UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 11-1804
JOSEPH B. WILLIAMS, III,
Petitioner - Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent - Appellee.
Appeal from the United States Tax Court. (Tax Ct. No. 2202-08)
Argued: September 19, 2012 Decided: December 4, 2012
Before WILKINSON and THACKER, Circuit Judges, and Michael F.
URBANSKI, United States District Judge for the Western District
of Virginia, sitting by designation.
Affirmed by unpublished opinion. Judge Urbanski wrote the
opinion, in which Judge Wilkinson and Judge Thacker joined.
ARGUED: David Harold Dickieson, SCHERTLER & ONORATO, LLP,
Washington, D.C., for Appellant. Damon William Taaffe, UNITED
STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.
ON BRIEF: Pamela Satterfield, SCHERTLER & ONORATO, LLP,
Washington, D.C., for Appellant. ON BRIEF: Tamara W. Ashford,
Deputy Assistant Attorney General, Robert W. Metzler, UNITED
STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.
Unpublished opinions are not binding precedent in this circuit.
URBANSKI, District Judge:
Joseph B. Williams, III, challenges the notice of tax
deficiency issued to him by the Commissioner of Internal Revenue
for tax years 1993 through 2000. The Tax Court upheld the
Commissioner’s notice of deficiency. Williams now appeals.
Williams argues that the Tax Court erred in three ways:
(1) by holding Williams’ guilty plea to criminal tax evasion
collaterally estops him from denying liability for civil fraud
penalties for tax years 1993 through 2000; (2) by attributing
income generated by Williams’ consulting services to Williams
individually instead of to the foreign corporation he formed;
and (3) by disallowing certain charitable deductions taken by
Williams for art donations made to two universities over the
course of three years. Finding each of Williams’ arguments to
be without merit, we affirm.
I.
A.
Williams worked for Mobil Oil Corporation from 1973 until
his retirement in 1998. In the 1990s, he was tasked with
developing strategic business relationships in Russia and former
Soviet republics. In 1993, separate and apart from his work
with Mobil, Williams began providing consulting and other
services concerning pipeline-related contracts to foreign
2
governments. Alika Smekhova, a Russian actress and celebrity,
arranged introductions and provided interpretation services for
Williams in connection with his consulting work. That same
year, Williams formed ALQI Holdings, Inc. (“ALQI”), a British
Virgin Islands corporation. Williams was the sole owner,
operational director, and officer of ALQI. Neither Williams nor
Smekhova had a written employment contract with ALQI.
Two accounts were opened in ALQI’s name at a Swiss bank,
Banque Indosuez (“the ALQI accounts”). Williams had complete
authority over the ALQI accounts. The bank provided Williams
with use of its office space, as well as a Swiss mobile
telephone and credit card that were issued and billed in
Williams’ name. All monies deposited into the ALQI accounts
between 1993 and 2000 were received for Williams’ oil and
pipeline-related consulting services. There are no consulting
agreements documenting the services rendered. Williams did not
use the ALQI name in his dealings with third parties and did not
maintain corporate accounting records.
Smekhova was paid a stipend of $5,000 to $10,000 per month
from the ALQI accounts, but Williams did not pay himself a
salary or commission. Funds were transferred from the ALQI
accounts at Williams’ direction, however, and were used to pay
credit cards and other bills reflecting Williams’ personal
expenses, such as a $30,000 shopping spree in Paris and a family
3
ski vacation. Williams also made gifts to family and friends
from these accounts, including over $41,000 in payments to his
former secretary and a $15,000 gift to the wife of Williams’
deceased father.
More than $7 million in consulting fees were deposited into
the Swiss accounts during the relevant period and over $1.1
million in interest, dividends and capital gains was earned on
these deposits. Williams did not report any of the consulting
fee or investment income on his individual tax returns for tax
years 1993 through 2000, nor did he disclose the existence of
ALQI or its Swiss accounts.
In 2000, at the request of the United States government,
the Swiss government froze the ALQI accounts. Subsequently,
Williams disclosed his ownership interest in ALQI and the
existence of the ALQI accounts on his 2001 tax return. 1 In 2003,
Williams amended his 1999 and 2000 tax returns 2 to report the
investment income earned on the funds in the ALQI accounts, and
he paid the additional tax due. Williams did not include as
1
Earlier this year we determined that Williams willfully
violated 31 U.S.C. § 5314(a) by failing to file for tax year
2000 the form TD F 90-22.1 (“FBAR”), on which he was required to
disclose his interest in the ALQI accounts. United States v.
Williams, No. 10-2230, 2012 WL 2948569 (4th Cir. July 20, 2012).
2
Amended returns for 1993 through 1998 were prepared but
were never filed.
4
income on either his original or amended returns the corpus of
the accounts.
In 2003, Williams was charged in a two-count superseding
criminal information with conspiracy to defraud the government,
in violation of 18 U.S.C. § 371, and tax evasion, in violation
of 18 U.S.C. § 7201. On June 12, 2003, Williams entered a
guilty plea to both counts. The court accepted the guilty plea,
sentenced Williams to 46 months’ incarceration, and ordered him
to pay $3,512,000 in restitution. Williams was released from
federal custody on May 21, 2006.
B.
In 1996, Williams signed an Art Purchase Agreement in which
he purportedly committed to purchasing at a discount from Abbey
Art Consultants, Inc. (“Abbey Art”) certain works of art that,
at Williams’ direction, were to be donated at fair market value
to charitable institutions. The Agreement recited that Williams
“desire[d] to purchase” $72,000 worth of art, but did not
identify specific pieces of art, and provided that the purchase
price would not exceed 24% of the appraised fair market value of
the art. The Agreement required Williams to pay only $3,600
upon signing; the balance of the purchase price was to be paid
on or before such time as the art was donated to charity.
Abbey Art was to facilitate all aspects of the art donation
and incur all expense, including paperwork, appraisal,
5
packaging, shipping, and storage costs. The Agreement provided
that Abbey Art would arrange for the donation “after the
required holding period of one (1) year.” While Williams could
request a donation be made to a certain charitable institution,
Abbey Art ultimately had the discretion to choose the donee. If
Abbey Art was unable to facilitate the art donation for any
reason, the Agreement required Abbey Art to refund Williams’
payments. Additionally, Abbey Art’s sole remedy under the
Agreement for Williams’ non-payment was to retain payments
already received and retake possession of the art. 3 In the event
of a reduction in the fair market value of the art, Abbey Art
agreed to pay Williams an amount equal to “the percentage of the
dollars paid for each dollar the fair market value of the Art
has been reduced.” Finally, the Agreement provided that it was
the entire agreement between the parties and that it was to be
interpreted under New York law.
In December 1997, Abbey Art, at Williams’ direction, donated
certain pieces of art with an appraised fair market value of
$425,625 to Drexel University. Williams received an invoice
from Abbey Art in the amount of $98,400, representing a purchase
3
A term of the Agreement requiring specific performance of
the unpaid portion of the purchase price was crossed out and
initialed by Williams and his wife who, while a signatory to
this Agreement, is not a party to this case.
6
price of $102,000 (approximately 24% of the appraised fair
market value of the art) less Williams’ $3,600 deposit.
Williams paid Abbey Art $98,400 before the end of 1997 and on
his federal income tax return for that year, Williams claimed a
charitable contribution deduction of $425,625.
In December 1999, Williams wrote Abbey Art requesting that a
gift of art be made on his behalf to Florida International
University for the current tax year. Williams enclosed with
this letter a check in the amount of $57,500. Certain pieces of
art with an appraised value of $250,525 were donated at
Williams’ request prior to the end of the year. On his 1999
federal tax return, Williams claimed the full fair market value
of the art as a charitable contribution deduction.
In 1999, Williams paid Abbey Art $4,600, and in October
2000, Abbey Art arranged a gift of additional artwork with an
appraised value of $98,900 to Drexel University. Williams paid
Abbey Art the balance due on this donation, $17,158, on December
8, 2000. Williams again claimed the fair market value of the
donated art as a charitable contribution deduction on his 2000
federal income tax return.
C.
On October 29, 2007, the Commissioner of Internal Revenue
issued a notice of tax deficiency to Williams. The Commissioner
found the consulting fees deposited into the ALQI accounts
7
between 1993 and 2000, as well as the investment income earned
on those funds, to be taxable income to Williams and assessed
civil fraud penalties for each of the eight years he failed to
report this income on his tax returns. The Commissioner also
determined that Williams was only entitled to charitable
contribution deductions in the amount of his basis in the art
donated through Abbey Art, because Williams had not owned the
art for at least one year prior to the donations. The
Commissioner assessed accuracy-related penalties on the
underpayments resulting from the disallowed charitable
deductions.
Williams challenged the notice of deficiency by filing a
petition in the Tax Court. The Tax Court granted partial
summary judgment in favor of the Commissioner, holding Williams
was collaterally estopped from denying that he had committed
civil tax fraud during each of the years 1993 through 2000.
Williams v. Comm’r, No. 2202-08, 2009 WL 1033354 (U.S. Tax Ct.
Apr. 16, 2009). Following a bench trial, the Tax Court found
that the consulting fee and investment income deposited into the
ALQI accounts between 1993 and 2000 was attributable to Williams
individually. The Tax Court further held that Williams was not
entitled to a charitable contribution deduction in the amount of
the fair market value of the donated art because Williams did
not hold the art for more than one year before donating it.
8
Accordingly, the Tax Court upheld the Commissioner’s notice of
deficiency and assessment of civil tax fraud and accuracy-
related penalties. Williams v. Comm’r, No. 2202-08, 2011 WL
1518581 (U.S. Tax Ct. Apr. 21, 2011). This appeal followed.
We review the Tax Court’s decision applying the same
standard of review as we would to a civil bench trial in the
United States district court. Waterman v. Comm’r, 176 F.3d 123,
126 (4th Cir. 1999). Questions of law and statutory
interpretation are reviewed de novo and findings of fact for
clear error. Id. The grant of the Commissioner’s motion for
partial summary judgment on the collateral estoppel issue is
reviewed de novo. Henson v. Liggett Grp., Inc., 61 F.3d 270,
274 (4th Cir. 1995). The Commissioner’s notice of deficiency is
presumed to be correct, and the taxpayer bears the burden of
proving it wrong. McHan v. Comm’r, 558 F.3d 326, 332 (4th Cir.
2009); see also Welch v. Helvering, 290 U.S. 111, 115 (1933).
II.
Williams first argues on appeal that the Tax Court erred in
holding that his guilty plea to criminal tax evasion in
violation of 18 U.S.C. § 7201 collaterally estops him from
9
denying his liability for civil tax fraud penalties under 26
U.S.C. § 6663 for the years 1993 through 2000. 4
The doctrine of collateral estoppel applies “where (1) the
‘identical issue’ (2) was actually litigated (3) and was
‘critical and necessary’ to a (4) ‘final and valid’ judgment (5)
resulting from a prior proceeding in which the party against
whom the doctrine is asserted had a full and fair opportunity to
litigate the issue.” McHan, 558 F.3d at 331 (quoting Collins v.
Pond Creek Mining Co., 468 F.3d 213, 217 (4th Cir. 2006)
(citation and quotation marks omitted)). “[O]nce an issue is
actually and necessarily determined by a court of competent
jurisdiction, that determination is conclusive in subsequent
suits based on a different cause of action involving a party to
the prior litigation.” Montana v. United States, 440 U.S. 147,
153 (1979).
A taxpayer is collaterally estopped from denying civil tax
fraud when convicted for criminal tax evasion under 18 U.S.C. §
7201 for the same taxable year. Moore v. United States, 360
4
Generally, the Commissioner must assess a deficiency
within three years of the filing of the tax return from which
the deficiency stems. 26 U.S.C. § 6501(a). If a deficiency is
determined in the case of a false or fraudulent return with the
intent to evade tax, however, the Commissioner can assess such a
deficiency at any time. Id. at § 6501(c)(1). The Commissioner
bears the burden of proving civil tax fraud. 26 U.S.C. §
7454(a).
10
F.2d 353, 355 (4th Cir. 1966); DiLeo v. Comm’r, 96 T.C. 858,
885-86 (1991), aff’d, 959 F.2d 16 (2d Cir. 1992); see generally
United States v. Wight, 839 F.2d 193, 196 (4th Cir. 1988) (“The
doctrine of collateral estoppel may apply to issues litigated in
a criminal case which a party seeks to relitigate in a
subsequent civil proceeding.”). “[W]hile the criminal evasion
statute does not explicitly require a finding of fraud, the
case-by-case process of construction of the civil and criminal
tax provisions has demonstrated that their constituent elements
are identical.” Moore, 360 F.2d at 356.
A.
Williams argues that the Tax Court misinterpreted the terms
of his guilty plea in barring him from denying civil tax fraud
liability for the years 1993 through 2000. Williams contends
that he did not plead guilty to tax evasion, but rather to
evasion of payment of taxes, the elements of which are not
dependent upon any specific tax year. 5 As such, Williams argues
5
Section § 7201 “includes the offense of willfully
attempting to evade or defeat the assessment of a tax as well as
the offense of willfully attempting to evade or defeat the
payment of a tax.” Sansone v. United States, 380 U.S. 343, 354
(1965). As the Third Circuit in United States v. McGill, 964
F.2d 222, 230 (1992), explained, the willful filing of a false
return satisfies the elements of evasion of assessment. Such
cases are far more common than evasion of payment cases, which
are rare and generally require an affirmative act that occurs
after any filing, such as placing assets in the name of others
(Continued)
11
that he is not collaterally estopped from denying civil tax
fraud for the entire eight year period set forth in the notice
of deficiency, or for any particular year therein.
We reject this argument because, in addition to lacking
merit, it has been waived. Williams failed to raise this
argument before the Tax Court. Ordinarily, we will not consider
an issue raised for the first time on appeal except in limited
circumstances, Nat’l Wildlife Fed’n v. Hanson, 859 F.2d 313, 318
(4th Cir. 1988), and this rule is applied equally by courts of
appeals reviewing Tax Court decisions, Karpa v. Comm’r, 909 F.2d
784, 788 (4th Cir. 1990) (citing Grauvogel v. Comm’r, 768 F.2d
1087, 1090 (9th Cir. 1985)). Williams has not suggested any
reason why we should depart from our ordinary rule in this case,
and we see no reason to do so.
B.
Williams also takes issue with the Tax Court’s finding that
his conviction for tax evasion collaterally estops him from
denying civil fraud for each year from 1993 through 2000.
Williams disputes that he pled guilty to tax evasion for each
and every one of these years. The record, however, proves fatal
or causing debts to be paid through and in the name of others.
Id.
12
to this claim. The plain language of the superseding criminal
information charges Williams with tax evasion for each year from
1993 through 2000:
From in or about 1993, through in or about April 2001,
. . . J. BRYAN WILLIAMS, the defendant, unlawfully,
willfully and knowingly did attempt to evade and
defeat a substantial part of the income tax due and
owing by J. BRYAN WILLIAMS . . . for the calendar
years 1993 through 2000, by various means, including,
among others by (a) arranging for approximately $7.98
million in payments which were income to Williams to
be made into the secret Alqi accounts in Switzerland
he controlled; and (b) preparing and causing to be
prepared, signing and causing to be signed, and filing
and causing to be filed, false and fraudulent U.S.
Individual Income Tax Returns, Forms 1040, for the
calendar years 1993 through 2000, on which he failed
to disclose his interest in the secret Alqi bank
accounts in Switzerland, and on which, in the years
set forth below, he failed to report the approximate
amounts of income set forth below, and upon which
income there was a substantial additional tax due and
owing to the United States of America:
Calendar Approximate
Year Amount of Income
1993 $1,029,518.72
1994 $752,479.52
1995 $998,723.14
1996 $3,917,762.57
1997 $1,670,891.49
1998 $133,371.90
1999 $109,167.59
2000 $256,234.64
(Title 26, United States Code, Section 7201).
Williams pled guilty to this tax evasion count, as well as to
conspiracy to defraud the government in violation of 18 U.S.C. §
371. Pursuant to a written plea agreement, Williams agreed to
13
“file accurate amended personal tax returns for the calendar
years 1993 through 2000” and “pay past taxes due and owing to
the [IRS] by him for calendar years 1993 through 2000, including
any applicable penalties.”
Additionally, Williams admitted during his allocution at
his guilty plea hearing that he knew the funds deposited into
the ALQI accounts were taxable to him. Williams acknowledged
that for “the calendar year tax returns for ‘93 through 2000,
[he] chose not to report the income to [the IRS] in order to
evade the substantial taxes owed thereon, until [he] filed [his]
2001 tax return.” Williams continued: “I therefore believe
that I am guilty of evading the payment of taxes for the tax
years 1993 through 2000.” As the Tax Court observed, there is
no question that Williams pled guilty to and was convicted of
tax evasion for each of the eight calendar years 1993 through
2000.
Williams insists he made clear to the district court that
he was pleading to a narrower statement of facts concerning tax
evasion than those contained in the superseding information.
The record proves otherwise. At the plea hearing, Williams’
counsel told the district judge:
[W]e’re not adopting or accepting the facts as stated
in the conspiracy count, which I think is the
recitation of what was in the original indictment in
this case. What we have agreed is that Mr. Williams
would plead guilty to conspiracy counts, but based
14
upon the factual allocution, which he has given to the
Court.
This statement plainly refers to the conspiracy count, not to
the tax evasion count. Williams pled guilty to both conspiracy
and tax evasion. While he raised a concern at the plea hearing
about the factual allegations surrounding the conspiracy count,
Williams did not deny any fact or allegation concerning tax
evasion, nor raise any issue whatsoever with respect to that
count. On the contrary, Williams expressly admitted to facts
that demonstrate his tax evasion scheme continued from 1993
until the time he filed his 2001 tax return, as charged in the
information.
C.
Williams’ final contention with respect to collateral
estoppel is that he did not have a full and fair opportunity to
litigate the issue previously, because at the time he entered
his guilty plea, neither the Commissioner nor Williams had
analyzed the actual tax implications arising from the ALQI
accounts and the amount of deficiencies for each tax year. 6
6
Any suggestion that Williams’ conviction following a
guilty plea, rather than a trial, renders collateral estoppel
inapplicable misses the mark. “[T]here is no difference between
a judgment of conviction based upon a guilty plea and a judgment
rendered after a trial on the merits,” for purposes of applying
the doctrine of collateral estoppel, as the conclusive effect is
the same. Blohm v. Comm’r, 994 F.2d 1542, 1554 (11th Cir.
1993).
(Continued)
15
Thus, argues Williams, the fraud penalties were not actually and
necessarily decided by the court in his criminal case.
Williams confuses the issues. It matters not whether civil
fraud penalties and interest had been calculated as of the date
of his guilty plea or sentencing. 7 These determinations are not
Moreover, Williams’ reliance on United States v.
International Building Co., 345 U.S. 502, 505-06 (1953), is
misplaced. Williams claims International Building stands for
the proposition that collateral estoppel is not appropriate when
the decision of a prior court is the result of compromise or
negotiation rather than a full review of the facts. But
International Building involved “a pro forma acceptance by the
Tax Court of an agreement between the parties to settle their
controversy for reasons undisclosed.” Id. at 505. Indeed, in
International Building, the Commissioner agreed to withdraw his
proofs of claim for tax deficiencies filed in International
Building’s bankruptcy proceeding, upon a stipulation that the
withdrawal was “‘without prejudice’ and did not constitute a
determination of or prejudice the rights of the United States to
any taxes with respect to any year other than those involved in
the claim.” Id. at 503. The parties filed stipulations in the
pending Tax Court proceedings that there was no tax liability
for the years 1933, 1938, and 1939, and the Tax Court entered
formal decisions to that effect. No factual findings were made,
no briefs were filed, and no hearings were held. The Supreme
Court held that while the Tax Court’s decisions were res
judicata with respect to tax claims for 1933, 1938, and 1939,
they did not collaterally estop the Commissioner from assessing
deficiencies for the years 1943, 1944, and 1945. Id. at 505.
International Building is plainly distinguishable from the
instant case.
7
Moreover, the record makes clear it was Williams’ counsel
who advocated for proceeding with the guilty plea and sentencing
hearings before a sum certain in penalties and interest had been
calculated. Williams cannot now argue that he was rushed into
pleading guilty before a final figure had been determined.
16
required to secure a criminal conviction for tax evasion. What
matters for purposes of collateral estoppel is that Williams was
indeed convicted of evasion for the years in question. As we
held in Moore, that conviction “supplies the basis for a finding
of fraud in [a] civil proceeding to determine tax liability.”
360 F.2d at 355 (citing Tomlinson v. Lefkowitz, 334 F.2d 262
(5th Cir. 1964)).
Williams pled guilty to a tax evasion scheme that continued
from 1993 until 2000. In so doing, Williams admitted that he
committed tax fraud in each of those eight years. In light of
his guilty plea and allocution, Williams cannot now deny
liability for civil tax fraud penalties for the years in
question. We find the Tax Court correctly applied the doctrine
of collateral estoppel in this case.
III.
Williams next argues that the Tax Court erred in finding
him individually liable for tax on the consulting fee income
deposited into the ALQI accounts between 1993 and 2000.
Williams asserts that ALQI was a legitimate business for which
he performed consulting work and contends that he acted on the
company’s behalf when he earned the consulting fees at issue.
We are not persuaded.
17
“The principle that income is taxed to the one who earns it
is basic to our system of income taxation.” Haag v. Comm’r, 88
T.C. 604, 610 (1987), aff’d, 855 F.2d 855 (8th Cir. 1988)
(unpublished table decision); see also Lucas v. Earl, 281 U.S.
111 (1930). For income to be taxable to a corporation: (1) the
service-performer must be an employee of the corporation whom
the corporation has the right to direct or control in some
meaningful sense; and (2) there must exist between the
corporation and the person a contract or similar indicium
recognizing the corporation’s controlling position. Haag, 88
T.C. at 611 (citing Johnson v. Comm’r, 78 T.C. 882, 891 (1982)).
No such employer-employee relationship exists here.
Williams testified that he had no written employment
agreement and received no regular salary or commission payments
from ALQI. He stipulated that he was the sole operational
director and officer of ALQI and the only person with authority
to act on the company’s behalf in its business activities.
Williams had exclusive signature authority over the ALQI
accounts from 1993 through 2000 and was the sole person from
whom Banque Indosuez would accept instructions with respect to
those accounts. There is simply no indication that ALQI wielded
any form of control over Williams as an employee.
Beyond that, the evidence strongly suggests that Williams
did not act on behalf of ALQI when he earned the income in
18
question and merely used ALQI as a bank account. Apart from
Williams’ testimony, there is no evidence that Williams’
consulting clients even knew ALQI existed. There are no
consulting agreements, notes or other records that reflect
ALQI’s business dealings. In fact, there are no ALQI business
records at all for the period at issue, except for bank records
maintained by Banque Indosuez and a single balance sheet and
profit and loss statement dated June 30, 2000. Williams’
accountant, Donald Williamson, testified that while he reviewed
voluminous bank records and incorporation documents in the
course of his work, he did not see any general ledgers, profit
and loss statements or balance sheets for ALQI, nor did he see
any consulting contracts. Williamson testified that he relied
on the representations of Williams and Williams’ counsel that
ALQI earned the consulting fees in question, and he took those
representations at face value.
In an effort to legitimize ALQI’s operations, Williams
points to ALQI’s use of Banque Indosuez’s office space, its
Swiss cell phone and credit card, as well as the fact that
clients deposited consulting fees directly into the ALQI
accounts. Williams insists that ALQI employed Smekhova to
arrange, attend and translate at meetings conducted for ALQI
business, and that ALQI, not Williams, paid her for her
services. But Smekhova, like Williams, had no written
19
employment agreement with ALQI. As the Tax Court noted, “[t]he
fact that Mr. Williams’ business and personal expenses were paid
out of these same Swiss bank accounts does not prove that his
clients contracted with ALQI or that ALQI was anything other
than the receptacle into which Mr. Williams diverted his
consulting income.” Williams, 2011 WL 1518581, at *14.
Williams argues that because ALQI is not a “sham”
corporation - and the Tax Court assumed that it is not - it must
follow that the consulting fee income is taxable to ALQI. But
Williams’ reasoning is flawed. As the Tax Court persuasively
explained, whether ALQI is a legitimate business entity is
irrelevant; ALQI simply did not earn the income at issue. 8 Id.;
see Haag, 88 T.C. at 611 (“A finding that the [corporation] is
8
Williams argues Moline Properties, Inc. v. Comm’r, 319
U.S. 436 (1943), supports his position, but his argument falls
short. In that case, petitioner Moline Properties claimed that
gain on sales of its real property should be treated, and
therefore taxed, as the gain of its sole stockholder, and that
its corporate existence should be ignored as fictitious.
Notwithstanding the fact that Moline “kept no books and
maintained no bank account during its existence,” the Supreme
Court held that it was a separate entity with a tax identity
distinct from its stockholder. In reaching this conclusion, the
Court noted the fact that the stockholder exercised negligible
control over the entity, that Moline mortgaged and sold portions
of its property, and that Moline entered into its own business
venture by leasing part of its property and collecting rental
income. Id. at 440. On the contrary, in the instant case,
Williams exercised exclusive and complete control over ALQI, and
there is no evidence that ALQI carried on any business activity
apart from serving as Williams’ bank account.
20
not a sham does not preclude application of the assignment of
income doctrine because a taxpayer can assign income to a
corporation with real and substantial businesses to avoid tax
liability.”).
Moreover, Williams cannot rise above his own admissions at
his guilty plea hearing that the “purpose of the [ALQI] accounts
was to hold funds and income [he] received from foreign sources
during the years 1993 to 2000.” Williams further acknowledged
that he “knew that most of the funds deposited into the A[LQI]
accounts, and all of the interest income were taxable income to
[him],” but admitted he “chose not to report the income to the
Internal Revenue Service in order to evade the substantial taxes
owed thereon.”
The Commissioner’s determinations of income are entitled to
a presumption of correctness, and the taxpayer bears the burden
of proving them wrong. McHan v. Comm’r, 558 F.3d 326, 332 (4th
Cir. 2009). “The IRS is not given free rein, however: the
taxpayer can rebut the presumption of correctness by proving, by
a preponderance of the evidence, that the IRS’s income
determination is arbitrary or erroneous.” Id. Williams has not
rebutted the presumption in this case. For these reasons, we
find that Williams is liable for tax on the corpus of the ALQI
21
accounts, in addition to the passive income earned on those
funds. 9
IV.
Williams’ final argument on appeal is that the Tax Court
erred in limiting his charitable contribution deductions to his
basis in the art donated through Abbey Art, rather than allowing
deduction of the art’s fair market value. Williams contends
that the Tax Court erroneously found the Art Purchase Agreement
to be an option contract, ignoring both the mutual understanding
of the parties and the plain language of the Agreement. For the
reasons that follow, we find Williams’ arguments unavailing.
A.
Generally, a deduction is allowed for any charitable
contribution for which payment is made within the taxable year.
26 U.S.C. § 170(a)(1). The deduction is allowable, however,
only if the contribution is “verified under the regulations
prescribed by the Secretary.” Id. When a contribution involves
property other than money, the amount of the charitable
contribution is the fair market value of the property at the
9
Given this holding, we see no reason to address Williams’
challenge to the validity of the Controlled Foreign Corporation
regulations, as this argument only becomes relevant if the
consulting fee income were attributable to ALQI.
22
time the donation is made. 26 C.F.R. § 1.170A-1(c)(1). This
rule is modified in situations involving donations of
appreciated property. In those circumstances, the amount of any
charitable contribution is reduced by the amount of gain that
would not have qualified as long-term capital gain if the
property had been sold by the taxpayer at its fair market value,
determined as of the time of the contribution. 26 U.S.C. §
170(e)(1)(A). In other words, section 170(e)(1)(A) permits the
deduction of long-term capital gain appreciation but if the
property is not long-term capital gain property, the charitable
contribution deduction is limited to the taxpayer’s basis at the
time of the contribution. Long-term capital gain is defined as
gain from the sale or exchange of a capital asset 10 held for more
than one year. 26 U.S.C. § 1222(3). The taxpayer bears the
burden of proving he is entitled to a charitable deduction in
the amount of the fair market value of the donated property.
See INDOPCO, Inc. v. Comm’r, 503 U.S. 79, 84 (1992).
B.
The issue to be resolved is whether Williams held the art
in question for more than one year before donating it. “In
common understanding to hold property is to own it. In order to
10
The art in question qualifies as a capital asset pursuant
to 26 U.S.C. § 1221(a).
23
own or hold one must acquire. The date of acquisition is, then,
that from which to compute the duration of ownership or the
length of holding.” McFeely v. Comm’r, 296 U.S. 102, 107
(1935). Williams argues that he acquired the art when he
executed the Art Purchase Agreement in December 1996. The
Commissioner asserts that Williams did not acquire the art until
he paid for it, which in each case was within a year of the
donation.
In determining the date of acquisition of property:
[N]o hard-and-fast rules of thumb can be used, and no
single factor is controlling. “Ownership of property
is not a single indivisible concept but a collection
or bundle of rights with respect to the property;”
consequently, we must examine the transaction in its
entirety. The date of the passage of legal title is
not the sole criteria; the date on which “the benefits
and burdens or the incidents of ownership of the
property” were passed must also be considered, and the
legal consequence of particular contract provisions
must be examined in the light of the applicable State
law.
Hoven v. Comm’r, 56 T.C. 50, 55 (1971) (internal citations
omitted).
The Tax Court did not look to state law in resolving this
issue, however, and the Commissioner insists that state law has
no applicability here. Both the Commissioner and the Tax Court
cite United States v. Heller, 866 F.2d 1336, 1341 (11th Cir.
1989), for the proposition that “federal tax law disregards
transactions lacking an economic purpose which are undertaken
24
only to generate a tax savings. Federal tax law is concerned
with the economic substance of the transaction under scrutiny
and not the form by which it is masked.” Indeed, the Fifth
Circuit has recognized that “[t]he application and
interpretation of the Internal Revenue Code is a matter of
federal law. The form of a document and its effect under state
law are therefore not controlling in these federal
determinations.” Deshotels v. United States, 450 F.2d 961, 964
(5th Cir. 1972). The Fifth Circuit found it appropriate to look
to Louisiana law in Deshotels, however, in order to understand
the agreement at the heart of the parties’ dispute. Id.
Williams argues we should do the same here and look to New York
law 11 in interpreting the Art Purchase Agreement, and he cites to
our decision in Volvo Cars of North America, LLC v. United
States, 571 F.3d 373 (4th Cir. 2009), in support of that
contention.
In that case, Volvo had written-off excess inventory that
it purportedly sold to a warehouser pursuant to the terms of a
1983 contract, thereby reducing its taxable income for the 1983
tax year. The IRS found these were not bona fide sales because
Volvo retained control over the inventory even after it was
11
The parties do not dispute that if state law is to be
invoked in the context of this analysis, New York law applies
per the terms of the Agreement.
25
transferred. Volvo brought suit seeking a refund of the tax
paid due to the disallowed write-offs, and the jury returned a
verdict in Volvo’s favor. The district court entered judgment
notwithstanding the verdict as to transfers of inventory made
prior to execution of the 1983 contract, finding as a matter of
law that the contract did not address inventory previously
transferred to the warehouser. Volvo appealed. In determining
whether the 1983 contract covered inventory previously
transferred, we looked to state law “because ‘in the application
of a federal revenue act, state law controls in determining the
nature of the legal interest which the taxpayer had in the
property.’” Id. at 378 (citing United States v. Nat’l Bank of
Commerce, 472 U.S. 713, 722 (1985)). As the Supreme Court
stated in National Bank, “[t]his follows from the fact that the
federal statute ‘creates no property rights but merely attaches
consequences, federally defined, to rights created under state
law.’” 472 U.S. at 722 (quoting United States v. Bess, 357 U.S.
51, 55 (1958)).
To be sure, the economic substance of the transaction is
the primary concern in the instant case. We need not accept
that the parties contracted for the sale of art simply because
their signatures appear on a document entitled “Art Purchase
Agreement.” Even if we look to state law to help determine the
nature of the legal interest conveyed by the Agreement, as
26
Williams urges us to do, we remain convinced that the Tax Court
correctly determined that Williams’ charitable contribution
deduction is limited to his basis in the donated art.
C.
The Tax Court examined the rights, duties and obligations
the parties assumed when they executed the Art Purchase
Agreement and concluded that by signing the Agreement and paying
$3,600 up front, Williams purchased an option to buy art. Under
New York law, “whether an agreement is a binding contract or an
option is to be determined like any other issue of contract
interpretation from all four corners of the agreement.”
Interactive Prop. Corp. v. Blue Cross & Blue Shield, 450
N.Y.S.2d 1001, 1002 (1982). Although a “contract for sale” can
encompass both a present sale of goods and a contract to sell
goods at a future time, a “sale” requires the passing of title
from the seller to the buyer for a price, N.Y. U.C.C. Law § 2-
106, and “[t]itle to goods cannot pass under a contract for sale
prior to their identification to the contract,” id. at § 2-
401(1). Indeed, “title passes to the buyer at the time and
place at which the seller completes his performance with
reference to the physical delivery of the goods . . . even
though a document of title is to be delivered at a different
time or place. . . .” Id. at § 2-401(2).
27
An option contract, on the other hand, “is an agreement to
hold an offer open; it confers upon the optionee, for
consideration paid, the right to purchase at a later date.”
Kaplan v. Lippman, 75 N.Y.2d 320, 324 (1990). “[U]ntil the
optionee gives notice of his intent to exercise the option, the
optionee is free to accept or reject the terms of the option.”
Id. at 325. The contract ripens into a fully enforceable
bilateral contract once the optionee gives notice of his intent
to exercise the option in accordance with the agreement. Id.
The following leads us to believe the Tax Court correctly
concluded that the Art Purchase Agreement is not a contract for
sale that triggered the holding period required for long-term
capital gain. 12
1.
Title to the art did not pass upon execution of the
Agreement in 1996, and delivery was not made. In fact, the art
in question was not even identified in the Agreement. Rather,
“[t]he specific items purchased by the Client [were to] be
described in written appraisals” and given to Williams once he
received physical possession of the art or donated it to a
12
We note that paragraph 12 of the Agreement provides that
it is “the entire agreement between the respective parties
hereto and there are no other provisions, obligations,
representations, oral or otherwise, of any nature whatsoever.”
28
charitable institution. This could not occur, pursuant to the
Agreement’s terms, until Williams paid the balance of the
purchase price. While he asserts art was segregated for him in
Abbey Art’s warehouse, Williams does not have an inventory of
this segregated art, nor did he ever visit the warehouse to view
it.
2.
The Agreement provides that $3,600, five percent of the
total agreed purchase price of the art ($72,000), was to be paid
up front and would be held in escrow pending satisfaction of the
Agreement’s provisions. The balance of the purchase price was
due at the time Williams received physical possession of the art
or when it was donated, an act which was to occur in the future
but at no specified time.
Aside from the initial $3,600 payment, Williams had no
obligation to perform under the contract. Williams was not
required to follow through with the purchase, and Abbey Art had
no right to require specific performance of the full balance of
the purchase price. Its sole remedy for Williams’ non-payment
was to retain as liquidated damages any monies that Williams had
paid towards the purchase of the art and to reclaim ownership
over it.
Indeed, Abbey Art bore all of the expense and all of the
risk in this transaction. It was responsible for selecting and
29
paying the appraiser, packaging and shipping the art, and
completing all the necessary paperwork. Even in storing the
art, Abbey Art bore the risk of loss. See N.Y. U.C.C. Law § 2-
509. Moreover, if the fair market value of the art fell below
what was reflected in the appraisal, reducing the tax benefit to
Williams, Abbey Art was required to refund Williams the
percentage of his dollars paid for each dollar in reduction of
the fair market value.
3.
The Agreement provides that the total purchase price of the
art would not exceed 24% of the cumulative appraised fair market
value of the art purchased. 13 The purchase price set forth in
the agreement is $72,000, which is 24% of $300,000. Thus, the
Agreement contemplates $300,000 worth of art would be purchased.
Yet the fair market value of the first art donation Williams
made ($425,625) far exceeded that amount. Arguably, even if
title did pass for $300,000 worth of art upon execution of the
Agreement in 1996, it still would not account for the extra
$125,000 worth of art donated to Drexel University in 1997, the
$250,525 worth of art donated to Florida International
13
It goes without saying that the appreciation guaranteed
to Williams by virtue of this Agreement is suspect, to say the
least. The Commissioner has not challenged the valuation of the
art, however, and that issue is not before us.
30
University in 1999, and the $98,900 worth of art donated to
Drexel in 2000.
D.
In sum, the 1996 Art Purchase Agreement was not a contract
for sale. Therefore, Williams’ holding period for purposes of
the long-term gain calculation did not begin until he paid for
and acquired a present interest in the art. In each instance,
this occurred less than one year from the date of his donation.
Williams paid for the December 1997 donation to Drexel
University in December 1997. He paid for the December 1999
donation to Florida International University in December 1999.
And he paid for the October 2000 donation to Drexel in full in
December of that same year. For these reasons, we find the Tax
Court did not err in concluding that Williams’ charitable
contribution deduction is limited to his basis in the art.
V.
Because Williams has not met his burden of proving the
Commissioner’s notice of deficiency is erroneous, we affirm.
AFFIRMED
31