T.C. Memo. 2011-180
UNITED STATES TAX COURT
HAL D. HICKS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15909-08. Filed July 28, 2011.
Edward P. Guttenmacher, for petitioner.
Vivian N. Rodriguez, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
FOLEY, Judge: After concessions, the issues for decision
are whether petitioner is liable for a section 6663(a)1 fraud
penalty with respect to his 1998 underpayment of tax and whether
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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respondent may assess penalties and interest relating to
petitioner’s 1998 liability.
FINDINGS OF FACT
During 1998 (year in issue), petitioner owned and operated
multiple businesses, including Midwest Transit, which was in the
business of transporting mail. Fuel suppliers issued Midwest
Transit fuel rebate checks, which were cashed by Midwest Transit
employees who delivered the proceeds to petitioner.2 During the
year in issue, petitioner used, for personal purposes, $199,800
of proceeds from the fuel rebate checks.
On December 21, 1998, petitioner incorporated Mail Trans,
Inc. (Mail Trans), as an S corporation. At all times during
1998, petitioner was the sole shareholder of Mail Trans. In
December 1998, Mail Trans purchased an airplane from Raytheon
Corp. for approximately $4.2 million. In December 1998, the
airplane, with petitioner’s accountant on board, was flown from
Wichita, Kansas, to Oklahoma City, Oklahoma, where it was
refueled before returning to Wichita. At the time of the flight,
the airplane was not painted and the interior was unfinished.
After the flight, Raytheon Corp. completed the airplane, and in
2
A fuel rebate is typically a refund provided by a fuel
supplier to the purchaser of its fuel. If, for example, 100
gallons of fuel is purchased from a supplier at $1.03 a gallon
and the purchaser receives a 3-cent-per-gallon rebate from the
supplier, the supplier would mail a fuel rebate check to the
purchaser for $3.
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March 1999, petitioner took delivery of it. Mail Trans was not
in the business of transporting mail and the airplane was not
used for any business purpose.
On March 22, 1999, Mail Trans filed its 1998 Form 1120S,
U.S. Income Tax Return for an S Corporation (Mail Trans’ 1998
return), on which it reported a $110,000 net loss from “trade or
business activities”. The return contained only two entries
(i.e., $100,000 in gross receipts and a $210,000 depreciation
deduction). The $210,000 depreciation deduction was attributable
to 1 month of depreciation relating to the airplane.
On October 15, 1999, petitioner filed his 1998 Form 1040,
U.S. Individual Income Tax Return (1998 return). Petitioner did
not report as income the $199,800 of proceeds from the fuel
rebate checks. On Schedule E, Supplemental Income and Loss, of
his 1998 return, petitioner reported a $110,000 passthrough loss
attributable to Mail Trans (Schedule E loss).
On April 6, 2005, after a criminal investigation led by
Assistant U.S. Attorney George A. Norwood, criminal proceedings
in the U.S. District Court for the Southern District of Illinois
(District Court) were initiated against petitioner. On January
12, 2006, petitioner signed an agreement in which he pleaded
guilty to willfully making and submitting a false 1998 tax return
in violation of section 7206(1) and to falsifying a fuel use
certification form in violation of 18 U.S.C. sections 1001 and
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1002 (plea agreement). The plea agreement provided that it “does
not prohibit the United States, any agency thereof, or any third
party from initiating or prosecuting any civil proceedings
directly or indirectly involving Defendant.”
On February 3, 2006, the District Court filed an amended
stipulation of facts signed by Mr. Norwood, petitioner, and David
Helfrey, petitioner’s attorney. The amended stipulation of facts
provided that petitioner willfully made, signed, and filed his
1998 Federal income tax return and that petitioner “did not
believe * * * [the] return was true, correct, and complete as to
every material matter.” The amended stipulation of facts also
provided:
The income tax return was false as to a material
matter, as follows. The defendant failed to report on
the income tax return approximately $199,800 in income
tax received through rebate checks issued to his
company which the defendant used for his own personal
use. In addition, the defendant took an unauthorized
depreciation deduction of $210,000 in the tax year 1998
for an airplane purchased by one of his companies. The
unauthorized deduction passed through from the
defendant’s S Corporation (Mail Trans) tax returns to
the defendant’s Individual Income Tax return for 1998.
The amount that passed through was $110,000.
* * * * * * *
The parties agree that the Tax Loss for relevant
conduct purposes for * * * 1998 in this case is
$228,258.
On September 11, 2006, the District Court held a sentencing
hearing relating to petitioner’s criminal case. The District
Court readily acknowledged that it did not know the correct
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amount of the tax loss incurred as a result of petitioner’s
misconduct and was willing to accept petitioner’s requested
downward adjustment to the proposed amount because that
adjustment (i.e., from $256,258 to $228,258) did “not affect the
[sentencing] guideline range”.
On September 21, 2006, the District Court entered a judgment
of conviction (judgment) pursuant to which petitioner was
sentenced to 18 months in prison and ordered to pay the U.S.
Postal Service $36.20 in restitution, the Internal Revenue
Service (IRS) $228,258 in restitution, and the District Court a
$200 assessment and a $3,000 criminal fine. The District Court
determined that petitioner “[did] not have the ability to pay
interest” and waived the interest requirement with respect to the
$228,258 restitution award and the $3,000 fine.
On March 31, 2008, respondent issued petitioner a notice of
deficiency relating to 1998. In the notice, respondent
determined that petitioner underreported his income by $199,800
(i.e., the amount of fuel rebates used for personal purposes) and
disallowed the Schedule E loss (i.e., the flowthrough expense
relating to Mail Trans’ $210,000 depreciation deduction). As a
result, respondent determined that petitioner was liable for a
$167,657 deficiency. In addition, respondent determined that all
or part of the underpayment of tax required to be shown on
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petitioner’s 1998 return was due to fraud and that petitioner was
therefore liable for a $127,243 section 6663(a) fraud penalty.
On June 20, 2008, Assistant U.S. Attorney for the Southern
District of Illinois Gerald M. Burke filed two certificates of
release of lien relating to the judgment against petitioner
(collectively, certificates of release). The certificates of
release provided that “the requirements of section 3613(c) of
title 18 of the United States Code have been satisfied with
respect to the judgment * * *, together with all statutory
additions; and that the lien for this judgment and statutory
additions has thereby been released.”3 On June 30, 2008,
petitioner, while residing in Florida, filed his petition with
the Court. On July 14, 2008, petitioner made a restitution
payment to the IRS of approximately $228,000. The IRS did not
deem this payment received until September 11, 2008.
OPINION
Petitioner concedes that he underreported his 1998 taxes and
that he is liable for a section 6663 civil fraud penalty with
respect to the portion of the underpayment of tax relating to
3
Tit. 18 U.S.C. sec. 3613(c) (2006) provides:
an order of restitution made pursuant to sections * * *
3663 * * * [or] 3663A * * * is a lien in favor of the
United States on all property and rights to property of
the person fined * * *. The lien arises on the entry
of judgment and continues for 20 years or until the
liability is satisfied, remitted, set aside, or is
terminated under subsection (b).
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$199,800 of unreported income. Consequently, petitioner’s entire
underpayment of tax is treated as attributable to fraud and
subject to a 75-percent penalty, unless petitioner establishes by
a preponderance of the evidence that a particular portion of the
underpayment is not attributable to fraud. See secs. 6663(b),
7454(a); Rule 142(b); Parks v. Commissioner, 94 T.C. 654, 660-
661, 664-665 (1990); Stephenson v. Commissioner, 79 T.C. 995,
1007 (1982), affd. 748 F.2d 331 (6th Cir. 1984). Petitioner
contends that he is not liable for a section 6663 civil fraud
penalty with respect to the portion of underpayment of tax
relating to the disallowed Schedule E loss (i.e., Mail Trans’
$210,000 airplane depreciation deduction). We disagree.
Petitioner formed Mail Trans and purchased the airplane in
December 1998. The airplane was flown once in 1998. Mail Trans,
however, did not place the airplane in service in that year. In
fact, the airplane was not completed and petitioner did not take
delivery of it until 1999. Furthermore, the airplane was not
used for any business purpose, and despite its moniker, “Mail
Trans” was not in the mail transportation business.
Nevertheless, Mail Trans reported a $210,000 airplane
depreciation deduction (i.e., a deduction equal to 1 month of
depreciation) on its 1998 return. See sec. 167(a); Piggly Wiggly
S., Inc. v. Commissioner, 84 T.C. 739, 745-746 (1985), affd. on
another issue 803 F.2d 1572 (11th Cir. 1986); secs. 1.167(a)-
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10(b), 1.167(a)-11(e)(1)(i), Income Tax Regs. Petitioner’s
machinations, substantial understatement of income, concealment
of income, and filing of false documents convince us that he
intended to evade tax. See Korecky v. Commissioner, 781 F.2d
1566, 1568 (11th Cir. 1986), affg. T.C. Memo. 1985-63;
Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992).
Accordingly, we sustain respondent’s determination.
All of petitioner’s contentions are unconvincing.
Petitioner’s primary contention is that the District Court’s
judgment and the two certificates of release filed with respect
to the judgment precluded respondent from assessing penalties
relating to petitioner’s 1998 deficiency. In essence, petitioner
contends that the doctrine of collateral estoppel applies with
respect to his 1998 tax liability. We reject this contention for
the following reasons. First, although petitioner pleaded guilty
to willfully making and submitting a false tax return,
petitioner’s tax liability was not an essential element of the
Government’s case and was not actually litigated. See sec.
7206(1); Montana v. United States, 440 U.S. 147, 153 (1979); Hi-Q
Pers., Inc. v. Commissioner, 132 T.C. 279, 289-290 (2009).
Furthermore, the District Court did not make ultimate findings of
fact with respect to petitioner’s tax liability. See Hi-Q Pers.,
Inc. v. Commissioner, supra at 290; Brotman v. Commissioner, 105
T.C. 141, 153 (1995).
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Second, the District Court, in ordering that petitioner make
restitution payments to the IRS as part of the judgment, did not
make a determination of petitioner’s civil tax liability and did
not bar the Commissioner from assessing a greater amount of civil
tax liability. See Morse v. Commissioner, 419 F.3d 829, 833-835
(8th Cir. 2005), affg. T.C. Memo. 2003-332; Creel v.
Commissioner, 419 F.3d 1135, 1140 (11th Cir. 2005) (providing
that an order to pay restitution is a criminal penalty rather
than a civil penalty); Hickman v. Commissioner, 183 F.3d 535,
537-538 (6th Cir. 1999), affg. T.C. Memo. 1997-566.4 Indeed, the
District Court estimated the restitution amount and acknowledged
that it may not have been the correct amount.
Third, the plea agreement explicitly provided that it “does
not prohibit the United States, any agency thereof, or any third
party from initiating or prosecuting any civil proceedings
directly or indirectly involving Defendant.” Cf. Creel v.
Commissioner, supra at 1140. In addition, there was no reference
to petitioner’s civil tax liabilities in either the restitution
order or the certificates of release, and we cannot infer from
the language in the certificates of release that the District
4
The Government, when a criminal proceeding is undertaken,
does not surrender its right to collect tax deficiencies or civil
fraud additions. Spies v. United States, 317 U.S. 492, 495
(1943); Helvering v. Mitchell, 303 U.S. 391 (1938); United States
v. Sabourin, 157 F.2d 820 (2d Cir. 1946); see also Harper v.
Commissioner, 54 T.C. 1121, 1138 (1970).
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Court determined that petitioner satisfied both his criminal and
civil tax liabilities. Accordingly, respondent’s ability to
assess additional penalties on the deficiency relating to
petitioner’s 1998 return was not limited by the plea agreement,
the District Court’s judgment, the restitution order, or the
certificates of release.5
Petitioner also contends that the stipulation of facts
limits his liability. The stipulation of facts provides that
“The income tax return was false as to a material matter, as
follows”, and petitioner contends that this language establishes
that the return was false with respect to only one item (i.e.,
the unreported income relating to the rebate checks). Simply
put, the language “false as to a material matter” (emphasis
added) does not preclude a finding that the return was false with
respect to more than one item. Finally, we reject petitioner’s
contention that he is not liable for a section 6663 fraud penalty
5
Petitioner also contends that respondent is precluded from
assessing interest on the deficiency relating to petitioner’s
1998 return. Our jurisdiction to redetermine a deficiency in tax
generally does not extend to statutory interest imposed pursuant
to sec. 6601. See secs. 6213(a), 6214(a), 7481(c); Rule 13(a),
(c); Katz v. Commissioner, 115 T.C. 329, 340-341 (2000); Naftel
v. Commissioner, 85 T.C. 527, 529-531 (1985). Indeed, sec.
6601(e)(1) provides that interest is excluded from the definition
of a “tax” for purposes of sec. 6211(a), and thus such interest
is not a part of the “deficiency” over which we have
jurisdiction. See White v. Commissioner, 95 T.C. 209, 213-214
(1990). Accordingly, we do not have jurisdiction over, and may
not opine on, the interest assessment imposed pursuant to sec.
6601.
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because he relied on professional advice (i.e., the advice of
Raytheon Corp. employees, his accountant, and those who helped
him form Mail Trans). In support of this contention, petitioner
offered merely his testimony, which simply was not credible. See
sec. 6664(c).
Contentions we have not addressed are irrelevant, moot, or
meritless.
To reflect the foregoing,
Decision will be entered
under Rule 155.