T.C. Memo. 2008-220
UNITED STATES TAX COURT
JACK E. AND RUTH I. CHRISTIANS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21555-07. Filed September 29, 2008.
Robert Alan Jones, for petitioners.
A. Gary Begun, for respondent.
MEMORANDUM OPINION
JACOBS, Judge:1 This matter is before the Court on
respondent’s motion for summary judgment filed pursuant to Rule
121. Petitioners filed a response opposing respondent’s motion.
1
This case was assigned to Judge Julian I. Jacobs for
disposition of respondent’s motion for summary judgment by order
of the Chief Judge on Aug. 12, 2008.
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The issues presented are: (1) Whether petitioners, each of whom
was indicted and subsequently convicted under section 7201 for
willfully attempting to evade and defeat a large part of the
income tax due * * * for the calendar year 1995, by filing
and causing to be filed * * * a false and fraudulent joint
U.S. Individual Income Tax Return, Form 1040, wherein
approximately TWO MILLION NINE HUNDRED FORTY SIX THOUSAND
FIFTY dollars ($2,946,050) of income was excluded from the
return causing an underpayment of approximately EIGHT
HUNDRED TWENTY FOUR THOUSAND EIGHT HUNDRED NINETY FOUR
Dollars ($824,894)in taxes,
are collaterally estopped from contesting their liability for the
civil fraud penalty under section 6663 for the same taxable year;
and (2) whether petitioners are entitled to a $25,600 charitable
contribution deduction for taxable year 1995.
All section references are to the Internal Revenue Code
(Code) as amended, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. The parties stipulated
that any appeal in this case will lie to the Court of Appeals for
the Sixth Circuit.
The Court of Appeals for the Sixth Circuit, in United States
v. Christians, 105 Fed. Appx. 748 (6th Cir. 2004), affirmed
petitioners’ convictions under section 7201. The Court of
Appeals identified the relevant facts to be as follows.
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In 1995, Meijer, Inc., a large retailer, entered into
negotiations with the Christians [petitioners herein] for
the purchase of their Michigan home and an accompanying 20-
acre tract of land. On the day before Meijer made its final
offer of approximately $3.1 million, the Christians created
Cornerstone Management Trust, naming themselves as trustees,
and deeded their property to the trust for $10. The
Christians accepted Meijer’s $3.1 million offer.
A few days before the closing on the land sale, the
Christians created Ottawa Trust, again naming themselves as
trustees. After receiving a check written to the
Cornerstone Management Trust for $3,072,699.94, the
Christians deposited the funds in Ottawa Trust’s account.
In the months following the sale, the Christians moved most
of the money to Barclays Bank in the Cayman Islands,
ultimately sending over $3 million there.
On April 15, 1996, the Christians filed their
individual IRS Form 1040, which omitted any reference to the
real-property sale or to the gain realized from it.[2] The
Christians also filed an IRS Form 1041 for Cornerstone
Management Trust. This return disclosed the property sale,
calculated the tax due at over $1.1 million, and was signed
by Jack Christians. Instead of paying the tax, however,
Jack Christians attached a disclaimer, which read in part:
“The assessment and payment of income taxes is voluntary
with no distraint. . . . The above named taxpayer(s)
respectfully disclaim any liability and decline to volunteer
concerning assessment and payment of any [tax].” The
disclaimer closed by suggesting that if the taxpayer “shows
the tax to be zero,” then the IRS has the obligation of
assessing any tax deficiency.
The IRS audited the Christians, who refused to
cooperate, even after Agent Rogowski of the IRS’s Criminal
Investigation Division became involved. After a court
enforced an administrative summons for their records, the
Christians produced documentation regarding the real
property sale and the trusts. The documents revealed that
the Christians maintained control of the two trusts and, as
a result, retained control over the transfer of their real
property and the proceeds from the sale.
After meeting with Agent Rogowski and after receiving
an accountant’s advice that the proceeds of the sale
2
The return showed a total tax of $9,469.
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belonged on their individual tax return, the Christians
filed an amended 1995 return using an IRS Form 1040X on July
17, 1997. The return listed the tax due at approximately
$1.1 million,[3] stated that the “admitted tax liability is
zero,” then added a tax disclaimer nearly identical to the
one attached to Cornerstone Management Trust’s earlier
return.
On February 27, 2002, a grand jury indicted the
Christians on a single count of willfully attempting to
evade the payment of income tax due from the sale of their
property “by filing ... a false and fraudulent joint U.S.
Individual Income Tax Return, Form 1040” in violation of 26
U.S.C. §7201. The jury returned a guilty verdict against
both defendants. The court sentenced them each to 27-month
prison sentences. [Id. at 749-750; joint appendix refs.
omitted.]
On their 1995 return petitioners claimed a $25,600
charitable contribution deduction consisting of $600 in cash and
$25,000 of other property. Attached to the return was a Form
8283, Noncash Charitable Contributions, which described the
donated property as a house in good condition with a fair market
value of $25,000 and identified the donee as the Evangelistic
Center of Grand Rapids, Michigan. A letter of thanks and a
receipt for $25,000, both signed by Pastor Harry Dunn of the
Evangelistic Center, were attached to the return. In their
amended 1995 return, filed July 17, 1997, in addition to
increasing the amount of their adjusted gross income to include
the gain from the sale of property to Meijer, Inc., petitioners
claimed an additional $120,025 charitable contribution deduction.
3
The amended return increased petitioners’ adjusted gross
income by $2,948,000, with the explanation “Ottawa Revocable
Living Trust Not Included in Original Filing of Form 1040”, and
showed $1,118,112 as the correct amount of total tax.
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Respondent issued a notice of deficiency on June 29, 2007.
Respondent determined that petitioners’ income should be
increased by $2,948,000 to reflect the sale of property to
Meijer, Inc., and disallowed the $25,600 charitable contribution
deduction claimed in the original return. The resulting tax,
according to respondent, is $845,049, leaving a deficiency of
$835,580 after taking into account the amount of tax ($9,469)
shown on the original return. Respondent acknowledges that
petitioners made a payment of $824,894 on January 24, 2003, which
will be applied to the deficiency amount. Respondent also
determined that petitioners are liable for the section 6663 civil
fraud penalty in the amount of $626,685.
Petitioners admit that the gain from the sale of property to
Meijer, Inc., is includable in their income for 1995 and
generated tax. They assert, however, that their tax liability
was not understated but rather was reported by means of two
returns--a Form 1040, U.S. Individual Income Tax Return, and a
Form 1041, U.S. Income Tax Return for Estates and Trusts, filed
by Cornerstone Management Trust.
Petitioners concede in their response opposing respondent’s
motion that “the law is not generally in their favor”, but they
maintain “they should be allowed to contest the fraud penalty on
the basis of the facts which establish that no fraudulent tax
returns were filed but rather the Petitioners refused to pay the
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original amounts due, and moved their assets out of the
jurisdiction of the United States to frustrate collection efforts
by the IRS.”
In summarizing their position, petitioners state:
This is clearly a willful refusal to pay, tax protest type
case not a fraudulent attempt to evade liability. Although
convicted of violating IRC §7201, it is clear that
Petitioners were engaged in conduct to attempt to validate
their incorrect positions that no taxes were due and owing
at that time.
This should not result in collateral preclusion by
fraud. It was not necessary under §7201 for the jury to
find a fraudulent filing to sustain or support the
conviction. Therefore, the facts should be viewed as
admitted by Respondent, thus precluding summary judgment on
the issue.
Petitioners also assert that they are entitled to contest
respondent’s disallowance of their $25,600 claimed charitable
contribution. Finally, petitioners claim that their $824,894
payment of January 24, 2003, extinguished their tax liability.
Discussion
As a preliminary matter, we note that summary judgment is
intended to expedite litigation and avoid unnecessary and
expensive trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678,
681 (1988). The Court may grant summary judgment where there is
no genuine issue of any material fact and 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). The moving party bears the burden of proving that no
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genuine issue of material fact exists, and the Court will view
any factual material and inferences in the light most favorable
to the nonmoving party. Dahlstrom v. Commissioner, 85 T.C. 812,
821 (1985). A partial summary adjudication may be made even if
it does not dispose of all the issues in the case. Rule 121(b);
Naftel v. Commissioner, 85 T.C. 527, 529 (1985). Rule 121(d)
provides that where the moving party properly makes and supports
a motion for summary judgment, “an adverse party may not rest
upon the mere allegations or denials of such party’s pleading,”
but must set forth specific facts, by affidavits or otherwise,
“showing that there is a genuine issue for trial.”
We now turn to the first of the two issues; namely, whether
petitioners’ convictions for income tax evasion under section
7201 collaterally estop them from litigating the issue of their
liability for the civil fraud penalty under section 6663.
In Montana v. United States, 440 U.S. 147, 153-154 (1979),
the Supreme Court provided guidance on the application of the
doctrine of collateral estoppel as follows: “Under collateral
estoppel, once an issue is actually and necessarily determined by
a court of competent jurisdiction, that determination is
conclusive in subsequent suits based on a different cause of
action involving a party to the prior litigation.”
The two Code sections involved herein are section 6663 and
section 7201. Section 6663 provides:
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SEC. 6663. IMPOSITION OF FRAUD PENALTY.
(a) Imposition of Penalty.--If any part of any
underpayment of tax required to be shown on a return is due
to fraud, there shall be added to the tax an amount equal to
75 percent of the portion of the underpayment which is
attributable to fraud.
(b) Determination of Portion Attributable to Fraud.--
If the Secretary establishes that any portion of an
underpayment is attributable to fraud, the entire
underpayment shall be treated as attributable to fraud,
except with respect to any portion of the underpayment which
the taxpayer establishes (by a preponderance of the
evidence) is not attributable to fraud.
(c) Special Rule for Joint Returns.--In the case of a
joint return, this section shall not apply with respect to a
spouse unless some part of the underpayment is due to the
fraud of such spouse.
An “underpayment” for purposes of section 6663 is defined in
section 6664(a), in relevant part, as the amount by which the tax
imposed exceeds the amount shown as the tax by the taxpayer on
his return.
The record shows, and petitioners admit, that they filed a
1995 individual tax return on which they did not report the gain
from the sale of their property to Meijer, Inc., or the tax
imposed on the gain. However, petitioners assert that their tax
liability was not understated but rather was reported by means of
two returns--a Form 1040 and a Form 1041 filed by Cornerstone
Management Trust. Petitioners made this same assertion in
appealing their convictions under section 7201. The Court of
Appeals for the Sixth Circuit rejected this argument, stating:
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Nor may the Christians sidestep this conclusion [that
they willfully evaded their taxes] by pointing out that
their 1995 individual tax return did not contain a false
statement when read in conjunction with Cornerstone
Management Trust’s IRS Form 1041, which did disclose the tax
owed and proceeded to disclaim any liability for it. The
Government prosecuted the Christians for income tax evasion
with respect to their individual tax return, not the return
of Cornerstone Management Trust. And their individual
return neither acknowledged nor paid the tax due. No doubt,
a jury could have concluded that the acknowledgment of the
sale and the tax due on the Cornerstone Management Trust
form undermined a finding that the Christians acted
willfully and committed an affirmative act of evasion. But
in view of the Christians’ prior tax-filing experiences,
their sudden decision no longer to use an accountant, their
creation of the sham trusts and offshore accounts and their
non-cooperative conduct once the Government inquired about
the sale, the Christians cannot tenably argue that the jury
was compelled to reach such a conclusion on the basis of the
Cornerstone tax filing. [United States v. Christians, 105
Fed. Appx. at 752].
We are mindful that petitioners, in their amended return,
admitted an underpayment of tax for 1995. See Badaracco v.
Commissioner, 464 U.S. 386, 399 (1984).4 Therefore, there is no
doubt that there was an “underpayment of tax required to be shown
on a return” with respect to petitioners’ 1995 return as required
by section 6663.
4
Petitioners do not appear to argue that their amended
return, filed after they were notified that the IRS’s Criminal
Investigation Division had become involved, remedied the
fraudulent underpayment with respect to their original return.
Indeed, as the Supreme Court noted in Badaracco v. Commissioner,
464 U.S. 386, 394 (1984), “once a fraudulent return has been
filed, the case remains one ‘of a false or fraudulent return,’
regardless of the taxpayer’s later revised conduct, for purposes
of criminal prosecution and civil fraud liability” and “a
taxpayer who submits a fraudulent return does not purge the fraud
by subsequent voluntary disclosure”.
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Section 7201 provides:
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.
Petitioners were convicted of violating section 7201. We
have repeatedly held that “A conviction for an attempt to evade
or defeat tax pursuant to section 7201, either upon a guilty plea
or upon a jury verdict, conclusively establishes fraud in a
subsequent civil tax fraud proceeding through the application of
the doctrine of collateral estoppel.” Marretta v. Commissioner,
T.C. Memo. 2004-128 (citing DiLeo v. Commissioner, 96 T.C. 858,
885 (1991), affd. 959 F.2d 16 (2d Cir. 1992) and Frey v.
Commissioner, T.C. Memo. 1998-226), affd. 168 Fed. Appx. 528 (3d
Cir. 2006); see also Montalbano v. Commissioner, T.C. Memo. 2007-
349 (“It is well established that a final criminal judgment for
tax evasion under section 7201 collaterally estops relitigation
of the issue of fraudulent intent in a subsequent proceeding over
the civil fraud penalty.”); Uscinski v. Commissioner, T.C. Memo.
2006-200 (“Because the elements of criminal tax evasion and civil
tax fraud are identical, petitioner’s prior conviction under
section 7201 conclusively establishes the elements necessary for
finding fraud under section 6663.”); Wilson v. Commissioner, T.C.
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Memo. 2002-234 (“We hold that the doctrine of collateral estoppel
bars * * * [the taxpayer convicted under section 7201] from
relitigating in the instant case the matters litigated in * * *
[the taxpayer’s] criminal tax proceeding, i.e., whether * * *
[the taxpayer] underpaid his tax for each of the taxable years *
* * and whether his underpayment of such tax for each such year
was due to fraud.”). Our holding in this regard has been
affirmed by the Court of Appeals for the Sixth Circuit. Shah v.
Commissioner, 208 F.3d 215 (6th Cir. 2000), affg. without
published opinion T.C. Memo. 1999-71; Gray v. Commissioner, 708
F.2d 243, 246 (6th Cir. 1983), and cases cited thereat, affg.
T.C. Memo. 1981-1.5
As recounted supra, petitioners were indicted and convicted
for willfully attempting to evade the payment of income tax due
5
Petitioners, in their opposition to respondent’s motion for
summary judgment, rely on the dissenting opinion in Gray v.
Commissioner, 708 F.2d 243, 247 (6th Cir. 1983) Merritt, J.,
dissenting, affg. T.C. Memo. 1981-1. The taxpayer in Gray, who
entered a guilty plea to income tax evasion under sec. 7201,
claimed that he did not understand that his guilty plea would
have collateral consequences in subsequent civil proceedings.
The dissent objected to application of collateral estoppel under
those circumstances. Even were we to recognize a difference
between a guilty plea and a jury verdict for purposes of
application of collateral estoppel in these circumstances, which
we do not, see Marretta v. Commissioner, T.C. Memo. 2004-128,
affd. 168 Fed. Appx. 528 (3d Cir. 2006), petitioners’ convictions
were the result of a jury verdict of income tax evasion under
sec. 7201 rather than the result of guilty pleas to those
charges. In any event, apart from our own precedent, we would be
constrained by the majority position in Gray v. Commissioner,
supra, to apply the doctrine of collateral estoppel to the case
at bar. See Golsen v. Commissioner, 54 T.C. 742, 757 (1970),
affd. 445 F.2d 985 (10th Cir. 1971).
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from the sale of their property by filing a false and fraudulent
joint tax return for 1995 in violation of section 7201. As the
Court of Appeals noted, the petitioners’ filing of a false Form
1040 constituted the affirmative act of evasion under section
7201 charged in the indictment. United States v. Christians, 105
Fed. Appx. at 753. Therefore, contrary to petitioners’ claim,
the issue of whether they filed a false and fraudulent return for
1995 was in fact “actually and necessarily determined by a court
of competent jurisdiction”, Montana v. United States, 440 U.S. at
153. Thus, petitioners are estopped from relitigating that issue
in this proceeding.
On the record presented, we find that there is no genuine
issue of material fact with respect to the section 6663 penalty
insofar as it relates to petitioners’ 1995 underpayment
attributable to petitioners’ failure to report the gain from the
sale of their property to Meijer, Inc., in their 1995 return. We
thus hold that a decision may, and should, be entered against
petitioners on that issue as a matter of law. Accordingly, we
sustain respondent’s determination to impose a penalty under
section 6663 with respect to the portion of petitioners’ 1995
underpayment attributable to the omitted gain from the sale.
We now turn to that portion of petitioners’ 1995
underpayment which is attributable to petitioners’ $25,600
claimed charitable contribution deduction. Petitioners’
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entitlement to the charitable contribution deduction was not
addressed in the criminal proceeding which resulted in their
convictions under section 7201, and petitioners dispute
respondent’s disallowance of the charitable contribution
deduction. Summary judgment with respect to this matter is not
appropriate. A trial with respect to this issue should proceed.
A determination of the extent to which petitioners have paid
their outstanding tax liability must await the resolution of the
issue relating to the claimed charitable contribution deduction.
To reflect the foregoing,
An order granting in part
and denying in part
respondent’s motion for
summary judgment will be
issued.