District of Michigan (District Court). During the trial, a
Government witness testified that petitioner's gross income for
1986 through 1988, respectively, was $30,252, $49,324, and
$56,504. The witness further identified petitioner's
corresponding tax liabilities as $7,249, $13,246, and $15,781,
respectively. The Government also submitted into evidence
Exhibit 40B, entitled "Computation of Taxable Income and Tax Due
for Gerald R. Hickman", which identified, among other things,
petitioner's gross income, taxable income, and total tax due for
1986 through 1988.
On July 23, 1993, petitioner was found guilty on all three
counts. On October 20, 1993, the District Court entered an order
- 6 -
of judgment against petitioner, sentencing petitioner to
community confinement and probation. In addition, the District
Court's Order of Judgment required petitioner to make immediate
restitution to the Internal Revenue Service in the total amount
of $36,276. The restitution amount is based on the Government
witness's testimony of petitioner's tax liability for 1986
through 1988. On or around December 27, 1993, petitioner paid
the ordered restitution in full. The judgment of the District
Court is final.
Subsequently, respondent determined in the notice of
deficiency that petitioner received income in the amounts of
$30,252, $49,324, and $56,638, respectively, for 1986 through
1988. Based on those amounts, respondent's deficiency
determinations for 1986 through 1988 are $10,690, $17,884, and
$19,350, respectively. The total deficiency for all 3 years is
$47,924, an $11,648 difference from the tax liability presented
to the District Court and the District Court's ordered
restitution payment.
The difference in the tax liability calculation submitted to
the District Court and respondent's deficiency determination
stems from respondent's disallowance of certain capital losses
and itemized deductions. These disallowances result in positive
adjustments to the taxable income figures presented to the
District Court.
- 7 -
OPINION
Petitioner concedes that he had gross income in the amounts
determined by respondent for the years in issue. Petitioner
alleges, however, that the doctrines of collateral estoppel and
res judicata preclude respondent from seeking deficiencies in
excess of those found by the District Court and additions in tax.
I. Collateral Estoppel and Respondent's Deficiency Determination
The primary issue in this case is whether the doctrine of
collateral estoppel precludes respondent from asserting tax
deficiencies for the 1986 through 1988 tax years. Petitioner
argues that the District Court's order of restitution is
tantamount to a final determination of petitioner's tax
liabilities. Thereby, respondent is precluded from determining
tax liabilities in excess of those "determined" by the District
Court. What is at stake for petitioner is the payment of an
additional $11,648 in income taxes.
A. Collateral Estoppel
Respondent argues that the doctrine of collateral estoppel
does not apply for the tax years 1986 through 1988 because the
District Court did not decide the issue of petitioner's exact
income tax liabilities. Thereby, respondent is not precluded
from determining and assessing petitioner's income tax
liabilities. Respondent sets forth two arguments in support of
this position. First, the indictment did not charge petitioner
- 8 -
with any specific tax liability amount. Instead, it only charged
petitioner with receiving specific amounts of income, amounts
which petitioner does not dispute. Second, the District Court's
order for restitution was based upon the testimony of a
Government witness, whose testimony was incidental to the issue
of the specific amounts of income received by petitioner.
Respondent contends that petitioner's tax liability was not
actually litigated and decided, and that the evidence of
petitioner's tax liability was only introduced for the purpose of
proving that petitioner was required to file Federal income tax
returns.
Petitioner argues that the District Court determined his
income tax liabilities for 1986 through 1988, and that respondent
is collaterally estopped from relitigating petitioner's tax
liability for those years. In support, petitioner contends that
his tax liability was actually determined, actually litigated,
and essential to the judgment of the criminal conviction and
restitution order. As a result of the District Court's judgment,
petitioner contends that his tax liability for 1986 through 1988
is limited to the $36,276 amount ordered by the District Court.
"Collateral estoppel and the related doctrine of res
judicata have the dual purpose of protecting litigants from the
burden of relitigating an identical issue and of promoting
judicial economy by preventing unnecessary or redundant
- 9 -
litigation." Meier v. Commissioner, 91 T.C. 273, 282 (1988).
Issue preclusion, or collateral estoppel, is defined in 1
Restatement, Judgments 2d, section 27 (1982), as follows: "When
an issue of fact or law is actually litigated and determined by a
valid and final judgment, and the determination is essential to
the judgment, the determination is conclusive in a subsequent
action between the parties, whether on the same or a different
claim." Collateral estoppel may be applied in civil trials to
issues previously determined in a criminal conviction. Appley v.
West, 832 F.2d 1021, 1026 (7th Cir. 1987); Otherson v. Department
of Justice, 711 F.2d 267, 271 (D.C. Cir. 1983); Amos v.
Commissioner, 43 T.C. 50 (1964), affd. 360 F.2d 358 (4th Cir.
1965).
In Montana v. United States, 440 U.S. 147, 155 (1979), the
Supreme Court established a three-prong test for applying
collateral estoppel: First, whether the issues presented in the
subsequent litigation are in substance the same as those issues
presented in the first case; second, whether controlling facts or
legal principles have changed significantly since the first
judgment; and third, whether other special circumstances warrant
an exception to the normal rules of preclusion. In Peck v.
Commissioner, 90 T.C. 162, 166 (1988), affd. 904 F.2d 525 (9th
Cir. 1990), the Court stated that the "three-pronged rubric
provided by the Supreme Court in the Montana case embodies a
- 10 -
number of detailed tests developed by the courts to test the
appropriateness of collateral estoppel in essentially factual
contexts." Building on the Supreme Court's analysis in
Montana, the Court in Peck identified five conditions that must
be satisfied for collateral estoppel to apply: First, the issue
in the second suit must be identical in all respects with the one
decided in the first suit; second, there must be a final judgment
rendered by a court of competent jurisdiction; third, collateral
estoppel may only be invoked against parties and their privities
to the prior judgment; fourth, the parties must have actually
litigated the issue and the resolution of these issues must have
been essential to the prior decision; and fifth, the controlling
facts and applicable legal rules must remain unchanged from those
in the prior litigation. Id. at 166-167; see also Commissioner
v. Sunnen, 333 U.S. 591, 599-600 (1948); Gammill v. Commissioner,
62 T.C. 607, 613-615 (1974). The parties do not dispute that the
judgment of the District Court is a final judgment by a court of
competent jurisdiction, that the same parties are involved in the
two proceedings, or that controlling facts and applicable legal
rules have remained unchanged. The arguments in this case
concern whether or not the issue in the two cases is identical,
whether the parties actually litigated and decided the issue
before the District Court, and whether the District Court's
resolution of the issue was essential to its decision.
- 11 -
We believe that resolution of the issue of whether the
District Court's finding of petitioner's tax liability was
essential to its decision is dispositive. Thus, we focus on this
precondition to the application of collateral estoppel.
Respondent argues that the District Court was not required to
find the amount of petitioner's specific tax liability in finding
him guilty in the criminal case, and that a finding of his
specific income tax liability was not essential to the District
Court's judgment. Petitioner argues that in order for the
District Court to enter a judgment and impose a sentence against
him, it was necessary for the District Court to determine the
amount of his income tax lability for the years in issue.
We conclude that resolution of petitioner's tax liability
was not essential to the District Court's judgment. Petitioner's
specific tax liability is not an element that the Government must
prove in order to secure a conviction under section 7203.
Section 7203 states that "Any person required under this title to
* * * make a return * * * who willfully fails to * * * make such
return * * * at the time or times required by law or regulations,
shall, in addition to other penalties provided by law, be guilty
of a misdemeanor". To sustain its burden of proof under section
7203, the Government must establish three elements: (1) that the
defendant was required by law to file a tax return for the year
in issue; (2) that he or she failed to timely file such tax
- 12 -
return; and (3) that the failure was willful. Sec. 7203;
see also United States v. Ostendorff, 371 F.2d 729, 730 (4th Cir.
1967). In order to establish that petitioner was required by law
to file a return, it must be shown that he received at least the
amount of gross income specified by section 6012(a).
Establishing petitioner's tax liability is not an element of
section 7203, and consequently no specific income tax liability
need be determined. See Cipparone v. Commissioner, T.C. Memo.
1985-234; cf. Johnson v. Commissioner, T.C. Memo. 1993-227
(taxpayer precluded from disputing the amounts he received as
embezzlement income where he was convicted in state court of
"Theft in Office" and the specific amounts embezzled were, under
state law, essential elements of each count in the indictment).
Second, the fact that the District Court's order of
restitution is discretionary also supports our conclusion that a
finding of petitioner's tax liability was not essential to the
District Court's judgment. Pursuant to 18 U.S.C. section 3663
(1994), "The court * * * may order, in addition to or, in the
case of a misdemeanor, in lieu of any other penalty authorized by
law, that the defendant make restitution to any victim of such
offense". (Emphasis added.)
For the aforementioned reasons, we find that an adjudication
of petitioner's tax liability was not essential to the District
Court's judgment and that this precondition to the application of
- 13 -
collateral estoppel is not satisfied. We therefore find that
respondent is not collaterally estopped from asserting tax
deficiencies for the 1986 through 1988 tax years.
B. Respondent's Deficiency Determination
Respondent determined that petitioner underpaid his 1986
through 1988 income tax by $10,690, $17,884, and $19,350,
respectively. The underpayment is attributable to petitioner's
failure to file his income tax returns for 1986 through 1988, and
report income earned in his capacity as a self-employed
independent contractor. Petitioner does not argue that
respondent's determination of the deficiency is incorrect. We
therefore sustain respondent's determination.
II. Res Judicata and The Additions To Tax
As an initial matter, petitioner argues that the doctrine of
res judicata bars respondent from litigating petitioner's
liability for any additions to tax. Petitioner contends that the
Government's failure to raise the issue of any additions to tax
in the criminal proceeding precludes respondent from raising the
issue before this Court.
Res judicata (claim preclusion) precludes relitigation of
issues that were or could have been raised regarding a cause of
action. Commissioner v. Sunnen, 333 U.S. 591 (1948). Under the
doctrine of res judicata, when a court of competent jurisdiction
has entered a final judgment on the merits of a cause of action,
- 14 -
the parties to the suit and their privies are thereafter bound
not only as to every matter which was offered and received to
sustain or defeat the claim or demand, but as to any other
admissible matter which might have been offered for that purpose.
Id. at 597. But where the second action between the same parties
is upon a different cause or demand, the judgment in the prior
action has preclusive effect only as to those matters in issue or
points controverted, upon the determination of which the finding
or verdict was rendered. Id. at 597-598.
In Neaderland v. Commissioner, 424 F.2d 639, 641 (2d Cir.
1970), affg. 52 T.C. 532 (1969), the court stated: "When a civil
trial follows criminal proceedings which were based on the same
facts, a different cause of action is involved and the doctrine
of collateral estoppel rather than that of res judicata must be
considered." See also Helvering v. Mitchell, 303 U.S. 391
(1938); United States v. Barnette, 10 F.3d 1553, 1561 (11th Cir.
1994); Towe v. Commissioner, T.C. Memo. 1992-689. The doctrine
of res judicata is therefore not applicable. For reasons already
explained, it is obvious that ascertaining petitioner's liability
for these additions to tax was not essential to the District
Court's judgment and the doctrine of collateral estoppel also has
no preclusive effect.
A. Section 6651(a)(1)--Failure To File
- 15 -
Respondent determined that petitioner is liable under
section 6651(a)(1) for his failure to file returns for 1986
through 1988. In addition to the facts presented in this case,
respondent pleaded and relies upon the doctrine of collateral
estoppel to establish petitioner's liability under section
6651(a)(1). This argument is based upon the fact that petitioner
was convicted under section 7203 of willful failure to file
income tax returns for 1986 through 1988.
Section 6651(a)(1) imposes a 5-percent addition to tax each
month for failure to file a tax return. The addition is not to
exceed 25 percent in the aggregate. A section 6651(a)(1)
addition to tax is warranted where a taxpayer fails to file a
timely return unless the taxpayer shows that his failure to do so
was due to reasonable cause and not due to willful neglect.
Where the taxpayer exercised ordinary business care and prudence
and was nevertheless unable to file the return within the
prescribed time, the delay is deemed due to reasonable cause.
Sec. 301.6651-1(c), Proc. & Admin. Regs.
As previously noted, the doctrine of collateral estoppel is
intended to avoid repetitious litigation by precluding the
relitigation of any issue of fact or law that was actually
litigated and that culminated in a valid and final judgment.
Montana v. United States, 440 U.S. at 153; Kotmair v.
Commissioner, 86 T.C. 1253, 1262 (1986). The fact that was
- 16 -
conclusively established by petitioner's conviction under
section 7203 was that he had willfully failed to file a return
for each of the years 1986 through 1988. "Willful" means the
voluntary, intentional violation of a known legal duty.
United States v. Pomponio, 429 U.S. 10, 12 (1976). Petitioner's
conviction under section 7203 thus conclusively establishes that
his failure to file was not due to reasonable cause and was due
to willful neglect, and he is accordingly estopped from
contending otherwise. Kotmair v. Commissioner, supra at 1263.
Petitioner is therefore liable for the section 6651 addition to
tax.
B. Section 6653--Negligence Addition To Tax
Respondent determined that petitioner is liable under
section 6653 for the negligence addition to tax as follows: For
the 1986 and 1987 tax years, pursuant to section 6653(a)(1)(A)
and (B); for the 1988 tax year, pursuant to section 6653(a)(1).
Respondent argues that the doctrine of collateral estoppel also
precludes petitioner from arguing against imposition of the
negligence addition to tax. Respondent contends that
petitioner's conviction under section 7203 conclusively
establishes that petitioner willfully failed to file his 1986
through 1988 returns, and thereby petitioner is collaterally
estopped from denying his liability for the negligence addition
to tax.
- 17 -
A section 6653(a) addition to tax is imposed if any part of
the underpayment of tax is due to negligence. For the 1986 and
1987 tax years, if any part of an underpayment is due to
negligence, there shall be added to the tax an amount equal to
the sum of 5 percent of the underpayment and an amount equal to
50 percent of the interest payable under section 6601 with
respect to the portion of such underpayment which is attributable
to negligence. Sec. 6653(a)(1)(A) and (a)(1)(B). For the 1988
tax year, if any part of an underpayment is due to negligence,
there shall be added to the tax an amount equal to 5 percent of
the underpayment.4 Sec. 6653(a)(1). "Negligence" includes any
failure to make a reasonable attempt to comply with the
provisions of the Code. Sec. 6653(a)(3). Furthermore,
negligence is the failure to do what a reasonable and ordinarily
prudent person would do under the circumstances.
Petitioner's conviction under section 7203 for willful
failure to file returns for 1986 through 1988 conclusively
establishes the following: (1) that petitioner had the duty to
file such returns; (2) that he he failed to do so; and (3) that
his failure to do so was willful; i.e., that he intentionally
disregarded applicable rules or regulations requiring the filing
of returns. We therefore find that petitioner is collaterally
4
For 1988, the time-sensitive interest component of the
negligence penalty was eliminated.
- 18 -
estopped from contesting his liability for the negligence
addition to tax, and uphold respondent's determination on this
issue. Kotmair v. Commissioner, supra at 1263-1264.
C. Section 6654--Failure To Pay Estimated Tax
Respondent determined an addition to tax under section 6654
for 1986 through 1988 based on petitioner's failure to pay
estimated income tax. Section 6654(a) provides for an addition
to tax "in the case of any underpayment of estimated tax by an
individual". Estimated income tax payments are used to provide
for current payment of income taxes not collected through
withholding. This addition to tax is in addition "to any
applicable criminal penalties and is imposed whether or not there
was reasonable cause for the underpayment". Sec. 1.6654-1(a)(1),
Income Tax Regs. Moreover, an addition to tax under section 6654
is mandatory absent the application of one of the exceptions
contained in that section. In re Sanford, 979 F.2d 1511, 1514
(11th Cir. 1992); Niedringhaus v. Commissioner, 99 T.C. 202, 222
(1992); Recklitis v. Commissioner, 91 T.C. 874, 913 (1988);
Bagur v. Commissioner, 66 T.C. 817, 824 (1976), remanded on other
grounds 603 F.2d 491 (5th Cir. 1979).
Petitioner does not argue that any of the exceptions
contained in section 6654 apply, nor does he argue that
- 19 -
respondent erred in determining an addition to tax under section
6654. Accordingly, we sustain respondent's determination and
find petitioner liable under section 6654 for his failure to make
estimated tax payments for 1986 through 1988.
We have considered all other arguments made by the parties
and found them to be either irrelevant or without merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.