T.C. Memo. 2008-262
UNITED STATES TAX COURT
JOSEPH CARIONE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23559-06. Filed November 24, 2008.
James O. Druker, for petitioner.
Theresa G. McQueeney, for respondent.
MEMORANDUM OPINION
SWIFT, Judge: Respondent determined a deficiency of $88,914
in petitioner’s 2000 Federal income tax.
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The primary issue for decision is whether $388,301 in
capital gain income received relating to a 1998 court-ordered
criminal forfeiture sale of the assets of petitioner’s S
corporation is taxable to petitioner and if so whether it is
taxable to petitioner in the year 2000.
Unless otherwise indicated, references to sections are to
the Internal Revenue Code applicable to 2000, and references to
Rules are to the Tax Court Rules of Practice and Procedure.
Background
The facts have been stipulated and are so found. This case
has been submitted under Rule 122. At the time of filing his
petition, petitioner resided in New York.
During the 1990s petitioner was president, chief operating
officer, and sole shareholder of Grand Carting, Inc. (Grand
Carting), a New York S corporation which operated a commercial
trash-hauling business on Long Island, New York.
In 1996 the United States indicted petitioner, Grand
Carting, and other individuals in the Federal District Court for
the Eastern District of New York (District Court) on charges of
money laundering, conspiracy, and other crimes under the
Racketeer Influenced and Corrupt Organizations Act (RICO),
18 U.S.C. secs. 1961-1968 (2006).
The indictment also asked for “RICO forfeiture” to the
United States of assets which petitioner and the other named
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defendants acquired or maintained in violation of RICO. See 18
U.S.C. sec. 1963(a).
On September 10, 1996, the District Court issued a
restraining order which, among other things, restrained
petitioner, without approval of the court, from in any way
alienating or selling the property and assets of Grand Carting
other than in the ordinary course of business and appointed the
U.S. Marshals Service to monitor Grand Carting and to ensure that
its assets were not sold or wasted during the pendency of the
restraining order.
During the pendency of the criminal charges, Grand Carting
lost customers and revenue. Accordingly, petitioner sought to
sell the assets of Grand Carting, and petitioner negotiated for
the sale of Grand Carting’s assets to Waste Management of NY,
Inc. (WMI), for $548,309.
On May 5, 1998, after obtaining permission from the District
Court and pursuant to an order of the District Court, the sale of
Grand Carting’s assets to WMI occurred, and the $548,309 proceeds
were deposited into an escrow account with the District Court to
be withdrawn only upon further order of the court.
Considering only its tax bases in the assets sold, on the
sale to WMI Grand Carting realized a net long-term capital gain
of $388,301.
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On February 12, 1999, as part of the plea agreements which
were entered into in the criminal case, the District Court issued
a Consent Order of Forfeiture signed by all of the defendants in
the criminal case including Grand Carting and petitioner. As
part of the Consent Order of Forfeiture the defendants in the
criminal case, including Grand Carting and petitioner, agreed
that they were jointly and severally liable to the United States
for a forfeiture judgment of $6,900,721.
The February 12, 1999, Consent Order of Forfeiture provided
that the $6.9 million forfeiture judgment was to be fully paid by
the defendants by July 1, 2000, and that initially payments on
the judgment were to be made by various lead defendants in the
criminal case other than Grand Carting and petitioner. However,
the forfeiture judgment also provided that Grand Carting’s assets
that had been placed in escrow were subject to forfeiture to pay
for any balance due on the forfeiture judgment as of the July 1,
2000, payment deadline. The language of the Consent Order of
Forfeiture reads as follows:
In the event that the Forfeiture Judgment is not fully
paid by July 1, 2000, the government may in its sole
discretion sell, and/or forfeit and sell, all property
restrained in this matter, including the proceeds of
the sale of Grand Carting, which shall be held in
escrow until the Forfeiture is satisfied, or until July
1, 2000, whichever is earlier. The funds realized by
the sale of these properties, after payment of all
reasonable costs, expenses associated with the sale,
shall be forfeited to the government to the extent that
the Forfeiture Judgment remains unsatisfied, and the
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funds shall be deposited into the Asset Forfeiture Fund
and credited towards the Forfeiture Judgment.
On July 1, 2000, the balance unpaid on the forfeiture
judgment was over $2 million, and on August 9, 2000, the District
Court ordered that the $548,309 proceeds from the sale of Grand
Carting’s assets which were in the escrow account be transferred
into the Asset Forfeiture Fund and be applied as further payment
on the forfeiture judgment.
On August 9, 2000, the District Court issued an order which
referenced the July 1, 2000, payment deadline and which ordered
that the proceeds be released from escrow, be paid into the Asset
Forfeiture Fund, and be applied to the forfeiture judgment.
On January 16, 2001, $560,689 in the escrow account, plus
accrued interest of $63,292, was actually disbursed from the
escrow account and transferred into the Asset Forfeiture Fund.
Tax Returns
The $388,301 net long-term capital gain realized on the sale
of Grand Carting’s assets was reported on its 1998 Federal
corporate income tax return and on an attached Schedule K-1,
Shareholder’s Share of Income, Credits, Deductions, etc.,
indicating petitioner as the sole shareholder.
In October 1999 petitioner, a cash basis taxpayer, filed his
1998 individual Federal income tax return and reported thereon
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the $388,301 net long-term capital gain realized on the sale of
Grand Carting’s assets as passthrough income to petitioner.
On September 18, 2000, petitioner paid to respondent the
$49,400 in Federal income taxes attributable to the $388,301
reported capital gain on the sale of Grand Carting’s assets.
On November 2, 2000, petitioner filed with respondent an
amended 1998 Federal income tax return on which petitioner
claimed that the assets of Grand Carting were not sold in 1998
and that the proceeds relating to the sale of the assets should
be taxed to him, if ever, in 2000.
On or about September 6, 2002, petitioner filed a second
amended 1998 Federal income tax return on which petitioner
claimed further that the $388,301 proceeds should not be taxable
to him in 1998 because the proceeds were directly forfeited to
the U.S. Government and he never had dominion and control over
them. Petitioner’s two amended tax returns include the following
statement: “Taxpayer’s accountant incorrectly included a capital
gain from the sale of [Grand Carting], whereas in fact, this
corporation was not sold in 1998. The taxable event, if any,
should occur in the year 2000.”
For 2000, Grand Carting did not file a Federal corporate
income tax return.
On October 15, 2001, petitioner filed his 2000 Federal
income tax return and reported thereon total income of $44,165,
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which did not include any portion of the $388,301 long-term
capital gain relating to the sale of Grand Carting’s assets.
No disclosure was made on petitioner’s 2000 Federal income
tax return relating to the sale of Grand Carting’s assets or the
$388,301 proceeds.
On their 1998, 1999, 2000, and 2001 Federal income tax
returns, neither petitioner nor Grand Carting reported the
$63,292 in interest income that accrued over the course of those
years on the funds being held in escrow, which interest in
January of 2001 was transferred to the Asset Forfeiture Fund.
District Court Refund Suit
On the basis of respondent’s failure to allow petitioner
the refund that was claimed in petitioner’s two amended 1998
Federal income tax returns, petitioner timely filed in the
District Court for the Eastern District of New York a suit for
refund alleging overpayment of his 1998 Federal income taxes.
See Carione v. United States, 368 F. Supp. 2d 186 (E.D.N.Y.
2005), motion for reconsideration denied, 368 F. Supp. 2d 196
(E.D.N.Y. 2005), appeal dismissed per unreported stipulation (2d
Cir. Sept. 19, 2005).
In the District Court litigation, petitioner argued that
because the proceeds were subject to the forfeiture order and
were placed directly in escrow, he neither received nor had
control over the proceeds. Accordingly, petitioner claimed that
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he should not be taxed thereon--not in 1998 when Grand Carting’s
assets were sold and not in 2000 when the proceeds were ordered
by the District Court to be withdrawn from escrow and paid on the
forfeiture judgment.
In the District Court litigation, the Government argued that
the proceeds should be taxed to petitioner in 1998 because
petitioner in 1998 negotiated the sale of Grand Carting’s assets,
because the sale of the assets actually occurred in 1998, and
because petitioner knew that the proceeds of the sale would be
placed in escrow and eventually likely used to satisfy the
forfeiture judgment.
On March 17, 2005, the District Court in Carione ruled in
petitioner’s favor and held that the proceeds were not taxable to
petitioner in 1998; rather, the District Court explained, the
proceeds should be taxed to petitioner in August 2000 when the
proceeds were ordered to be released from the bona fide and
arm’s-length escrow over which the District Court, not
petitioner, had control and in the year in which the proceeds
effectively were used to satisfy petitioner’s forfeiture
judgment.
An appeal from the District Court’s opinion was dismissed
pursuant to the parties’ stipulation, and on September 19, 2005,
the District Court’s judgment in Carione became final.
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On September 7, 2006, respondent mailed to petitioner a
notice of deficiency for 2000 charging petitioner in that year
with the $388,301 additional long-term capital gain income
relating to the sale and use of the $388,301 Grand Carting
proceeds to pay petitioner’s obligation on the forfeiture
judgment.
One day before the scheduled trial herein, respondent filed
a motion for leave to file a second amended answer seeking to
charge petitioner with $63,291 in interest income that had
accrued on the $388,301 Grand Carting proceeds while the proceeds
were held in the escrow account.
Discussion
Under section 61, all income from whatever source derived is
included in gross income. Under section 61(a)(2) and (3), gains
derived from business and from dealings in property are
specifically included in gross income.
Under section 1366, because petitioner was the sole
shareholder the gains and losses of Grand Carting pass through to
petitioner, and the possibility that the assets of Grand Carting
may have been earned through illegal activities does not alter
the taxability of gains relating thereto. See James v. United
States, 366 U.S. 213, 218 (1961).
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It is clear that the proceeds realized on the sale of Grand
Carting’s assets generally would be taxable to petitioner as the
100-percent owner of the stock of Grand Carting.
Petitioner, however, argues that the $388,301 Grand Carting
proceeds should not be charged to him as income even in 2000
because the proceeds were placed directly into escrow and were
always subject to the District Court’s control, not petitioner’s.
Petitioner further emphasizes that from the beginning of the
forfeiture proceeding his liability under the $6.9 million
forfeiture judgment was not personal, was to be paid solely from,
and was limited or capped by the amount of, the proceeds realized
on a sale of the Grand Carting assets.
We note that if the proceeds are taxable to petitioner in
2000, there clearly was an omission of more than 25 percent of
gross income on petitioner’s 2000 Federal income tax return, the
6-year period of limitations would apply, and respondent’s notice
of deficiency to petitioner for 2000 would be timely.1
The District Court in Carione v. United States, supra at
194, explained with regard to the taxability of the proceeds to
petitioner as follows:
1
Respondent argues in the alternative that if the
assessment period of limitations with regard to petitioner’s
Federal income taxes for 2000 is not open under sec.
6501(e)(1)(A), then the assessment period of limitations for 2000
would be open under the mitigation provisions of secs. 1311 to
1314.
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Courts should construe “income” liberally, “in
recognition of the intention of Congress to tax all
gains except those specifically exempted. * * *
[James v. United States, 366 U.S. 213, 219 (1961).] A
further general principle of taxation is that “an
individual should be taxed on any economic benefit
conferred upon him, to the extent that the benefit has
an ascertainable fair market value.” The above quotes
suggest, and the various cases demonstrate, that a
taxpayer does not gain income only through his dominion
and control over something; a taxpayer also realizes
taxable income where he “obtains the fruition of the
economic gain which has already accrued to him.”
Comm’r v. Fender Sales, Inc., 338 F.2d 924, 928 (9th
Cir. 1964).
In conformity with these principles, the Supreme
Court has long held that “discharge by a third person
of an obligation to [the taxpayer] is equivalent to
receipt by the person taxed.” Old Colony Trust Co. v.
Comm’r, 279 U.S. 716, 729 * * * (1929) (employer’s
payment of employee’s taxes constitutes taxable
income). “Income is not any the less taxable income of
the taxpayer because by his command it is paid directly
to another in performance of the taxpayer’s obligation
to that other.” [United States v.]Joliet & C.R. Co.,
315 U.S. * * * [44, 49 (1942)] (quoting Raybestos-
Manhattan, Inc. v. U.S., 296 U.S. 60, 64 * * * (1935)).
Where a taxpayer’s property interest, even one that was
never in his control or possession, is used to satisfy
his outstanding obligation to the Government, the
corresponding reduction in the amount of that
obligation constitutes an “economic benefit,” and is
taxable as income. See Koehn v. Comer, No. 97 Civ.
76328, 2003 WL 1735496, at *1 (E.D. Mich. Feb. 19,
2003).
With regard to whether the capital gain should be included
in petitioner’s income in 1998, however, the District Court went
on to explain as follows:
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Where a taxpayer’s would-be income is deposited in
an escrow account beyond that taxpayer’s reach, it
generally should not be included in his taxable income.
See, e.g., C.I.R. v. Indianapolis Power & Light Co.,
493 U.S. 203, 211 n.7 * * * (1990) (acknowledging
Commissioner’s concession that security deposits held
by power company “would not be taxable if they were
placed in escrow”); Ware v. C.I.R, 906 F.2d 62, 65 n.2
(2d Cir. 1990) (fee not actually or constructively
received by firm for tax purposes so long as held in
escrow beyond firm’s control); and Reed v. Comm’r, 723
F.2d 138, 149 (1st Cir. 1983) (taxpayer not required to
report income held in bona fide escrow for payment in
later tax period and from which no other present
beneficial interest is derived). [Carione v. United
States, 368 F. Supp. 2d at 192-193.]
And the District Court concluded that--
(1) the sale of Grand Carting’s assets produced taxable
income to Grand Carting, (2) and thus to Carione, but
(3) only in August 2000, when such proceeds were
released from escrow and used to satisfy * * *
[petitioner’s] prior forfeiture judgment. [Id.]
We generally agree with the analysis of the District Court
as to the applicable tax law. We also agree with the District
Court’s dicta that petitioner has taxable income for 2000 from
the proceeds of the sale of Grand Carting’s assets.2
For Federal income tax purposes, a gain is treated as
realized when the taxpayer receives the benefit of the gain,
which may occur even if the proceeds representing the gain are
not paid directly to the taxpayer. Helvering v. Horst, 311 U.S.
2
Respondent acknowledges that the doctrine of collateral
estoppel does not apply to the resolution of this issue.
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112, 115 (1940). The proceeds from the sale of Grand Carting’s
assets were not paid to petitioner in 1998, and because they were
escrowed petitioner did not receive the benefit of the proceeds
until 2000 when they were ordered to be released from escrow and
used to discharge petitioner’s debt under the forfeiture
judgment.
When the defendants in the criminal case (including
petitioner) failed to satisfy the July 1, 2000, forfeiture
payment deadline and the escrowed proceeds were ordered released
by the District Court to be applied to the forfeiture fund (i.e.,
in August 2000), petitioner received the economic benefit of the
1998 $388,301 net capital gain and of the $63,292 interest
income. The August 9, 2000, District Court order memorialized
the release of the funds from escrow and resulted in a discharge
of petitioner’s forfeiture obligation.
As sole shareholder of the S corporation, petitioner is
charged with the income thereof and is to be taxed thereon on
August 9, 2000, when he received the economic benefit of the
proceeds upon entry of the order directing application thereof to
his obligation under the criminal forfeiture.
We note that although the escrowed funds were physically
transferred out of the escrow in January 2001, the benefit of the
escrowed funds shifted to or was realized by petitioner on August
9, 2000, the date of the District Court’s order. As of that date
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petitioner’s liability under the forfeiture judgment was
satisfied and the various parties’ entitlement to the funds was
settled and no longer in dispute.
Because the unreported $388,301 long-term capital gain
taxable to petitioner in 2000 is in excess of 25 percent of the
reported 2000 gross income of $44,165, the 6-year period of
limitations under section 6501(e)(1)(A) applies and respondent’s
September 7, 2006, notice of deficiency is timely.
On the basis of well-established tax law we conclude that
the $388,301 proceeds are taxable to petitioner in 2000. As the
Supreme Court has held, the “discharge by a third person of an
obligation to * * * [the taxpayer] is equivalent to receipt by
the person taxed.” Old Colony Trust Co. v. Commissioner, 279
U.S. 716, 729 (1929) (employer’s payment of employee’s taxes
constitutes taxable income to the employee).
Respondent also argues that under the doctrine of judicial
estoppel petitioner should be barred from challenging the
taxability to him in 2000 of the forfeiture funds. Judicial
estoppel is an equitable doctrine that prevents a party in a
subsequent judicial proceeding from asserting a position
contradictory to a position that the party asserted and that a
court adopted in a prior judicial proceeding.
We have explained the proper application of judicial
estoppel as follows:
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We hold that the doctrine of judicial estoppel is
available in the Tax Court to be used in appropriate
cases, such as the one before us, to prevent parties
from taking positions that are inconsistent with those
previously asserted by the parties and accepted by
courts and that would result in inappropriate and
prejudicial consequences to the courts. [Huddleston v.
Commissioner, 100 T.C. 17, 28-29 (1993).]
In view of petitioner’s affirmative contention in the prior
refund suit that the forfeiture proceeds should be taxable to
petitioner, if at all, in 2000, and the District Court’s
agreement therewith, and in view of our holding that petitioner
is taxable on the proceeds, petitioner is judicially estopped
from denying the taxability thereof in 2000.
We conclude that the doctrine of judicial estoppel also
applies here to bar petitioner from arguing that he is not
taxable on the $388,301 proceeds in 2000.
Petitioner argues that in his District Court refund suit the
Government should have filed a counterclaim raising an
alternative issue as to the taxability to petitioner of the
forfeiture proceeds in 2000. Having failed to do so, petitioner
argues respondent now is precluded from asking this Court to tax
him in 2000 on the proceeds. Petitioner states that respondent
is engaged in “serial litigation” (i.e., “trying to tax the same
item of income in different years, particularly where the issue
was squarely raised in the first lawsuit.”).
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We disagree. Each taxable year stands on its own.
Respondent’s position that petitioner should be taxed on the
forfeiture proceeds in 2000 was not a required counterclaim in
petitioner’s tax refund suit for 1998. See Fed. R. Civ. P. 13(a)
and (b); Flora v. United States, 362 U.S. 145, 166 (1960);
Hemmings v. Commissioner, 104 T.C. 221, 234-235 (1995).
Petitioner argues that under the duty-of-consistency
doctrine respondent should not be allowed to take a position in
this case inconsistent with the position respondent took in the
District Court litigation. To the contrary, petitioner never
relied on respondent’s adjustment that the forfeiture funds
should be taxed to petitioner in 1998, and petitioner’s own
amended 1998 Federal income tax return stated that the funds
should be taxed in 2000, if at all. Further, the District Court
rejected respondent’s position as to the year 1998. See Cluck v.
Commissioner, 105 T.C. 324, 332 (1995), for an explanation of the
proper application of the duty-of-consistency doctrine.
Lastly, citing Dept. of Revenue of Mont. v. Kurth Ranch, 511
U.S. 767 (1994), and United States v. Bajakajian, 524 U.S. 321
(1998), petitioner argues that taxing him on the $388,301
proceeds would violate the double jeopardy clause of the
Constitution.
In Kurth Ranch, a tax imposed upon the possession and
storage of illegal substances constituted an additional penalty
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on those convicted of selling the substances and violated the
defendant’s rights under the Fifth Amendment’s Double Jeopardy
Clause. Here, petitioner claims that because the forfeiture of
the proceeds occurred after the guilty pleas were entered, the
forfeiture constituted an impermissible additional punishment of
petitioner and unconstitutional double jeopardy.
Among other reasons for rejecting petitioner’s double
jeopardy argument, we note that petitioner’s forfeiture
obligation was established not after but simultaneously with the
guilty pleas that were entered and was imposed as part of the
criminal sentencing relating to the guilty pleas.
We have considered and we reject all other arguments made by
petitioner as to the nontaxability of the $388,301 proceeds.
Petitioner objects to respondent’s attempt by motion filed
just before the scheduled trial herein to raise an issue as to
the taxability to him of the $63,291 in interest income which had
accrued on the $388,301 Grand Carting proceeds while the proceeds
were in the escrow account. Petitioner notes that respondent was
fully aware of this interest income during discovery that
occurred in the District Court refund suit and that respondent’s
failure herein to raise the taxability thereof by motion and on a
timely basis should be denied. We agree. See Rule 41(a).
Respondent has provided no adequate explanation as to why
the taxability of the interest income was not raised earlier than
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the eve of the scheduled trial herein. We will deny respondent’s
untimely motion to amend his answer to charge petitioner with an
additional $63,291 in interest income.
An appropriate order and
decision will be entered.