T.C. Memo. 2012-226
UNITED STATES TAX COURT
PETER Y. ATKINSON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5528-10. Filed August 7, 2012.
Mitchell Bryan and Michael J. Tuchman, for petitioner.
Lawrence C. Letkowicz, for respondent.
MEMORANDUM OPINION
KROUPA, Judge: This matter is before the Court on respondent’s motion for
partial summary judgment under Rule 121.1 Respondent determined
1
All Rule references are to the Tax Court Rules of Practice and Procedure,
and all section references are to the Internal Revenue Code, as amended and in
(continued...)
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[*2] deficiencies of $686,535 and $140,049 in petitioner’s Federal income tax for
2000 and 2001 (years at issue), respectively. Petitioner, a Canadian citizen and
resident, received payments purportedly in exchange for entering into covenants not
to compete (noncompete agreements) with United States companies. Petitioner
asserts that the payments are not U.S.-source income subject to Federal income tax.
Respondent contends that the payments resulted from fraud and are therefore
subject to Federal income tax under the Convention and Protocols with Respect to
Taxes on Income and Capital, U.S.-Can., Sept. 26, 1980, T.I.A.S. No. 11087
(Convention).
We are asked to decide two issues. First, we consider whether a prior
pecuniary fraud conviction precludes petitioner from disputing that one of the
payments resulted from fraud. We hold that the collateral estoppel doctrine
precludes petitioner from disputing that the payment resulted from fraud. Next, we
decide whether a different pecuniary fraud conviction that was vacated bars
petitioner from disputing that another payment resulted from fraud. We hold that
collateral estoppel does not apply in that circumstance.
1
(...continued)
effect for the years at issue, unless otherwise indicated.
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[*3] Background
The facts have been assumed solely for resolving the pending motion.
Petitioner is a Canadian citizen and resided in Canada at the time he filed the
petition. Petitioner did not file a Federal income tax return for these years at issue.
I. Ravelston and Hollinger
Ravelston Corporation Limited (Ravelston) was a privately held foreign
corporation, with its principal office in Toronto, Canada. Ravelston indirectly held
a controlling interest in Hollinger International, Inc. (Hollinger). Hollinger was a
publicly traded domestic corporation that owned the Chicago Sun-Times, the Daily
Telegraph in the United Kingdom, the National Post in Toronto, the Jerusalem Post
in Israel, and numerous community newspapers in the United States and Canada.
Conrad Black was Ravelston’s chief executive officer and chairman of the
board of directors. Mr. Black controlled approximately 65% of Ravelston. John
Arthur Boultbee was Ravelston’s chief financial officer and indirectly owned
approximately 1% of Ravelston. F. David Radler was Ravelston’s president and
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[*4] indirectly maintained a 14% ownership interest. Petitioner owned nearly 1% of
Ravelston.2
Petitioner and Messrs. Black, Radler and Boultbee (collectively, Hollinger’s
management) provided management services to Hollinger under a written agreement
between Hollinger and Ravelston. Mr. Black served as Hollinger’s chief executive
officer and chairman. Mr. Radler served as president, chief operating officer and
deputy chairman for Hollinger. Petitioner and Mr. Boultbee each served as an
executive vice president.
II. Sale of Community Newspapers and Purported Noncompete Agreements
In the late 1990s Hollinger’s management anticipated that the rise of the
Internet would negatively influence the print newspaper industry’s profitability.
They created a plan to sell Hollinger’s community newspapers. From 1998 through
2001 Hollinger’s management effected that plan.
The transactions were structured so that each member of Hollinger’s
management received a share of the proceeds, purportedly in exchange for
entering into a noncompete agreement with the purchasers. The payments were
2
Mr. Radler and Mr. Boultbee each filed petitions with this Court for
redetermination of separate deficiency notices. See Radler v. Commissioner, docket
No. 13680-10; Boultbee v. Commissioner, docket No. 13856-10. Respondent has
filed a similar motion for partial summary judgment in Mr. Boultbee’s case, a
Memorandum Opinion in which is also being filed today.
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[*5] not disclosed to the audit committee of Hollinger’s board of directors. Those
transactions included sales of newspapers to Forum Communications, Inc. (Forum),
PMG Acquisition Corporation (PMG) and Community Newspaper Holdings, Inc.
(CNHI).3 Petitioner was paid $15,000 of the proceeds from the Forum and PMG
transactions (Forum payment) and $450,000 of the proceeds from the CNHI
transaction (CNHI payment)4 purportedly for noncompete agreements. Petitioner
never entered into a written noncompete agreement with Forum or PMG.
Each member of Hollinger’s management also entered into a purported
noncompete agreement with a Hollinger subsidiary, American Publishing Company
(APC). Petitioner was paid $137,500 from APC, purportedly in consideration for
his noncompete agreement with APC (APC payment).
3
Respondent determined in the deficiency notice that the tax liabilities stem
from five payments for purported noncompete agreements. Respondent contended
that petitioner received $1,321,860 from CanWest Global Communications Corp. in
2000 and $246,000 from Osprey Media Group in 2001. The parties stipulated that
petitioner did not receive “theft and/or other income” as a result of either payment.
4
Respondent identifies the CNHI payment as income in the deficiency notice.
Respondent does not address the CNHI payment in his motion for partial summary
judgment.
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[*6] III. Indictment and Prosecution
The United States indicted petitioner and Messrs. Black and Boultbee on
numerous charges of fraud.5 United States v. Black, No. 05-CR-727 (N.D. Ill.
filed Aug. 18, 2005). The United States alleged in the superseding information, as
pertinent here, that the Forum payment and the APC payment were unauthorized
bonuses that violated Hollinger’s management’s fiduciary duty to Hollinger’s
shareholders.6 The United States argued that Hollinger’s management
characterized the payments as compensation for noncompete agreements because
the income would not be taxed by Canadian authorities.
The United States alleged that the Forum payment and the APC payment
each were obtained through fraud under distinct legal theories. First, the United
States alleged each payment was obtained through pecuniary fraud, which was a
scheme of fraudulent appropriation of money to which Hollinger was legally
entitled. See 18 U.S.C. sec. 1341 (2006); Black v. United States, 625 F.3d 386,
5
A fourth Hollinger executive, Mark S. Kipnis, was identified as a defendant
in the superseding information. Mr. Kipnis has not filed a petition before this Court.
6
The Government indicted petitioner and Messrs. Black, Boultbee and Kipnis
in a single charging document. For convenience, we will limit our discussion of the
superseding information, prosecution and appellate review to petitioner unless
otherwise relevant to the petition.
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[*7] 388 (7th Cir. 2010). The United States alleged that each payment was also
obtained through “honest services” fraud, which was a scheme to deprive Hollinger
of its “intangible right of honest services.” See 18 U.S.C. sec. 1346; Black, 625
F.3d at 388.
The jury found petitioner guilty of fraud with respect to the Forum payment
and the APC payment. The general verdict, however, did not distinguish between
the distinct theories of fraud alleged in the superseding information. It was therefore
unclear whether the jury found petitioner guilty of pecuniary fraud, honest services
fraud or both.
IV. Appellate Review of Convictions
On appeal, the Supreme Court of the United States held in a related opinion
issued on the same day that honest services fraud requires proof that an individual
solicited or received a bribe or a kickback. See Skilling v. United States, ___ U.S.
___, 130 S. Ct. 2896, 2912 n.9 (2010). The Supreme Court remanded petitioner’s
case to the United States Court of Appeals for the Seventh Circuit for further
consideration. Black v. United States, ___ U.S. ___, 130 S. Ct. 2963 (2010). On
remand, the Court of Appeals determined that the bribe or kickback element had not
been proven. Black, 625 F.3d at 388. Petitioner’s convictions under the honest
services fraud theory were therefore vacated. Id.
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[*8] Because the verdict was general, the Court of Appeals considered whether
the record demonstrated that the Forum payment and the APC payment each were
obtained through pecuniary fraud. Id. The Court of Appeals determined that the
record conclusively established beyond a reasonable doubt that the Forum payment
was obtained through pecuniary fraud. Id. The Court of Appeals therefore affirmed
the pecuniary fraud conviction for the Forum payment (Forum pecuniary fraud
conviction). Id. at 393-394.
The Court of Appeals concluded differently with respect to the APC payment.
It reasoned that it was possible (although unlikely) that the jury had convicted
petitioner only under the honest services theory. Id. at 392. Consequently, the
Court of Appeals reversed the fraud conviction predicated on the APC payment and
remanded the matter for a new trial on that issue. Id. at 393-394. The Government
chose not to retry petitioner on the counts that were based on the APC payments.
Those counts were dismissed.
V. Petition and Answer
Respondent issued a deficiency notice in 2010 for the years at issue.
Petitioner filed a petition for redetermination. The amendment to the answer
affirmatively pleaded collateral estoppel. As previously noted, respondent moved
for partial summary judgment.
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[*9] Discussion
I. Introduction
The instant motion ultimately relates to the characterization of the Forum
payment and APC payment under the Convention. The Convention is designed to
prevent double taxation and to avoid fiscal evasion. N.W. Life Assur. Co. of Can.
v. Commissioner, 107 T.C. 363, 375 (1996). Because petitioner was a Canadian
citizen residing in Canada, the United States may tax petitioner’s income arising in
the United States only to the extent permitted by the Convention. The parties
agree that under the Convention the United States may not tax the payments if
they were compensation for noncompete agreements.
Respondent argues that income derived from a fraudulent scheme (fraud
income),7 however, is taxable under the Convention as “other income.” All
income not specifically identified by the Convention is characterized as “other
income.” Convention art. XXII. “Other income” is taxable by the signatory
country wherein the taxpayer resides unless the income arises in the other
signatory country. Id. If the income arises in the other signatory country, both
7
It is well settled that funds derived through embezzlement or other fraudulent
schemes are income. See James v. United States, 366 U.S. 213 (1961); Peters v.
Commissioner, 51 T.C. 226, 232 (1968); Davis v. Commissioner, T.C. Memo.
1991-333.
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[*10] signatory countries may tax the income. Id. Petitioner’s fraud income would
therefore be taxable if it arose in the United States. Respondent asks us to hold that
the criminal conviction precludes petitioner from disputing that both the Forum
payment and the APC payment resulted from fraud and ultimately that each is “other
income” within the meaning of the Convention.
In contrast, petitioner argues that the payments are not subject to United
States tax because the payments were compensation for personal services performed
without the United States.8 Petitioner avers that he worked and resided in Canada
when he received the payments. Respondent does not dispute this. Rather,
respondent contends that it has been conclusively determined that each payment was
obtained through fraud and was not compensation for personal services. With that
in mind, we turn to the instant motion.
8
Petitioner argues that compensation for noncompete agreements do not
constitute U.S.-source income. See secs. 861(a)(3), 862(a)(3). This argument relies
on the assumption that the income was compensation for bona fide noncompete
agreements. Respondent’s motion for partial summary judgment seeks to preclude
petitioner from disputing the income’s characterization as “other income” as
opposed to personal service income. We therefore need not reach petitioner’s
argument that compensation for noncompete agreements is non-U.S.-source income
not subject to United States tax.
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[*11] II. Standard of Review
We now consider whether it is appropriate to grant summary judgment and
the applicable standard of review. Summary judgment is intended to expedite
litigation and avoid unnecessary and expensive trials. See, e.g., FPL Group, Inc.
& Subs. v. Commissioner, 116 T.C. 73, 74 (2001). Either party may move for
summary judgment upon all or any part of the legal issues in controversy. Rule
121(a). A motion for summary judgment or partial summary judgment will be
granted if the pleadings and other acceptable materials, together with the
affidavits, if any, show that there is no genuine issue as to any material fact and
that a decision may be rendered as a matter of law. See Rule 121(b); Elec. Arts,
Inc. v. Commissioner, 118 T.C. 226, 238 (2002). The moving party has the
burden of proving that no genuine issue of material fact exists and that it is
entitled to judgment as a matter of law. See, e.g., Rauenhorst v. Commissioner,
119 T.C. 157, 162 (2002). The party opposing summary judgment must set forth
specific facts showing that there is a genuine issue for trial and may not rely
merely on allegations or denials in the pleadings. Rule 121(d); see also Celotex
Corp. v. Catrett, 477 U.S. 317, 322 (1986). Because summary judgment decides
against a party before trial, we grant such a remedy cautiously and sparingly, and
only after carefully ascertaining that the requirements for summary judgment have
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[*12] been met. P & X Mkts., Inc. v. Commissioner, 106 T.C. 441, 443 (1996),
aff’d without published opinion, 139 F.3d 907 (9th Cir. 1998); Boyd Gaming Corp.
v. Commissioner, 106 T.C. 343, 346-347 (1996).
III. Collateral Estoppel
We now consider whether petitioner is barred under the collateral estoppel
doctrine from disputing that the Forum payment and the APC payment were
obtained through fraud. Collateral estoppel has been applied in Federal tax cases to
preclude a party from relitigating previously decided issues of fact or law necessary
to a court’s prior judgment. Commissioner v. Sunnen, 333 U.S. 591, 598 (1948);
Meier v. Commissioner, 91 T.C. 273, 286 (1988) (citing Parklane Hosiery Co. v.
Shore, 439 U.S. 322 (1979) and Montana v. United States, 440 U.S. 147, 153-154
(1979)); see also Koprowski v. Commissioner, 138 T.C. ___, ___ (slip op. at 12)
(Feb. 6, 2012) (citing Allen v. McCurry, 449 U.S. 90, 94 (1980)). Collateral
estoppel operates with respect to issues of fact, issues of law and mixed issues of
fact and law. Blanton v. Commissioner, 94 T.C. 491, 495 (1990). Its application
conserves judicial resources and fosters reliance on judicial action by minimizing the
possibility of inconsistent decisions. Montana, 440 U.S. at 153-154; Meier v.
Commissioner, 91 T.C. at 282-284.
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[*13] Six conditions must be met for collateral estoppel to apply. See generally
Peck v. Commissioner, 90 T.C. 162, 166-167 (1988), aff’d, 904 F.2d 525 (9th Cir.
1990). First, there must be a final judgment rendered by a court of competent
jurisdiction. Id. Second, the issue in the second suit must be identical with the one
decided in the first suit. Id. Third, collateral estoppel may be asserted only against
parties (or their privies) to the prior judgment. Id. Fourth, the parties must actually
have litigated the issues, and the resolution of these issues must have been essential
to the prior decision. Id. Fifth, the controlling facts and applicable legal rules must
remain unchanged from those in the prior litigation. Id. Sixth, there must not be any
special circumstances that warrant an exception to its application. Meier v.
Commissioner, 91 T.C. at 282-284.
A. Final Judgment
We first consider whether there was a final judgment in the earlier matter by a
court of competent jurisdiction. See Berman v. Dep’t of Interior, 447 Fed. Appx.
186, 191 (Fed. Cir. 2011); Peck v. Commissioner, 90 T.C. at 166; Gammill v.
Commissioner, 62 T.C. 607, 613 (1974). A judgment that has been vacated,
reversed, or set aside on appeal is deprived of all conclusive effect, both as res
judicata and as collateral estoppel. Kosinski v. Commissioner, 541 F.3d 671, 676-
677 (6th Cir. 2008), aff’g T.C. Memo. 2007-173. Where a portion of the judgment
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[*14] is reversed or vacated on appeal, there is no final judgment as to issues not
actually resolved by the appellate court. Berman, 447 Fed. Appx. at 191.
Therefore, a new judgment must be entered regarding the matters reversed or
vacated. Id. (citing In re Microsoft Corp. Antitrust Litig., 355 F.3d 322, 328-329
(4th Cir. 2004)).
On remand from the Supreme Court, the Court of Appeals affirmed the Forum
pecuniary fraud conviction but vacated the conviction related to the APC payment.
The Forum pecuniary fraud conviction then became final when the Supreme Court
denied petitioner’s petition for writ of certiorari.
The conviction related to the APC payment was vacated and the matter was
remanded to the District Court for a new trial. The Government did not retry
petitioner on the counts that were based on the APC payments.9 Thus, there was no
final judgment.
Respondent acknowledges that the conviction related to the APC payment
was vacated yet argues that the Court of Appeals found that the Government had
proven pecuniary fraud by a preponderance of the evidence. The Court of Appeals
viewed the record to be “certainly sufficient to prove a pecuniary fraud” and
9
The Court takes judicial notice that the trial court granted the Government’s
oral motion to dismiss the APC counts. See United States v. Black, No. 05-CR-727
(N.D. Ill. filed Feb. 3, 2011).
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[*15] observed that the sentencing court may consider any conduct proven by a
preponderance of the evidence. Black, 625 F.3d at 391. Neither observation,
however, negates the final judgment requirement. Nor is a finding during criminal
sentencing entitled to preclusive effect. See Kosinski v. Commissioner, 541 F.3d
at 677-679.
Consequently, there was no final judgment with respect to the conviction
related to the APC payment and collateral estoppel cannot be applied. Because of
our holding, we will not consider the remaining elements with respect to the APC
payment. We still must analyze whether collateral estoppel applies regarding the
Forum payment.
B. Identical Issues
We next consider whether the issue in this case regarding the Forum
payment is identical in all respects to the issue decided in the criminal matter.
Commissioner v. Sunnen, 333 U.S. at 599-600; Peck v. Commissioner, 90 T.C. at
166-167. We are mindful that a prior conviction precludes a party in a later civil
suit from contesting facts necessarily established in the criminal proceeding. See
Compton v. Ide, 732 F.2d 1429, 1434 (9th Cir. 1984), abrogated on other grounds
by Agency Holding Corp. v. Malley-Duff & Assocs., Inc., 483 U.S. 143 (1987).
In the case of a criminal conviction based on a guilty verdict, issues essential to
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[*16] that verdict are regarded as having been determined by the judgment. Blanton
v. Commissioner, 94 T.C. at 496. What issues were adjudicated in the prior
proceeding is a question of law. Id.
Respondent contends that the Forum pecuniary fraud conviction required a
finding that the payment was obtained through fraud and not in exchange for a bona
fide noncompete agreement. We agree. The conviction required a finding that
petitioner fraudulently appropriated Hollinger’s money. The Court of Appeals found
that it was “decisively unbelievable” that the payment was bona fide compensation
and concluded that the “only rational explanation” was that the Forum payment
constituted “proceeds of a plain-vanilla pecuniary fraud.” Black, 625 F.3d at 393.
Here, the issue is whether the payment was compensation for a noncompete
agreement or the result of unlawful conduct. The finding of fraud in the criminal
matter is the same issue.10 This element is satisfied.
10
We note that it can be difficult to ascertain from a jury’s general verdict
exactly what facts were found as a predicate to that verdict. See Blanton v.
Commissioner, 94 T.C. 491, 496 (1990). Here, the parties agree on most of the
underlying facts and the appellate opinion summarizes the findings of fact necessary
to the Forum pecuniary fraud conviction. Thus, an examination of the record in the
criminal proceeding is not necessary in this circumstance.
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[*17] C. Identical Parties
We next consider whether petitioner was the same party as in the criminal
matter. The parties agree and the record supports that petitioner was the defendant
in the criminal matter. This element is satisfied.
D. Issue Actually Litigated and Essential to the Prior Decision
We now decide whether the issue was actually litigated and essential to the
prior criminal conviction. An issue is decided if the issue’s determination was
necessary to support the judgment entered in the prior proceeding. See Blanton v.
Commissioner, 94 T.C. at 496. The pecuniary fraud conviction required a finding
that the payment to petitioner resulted from a fraudulent scheme to deprive Hollinger.
The jury had to find that petitioner stole the company’s rightful property and reject
petitioner’s contention that the payment was consideration for a valid noncompete
agreement. Black, 625 F.3d at 393. This element is satisfied.
E. Controlling Facts and Applicable Principles Remain Unchanged
We next consider any changes to the controlling facts or legal principles since
the criminal matter. The parties do not contend that there have been, nor are we
aware of, any changes to the controlling facts or the legal principles underlying the
Forum pecuniary fraud conviction. This element is satisfied.
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[*18] F. Special Circumstances Exception
Our final consideration is whether any special circumstances warrant an
exception to applying collateral estoppel. Petitioner has not argued that any apply.
Nor do we perceive any reason that collateral estoppel is inapplicable in this
situation. Petitioner had a great incentive to fully litigate this issue in the criminal
matter. The appellate review confirms that the issue was established and the jury so
found. This element is satisfied.
IV. Conclusion
In toto, we hold that the collateral estoppel doctrine applies to the Forum
pecuniary fraud conviction. We shall grant respondent’s partial summary judgment
motion only as to the Forum payment. Accordingly, petitioner is barred from
disputing that the Forum payment was the result of fraud. We decline, however, to
apply issue preclusion to the APC payment because there was no final judgment
establishing that the payment was the result of fraud. We make no further
determination at this stage on the Convention’s application to each payment. A trial
will be scheduled in due course to resolve the outstanding issues.
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[*19] In reaching these holdings, we have considered all of the parties’ arguments,
and, to the extent not addressed, we conclude that they are moot, irrelevant or
without merit.
To reflect the foregoing,
An appropriate order will be issued.