T.C. Memo. 2000-267
UNITED STATES TAX COURT
ARMIN UNGER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 24681-97. Filed August 24, 2000.
Armin Unger, pro se.
Carol A. Szczepanik, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
RUWE, Judge: Respondent determined deficiencies in
petitioner’s Federal income taxes and additions to tax as
follows:
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Additions to Tax
Sec. Sec. 6653 Sec. 6653
Year Deficiency 6651(f) (b)(1)(A) (b)(1)(B) Sec. 6653(b)(1)
1
1987 $6,083 N/A $4,562.25 N/A
1988 3,189 N/A N/A N/A $2,391.75
1989 29,501 $22,125.75 N/A N/A N/A
1990 1,909 1,431.75 N/A N/A N/A
1
50 percent of the interest due on $6,083
The issues for decision are: (1) Whether petitioner had
unreported taxable income during the years at issue, and (2)
whether petitioner is liable for additions to tax for fraud
(section 6653(b))1 and fraudulent failure to file (section
6651(f)).
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. At
the time the petition was filed, petitioner resided in Lakewood,
Ohio. During the years in issue petitioner’s sole source of
income was the sale of illegal drugs. Petitioner derived
sufficient taxable income from the illegal sale of controlled
substances to require the filing of a Federal income tax return
in each of the years in question. Petitioner did not file income
tax returns for the tax years 1987 through 1990.
On July 18, 1994, petitioner pleaded guilty to the felony
offence set out in section 72012 (Attempt to Evade or Defeat Tax)
1
Unless otherwise indicated, 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.
2
Sec. 7201 provides:
(continued...)
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in relation to his 1989 tax year. As part of his plea agreement,
petitioner acknowledged:
(1) he had a substantial income tax due and owing to
the United States for the year 1989;
(2) he made an affirmative attempt to evade that tax by
failing to file an income tax return and pay the taxes
owing for that year and by engaging in the following
affirmative acts alleged in the information, namely–-
dealing extensively in cash and money orders, using
nominees to make certain expenditures, and structuring
a currency transaction in excess of $10,000 to avoid
the filing of a currency transaction report; and
(3) he acted willfully and with the intent to defraud
the government of the additional unreported taxes.
Unger also acknowledges that he engaged in similar
relevant criminal conduct with respect to his 1987 and
1990 income taxes.
Petitioner maintained multiple bank accounts. Some of the
accounts were held in his own name, numerous accounts were held
jointly with his mother, Helen Unger, and still others were in
his mother’s name alone (collectively petitioner’s bank
accounts). Petitioner had access to the joint accounts and the
bank accounts styled in his mother’s name and provided funds that
2
(...continued)
SEC. 7201. ATTEMPT TO EVADE OR DEFEAT TAX.
Any person who willfully attempts in any manner to
evade or defeat any tax imposed by this title or the
payment thereof shall, in addition to other penalties
provided by law, be guilty of a felony and, upon
conviction thereof, shall be fined not more than
$100,000 ($500,000 in the case of a corporation), or
imprisoned not more than 5 years, or both, together
with the costs of prosecution.
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were deposited into these accounts. Petitioner and his mother
maintained joint safe deposit boxes at Sun Bank from 1986 to 1989
and at California Federal Bank during 1990. Petitioner also
maintained safe deposit boxes in his own name at Huntington Bank
and National City Bank from 1986 to 1990.
Petitioner purchased 10 automobiles during the period
November 1986 to December 1990. At least one of the automobiles,
a 1990 Mazda, was purchased with cashier’s checks showing an
individual other than petitioner as the remitter. That
individual did not consent to the use of her name in the
transaction. Petitioner maintained message, mobile phone, and
cellular phone service under three different assumed names.
Petitioner’s sole income-generating activity was illegal
narcotic sales. However, when interviewed by respondent’s agents
in 1991, petitioner stated that he had no sources of income and
that he was fully supported by his family. Petitioner did not
keep records of his income-generating activities and used cash
frequently. Consequently, respondent determined petitioner’s
income by using the “net worth method”. In making the
determination of petitioner’s opening net worth, respondent
determined the total amount contained in petitioner’s bank
accounts, the amount of other cash on hand, and other known
assets.
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Respondent’s net worth calculation is set out in the
appendix. Amounts in bank accounts held in the name of
petitioner’s mother and held jointly by petitioner and his mother
are included in the net worth analysis. Inclusion of these
accounts in petitioner’s net worth is supported by the evidence.
The net worth calculation is supported by the evidence and
accurately shows petitioner’s net worth and expenditures and
establishes that petitioner had net taxable income of $33,685,
$24,647, $108,609, and $18,038 for the years 1987, 1988, 1989,
and 1990, respectively.
OPINION
When a taxpayer keeps no books, or keeps books that are
inadequate, section 446(b) authorizes the Internal Revenue
Service to compute the taxpayer’s income by any method that
clearly reflects income. See sec. 446(b). The “net worth
method” has been accepted by the courts as satisfying this
legislative mandate. Holland v. United States, 348 U.S. 121
(1954). The Supreme Court described the method as follows:
In a typical net worth prosecution, the
Government, having concluded that the taxpayer’s
records are inadequate as a basis for determining
income tax liability, attempts to establish an “opening
net worth” or total net value of the taxpayer’s assets
at the beginning of a given year. It then proves
increases in the taxpayer’s net worth for each
succeeding year during the period under examination and
calculates the difference between the adjusted net
values of the taxpayer’s assets at the beginning and
end of each of the years involved. The taxpayer’s
nondeductible expenditures, including living expenses,
are added to these increases, and if the resulting
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figure for any year is substantially greater than the
taxable income reported by the taxpayer for that year,
the Government claims the excess represents unreported
taxable income. [Id. at 125.]
The Commissioner’s determination of tax liability, if
calculated according to an acceptable procedure, such as the net
worth method, is presumptively correct and places the burden of
producing contrary evidence upon the taxpayer. See Helvering v.
Taylor, 293 U.S. 507 (1935); Traficant v. Commissioner, 884 F.2d
258, 263 (6th Cir. 1989), affg. 89 T.C. 501 (1987); Calderone v.
United States, 799 F.2d 254, 258 (6th Cir. 1986). Generally, the
taxpayer will bear the burden of proving by a preponderance of
the evidence that the Commissioner’s determination is “arbitrary
and excessive.” Helvering v. Taylor, supra at 515; Traficant v.
Commissioner, supra at 263; Calderone v. United States, supra at
258.
Petitioner testified on his own behalf. We do not find
petitioner to be a credible witness. Petitioner’s testimony was
self-serving, unbelievable, and uncorroborated. Petitioner’s
testimony at trial also contradicted prior statements he had
made. Petitioner did not call any other witnesses to testify,
nor did he introduce any documents into evidence that would tend
to show that respondent’s determination was “arbitrary and
excessive.”
Petitioner challenges certain items that were included in
the net worth computation. We will address each of these items.
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In the net worth computation, respondent characterized a
$6,200 payment made by petitioner in 1989 to Ms. Owca as a gift.
Petitioner disputes respondent’s characterization of his $6,200
payment to Ms. Owca and claims the expenditure was an investment.
Ms. Owca is petitioner’s former girlfriend. Petitioner also
disputes respondent’s characterization of a $10,000 payment made
in 1988 to Mr. C. Owca as a loan receivable. Petitioner claims
that he actually made the check out for $10, gave it to Ms. Owca,
and that Ms. Owca then altered it to $10,000. Petitioner’s
explanations in both instances are unbelievable. The $6,200
payment to Ms. Owca was made by a check containing the notation
that it was a gift. This was corroborated by Ms. Owca. The
$10,000 check was drawn on an account in the names of petitioner
and Helen Unger (petitioner’s mother). It bears a notation that
it was a loan, and the check does not appear to have been
altered.
On brief, petitioner disputes the accuracy of respondent’s
use of $5,000 cash on hand as of December 31, 1986. The amount
of opening cash on hand on December 31, 1986, was determined on
the basis of petitioner’s prior representations. Respondent’s
use of this amount of beginning cash on hand in the net worth
analysis does not render the analysis unreliable. See United
States v. Giacalone, 574 F.2d 328, 333 (6th Cir. 1978).
Petitioner also disputes the inclusion in the net worth
computation of bank accounts that were held jointly with his
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mother, or in her own name. However, the evidence shows that
petitioner transferred significant amounts of money to his
mother’s accounts and had access to and control over those bank
accounts. During the years in issue, Helen Unger was retired and
had a modest income. Her gross income, which conceivably could
have been a source of some funds deposited to those accounts, was
subtracted from respondent’s net worth computation in arriving at
petitioner’s understatement of income.
When ownership or the source from which assets are purchased
by a taxpayer and his family are confused, the Commissioner is
permitted to resort to the use of a consolidated net worth
statement. See Smith v. Commissioner, 31 T.C. 1 (1958); Lias v.
Commissioner, 24 T.C. 280 (1955), affd. 235 F.2d 879 (4th Cir.
1956). Under the consolidated method, the combined taxable
income of the taxpayer and his family group is determined by
taking the increase in their combined net worth during each year,
adding personal expenses paid each year, and making proper
adjustments. From the combined taxable net income determined
under this method, the income reported for the other members of
the family group is deducted, leaving the taxable net income of
the taxpayer. See Lias v. Commissioner, supra; Friedman v.
Commissioner, T.C. Memo. 1968-145, affd. 421 F.2d 658 (6th Cir.
1970).
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After considering the entire record, we find nothing that
would support the conclusion that respondent’s determination is
arbitrary or excessive. Indeed, we find the items shown in the
consolidated net worth calculation set out in the appendix to be
supported by the record. Therefore, we sustain respondent’s
determination of deficiencies in each of the years in question.
Respondent also determined that petitioner is liable for an
addition to tax for fraud for each of the years 1987, 1988, 1989,
and 1990. Respondent bears the burden of proof on this issue.
See sec. 7454(a); Rule 142(b). In order to discharge the burden,
respondent must prove by clear and convincing evidence that: (1)
An underpayment exists for each year in issue, and (2) some
portion of the underpayment for that year is due to fraud. See
sec. 7454(a); Clayton v. Commissioner, 102 T.C. 632 (1994);
Petzoldt v. Commissioner, 92 T.C. 661, 699 (1989). On the basis
of respondent’s net worth computation and the evidence supporting
it, we find that respondent has clearly and convincingly
established that petitioner had taxable income on which there was
an underpayment of tax for each of the years in issue.
In order to show that some portion of an underpayment is due
to fraud, respondent must also show that petitioner intended to
evade taxes known to be owing by conduct designed to conceal,
mislead, or otherwise prevent the collection of taxes. See
Stoltzfus v. United States, 398 F.2d 1002, 1004 (3d Cir. 1968);
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Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983). “Fraud * * *
requires intentional wrongdoing. * * * To establish liability,
the Commissioner [has] to show knowing falsehood”. Laurins v.
Commissioner, 889 F.2d 910, 913 (9th Cir. 1989), affg. Norman v.
Commissioner, T.C. Memo. 1987-265.
The existence of fraud is a question of fact to be resolved
upon consideration of the entire record. See Gajewski v.
Commissioner, 67 T.C. 181, 199 (1976), affd. without published
opinion 578 F.2d 1383 (8th Cir. 1978). Fraudulent intent is
rarely established by direct evidence. As a consequence, courts
have inferred fraudulent intent from various kinds of
circumstantial evidence. Some of the indicia of fraud that have
been recognized include: (1) Understatement of income, (2)
failure to keep adequate records, (3) failure to file tax
returns, (4) implausible or inconsistent explanations of
behavior, (5) concealing assets, (6) failure to cooperate with
tax authorities, (7) engaging in illegal activities, (8)
attempting to conceal illegal activities, and (9) dealing in
cash. See Bradford v. Commissioner, 796 F.2d 303, 307-308 (9th
Cir. 1986), affg. T.C. Memo. 1984-601. Petitioner did all of
these.
While willful failure to file does not in itself establish
liability for additions to tax on account of fraud, such failure
may be properly considered in connection with other facts in
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determining whether any deficiency or underpayment of tax is due
to fraud. See Stoltzfus v. United States, supra. The consistent
and substantial understatement of income is itself evidence of
fraud. See Laurins v. Commissioner, supra. Petitioner has been
convicted of tax evasion under section 7201 for his 1989 tax
year. His conviction was the result of a plea of guilty. “A
guilty plea is as much a conviction as a conviction following
jury trial. The elements of criminal tax evasion and civil tax
fraud are identical.” Gray v. United States, 708 F.2d 243, 246
(6th Cir. 1983), affg. T.C. Memo. 1981-1. This Court and
numerous other Federal courts “have held that a conviction for
Federal income tax evasion, either upon a plea of guilty, or upon
a jury verdict of guilt, conclusively establishes fraud in a
subsequent civil tax fraud proceeding through application of the
doctrine of collateral estoppel.” Id.; see also Fontneau v.
United States, 654 F.2d 8, 10 (1st Cir. 1981) (guilty plea);
Arctic Ice Cream Co. v. Commissioner, 43 T.C. 68, 75-76 (1964)
(guilty plea). We therefore hold that petitioner is collaterally
estopped from asserting he is not liable for the addition to tax
prescribed in section 6651(f) in relation to his 1989 tax year.
Petitioner argues he did not intend to evade taxes he knew
to be owing. He claims that he wanted to, and intended to,
eventually pay his taxes. He claims that he failed to file
returns only because he believed that if he filed returns, it
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would expose his criminal activity to other law enforcement
agencies. We do not find petitioner’s testimony in this regard
to be truthful. Indeed, petitioner’s plea of guilty to tax
evasion for 1989 and his admissions in his plea agreement belie
his argument.
Petitioner’s plea agreement in part states:
(2) he made an affirmative attempt to evade that tax by
failing to file an income tax return and pay the taxes
owing for that year and by engaging in the following
affirmative acts alleged in the information, namely –-
dealing extensively in cash and money orders, using
nominees to make certain expenditures, and structuring
a currency transaction in excess of $10,000 to avoid
the filing of a currency transaction report; and
(3) he acted willfully and with the intent to defraud
the government of the additional unreported taxes.
Unger also acknowledges that he engaged in similar
relevant criminal conduct with respect to his 1987 and
1990 income taxes. [Emphasis added.]
Petitioner’s admission that he engaged in similar criminal
conduct with respect to the 1987 and 1990 tax years, along with
the other evidence, is sufficiently clear and convincing that
petitioner’s understatements of tax for 1987 and 1990 were due to
fraud and that his failure to file returns for those years was
fraudulent.
The same pattern of fraud existed both before and after the
1988 tax year. Petitioner admitted to illegal narcotics
trafficking, conducted his business almost exclusively in cash,
used aliases, kept and produced no records of his transactions,
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hid assets in his mother’s name, lied to respondent’s agents
about the source of his income, and consistently failed to file
income tax returns. This pattern constitutes clear and
convincing evidence that petitioner’s understatement of tax for
1988 was also due to fraud.
We hold that petitioner is liable for the additions to tax
for fraud for 1987, 1988, 1989, and 1990 as determined in the
notice of deficiency.
Decision will be entered
for respondent.
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Appendix
Net Worth Computation
Assets: 12/31/86 12/31/87 12/31/88 12/31/89 12/31/90
Cash on hand $5,000.00 $5,000.00 $5,000.00 $5,000.00 $24,000.00
Balance in bank accounts 129,884.69 150,593.57 166,477.42 219,350.78 241,174.21
Automobiles 15,333.41 43,865.29 44,929.79 92,297.20 62,358.87
Real estate 52,500.00 52,500.00 52,500.00 52,500.00 52,500.00
Loan receivable--C. OWCA -0- -0- 10,000.00 10,000.00 10,000.00
Total assets 202,718.10 251,958.86 278,907.21 379,147.98 390,033.08
Liabilities:
Charge cards–-VISA 311.23 1,504.43 1,192.36 -0- 2,237.27
Total liabilities 311.23 1,504.43 1,192.36 -0- 2,237.27
Net worth 202,406.87 250,454.43 277,714.85 379,147.98 387,795.81
Net worth at beginning of year N/A 202,406.87 250,454.43 277,714.85 379,147.98
Change in net worth N/A 48,047.56 27,260.42 101,433.13 8,647.83
Add:
Personal living expenses N/A 15,739.85 21,587.60 35,340.02 24,700.10
Nondeductible losses (vehicles) N/A -0- 952.50 1,662.50 15,628.09
Balance N/A 63,787.41 49,800.52 138,435.65 48,976.02
Less:
Gross income reported–-H. Unger N/A (6,413.00) (12,335.00) (16,805.00)
(16,138.00)
Depreciation expenses N/A (800.00) (800.00) (800.00) (800.00)
Understatement of rental
expense N/A (2,843.00) (1,430.00) (1,733.20) -0-
Nontaxable sources N/A (20,046.56) (10,588.87) (10,488.73) (13,999.55)
Understatement of income N/A 33,685.00 24,647.00 108,609.00
18,038.00
(rounded)