T.C. Memo. 2001-232
UNITED STATES TAX COURT
RICHARD P. CONSOLE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14972-97. Filed September 5, 2001.
Richard P. Console, pro se.
Steven W. Ianacone, for respondent.
MEMORANDUM OPINION
LARO, Judge: Respondent determined the following
deficiencies, additions to tax, and accuracy-related penalty with
respect to petitioner’s Federal income taxes:
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Accuracy-
Related
Additions to Tax Penalty
Year Deficiency Sec. 6653(b)(1)(A) Sec. 6661(a) Sec. 6653(b) Sec. 6663
1
1986 $104,596 $78,447 $26,149 ––- ---
1
1987 56,197 42,148 14,049 —–- ---
1988 50,951 —-- 12,737 $38,213 ---
1989 64,805 --- --- --- $48,604
1992 8,130 —-- —-- —-- ---
1
Additionally, sec. 6653(b)(1)(B) imposes an addition of 50
percent of the interest due on the deficiency.
Following a trial at which neither party presented any
substantive evidence relating to respondent’s determinations, we
must decide whether petitioner is liable for those amounts. We
hold he is. Section references are to the Internal Revenue Code
in effect for the subject years, and Rule references are to the
Tax Court Rules of Practice and Procedure. Petitioner resided in
New Jersey when his petition was filed.
Background
On November 21, 2000, respondent moved the Court under Rule
91(f) to issue an order directing petitioner to show cause why
proposed facts in evidence should not be accepted as established.
Three days later, the Court granted respondent’s motion and
ordered petitioner to file with the Court by December 8, 2000, a
response under Rule 91(f)(2) showing why the matters set forth in
respondent’s motion papers should not be deemed admitted for
purposes of this case. After petitioner failed to respond to the
substance of our order, we ordered that the facts and evidence
set forth in respondent’s motion papers be deemed established for
purposes of this case.
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Petitioner is considered under Rule 91(f) to have stipulated
the following relevant facts:
9. During each of the taxable years 1986, 1987,
1988 and 1989, the petitioner was a shareholder and
officer of Console, Wood and Curico, P.C. a law firm
incorporated under the laws of the state of New Jersey.
10. During the [sic] each of the taxable years
1986, 1987, 1988 and 1989, the petitioner followed a
practice of bringing bills for his personal expenses to
the law office for payment with checks drawn on the
bank accounts of the law firm.
11. All checks in payment of these personal bills
were coded by being marked with the letter “A”.
12. Checks so coded were entered in the cash
disbursement journal of the law firm and charged to an
account labeled “RPC”.
13. The above practice was elicited from the
petitioner during his testimony at a court appearance
where he was on trial for insurance fraud.
14. Petitioner would meet with his accountant and
petitioner would decide the nature of the item,
business or personal, and would direct the accountant
where to deduct the items determined to [be] business.
15. All items determined to be personal by the
petitioner were charged to petitioner as additional
income and reported on his personal return.
16. Based on a review of the accountant’s work
papers, the law firm’s cash disbursement journal, the
cancelled checks coded with an “A”, discussions with
the accountant and the court testimony of petitioner,
there was an excess of personal expenses of petitioner
paid by the law firm over the amounts reported as
income by petitioner for the taxable years 1986, 1987,
1988 and 1989.
17. Petitioner’s fraudulent omission of specific
items of income on his income tax returns filed for the
taxable years 1986, 1987, 1988 and 1989 is a part of a
four year pattern of intent to evade taxes.
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18. The petitioner understated his taxable income
on his income tax returns for the taxable years 1986,
1987, 1988 and 1989, in the amounts of $209,192.00,
$145,966.00, $181,965.00 and $231,448.00, respectively.
20. The petitioner understated his income tax
liabilities on his income tax returns for the taxable
years 1986, 1987, 1988 and 1989, in the amounts of
$104,596.00, $56,197.00, $50,951.00 and $64,805.00,
respectively.
21. A part of each deficiency in income tax for
taxable years 1986, 1987, 1988 and 1989, is due to
fraud with intent to evade taxes.
22. Richard P. Console, the petitioner herein, is
the same person who was the defendant in the criminal
case of United States of America v. Richard P. Console
(District of New Jersey), Case Number 91-42(nhp).
23. The respondent herein is a party in privity
with the United States of America, the prosecuting
party in the aforesaid criminal case in which the
petitioner herein was the defendant.
24. The indictment filed on January 10, 1991, in
said criminal case sets forth the following charge
against the defendant, the petitioner herein:
THE GRAND JURY CHARGES:
COUNT ONE
On or about September 8, 1987, in the District of New
Jersey and elsewhere.
RICHARD P. CONSOLE, Esq.,
the defendant, unlawfully, wilfully and knowingly did
attempt to evade and defeat a large part of the income
tax due and owing by himself to the United States of
America for the calendar year 1986, by preparing and
causing to be prepared, signing and causing to be
signed and filing and causing to be filed with the
Internal Revenue Service, a false and fraudulent 1986
United States Individual Income Tax Return on behalf of
himself, wherein it was stated that his taxable income
for the said calendar year was $145,565.00 and that the
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income tax due and owing to the United States of
America $57,018.00, whereas the defendant then and
there well knew that his taxable income for the said
calendar year was approximately $354,756.78 upon which
taxable income there was then due and owing to the
United States of America an income tax of approximately
$161,613.89.
In violation of Title 26, United States Code,
Section 7201, and Title 18, United States Code, Section
2. * * *
25. The petitioner on August 22, 1995, entered a
plea of guilty to the charge set forth against him in
said indictment. * * *
26. On September 6, 1995, the United States
District Court entered its judgment pursuant to said
plea. * * *
27. Among the issues of fact determined in the
aforesaid criminal case was whether Richard P. Console,
the defendant therein, and the petitioner herein, did
in fact willfully file a false and fraudulent income
tax return for the taxable year with intent to evade
and defeat income tax, and whether he did in fact by
such means understate a part of the income tax due and
owing by him to United States of America for said year.
28. During the 1992 tax year, petitioner received
$0.00 income on his purported Schedule C business and
listed expenses of $563,871.00 including $554,861.00 in
attorneys’s fees.
29. The $554,861.00 in attorney’s fees was paid
for his criminal defense in the action described in
paragraphs 22 through 26 above and in a prior criminal
matter described in paragraph 13 above.
Discussion
We address first whether petitioner is liable for the
deficiencies and additions to tax under section 6661(a) for
substantial understatement. Respondent’s determination is
presumed correct, and petitioner bears the burden of proving it
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wrong. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933). Petitioner is deemed to have stipulated that he
understated his income tax liabilities for 1986, 1987, 1988, and
1989 in the amounts shown as deficiencies, and the record
contains no evidence that would support a contrary finding. Nor
does the record contain any evidence to prove wrong the
deficiency for 1992 or the additions to tax under section
6661(a). For returns due before January 1, 1990, a taxpayer
whose return contains a substantial understatement of income tax
is liable for an addition to tax under section 6661 equal to 25
percent of the underpayment attributable to the understatement.
Pallottini v. Commissioner, 90 T.C. 498, 500-503 (1988).1
As to respondent’s determination of these deficiencies and
additions thereto, petitioner relies solely on his argument that
the notice of deficiency is invalid because, he alleges,
respondent impermissibly used grand jury material during the
audit underlying the notice of deficiency. At trial, petitioner
called two witnesses to attempt to prove this allegation. The
first witness was a special agent in respondent’s Criminal
1
An understatement is substantial if it exceeds the greater
of: (a) 10 percent of the tax required to be reported on the
return or (b) $5,000. Sec. 6661(b)(1)(A)(i) and (ii). An
understatement is reduced to the extent: (1) The position taken
resulting in the understatement was supported by substantial
authority, or (2) the taxpayer adequately disclosed in the
return, or in an attachment, relevant facts relating to his or
her position. Sec. 6661(b)(2)(B)(i) and (ii).
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Investigation Division. He was involved with petitioner’s grand
jury investigation and testified that he had prepared reports and
computations of petitioner’s tax liabilities exclusively for use
in the grand jury proceedings. He also testified that he was
unaware that any of those reports or computations were used by
respondent in the course of the audit underlying the notice of
deficiency. The second witness, one of respondent’s revenue
agents, provided no testimony that would support petitioner’s
allegation.
On the record before us, we are unpersuaded that respondent
relied on any grand jury material in the formulation of the
notice of deficiency. We hold that the notice of deficiency is
valid. Accordingly, we sustain respondent’s determination as to
the deficiencies and the additions to tax under section 6661(a).
We turn next to respondent’s determination that petitioner
is liable for the additions to tax for fraud under section
6653(b) and an accuracy-related penalty for fraud under section
6663. Respondent must prove this determination by clear and
convincing evidence. Sec. 7454(a); Rule 142(b); Castillo v.
Commissioner, 84 T.C. 405, 408 (1985); Rowlee v. Commissioner, 80
T.C. 1111, 1113 (1983). An addition to tax (or accuracy-related
penalty) for fraud is a civil sanction “provided primarily as a
safeguard for the protection of the revenue and to reimburse the
Government for the heavy expense of investigation and the loss
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resulting from the taxpayer's fraud.” Helvering v. Mitchell, 303
U.S. 391, 401 (1938).
Fraud denotes intentional wrongdoing on the part of the
taxpayer with the specific purpose of evading a tax known or
believed to be owing. Petzoldt v. Commissioner, 92 T.C. 661, 698
(1989). Fraud is shown by proof that the taxpayer intended to
conceal, mislead, or otherwise prevent the collection of his or
her taxes and that there is an underpayment of tax. Spies v.
United States, 317 U.S. 492, 499 (1943); Stoltzfus v. United
States, 398 F.2d 1002, 1005 (3d Cir. 1968); Webb v. Commissioner,
394 F.2d 366, 377 (5th Cir. 1968), affg. T.C. Memo. 1966-81;
Rowlee v. Commissioner, supra at 1123. Thus, in order to sustain
his burden as to fraud, respondent must prove that: (1)
Petitioner underpaid his taxes for the relevant years, and (2)
some part of each underpayment was due to fraud.2
It is well settled in this Court that the Commissioner may
establish fraud by relying upon matters deemed admitted under
Rule 90. Marshall v. Commissioner, 85 T.C. 267 (1985); Morrison
v. Commissioner, 81 T.C. 644, 651 (1983); Doncaster v.
Commissioner, 77 T.C. 334, 336 (1981). The Commissioner may also
establish fraud by relying on facts deemed to be stipulated under
2
If respondent establishes that some part of the
underpayment for a year is due to fraud, all of the underpayment
is deemed attributable to fraud unless petitioner proves
otherwise. See sec. 6653(b)(2), as in effect for 1986 through
1988; sec. 6663(b), as in effect for 1989.
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Rule 91(f). Ambroselli v. Commissioner, T.C. Memo. 1999-158. On
the basis of our review of the record, we conclude that
respondent has clearly and convincingly proven both prongs of the
two-part test for fraud. Petitioner is deemed under Rule 91(f)
to have stipulated that “a part of each deficiency for 1986,
1987, 1988, and 1989, was due to fraud with the intent to evade
taxes”. As to 1986, petitioner is also deemed to have stipulated
that he pled guilty to a violation of section 7201. Petitioner’s
conviction of criminal tax evasion for 1986 under section 7201
collaterally estops him from denying that his underpayment of
income tax for 1986 was due to fraud for purposes of section
6653(b). See, e.g., Johnson v. Sawyer, 47 F.3d 716, 722 (5th
Cir. 1995); Gray v. Commissioner, 708 F.2d 243 (6th Cir. 1983),
affg. T.C. Memo. 1981-1; Castillo v. Commissioner, supra at 409-
410; Brooks v. Commissioner, 82 T.C. 413, 431 (1984), affd.
without published opinion 772 F.2d 910 (9th Cir. 1985); Amos v.
Commissioner, 43 T.C. 50 (1964), affd. 360 F.2d 358 (4th Cir.
1965). We sustain respondent’s determinations of the additions
to tax and the accuracy-related penalty for fraud.
Decision will be entered
for respondent.