Edwards v. Comm'r

T.C. Memo. 2016-117

UNITED STATES TAX COURT

STEVEN EUGENE EDWARDS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 7329-10. Filed June 15, 2016.

Steven Eugene Edwards, pro se.

Timothy J. Driscoll, Jr., for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

RUWE, Judge: Respondent determined a $1,054,142 deficiency in

petitioner’s 2000 Federal income tax and a $790,606.50 fraud penalty under

section 6663.1 By amended answer, respondent asserted a $202,953 increase in

1
Unless otherwise indicated, all section references are to the Internal
(continued...)
 -2-

[*2] the income tax deficiency and a corresponding $152,214.75 increase in the

fraud penalty.

After concessions, the issues for decision are: (1) whether petitioner had

unreported interest income of $41,492.25;2 (2) whether petitioner had unreported

income from diverted funds of $3,174,817.80; and (3) whether petitioner is liable

for a fraud penalty under section 6663.

FINDINGS OF FACT

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.

At the time the petition was filed, petitioner resided in North Carolina.

During the taxable year 2000 petitioner was married to Marian C. Piornack (Ms.

Piornack).3 Petitioner was an owner of Magna Corp., which was a business

1
(...continued)
Revenue Code in effect for the year in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
2
Respondent determined in the notice of deficiency that petitioner and his
former spouse received $76,585 of interest income in the taxable year 2000 and
did not report $63,648 of this amount. Respondent concedes that $22,155.75 of
the $63,648 is attributable exclusively to petitioner’s former spouse and thus
asserts that petitioner failed to report interest income of $41,492.25.
3
Ms. Piornack was granted relief from joint and several liability under sec.
6015(b).
 -3-

[*3] ostensibly involved in insurance sales and employee leasing.4 In 2000

petitioner collected health and workers’ compensation insurance premiums from

various employers and represented to them that they had health and workers’

compensation coverage when in fact they did not. As summarized below,

petitioner failed to report significant amounts of income received during the year

in issue.

Interest Income

The parties stipulate that petitioner and Ms. Piornack received interest

income of $54,429.255 during the taxable year 2000, which accrued in bank

accounts held by (1) petitioner individually and/or (2) petitioner and Ms. Piornack

jointly at Englewood Bank, SouthBank, Centura Bank, and Triangle Bank.

Petitioner and Ms. Piornack reported $12,937 of interest income on their

joint 2000 Federal income tax return. Petitioner underreported his interest income

by $41,492.25 (i.e., $54,429.25 ! $12,937).

4
Employee leasing involves the outsourcing of human resource functions,
such as: employee benefits, payroll, workers’ compensation, recruiting, and
training and development.
5
The parties stipulate that petitioner and Ms. Piornack received interest
income of $54,429.51. This figure appears to be overstated by $0.26, and we have
corrected this error to comport with the underlying exhibits.
 -4-

[*4] Owl’s Woods Residence

In 2000 petitioner paid for the construction of a primary residence for

himself and Ms. Piornack on Owl’s Woods Lane in Orange County, North

Carolina (Owl’s Woods residence). Petitioner paid for the construction of the

Owl’s Woods residence using checks drawn on a SouthBank account held in the

name of Capital Marketing (Capital Marketing account).6 Both petitioner and Ms.

Piornack’s names are on the Capital Marketing account along with the address of

the Owl’s Woods residence. Petitioner issued checks7 to the builder of the Owl’s

Woods residence, Cyn-Mar Design, Inc. (Cyn-Mar), as follows:

Date Account Check No. Amount

1/17/2000 Capital Marketing 2611 $197,707.76
2/21/2000 Capital Marketing 2472 124,814.01
3/20/2000 Capital Marketing 2616 103,996.28
4/6/2000 Capital Marketing 2617 137,000.00
4/28/2000 Capital Marketing n/a 159,219.00
5/10/2000 Capital Marketing 2620 238,224.06
5/26/2000 Capital Marketing 2621 189,388.50
6/15/2000 Capital Marketing 2624 181,033.82

6
Petitioner opened the Capital Marketing account using the employer
identification number from Capital Marketing Associates, Inc., a company owned
by Alton Brown, an associate of petitioner’s at Magna Corp.
7
Petitioner signed each check to Cyn-Mar drawn on the Capital Marketing
account.
 -5-

[*5] 7/19/2000 Capital Marketing 2450 31,414.98
9/29/2000 Capital Marketing 2643 88,315.75
Total 1,451,114.16

The construction contract designates petitioner and Ms. Piornack as the owners of

the property on which Cyn-Mar built the Owl’s Woods residence, but the general

warranty deed designates only Ms. Piornack as grantee. Petitioner avoided titling

property in his name in an effort to keep it out of the Government’s reach.

Petitioner had two built-in safes and a portable safe in the Owl’s Woods

residence in which he stored cash. Petitioner also stored cash in a safe deposit box

he maintained at Englewood Bank in Florida. Petitioner and Ms. Piornack also

owned a townhouse in Florida which they used for vacation.

Sunshine Co. Commission Payments

In 2000 petitioner issued bills to, and received checks from, Sunshine Co.

for commissions from the sale of workers’ compensation and health insurance.

According to an account ledger, Sunshine Co. issued checks payable to petitioner

during the taxable year 2000 as follows:

Date Check No. Amount

2/8/2000 049989 $14,169.23
3/21/2000 051382 15,521.58
4/25/2000 052591 19,835.73
6/6/2000 054141 16,516.41
7/6/2000 055355 17,020.81
 -6-

[*6] 7/25/2000 056086 23,028.57
8/22/2000 056949 22,146.94
1
Total 128,239.27
1
The stipulation of facts calculates the sum of the above-
listed amounts to be $119,337.61. No explanation is given for
this discrepancy, and we have corrected this error to comport
with the underlying exhibits.

These checks were payable to petitioner personally.8

Fidelity Group Commission Payments

In 2000 Fidelity Group issued commission checks payable to Capital

Marketing as follows:

Date Check No. Amount

6/12/2000 2024 $154,379.21
7/14/2000 2049 62,561.37
9/12/2000 2099 59,587.79
Total 276,528.37

These checks were received and endorsed by petitioner and deposited into a

personal account held in the names of petitioner and Ms. Piornack. Each check

from Fidelity Group was classified on its face as a commission payment.

8
In his petition, petitioner acknowledges that the Sunshine payments were
payable to him personally and should have been reported as income.
 -7-

[*7] Carolina Green

Petitioner’s Roth individual retirement account is the owner of an entity

named Carolina Green, Inc. (Carolina Green). Carolina Green has no business

function but serves as the owner of a Bear Stearns brokerage account (Bear

Stearns account). In 2000 payments were made (via wire transfer) from

petitioner’s Capital Marketing account to the Bear Stearns account as follows:

Date Originating Account Payee Amount

2/8/2000 Capital Marketing Bear Stearns $25,000
2/25/2000 Capital Marketing Bear Stearns 70,000
3/7/2000 Capital Marketing Bear Stearns 115,000
3/17/2000 Capital Marketing Bear Stearns 102,000
3/27/2000 Capital Marketing Bear Stearns 130,000
4/12/2000 Capital Marketing Bear Stearns 119,000
4/20/2000 Capital Marketing Bear Stearns 2,000
4/24/2000 Capital Marketing Bear Stearns 198,000
4/26/2000 Capital Marketing Bear Stearns 80,000
5/1/2000 Capital Marketing Bear Stearns 75,000
5/22/2000 Capital Marketing Bear Stearns 145,000
6/26/2000 Capital Marketing Bear Stearns 1,000
7/13/2000 Capital Marketing Bear Stearns 49,000
Total 1,111,000

Petitioner authorized each wire transfer made to the Bear Stearns account.

Petitioner also made payments to various motorcycle stores and dealerships

from his Capital Marketing account as follows:
 -8-

[*8] Date Check No. Payee Amount

3/14/2000 2473 Harley Davidson $42,995
3/14/2000 2475 Twin Specialties 50,000
6/26/2000 2625 Twin Specialties 20,000
8/3/2000 2628 Twin Specialties 20,159
8/23/2000 2632 Twin Specialties 23,692
10/25/2000 2644 Twin Specialties 25,000
12/1/2000 2677 Harley Davidson 26,090
Total 207,936

Petitioner signed each of the checks paid to the motorcycle companies. The

Division of Motor Vehicles title history information recognizes Carolina Green as

the owner of two 2000 private motorcycles and a 2000 private trailer. Ms.

Piornack knew petitioner owned motorcycles, but she was unaware that he owned

“around eight motorcycles” until she discovered receipts in the den of the Owl’s

Woods residence.

On November 5, 2001, petitioner and Ms. Piornack filed a joint Federal

income tax return for 2000. They reported total income of $36,372, consisting of

wages of $7,500, taxable interest income of $12,937, ordinary dividends of $2,

taxable pension distribution of $16,288, and a $355 loss from Schedule E,

Supplemental Income and Loss.
 -9-

[*9] Petitioner’s Criminal Case

On July 26, 2005, petitioner was indicted by a grand jury in the U.S. District

Court for the Middle District of North Carolina (District Court). Petitioner was

charged with 12 counts of mail fraud under 18 U.S.C. sec. 1341; 3 counts of wire

fraud under 18 U.S.C. sec. 1343; 1 count of financial institution money laundering

under 18 U.S.C. sec. 1957; 2 counts of false statements to a bank under 18 U.S.C.

sec. 1014; 1 count of theft of healthcare funds under 18 U.S.C. sec. 669; and 3

counts of tax evasion under section 7201. Count 20 of the indictment (for tax

evasion under section 7201) states, in pertinent part:

During the period from on or about January 1, 2000, to on or
about November 5, 2001 * * * [petitioner], a resident of Durham,
North Carolina * * * did willfully attempt to evade and defeat a large
part of the income tax due and owing by him and his spouse to the
United States of America for the calendar year 2000 by: 1)
concealing and attempting to conceal from all proper officers of the
United States of America his true and correct income by depositing
funds into and causing funds to be deposited into accounts titled in
names other than his own, dispensing funds from and causing funds
to be dispensed from accounts titled in names other than his own,
receiving payments and causing payments to be issued in names other
than his own, and titling assets and causing assets to be titled in
names other than his own; and 2) preparing and causing to be
prepared, signing and causing to be signed, mailing and causing to be
mailed a false and fraudulent joint U.S. Individual Income Tax
Return, Form 1040, on behalf of himself and his spouse, which was
filed with the Internal Revenue Service * * *
 - 10 -

[*10] On February 21, 2006, petitioner entered a voluntary guilty plea in the

District Court to 2 counts of mail fraud, 1 count of theft of healthcare funds, and 1

count of tax evasion. On the same date a factual basis was filed in the District

Court, which in relevant part states:

From January 1, 2000, through April 30, 2001, the * * *
[petitioner] collected health insurance premiums of approximately
$1,400,000, from companies in South Carolina, Florida, and North
Carolina and elsewhere, which were diverted and not used to pay
claims or insurance for claims[.] From January 1, 2000, through
September 30, 2000, no insurance existed[.] From October 1, 2000,
through December 31, 2000, a reinsurance/stop loss policy existed
but the Fidelity Group, a health care benefit program operated
by * * * [petitioner], did not receive or pay the requisite claims to
invoke this policy[.] Thus, thousands of health claims went unpaid
because the Fidelity Group had insufficient funding and no insurance
for the first $125,000 in claims incurred per person. The Fidelity
Group operated in interstate commerce because it collected premiums
from clients in South Carolina and Florida * * * [. Petitioner]
instructed employees to remove the last page of plan description
documents containing the words “self-funded” before allowing the
plans to be mailed to clients[.] Jim Sikora, in South Carolina,
received a plan with the “self-funded” language and was assured by
both * * * [petitioner] and * * * [petitioner]’s employee Tim Martin
that a “printing mistake” had occured[.]

During the above time period, * * * [petitioner] utilized the
health care premiums for his own personal use[.] For instance, on
September 15, 2000, the Sunshine Group wired $150,000 in
premiums into * * * [petitioner]’s account in the name of Capital
Marketing, Inc[.] A week later, on September 22, 2000,
* * * [petitioner] wrote a check on this account for $88,315[.]75 to
Cynmar builders to pay for construction of his home in Durham[.]
The Sikora Group a [sic] their health premium in late February, 2000,
 - 11 -

[*11] but Tim Martin later told him that Fidelity made their last
payment to Epoch on February 14, 2000 (actually January 26,
2000)[.] Thus, in late February, Sikora Group remitted a health care
premium to * * * [petitioner]’s company, Fidelity, for which his
employees received no health care insurance protection[.] Sikora’s
premium was not returned to him[.]

In March 2001, PMCS, another third party administration hired
by * * * [petitioner], returned health claims to * * *
[petitioner]/Fidelity Group because they did not receive funding * * *
[. Petitioner] instructed employees to refuse to accept shipment of
claims and the claims were returned to PMCS[.] Although * * *
[petitioner]’s companies collected health insurance premiums from
employees, then health insurance claims went unpaid and remain in
storage at PMCS today[.]

* * * * * * *

In the tax year 2000, * * * [petitioner] was a resident of
Durham, North Carolina, and filed or caused to be filed a joint U.S.
Individual Income Tax Return, Form 1040, on behalf of himself and
his spouse, stating that their joint taxable income for the 2000
calendar year was $ 4,833, on which there was due and owing a tax of
$ 724[.] In truth and in fact, as * * * [petitioner] then well knew, his
income was substantially higher than he reported resulting in a tax
due and owing of substantially more than he calculated[.] According
to IRS reconstructions of his income and expenditures, * * *
[petitioner’s] corrected taxable income for 2000 was at least
$ 4[,]646,417 on which there was due and owing additional taxes of
$ 1,944,392[.]

* * * * * * *

During calendar year 2000, * * * [petitioner] recognized
substantial income and made efforts to conceal his receipt of the same
through purchasing property in nominee names. He caused to be
constructed a home situated in Orange County, North Carolina, for
 - 12 -

[*12] his wife and him but had the checks issued to the builder
CynMar for the costs of construction drawn on a Capital Marketing
Inc[.] account. He also issued checks payable for the purchase of
various motorcycles (some of which were put in nominee names) and
had money wired from the Capital Marketing, Inc[.] bank account to
the Bear Stearns investment and brokerage house [for] his personal
investment purposes although the investment accounts were
maintained in the name of a shell entity, Carolina Green, Inc[.] All of
these items constituted income to him as they were for his personal
benefit[.]

Petitioner and his attorney, as well as the Government’s attorney, appeared before

the District Court for a change of plea hearing on February 21, 2006, and the

District Court accepted petitioner’s guilty plea. During the change of plea hearing

petitioner pleaded guilty to 2 counts of mail fraud, 1 count of theft of healthcare

funds, and 1 count of tax evasion and agreed under oath that the underlying factual

basis was accurate. On June 26, 2006, a judgment in petitioner’s criminal case

was entered by the District Court, and he was sentenced to a term of 150 months’

imprisonment.

Notice of Deficiency

Respondent issued to petitioner a notice of deficiency on February 23, 2010,

determining a $1,054,142 deficiency in petitioner’s 2000 Federal income tax and a

$790,606.50 fraud penalty under section 6663. On Form 886A, Explanation of

Items, respondent states:
 - 13 -

[*13] [Petitioner] * * * submitted false information to insurers and failed to
remit the premiums, while providing false proof of insurance
certifications to his clients. * * * [Petitioner] also routinely continued
to collect premiums from his clients after insurance policies were
cancelled by the insurers. Further, in order to divert the funds
collected for insurance premiums to his personal use, * * *
[petitioner] established financial accounts in the names of nominees,
including his wife (* * * [Ms. Piornack]), Capital Marketing, Inc.,
and Carolina Green, Inc. He used the funds to acquire assets,
including an expensive home built in 2000, a “mountain chalet”,
investments, vehicles and motorcycles, also titled in nominee names
in several instances. None of the diverted funds were reported. * * *
[Petitioner] pled guilty to Income Tax Evasion under the provisions
of Title 26, U.S.C. 7201. Therefore, * * * [petitioner] is collaterally
estopped from raising a defense as to the assertion of the section 6663
fraud penalty. * * *

On March 29, 2010, petitioner timely filed a petition disputing respondent’s

determinations.

Trial was held on June 24, 2015. On September 8, 2015, respondent filed a

motion for leave to amend the pleadings to conform to the evidence, which we

granted on October 5, 2015. By amended answer on October 5, 2015, respondent

asserted an increase in petitioner’s tax deficiency of $202,953 and a corresponding

increase in the fraud penalty under section 6663 of $152,214.75.
 - 14 -

[*14] OPINION

1. Unreported Income

The Commissioner’s determinations in a notice of deficiency are generally

presumed correct, and the taxpayer bears the burden of proving that the

determinations are in error. See Rule 142(a); Welch v. Helvering, 290 U.S. 111,

115 (1933). For the presumption of correctness to attach with respect to

unreported income, the Commissioner’s determination must be supported by

“some evidentiary foundation linking the taxpayer to the alleged income-

producing activity.” Blohm v. Commissioner, 994 F.2d 1542, 1548-1549 (11th

Cir. 1993) (quoting Weimerskirch v. Commissioner, 596 F.2d 358, 362 (9th Cir.

1979), rev’g 67 T.C. 672 (1977)), aff’g T.C. Memo. 1991-636; see also Williams

v. Commissioner, 999 F.2d 760, 763-766 (4th Cir. 1993), aff’g T.C. Memo. 1992-

153. Petitioner has not disputed respondent’s determination on the grounds that it

was incorrect, arbitrary, or did not link him to an income-producing activity, and

therefore the burden of proof remains on him to prove by a preponderance of the

evidence that respondent’s determination is incorrect.9 See Helvering v. Taylor,

293 U.S. 507, 515 (1935); Tokarski v. Commissioner, 87 T.C. 74, 76-77 (1986).

9
We note that while an evidentiary foundation is required in unreported
income cases, the required support is “minimal”. Blohm v. Commissioner, 994
F.2d 1542, 1548-1549 (11th Cir. 1993), aff’g T.C. Memo. 1991-636.
 - 15 -

[*15] In addition, petitioner stipulates receiving some of the income at issue. In

his amended answer respondent asserts that petitioner is liable for an increased

deficiency. As the following discussion demonstrates, the evidence before the

Court supports an increased deficiency. See Rule 142(a)(1).

Section 61(a) defines gross income as “all income from whatever source

derived”. This definition is construed broadly and extends to all accessions to

wealth over which the taxpayer has complete control. See Commissioner v.

Glenshaw Glass Co., 348 U.S. 426, 431 (1955). As the Supreme Court explained,

“[a] gain ‘constitutes taxable income when its recipient has such control over it

that, as a practical matter, he derives readily realizable economic value from it.’”

James v. United States, 366 U.S. 213, 219 (1961) (quoting Rutkin v. United States,

343 U.S. 130, 137 (1952)). A taxpayer has dominion and control when the

taxpayer is free to use the funds at will. Cortes v. Commissioner, T.C. Memo.

2014-181, at *3 (citing Rutkin, 343 U.S. at 137). The use of funds for personal

purposes indicates dominion and control, even if these funds are in an account

titled in a name other than the taxpayer’s. See, e.g., Gardner v. Commissioner,

T.C. Memo. 2013-67, at *13.

Petitioner reported total income of $36,372 on his joint Federal tax return

for 2000, consisting of wages of $7,500, taxable interest of $12,937, ordinary
 - 16 -

[*16] dividends of $2, taxable pension distribution of $16,288, and a $355 loss

from Schedule E. Respondent argues that petitioner failed to report substantial

income from his insurance sales and employee leasing business by diverting funds

into various bank accounts titled in names other than his own. Respondent further

argues that petitioner used diverted funds for the construction of the Owl’s Woods

residence and to purchase motorcycles and motorcycle accessories. We address

each of respondent’s contentions separately below.

Interest Income

Respondent determined in the notice of deficiency that petitioner and Ms.

Piornack received $76,585 of interest income but reported only $12,937 on their

joint 2000 Federal income tax return. Of the $63,648 of alleged unreported

interest income (i.e., $76,585 ! $12,937), respondent concedes that $22,155.75 is

attributable solely to Ms. Piornack. Thus, respondent asserts that petitioner is

liable for tax resulting from $41,492.25 of unreported interest income.

Petitioner did not address the issue of interest income at any time during the

proceedings before this Court. As such, petitioner is deemed to have conceded

this issue pursuant to Rule 34(b)(4). This is further supported by the fact that

petitioner stipulates that he received $54,429.25 of interest income in his taxable

year 2000, but reported only $12,937. Accordingly, we hold that petitioner
 - 17 -

[*17] received $41,492.25 of unreported interest income during his taxable year

2000.

Owl’s Woods Residence

In 2000 petitioner made numerous payments from the Capital Marketing

account to Cyn-Mar for the construction of the Owl’s Woods residence.

Respondent argues that petitioner diverted $1,451,113.35 from his insurance sales

and employee leasing business for the construction of the Owl’s Woods residence

and that this amount is taxable to him for 2000.

Petitioner stipulates that he made payments totaling $1,451,114 to Cyn-Mar

for the construction of the Owl’s Woods residence and that each check to Cyn-Mar

was drawn on the Capital Marketing account and was endorsed by petitioner. The

Capital Marketing account listed petitioner’s name and the Owl’s Woods

residence address, and petitioner signed checks on this account.

Furthermore, on February 21, 2006, petitioner pleaded guilty in the District

Court to, inter alia, tax evasion for his taxable year 2000. As relevant to the Owl’s

Woods residence, the factual basis underlying the tax evasion charge states:

[Petitioner] caused to be constructed a home situated in Orange
County, North Carolina, for his wife and him but had the checks
issued to the builder CynMar for the costs of construction drawn on a
Capital Marketing Inc[.] account. * * * All of these items constituted
income to him as they were for his personal benefit.
 - 18 -

[*18] Petitioner appeared before the District Court on February 21, 2006, and

agreed under oath that this factual basis was accurate. Petitioner has not denied

the receipt of the moneys used to pay for the construction of the Owl’s Woods

residence. In his petition, petitioner appears to argue that the moneys used for

construction of the Owl’s Woods residence were “strictly loans” from “Capital

Financial Group, Nations and Integrity Corporation”. However, petitioner did not

expound upon this contention or present any documentation or other evidence that

he received “loans” for the construction of the Owl’s Woods residence or that he

intended to repay these funds.10 Moreover, petitioner did not raise at trial any

meritorious argument concerning the diverted funds used for the construction of

the Owl’s Woods residence. Accordingly, we hold that petitioner diverted

$1,451,114, which he used to pay Cyn-Mar for the construction of the Owl’s

Woods residence, and that these funds constituted taxable income.

Commission Payments

The parties stipulate that petitioner issued bills to, and received checks

from, Sunshine Co. totaling $128,239.27 for the year in issue. Furthermore, in the

petition, petitioner acknowledges that all checks received from Sunshine Co. were

10
Petitioner seemingly acknowledges in his petition that the funds diverted
to Cyn-Mar were characterized as “loans” solely to avoid paying tax on the
amounts.
 - 19 -

[*19] commission payments resulting from the sale of workers’ compensation and

health insurance and acknowledges that these payments should have been treated

as income by his accountant. Accordingly, we hold that the $128,239.27 of

commission payments from Sunshine Co. is taxable as income to petitioner for the

taxable year 2000.

The parties stipulate that petitioner received and endorsed commission

checks from Fidelity Group totaling $276,528.37 and that these checks were

deposited into petitioner and Ms. Piornack’s personal bank account. In the

petition, petitioner appears to argue that the checks from Fidelity Group are

actually repayment of moneys he “personally loaned” to Fidelity Group to “pay

premiums or claims”. Outside of this unsupported contention petitioner did not

produce any testimony or other evidence that he lent money to Fidelity Group or

that the payments received from Fidelity Group were repayment of loans.

Moreover, petitioner offers no explanation why, if the checks are repayment for

personal loans, the checks are payable to Capital Marketing and each is classified

on its face as a commission payment. Petitioner’s contention that the Fidelity

Group checks are loan repayments is unpersuasive and inconsistent with the

record, and therefore we hold that $276,528.37 of commission payments from

Fidelity Group is taxable income that he received in the year 2000.
 - 20 -

[*20] Carolina Green

Petitioner authorized wire transfers totaling $1,111,000 from the Capital

Marketing account to the Bear Stearns account in 2000. Respondent argues that

the distributions from the Capital Marketing account to the Bear Stearns account

are taxable to petitioner as income. In his petition, petitioner does not dispute that

the amounts transferred to the Bear Stearns account constitute income; however,

he appears to argue that the Bear Stearns account had “more than $2,000,000 in

losses” which would offset tax owed on this income. Petitioner offered no

evidence to substantiate that he incurred losses in the Bear Stearns account or

when these purported losses occurred. The parties stipulate that petitioner

authorized wire transfers totaling $1,111,000 into his Bear Stearns investment

account in the year in issue. Moreover, petitioner appeared before the District

Court on February 21, 2006, and agreed that he “had money wired from the

Capital Marketing, Inc[.] bank account to the Bear Stearns investment and

brokerage house [for] his personal investment purposes although the investment

accounts were maintained in the name of a shell entity, Carolina Green, Inc. All of

these items constituted income to him as they were for his personal benefit.” We

hold that the $1,111,000 transferred from the Capital Marketing account to the
 - 21 -

[*21] Bear Stearns account is taxable income to petitioner for the taxable year

2000.

Motorcycles, Parts, and Accessories

Respondent argues that funds diverted from the Capital Marketing account

for the purchase of motorcycles and motorcycle accessories should be taxable to

petitioner as income. In the petition, petitioner alleges that the motorcycles were

purchased for employees to drive during warm weather and were not owned by

him personally. The parties stipulate that petitioner signed seven checks in 2000--

made payable to either Twin Specialties or Myrtle Beach and/or Rocky Mountain

Harley Davidson--totaling $207,936. The Division of Motor Vehicles title history

information recognizes Carolina Green as the owner of two 2000 motorcycles and

a 2000 private trailer. At trial Ms. Piornack and Alton Brown testified that

petitioner owned motorcycles, rode these motorcycles with his friends and

business associates, and stored receipts for these motorcycles in the den of his

personal residence. Furthermore, petitioner appeared before the District Court on

February 21, 2006, and agreed that he had issued checks as payment for the

purchase of various motorcycles (some of which were put in nominee names) and

that these purchases were income to him because they benefited him personally.

Accordingly, we hold that petitioner had taxable income resulting from $207,936
 - 22 -

[*22] of funds he diverted from the Capital Marketing account to purchase

motorcycles and motorcycle-related accessories for the taxable year 2000.

2. Section 6663 Fraud Penalty

Respondent argues that petitioner’s previous conviction for tax evasion

under section 7201 collaterally estops him from disputing his liability for the civil

fraud penalty under section 6663(a). Section 6663(a) provides: “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.” The Commissioner bears the burden

of proving fraud by clear and convincing evidence. Sec. 7454(a); Rule 142(b). To

satisfy this burden, the Commissioner must establish that: (1) an underpayment

exists, and (2) that the taxpayer intended to evade tax known to be owing by

conduct intended to conceal, mislead, or otherwise prevent the collection of tax.

See Sadler v. Commissioner, 113 T.C. 99, 102 (1999); Parks v. Commissioner, 94

T.C. 654, 660-661 (1990). As discussed above, respondent has satisfied his

burden of showing that petitioner underpaid his income tax for 2000 and the

methods by which petitioner did this, and his own admissions during the prior

criminal proceeding are clear and convincing proof of fraud.
 - 23 -

[*23] In any event, collateral estoppel precludes relitigation of any issue of fact or

law that was actually litigated and necessarily determined by a valid and final

judgment. Montana v. United States, 440 U.S. 147, 153 (1979). It is well

established that a conviction for tax evasion under section 7201, upon either a

guilty plea or a jury verdict, conclusively establishes fraud in a subsequent civil

tax fraud proceeding through the doctrine of collateral estoppel. See, e.g., Amos

v. Commissioner, 360 F.2d 358 (4th Cir. 1965), aff’g 43 T.C. 50 (1964);

DiLeo v. Commissioner, 96 T.C. 858, 885 (1991), aff’d, 959 F.2d 16 (2d Cir.

1992); Marretta v. Commissioner, T.C. Memo. 2004-128, 2004 Tax Ct. Memo

LEXIS 130, at *9, aff’d, 168 F. App’x 528 (3d Cir. 2006). The only practical

difference between the elements of criminal tax evasion under section 7201 and

civil tax fraud is the “larger quantum of proof required in a criminal evasion case”.

Moore v. United States, 360 F.2d 353, 355 (4th Cir. 1965).

Petitioner pleaded guilty11 to tax evasion under section 7201 for 2000, and

that judgment has become final. Accordingly, petitioner is precluded from

11
It is immaterial that petitioner’s conviction resulted from a guilty plea
from the charges brought against him rather than from a trial on the merits after a
plea of not guilty. See Gray v. Commissioner, 708 F.2d 243, 246 (6th Cir. 1983)
(“A guilty plea is as much a conviction as a conviction following jury trial.”), aff’g
T.C. Memo. 1981-1. A guilty plea constitutes an admission of all the elements of
the criminal charge. McCarthy v. United States, 394 U.S. 459, 466 (1969).
 - 24 -

[*24] challenging that he filed a false and fraudulent Federal income tax return

with the requisite fraudulent intent. Petitioner is therefore liable for the section

6663 fraud penalty on the amount determined in part 1 of this opinion.

In reaching our decision, we have considered all arguments made by the

parties, and to the extent not mentioned or addressed, they are irrelevant or

without merit.

To reflect the foregoing,

Decision will be entered

under Rule 155.