# Harvey v. Commissioner

> United States Tax Court · July 12, 1999 · 78 T.C.M. 60

URL: https://www.frixlaw.com/law-library/cases/4332323

## Case

- **Full name:** JERRY LEE HARVEY v. COMMISSIONER OF INTERNAL REVENUE
- **Court:** United States Tax Court
- **Decided:** July 12, 1999
- **Citations:** 78 T.C.M. 60; 1999 T.C. Memo. 229; 1999 Tax Ct. Memo LEXIS 265
- **Precedential status:** Unpublished
- **Opinion:** Opinion
- **Judges:** "Parr, Carolyn Miller"
- **Cited by:** 0 later opinions in the Frix Law Library

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## Opinion text

T.C. Memo. 1999-229

UNITED STATES TAX COURT

JERRY LEE HARVEY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 9376-88, 7127-92, Filed July 12, 1999.
13113-96.

James D. McMaster, for petitioner.

W. Robert Abramitis, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

PARR, Judge: Respondent determined deficiencies in,

additions to, and a penalty on petitioner's Federal income taxes

as follows:
- 2 -

Docket No. 9376-88

Additions to Tax
Year Deficiency Sec. 6653(b) Sec. 6653(b)(2) Sec. 6654 Sec. 6661

1978 $1,161,317 $580,659 -- $37,226 --
1979 1,246,774 623,387 -- 52,098 --
1980 364,056 182,028 -- 23,197 --
1981 464,416 232,208 -- 35,585 --
1982 621,489 310,745 50% of the 60,604 $155,372
interest due
on $621,489
1983 172,038 86,019 50% of the 10,317 43,010
interest due
on $172,038

Docket No. 7127-92

Additions to Tax Penalty
Year Deficiency Sec. 6653(b)1 Sec. 6654 Sec. 6661 Sec. 6663(a)

1985 $439,711 $242,631 -- $116,760 --
1986 132,645 99,484 -- 33,161 --
1987 74,789 56,092 $4,039 -- --
1988 76,808 57,606 4,913 -- --
1989 98,870 -- 6,685 -- $74,153
1
For returns required to be filed after Sept. 3, 1982, and before Dec.
31, 1986, if the penalty under sec. 6653(b)(1) applies, the penalty under sec.
6653(b)(2) will also apply in an amount to be determined. For returns
required to be filed after Dec. 31, 1986, and on or before Dec. 31, 1988, if
the penalty under sec. 6653(b)(1)(A) applies, the penalty under sec.
6653(b)(1)(B) will also apply in an amount to be determined.

Docket No. 13113-96

Addition to Tax
Year Deficiency Sec. 6651(a)(1)

1992 $158,621 $39,655

All section references are to the Internal Revenue Code in

effect for the taxable years in issue, and all Rule references

are to the Tax Court Rules of Practice and Procedure, unless

otherwise indicated.
- 3 -

The issues for decision are:1 (1) Whether a 1980 plea

agreement in Mobile, Alabama, between petitioner and the

Government precludes respondent from determining deficiencies in

taxes owed by petitioner. We hold it does not. (2) Whether

respondent's use of petitioner's Cayman Islands records was

improper because it violated grand jury secrecy rules. We hold

it was not. (3) Whether respondent's use of petitioner's Cayman

Islands records was improper because it violated a treaty between

the United Kingdom and the United States regarding Cayman Islands

information. We hold petitioner lacks standing to challenge any

purported violation of the treaty. (4) Whether respondent's use

of petitioner's Panamanian bank records was improper because it

violated Panamanian law or petitioner's Fourth Amendment rights.

We hold it was not. (5) Whether petitioner had unreported income

for the years at issue as determined by respondent. We hold he

did. (6) Whether petitioner is entitled to deductions for net

operating losses for the years in issue. We hold he is not. (7)

Whether petitioner is liable for additions to tax for fraud

1
These consolidated cases essentially relate to unreported
income from narcotics trafficking and unreported interest earned
on that income. Docket No. 9376-88 relates to years when the
funds were located in the Cayman Islands, docket No. 7127-92
relates to years when the funds were located in Panama, and
docket No. 13113-96 relates to years when the funds were in the
custody of the District Court for the Southern District of
Florida before being transferred to the Internal Revenue Service
(IRS).
- 4 -

pursuant to section 6653(b) for the years 1978 through 1983 and

1985 through 1988, and the fraud penalty pursuant to section 6663

for 1989.2 We hold he is. (8) Whether petitioner is liable for

additions to tax for underpayment of individual estimated tax

pursuant to section 6654 for the years 1978 through 1983 and 1987

through 1989. We hold we lack jurisdiction for the years 1978

through 1983; however, he is for the years 1987 through 1989.

(9) Whether petitioner is liable for additions to tax for

substantial understatement pursuant to section 6661 for the years

1982, 1983, 1985, and 1986. We hold he is. (10) Whether

petitioner is liable for an addition to tax for failure to file a

timely return pursuant to section 6651(a)(1) for 1992. We hold

he is.

Some of the facts have been stipulated and are so found.

The stipulated facts and the accompanying exhibits are

incorporated herein by this reference. Petitioner resided in

Florida at the time he filed the petitions in these consolidated

cases.

2
Petitioner did not file a return for 1989. Accordingly,
the fraud penalty should be under sec. 6651(f) for fraudulent
failure to file, not under sec. 6663. The latter section applies
only where a return is filed. See sec. 6664(b). This is an
error in form only and does not have a substantive effect on
these cases. Cf. Pietz v. Commissioner, 59 T.C. 207, 213-214
(1972).
- 5 -

FINDINGS OF FACT

Petitioner's Background

Petitioner has an extensive background in all aspects of

aviation. Petitioner has worked loading airplanes. He also has

a degree in aeronautic engineering and has served in the U.S. Air

Force. In addition, petitioner has all obtainable pilot's

licenses and aircraft mechanic's licenses, including commercial

pilot.

Since the late 1960's, petitioner has been engaged in the

buying, selling, trading, and leasing of aircraft. Between 1969

and 1976, petitioner engaged in these aircraft activities

primarily outside the United States. In addition to conducting

these activities, petitioner was also flying as a commercial

pilot. During this time, petitioner lived in various countries.

In approximately 1976, petitioner returned to the United

States to live and purchased a house at 19824 Bob O Link Drive in

Hialeah, Florida. Petitioner had a large floor safe installed in

his house, into which he placed the cash that he had accumulated

from his previous business dealings, along with the money that he

was generating from his current business dealings.

Also in approximately 1976, in addition to his legitimate

aircraft business transactions, petitioner began leasing aircraft

to "bandits". Bandits are persons engaged in the smuggling of

marijuana. Petitioner placed the money he earned from these
- 6 -

activities into his floor safe along with his other funds,

essentially all of which he converted into cash.

In 1978, petitioner pled guilty to conspiracy to possess 100

pounds of marijuana, relating to a transaction in which he leased

an airplane to persons smuggling marijuana.

Petitioner did not file Federal income tax returns for years

prior to 1977.

Cayman Islands Bank Account

By December 1977, petitioner had accumulated approximately

$2.5 million in cash, which was stored in the floor safe in his

house. At this time, petitioner decided to relocate his cash

from the floor safe in his house to a bank account in the Cayman

Islands.

On February 27, 1978, petitioner opened a personal bank

account at the Bank of Nova Scotia in the Cayman Islands, making

an initial cash deposit of $247,500. The Bank of Nova Scotia

charged petitioner 1 percent of the deposit because it was cash.

From February 27 until July 4, 1978, petitioner deposited a total

of approximately $2 million in cash from his floor safe into his

Cayman Islands account. Thus, petitioner retained approximately

$500,000 in cash in the floor safe to use for business and

personal expenses.
- 7 -

Approximately one-half of this money that was deposited in

the Cayman Islands account was from activities related to leasing

aircraft to persons engaged in the smuggling of marijuana.

The funds petitioner deposited into the Bank of Nova Scotia

were used to purchase interest-bearing certificates of deposit.

During 1978, 1979, 1980, 1981, 1982, and 1983, these certificates

of deposit earned interest in the amounts of $90,891, $294,835,

$403,607, $588,847, $401,337, and $160,502, respectively.

Petitioner intentionally omitted the interest earned on his

money on deposit in the Cayman Islands account from his 1978

through 1983 Federal income tax returns.

Cayman Islands Corporations

Cayman Aviation Finance was a Cayman Islands corporation

that petitioner used to buy and trade airplanes. Cayman Aviation

Finance owned a Mercedes Benz that petitioner drove and a

condominium in North Carolina. Petitioner also had $486,000 in

an account at the Bank of Nova Scotia titled in the name of

Cayman Aviation Finance which he considered his money.

Kompas Corp. was another Cayman Islands corporation used by

petitioner. Kompas Corp. owned a house located at 3060 N.E. 40th

Street in Fort Lauderdale, Florida. Petitioner acquired this

house in 1981 or 1982. Petitioner purchased the stock of Kompas

Corp. and left the title to the house in the corporation's name.
- 8 -

Real Estate, Boats, and Airplanes

Petitioner owned various parcels of real estate and several

boats and airplanes.

In July 1978, petitioner purchased a DC-6 airplane, No.

45501, for $250,000. He also expended $50,000 for repairs to

this airplane in 1978.

In 1981, petitioner purchased a Douglas DC7C airplane, No.

74303, for $112,000. Also, on January 16, 1981, petitioner

purchased a Piper Aztec airplane for $18,720.

In August 1982, petitioner purchased a 1982 Lear airplane,

No. 97MJ, for $150,000. On December 30, 1982, petitioner also

made a cash downpayment of $5,000 on the purchase of a Lear 24

airplane, No. N100VQ. In addition, petitioner purchased a Cessna

305, L-19 airplane, No. N5229G, for $31,800 in 1982.

In 1980, petitioner purchased a 28-foot cigarette boat for

$4,106. Also in 1980, petitioner expended $26,000 for repairs to

a 35-foot cigarette boat, which was sold for $48,000.

On October 31, 1978, petitioner purchased certain real

property located in Miriah, North Carolina, for $47,000.

In 1979, petitioner purchased a house at 1357 Seminole Drive

in Fort Lauderdale, Florida, for $468,000. This house was titled

in the name Intercontinental Aircraft Leasing. Petitioner moved

into the house at 1357 Seminole Drive in late 1980 after his
- 9 -

house at 19824 Bob O Link Drive was machine gunned by drug

dealers.

The only other asset Intercontinental Aircraft Leasing owned

was another house located at 1261 Seminole Drive, Fort

Lauderdale, Florida, which was purchased in 1982. On February

15, 1982, petitioner paid $53,170.41, the balance due on the

purchase of the house located at 1261 Seminole Drive.

Petitioner's Arrest in Mobile, Alabama

On June 13, 1980, petitioner was arrested by Federal

authorities in Mobile, Alabama, and charged with possession of or

conspiracy to possess a controlled substance. The arrest stemmed

from a transaction where petitioner was delivering 105,000

methaqualone tablets, or quaaludes, to Mobile in exchange for

approximately $175,000 in cash.

On June 17, 1980, petitioner hired Thomas Haas (Haas), an

attorney in Mobile, to represent him. Haas concluded that there

was no defense, either directly or indirectly, to the charge and

that he had no way of winning the case on trial.

At that time William Kimbrough (Kimbrough) was the U.S.

attorney for the Southern District of Alabama. The chief

assistant U.S. attorney was William Rudolph Farve (Farve).

Haas plea bargained with Farve. The U.S. attorney in Mobile

entered into a plea agreement with petitioner, which was not

reduced to writing, whereby petitioner agreed to provide the
- 10 -

Government with evidence, testimony, and cooperation in

connection with an investigation in the Southern District of

Florida. See United States v. Harvey, 869 F.2d 1439 (11th Cir.

1989) (en banc). Michael Patrick Sullivan (Sullivan), an

assistant U.S. attorney for the Southern District of Florida,

participated in creating the agreement. In exchange for his

cooperation, petitioner would have the charges against him in

Mobile dismissed. When the U.S. attorney in Mobile received

information that petitioner had satisfied his obligations under

the plea agreement, Kimbrough filed a motion to dismiss the case

that was then pending against petitioner in the Southern District

of Alabama. The charges against petitioner in Mobile were

ultimately dismissed on March 16, 1981.

Petitioner's Criminal Tax Investigation in Florida

In 1983, the Criminal Investigation Division (CID) of the

IRS was investigating petitioner. The CID investigation of

petitioner resulted in a Federal grand jury investigation of

petitioner in the Southern District of Florida.

As part of the grand jury investigation, CID Special Agent

Stanley R. Young III (Young) was designated agent of the grand

jury for purposes of receiving, analyzing, and maintaining

documents sought by the grand jury as part of its investigation.

In June 1983, grand jury subpoenas were served on petitioner by

Young seeking petitioner's personal records and his corporate
- 11 -

records, including those from the Cayman Islands. Petitioner did

not produce any of the records.

In addition, a grand jury subpoena was served on the Bank of

Nova Scotia for the records relating to petitioner's bank account

in the Cayman Islands. Petitioner's Cayman Islands bank records

were not produced pursuant to this subpoena.

On July 28, 1983, petitioner removed all his funds at the

Bank of Nova Scotia in the Cayman Islands. Petitioner withdrew

$3,125,000 from his personal accounts and $486,000 from the

account of Cayman Aviation Finance, which petitioner considered

his money.

The funds petitioner withdrew from the Bank of Nova Scotia

were eventually deposited into petitioner's accounts at the Bank

of Credit and Commerce International (BCCI) in Panama City,

Panama. Petitioner's accounts at BCCI were interest-bearing

accounts. During 1985, 1986, 1987, 1988, and 1989, petitioner

earned interest on his funds deposited at BCCI in the amounts of

$271,383, $265,288, $214,074, $277,315, and $354,072,

respectively. Petitioner intentionally omitted the interest

earned on his money on deposit in Panama at BCCI from his 1985

through 1988 Federal income tax returns. Petitioner did not

report any of the interest he earned on the funds deposited at

BCCI during any taxable year.
- 12 -

The Government did eventually obtain petitioner's Cayman

Islands records, but not through grand jury subpoenas. The

records were obtained from the Cayman Islands Government pursuant

to the Agreement Concerning Obtaining Evidence From Cayman

Islands With Regard to Narcotics Activities, Aug. 29, 1984, U.S.-

U.K., 24 I.L.M. 1110 (as extended). The records were received by

Stephen Snyder (Snyder), an attorney in the Tax Division of the

Department of Justice. Snyder's office was located in

Washington, D.C.; however, some of the responsibilities of his

position entailed investigations in the Southern District of

Florida.

Immediately after Snyder received the records, he called

Young and had him fly to Washington, D.C., to pick them up.

Young, as agent of the grand jury, accepted the records on behalf

of the grand jury in the Southern District of Florida. Young

brought the records back to Florida with him and kept them in a

locked security cabinet in his office in Fort Lauderdale.

Thereafter, Young physically presented the records to the grand

jury with a discussion and analysis.

Using in part the Cayman Islands records, the grand jury in

the Southern District of Florida indicted petitioner in 1985 for

criminal tax violations for the years 1978 through 1982.

Petitioner filed a motion to dismiss the indictment as a
- 13 -

violation of the plea/cooperation agreement which was agreed to

in Mobile, Alabama.

During the litigation of petitioner's criminal tax charges

in Florida, the District Court for the Southern District of

Florida held that petitioner was given both use and transactional

immunity in his 1980 informal, unwritten, agreement with the

Government, and the indictment charging criminal tax violations

was dismissed. See United States v. Harvey, 651 F. Supp. 894

(S.D. Fla. 1986). A divided panel of the Court of Appeals for

the Eleventh Circuit affirmed. See United States v. Harvey, 848

F.2d 1547 (11th Cir. 1988). Subsequently, the Court of Appeals

decided to rehear the case en banc and vacated the panel opinion.

See United States v. Harvey, 855 F.2d 1492 (11th Cir. 1988). The

Court of Appeals then held that even though petitioner was given

use and transactional immunity in September 1980, the immunity

grant did not prohibit prosecution for criminal tax violations

allegedly committed in the years following the grant of immunity.

See United States v. Harvey, 869 F.2d 1439 (11th Cir. 1989) (en

banc). Petitioner was convicted of violating section 7201 for

his 1981 taxable year.

Petitioner's Arrest in St. Louis, Missouri

On December 18, 1986, petitioner was arrested at an airport

in St. Louis, Missouri, by the CID of the IRS. The arrest was

pursuant to a December 8, 1986, indictment by a Federal grand
- 14 -

jury in St. Louis, related to aircraft transactions with drug

smugglers. Petitioner's arrest in St. Louis was unrelated to the

grand jury and criminal tax prosecution in the Southern District

of Florida.

Following reversal of his initial conviction and remand, 845

F.2d 760 (8th Cir. 1988), petitioner was convicted in the Eastern

District of Missouri of conspiracy to impede the IRS in

collection of income taxes in violation of 18 U.S.C. sec. 371.

See United States v. Harvey, 900 F.2d 1253 (8th Cir. 1990).

At the time of his arrest, petitioner had $29,800 of U.S.

currency in his possession, along with three cashier's checks

totaling $250,000. The checks were payable to Jerry L. Harvey,

and the purchaser of the checks was Bill Walker & Associates.

Shortly after petitioner's arrest in St. Louis, IRS Revenue

Agent Ken Kibort (Kibort) was assigned to investigate

petitioner's potential civil tax liabilities. Kibort received

the assignment from his group manager and was handed a newspaper

article about petitioner's arrest. Kibort's assignment was to

investigate a potential termination assessment against

petitioner. From the currency and checks in petitioner's

possession at the time of his arrest, it appeared to Kibort that

petitioner had sold an airplane to Bill Walker & Associates.

A bond detention hearing in connection with petitioner's St.

Louis arrest was held on December 23, 1986. The bond detention
- 15 -

hearing was open to the general public. Kibort attended

petitioner's bond detention hearing and obtained a copy of a

proffer that was submitted in evidence at the hearing. The

proffer was submitted by the Government in support of a motion

for detention and explained why petitioner was perceived as a

flight risk. Kibort relied on the information obtained at the

bond detention hearing and contained in the proffer as background

information for petitioner's termination assessment.

The proffer disclosed that petitioner had been indicted in

Fort Lauderdale for income tax evasion pursuant to section 7201

for the years 1978 through 1982 and for filing a false return for

1980 pursuant to section 7206(1). The indictment for the latter

offense was based on his having indicated on the 1980 return that

he did not have an interest in or authority over a foreign bank

account during the tax year. The proffer also indicated that

part of the underreported income for the years of the indictment

was $1.8 million of interest income from Cayman Islands accounts.

In addition, the proffer indicated that during the pendency of

his criminal tax case in Florida, petitioner removed $485,000

from his Cayman Aviation Finance account and $3,125,000 from six

certificates of deposit at the Bank of Nova Scotia in the Cayman

Islands.

The proffer also chronicled petitioner's past experiences

with law enforcement officials. In addition, the proffer
- 16 -

indicated that petitioner was an adept pilot, had experience with

international travel, possessed high-quality counterfeit

identification, and held property in corporate names.

Kibort found this information he obtained at the bond

hearing very significant in making a termination assessment.

Kibort's inquiry into petitioner's civil tax liability did not

end, however, with the information obtained from the proffer at

the bond hearing. Kibort contacted Bill Walker & Associates,

which was a brokerage firm on St. Simons Island, Georgia. Kibort

learned that Bill Walker & Associates paid petitioner the three

checks in his possession at the time of his arrest, in addition

to two other checks and some currency.

Kibort also contacted an individual named Rafael Ellis

(Ellis) in Oklahoma City, Oklahoma. Ellis represented a

Brazilian corporation that purchased the aircraft at issue.

Ellis told Kibort that petitioner wanted the purchase price in

currency. Ellis did not want to pay the purchase price in

currency, so petitioner gave him the option of wire transferring

the purchase price to petitioner's bank account, No. ML-49, at

BCCI in Panama. Petitioner also told Ellis that his banker was

an individual named Syed Aftab Hussain (Hussain).

Since Kibort now knew the sale price of the aircraft from

the checks and currency, his next goal was to determine

petitioner's basis in the aircraft. Kibort discovered the
- 17 -

aircraft at issue had been purchased in Oklahoma along with two

other aircraft. The purchase records indicated that there was a

wire transfer of $750,000 from BCCI in Panama, in addition to

$300,000 in currency. At the time of the termination assessment,

however, Kibort did not know about the $750,000 wire transfer

from Panama. Kibort knew only that three aircraft had been

purchased, and he allocated a purchase price to the aircraft at

issue for purposes of the termination assessment. Based on the

sale price and basis, there was a profit on the aircraft at

issue.

On December 31, 1986, the IRS made three termination

assessments: One against Intercontinental Jet, Inc.

(Intercontinental Jet), another against petitioner personally,

and a third against petitioner as a transferee of

Intercontinental Jet.

Petitioner challenged the termination assessments, and

Kibort continued to work on the case. Petitioner went through

the administrative level of appeals of the termination

assessments and then petitioned the District Court for the

Southern District of Florida regarding the assessments. An open

hearing regarding the termination assessments was held in West

Palm Beach, Florida, before the same judge that had heard

petitioner's criminal tax prosecution.
- 18 -

In order to prepare for the hearing in Florida, Kibort

continued to follow up on several leads. At petitioner's bond

hearing, Kibort learned from Young's testimony that petitioner

had transferred money to Panama. Kibort also learned that a

$65,000 check payable to petitioner from Ellis was negotiated at

BCCI in Panama. Furthermore, Kibort learned that when petitioner

was arrested in St. Louis, he had in his possession a business

card of his banker, Hussain, who was an employee of BCCI, and an

address book that showed the account No. ML-49 on one of the

pages. Kibort also discovered, through FAA records, that

petitioner had sold another aircraft in 1985 for $700,000, and

$670,000 of that was wired to BCCI in Panama to account No. ML-

49.

All this information Kibort was gathering was solely in

preparation for the hearing regarding the termination

assessments. Kibort was not working on anything related to

petitioner's criminal tax prosecution. The District Court upheld

the termination assessments in October 1987.

After the decision on the termination assessments was

received, Kibort considered initiating a jeopardy assessment that

would cover the taxable years for which petitioner was under

criminal tax investigation. In order to do the jeopardy

assessment, Kibort needed the approval of several high officials

in the IRS, including someone representing the Collection
- 19 -

Division. The Collection Division would want assurance that the

assessment would result in a high probability of collection.

Kibort went to the IRS District Counsel in St. Louis and

discussed with him whether the IRS could reach petitioner's money

in Panama through a domestic branch of BCCI. The St. Louis

District Counsel referred Kibort to Jim Springer (Springer) at

the Department of Justice. Springer had just finished a similar

case, where overseas funds were sought from an international bank

through a domestic branch. Springer advised Kibort that he would

send him information regarding that action.

Springer was also familiar with petitioner. While

petitioner's criminal tax prosecution in Florida was pending,

petitioner filed a motion opposing admission in evidence of

foreign records, specifically records regarding petitioner

obtained from the Government of the Cayman Islands. The

Government opposed petitioner's motion. Attached to the

Government brief in opposition was a list of 46 paid bank drafts

from petitioner's bank accounts at the Bank of Nova Scotia in the

Cayman Islands. The final bank draft was paid on July 28, 1983,

to the Canadian Imperial Bank of Commerce in the amount of

$3,125,000. Also attached to the brief was a July 25, 1983,

letter to the manager of the Bank of Nova Scotia, signed by

petitioner, that stated:
- 20 -

Please forward to Bruce Campbell & Co. a draft in
favour of Canadian Imperial Bank of Commerce for the
sum of US$3,125,000.00, the balance on the account
should be handed to the bearer of this letter in cash.
These sums represent the six Certificates of Deposit
held at your branch and which mature today.

Bruce Campbell & Co. was the law firm petitioner used in the

Cayman Islands. In addition, attached to the brief was a copy of

the referenced check payable to the Canadian Imperial Bank of

Commerce. Springer had a copy of this brief and sent it to

Kibort in October 1987.

To make the jeopardy assessment, Kibort also needed to

obtain the permission of the CID. Kibort needed permission from

the CID to ensure that he was not taking any action that would

harm the pending criminal case. Kibort flew to Florida to meet

with Young, Revenue Agent Charlie Parenteau (Parenteau), and

others. The meeting entailed solely a presentation by Kibort as

to what he proposed to do as a computation to determine a

liability. Young, Parenteau, and the others present at the

meeting did not provide Kibort with any information. The CID

approved the jeopardy assessment. On December 10, 1987, the

assessment was made and levies were served against BCCI branches

in Miami and New York.

Kibort computed the tax for the jeopardy assessment using,

in part, the expenditures method based on the list of the 46 paid

bank drafts attached to the brief he received from Springer.
- 21 -

Kibort also relied on Young's testimony at the bond hearing in

St. Louis and the proffer. In addition, Kibort relied on a brief

filed in the Court of Appeals for the Eleventh Circuit which

dealt with the dismissal of petitioner's criminal tax indictment.

All the information Kibort used to make the jeopardy assessment

was public record.

The jeopardy assessment, like the termination assessment,

was litigated. It proceeded through an administrative level of

appeals and was then petitioned to the District Court for the

Southern District of Florida. The District Court held that the

jeopardy assessment was reasonable. See Harvey v. United States,

730 F. Supp. 1097 (S.D. Fla. 1990).

Kibort was also involved in issuing the notice of deficiency

for the years 1978 through 1983. The principal difference of

this calculation from the calculation for the jeopardy assessment

was that certain expenditures were added to unreported income

that were either unexplained or cash. None of the information

Kibort used came from Young, Snyder, or Parenteau unless it was

public record.

BCCI Returns Petitioner's Funds to the United States

BCCI deposited $4,602,776.17 of petitioner's money into the

registry of the District Court for the Southern District of

Florida in April 1990. To find out whether this represented all
- 22 -

of petitioner's funds in Panama, Kibort and others requested

petitioner's bank records from BCCI.

Special Agent Pamela L. McCullough (McCullough) of the U.S.

Customs Service had been participating in criminal investigations

concerning Manuel Antonio Noriega (Noriega) of Panama, and

others, in narcotics trafficking and money laundering. These

investigations led to two indictments against Noriega, and

others, including BCCI, in the District Court for the Middle

District of Florida in Tampa. Following the investigations, as

part of a plea agreement, BCCI agreed to assist the Government in

obtaining banking records maintained in Panama.

In approximately April 1990, McCullough went to Panama and

presented the Panamanian Government with an affidavit to obtain

the records of Noriega and others, including petitioner.

McCullough included the request for petitioner's records at the

request of an IRS CID agent. Petitioner's records were obtained

from BCCI and were used to make the determinations in the notice

of deficiency issued to him for the years 1985 through 1989.

The $4,602,776.17 returned by BCCI was deposited by the

Clerk of the Court for the Southern District of Florida into an

interest-bearing account at NationsBank. In June 1992, the IRS

received, pursuant to an order of the District Court, a total of

$5,132,074.88 from the NationsBank account consisting of the

$4,602,776.17 originally received from BCCI together with accrued
- 23 -

interest in the amount of $529,298.71. The $5,132,074.88

received by the IRS during 1992 was applied to petitioner's

unpaid tax assessments.

Petitioner was sent a form "Combined 1099/1098 Tax

Statement" by NationsBank. It was addressed "Jerry Lee Harvey,

5231 N.W. 84th Avenue, Fort Lauderdale, FL 33351-4903." This

form states that petitioner earned interest in the amount of

$529,298.71 during 1992. Petitioner did not report this income.

OPINION

Issue 1. Petitioner's 1980 Plea Agreement

Petitioner asserts that his 1980 plea agreement in Mobile,

Alabama, bars the Government from collecting any taxes on the

Cayman Islands funds he had accumulated before the agreement.

Petitioner's argument is that his 1980 agreement gave him

prospective civil tax immunity from the interest earned on the

fruits of his drug-trafficking career. Petitioner has advanced

this argument unsuccessfully in the past.

To summarize, petitioner accumulated substantial amounts of

money as a drug trafficker. He deposited this money in

clandestine accounts in the Cayman Islands, where it earned a

considerable amount of interest. Petitioner intentionally did

not report this interest income on any Federal income tax return.

When petitioner was arrested in Mobile, Alabama, he entered into

a plea agreement in which he cooperated with the Government.
- 24 -

Pursuant to this agreement, petitioner told Federal authorities

about his financial dealings, including the existence of funds in

the Cayman Islands.

Petitioner's 1980 plea agreement has already been the

subject of extensive litigation. In finding the jeopardy

assessments for 1978 through 1983 against petitioner reasonable,

and the amount assessed appropriate under the circumstances, the

District Court for the Southern District of Florida held:

This Court does not accept * * * [petitioner's]
contentions that his 1980 grant of immunity estops the
Government from making jeopardy assessments for civil
tax liabilities against the taxpayer. For ease of
analysis, the assessments can be divided between pre-
immunity and post-immunity tax years. The Eleventh
Circuit has determined that the 1980 grant of immunity
does not encompass tax years subsequent to 1979 and
that * * * [petitioner] is not immune from criminal
prosecution for tax evasion for post-immunity tax
years. Harvey, 869 F.2d at 1449. In light of the fact
that the immunity agreement does not even extend to tax
years after 1979, there is no question that the grant
of immunity does not preclude the Service from making
assessments for the tax years 1980 through 1983. As
for 1978 and 1979, the trial judge in United States v.
Harvey, 651 F. Supp. 894 (S.D. Fla. 1986), rev'd 869
F.2d 1439 (11th Cir. 1989) originally held that there
was immunity from criminal prosecution for tax evasion
for these years, but has subsequently determined that,
at least for purposes of a termination assessment, the
grant of immunity did not include civil matters.
Harvey v. United States, Case No. 87-6193 (S.D. Fla.
September 24, 1987). Given the limited effect of
judicial review of a jeopardy assessment pursuant to
section 7429, this Court will adopt this well-reasoned
approach. For purposes of this jeopardy review, the
1980 grant of immunity does not preclude the Government
from making assessments for civil tax liabilities for
the years 1978 and 1979. [Harvey v. United States, 730
F. Supp. at 1104-1105.]
- 25 -

Petitioner relies on a footnote in the en banc opinion of

the Court of Appeals for the Eleventh Circuit for the proposition

that his 1980 plea agreement bars respondent from pursuing any

taxes he failed to pay on his Cayman Islands funds before

September 1980. In the en banc review of his criminal tax

indictment in Florida, the Court of Appeals stated:

the government at least implicitly has come to
recognize that the 1980 immunity agreement bars any
prosecution for tax evasion allegedly committed before
September of 1980 (the date of the immunity agreement),
or any other legal action, such as forfeiture, that
might arise from violations that allegedly took place
before the immunity agreement. Harvey got a fresh
start in 1980, including his Cayman Islands money.
[United States v. Harvey, 869 F.2d at 1443 n.6.]

Petitioner argues that this footnote from the opinion of the

Court of Appeals in his criminal tax case prevents respondent

from pursuing any taxes he failed to pay on his Cayman Islands

funds before September 1980, the date of the immunity agreement.

Petitioner further argues that the full extent of his 1980

agreement, especially as it relates to civil tax liabilities

after September 1980, needs to be addressed in these proceedings.

Petitioner's 1980 agreement does not encompass tax years

after 1979. See United States v. Harvey, 869 F.2d at 1449;

Harvey v. United States, 730 F. Supp. at 1104. Accordingly,

respondent is not precluded from pursuing taxes for the years

after 1979 by petitioner's 1980 agreement.
- 26 -

Furthermore, respondent is not precluded from pursuing taxes

for the years 1978 and 1979 by petitioner's 1980 agreement. The

judge who originally dismissed petitioner's criminal tax

indictment in the Southern District of Florida also subsequently

held that for purposes of the termination assessment,

petitioner's 1980 agreement did not include immunity from civil

taxes. See Harvey v. United States, 730 F. Supp. at 1105. A

second judge for the Southern District of Florida also held that

petitioner's 1980 agreement did not include civil tax immunity

for 1978 and 1979 for purposes of the jeopardy assessments. See

id. When the District Court reviewed petitioner's jeopardy

assessments, it had the benefit of weighing the en banc opinion

of the Court of Appeals for the Eleventh Circuit in its

determinations. The District Court did not hold that the

footnote, on which petitioner now relies, prevented respondent

from pursuing taxes for 1978 and 1979.

In addition, the then U.S. attorney for the Southern

District of Alabama, Kimbrough, testified at trial that he did

not have the authority to compromise petitioner's civil liability

for Federal taxes and did not discuss any immunity from such

taxes with petitioner or his attorney, Haas. Kimbrough testified

that in making the immunity agreement, petitioner's obligation to

pay taxes was not something that he considered. Sullivan, the

assistant U.S. attorney for the Southern District of Florida who
- 27 -

participated in creating petitioner's 1980 agreement, likewise

testified that he did not have the authority to compromise or

grant immunity from Federal taxes. Accordingly, petitioner's

1980 agreement does not prevent respondent from determining

deficiencies in petitioner's income taxes for 1978 and 1979.

Issue 2. Grand Jury Secrecy and Fed. R. Crim. P. 6(e)

Petitioner asserts that respondent improperly used grand

jury information in violation of rule 6(e) of the Federal Rules

of Criminal Procedure. Petitioner asserts that this information

formed the direct basis for the jeopardy assessments and notice

of deficiency for the taxable years 1978 through 1983 and

indirectly led to the notices of deficiency involving the taxable

years 1985 through 1989, and 1992.

During the criminal tax proceedings in the Southern District

of Florida, petitioner's Cayman Islands records were obtained and

presented to the Federal grand jury. Petitioner asserts that

information regarding his Cayman Islands accounts was improperly

disclosed and then used by respondent.

Generally, matters occurring before a Federal grand jury may

not be disclosed. See Fed. R. Crim. P. 6(e). Petitioner

contends that respondent's determinations are based on

information that was improperly obtained in violation of rule

6(e) of the Federal Rules of Criminal Procedure.
- 28 -

Petitioner has made this argument before. In upholding the

jeopardy assessments, the District Court for the Southern

District of Florida stated:

This Court finds no merit in * * * [petitioner's]
contentions that the jeopardy assessments should be
barred because the Internal Revenue Service relied on
grand jury information purportedly disclosed in
violation of Rule 6(e) of the Federal Rules of Criminal
Procedure. The Federal Rules of Criminal Procedure
provide for disclosure of grand jury information to a
Government attorney conducting criminal matters.
Fed.R.Crim.P. (6)(e)(3)(A)(i), 54(c). It is axiomatic
that this "grand jury information" is properly revealed
during a criminal proceeding.

Furthermore, Rule 6(e) does not restrict the use
of grand jury information which has been publicly
disclosed in open court. * * * The "grand jury
information" relied upon in making the jeopardy
assessment in this case was disclosed in the bond
detention hearing, at the pre-Kastigar hearing and in
various other aspects of criminal proceedings. There
is no evidence that these disclosures were improper.
Furthermore, the majority of the information relied
upon in making the assessments has been incorporated in
a published decision. * * * [Harvey v. United States,
730 F. Supp. at 1107-1108.]

We agree with the conclusions of the District Court for the

Southern District of Florida. Kibort's primary source of

information for the determinations was the proffer and testimony

from the bond detention hearing in St. Louis, as well as a brief

filed in petitioner's criminal case in Florida. All of this

information was part of the public record. The fact that

petitioner failed to object to the disclosure of this information

at the bond detention hearing, or various other proceedings
- 29 -

before the District Courts, vitiates his belated objection now.

See Gavosto v. Commissioner, T.C. Memo. 1994-481. We hold that

there was no improper disclosure or use of grand jury information

by respondent.3

Issue 3. Cayman Islands Treaty Violation

Petitioner asserts that respondent improperly used

information that was obtained from the Government of the Cayman

Islands in violation of an agreement between the United States

and the United Kingdom.

Evidence concerning petitioner's bank accounts in the Cayman

Islands was obtained pursuant to the Agreement Concerning

Obtaining Evidence From Cayman Islands With Regard to Narcotics

Activities, Aug. 29, 1984, U.S.-U.K., 24 I.L.M. 1110 (as

extended). Petitioner challenges the use of this evidence by

asserting a violation of the agreement.

Petitioner's bank records in the Cayman Islands were

originally obtained for use in the criminal tax case in Florida.

In order to obtain these records under the terms of the

3
We note that Fed. R. Crim. P. 6(e) orders were later
issued. Hugh G. Isley, Jr. (Isley), was originally petitioner's
attorney in these proceedings. When Isley began representing
petitioner, he had no information or records for petitioner and
was attempting to obtain any records he could. In July 1994, the
District Courts for the Southern District of Florida and the
Eastern District of Missouri issued Fed. R. Crim. P. 6(e) orders
allowing the grand jury material gathered against petitioner to
be used by both petitioner and respondent in these cases.
- 30 -

agreement, the Attorney General of the United States was required

to certify that the records were for use in the grand jury

proceedings in Florida involving petitioner. Furthermore, the

Attorney General had to certify that the records would not be

used or disclosed for any purposes other than the resolution of

matters encompassed by the agreement without the written consent

of the Government of the Cayman Islands through the Cayman

Attorney General.

Petitioner argues that neither the criminal tax prosecution

in Missouri nor the instant civil tax proceedings are matters

encompassed by the agreement; i.e., narcotics activities.

Therefore, petitioner argues, the written consent of the

Government of the Cayman Islands was required for disclosure of

the records. Thus, petitioner asserts that since there was no

written authorization, it was improper to use the records for any

purpose other than the investigation conducted by the Federal

grand jury in Florida.

The District Court for the Southern District of Florida has

addressed this argument as well. In upholding the jeopardy

assessment, the District Court stated:

Neither are the jeopardy assessments prohibited on the
grounds that they are based on documents which * * *
[petitioner] asserts were obtained in violation of a
treaty with the Cayman Islands. United States citizens
do not have standing to challenge purported violations
of this treaty because the agreement did not create any
rights for United States citizens. United States v.
- 31 -

Mann, 829 F.2d 849, 852-853 (9th Cir. 1987). * * *
[Petitioner], a United States citizen, has no standing
to challenge any purported violation of the Cayman
Islands treaty. [Harvey v. United States, 730 F. Supp.
at 1106.]

See also United States v. Mann, 829 F.2d 849, 852-853 (9th Cir.

1987); United States v. Trupin, No. 97 Cr. 97 (S.D.N.Y. May 20,

1999).

We agree with the conclusions of the District Court for the

Southern District of Florida. We hold that petitioner lacks

standing to challenge any purported violation of the Cayman

Islands treaty.

Issue 4. Panamanian Law and Fourth Amendment Violations

Petitioner argues that his BCCI bank records were obtained

in violation of Panamanian law. Therefore, petitioner argues,

respondent's use of the records in making the determinations is

prohibited.

Petitioner's records were obtained from BCCI pursuant to a

request by an agent of the U.S. Customs Service. Petitioner

asserts that the request failed to meet the requirements for

production of the records under Panamanian law. In broad

strokes, petitioner argues that the records can be produced only

when evidence of drug trafficking, and linkage between the

trafficking and specific funds in Panamanian banks, is shown.

Petitioner also states that this evidence must include the
- 32 -

statement of at least two investigators, sworn to in person in

Panama. Petitioner asserts that the request did not satisfy

these requirements.

Petitioner asserts that pursuant to Panamanian law, he has

standing to challenge the manner in which the records were

obtained. We disagree. The article of law under which

petitioner claims to have standing refers to "all nationals and

foreigners living under Panamanian jurisdiction", which does not

include petitioner. Accordingly, petitioner lacks standing to

challenge any purported violation of Panamanian law. Cf. United

States v. Mann, supra at 852-853; Harvey v. United States, 730 F.

Supp. at 1106. We hold respondent's use of petitioner's BCCI

records was not improper.

Petitioner also argues that the Government violated his

rights under the Fourth Amendment to the U.S. Constitution when

it sought and obtained his BCCI records. Petitioner does not

have a protected Fourth Amendment interest in his BCCI records.

See United States v. Payner, 447 U.S. 727 (1980); United States

v. Miller, 425 U.S. 435 (1976); see also United States v. Mann,

supra. Thus, petitioner's claim of a Fourth Amendment violation

fails.
- 33 -

Issue 5. Petitioner's Unreported Income

Respondent determined that petitioner had unreported income

from the sale of aircraft and narcotics trafficking, and

unreported interest on that income.4

Respondent used the bank deposits method for the years 1978

through 1983 and then added certain additional cash or

unexplained expenditures. For the years 1985 through 1989,

respondent determined that petitioner had unreported interest

from BCCI in Panama and unreported gain in 1985 from the sale of

a Lear jet. For 1992, respondent determined that petitioner had

unreported income from NationsBank.

Every taxpayer is required to maintain adequate records of

taxable income. See sec. 6001. Petitioner did not maintain

adequate records from which the amount of his income or Federal

income tax liability could be computed. In the absence of such

records, a taxpayer's income may be reconstructed by any method

that, in the Commissioner's opinion, clearly reflects income.

See sec. 446(b); Parks v. Commissioner, 94 T.C. 654, 658 (1990).

The Commissioner's method need not be exact but must be

reasonable. See Holland v. United States, 348 U.S. 121 (1954).

The bank deposits method for computing unreported income has

long been sanctioned by the courts. See DiLeo v. Commissioner,

4
Respondent addresses only petitioner's unreported interest
income on brief.
- 34 -

96 T.C. 858, 867 (1991), affd. 959 F.2d 16 (2d Cir. 1992).

Though not conclusive, bank deposits are prima facie evidence of

income. See Estate of Mason v. Commissioner, 64 T.C. 651, 656-

657 (1975), affd. 566 F.2d 2 (6th Cir. 1977); see also Price v.

United States, 335 F.2d 671, 677 (5th Cir. 1964) (the bank

deposits method assumes that all money deposited in a taxpayer's

bank account during a given period constitutes gross income);

Tokarski v. Commissioner, 87 T.C. 74, 77 (1986); Jones v.

Commissioner, 29 T.C. 601 (1957). Where the taxpayer has failed

to maintain adequate records as to the amount and source of his

or her income, and the Commissioner has determined that the

deposits are income, the taxpayer has the burden of showing that

the determination is incorrect. See Rule 142(a); Clayton v.

Commissioner, 102 T.C. 632, 645 (1994); Parks v. Commissioner,

supra; Estate of Mason v. Commissioner, supra. Furthermore, the

Court of Appeals for the Eleventh Circuit, to which these cases

are appealable, has accepted the bank deposits method of income

reconstruction. See United States v. Carter, 721 F.2d 1514, 1538

(11th Cir. 1984) (citing United States v. Boulet, 577 F.2d 1165

(5th Cir. 1978)).

Petitioner was engaged in illegal narcotics activities. In

addition, the parties stipulated that in 1993 petitioner

testified during his criminal trial in Florida as follows:
- 35 -

"Q: Did you report any of the money you earned in '78
and '79

A: Which money are you discussing

Q: Illegal money for smuggling dope

A: Absolutely not.

Q: So you evaded you [sic] taxes in '78 and '79

A: Yes, I did.

Q: You also earned interest income in '78 and '79 from
the Bank of Nova Scotia

A: Yes.

Q: You didn't report that interest income either

A: No."

Petitioner does not challenge respondent's income reconstruction.

Accordingly, respondent's determinations are sustained.

In addition, petitioner stipulated that he did not report

interest income in the years at issue as follows:

Year Amount
1978 $90,891
1979 294,835
1980 403,607
1981 588,847
1982 401,337
1983 160,502

1985 271,383
1986 265,288
1987 214,074
1988 277,315
1989 354,072

Petitioner asserts that during 1990 through 1992, the time

his funds were held by the District Court for the Southern
- 36 -

District of Florida, he had no access to the funds or any of the

interest earned during that time.

In Poczatek v. Commissioner, 71 T.C. 371, 376-377 (1978),

the Court held that

It is well settled that income is taxable when it
has been actually or constructively received. North
American Oil Consolidated Co. v. Burnet, 286 U.S. 417
(1932). * * * [I]t is equally well settled that income
is not limited to direct receipt of cash (Crane v.
Commissioner, 331 U.S. 1 (1947)), and payment of a
legal obligation of a taxpayer is income to him even
though such income is not actually received by him.
Old Colony Trust Co. v. Commissioner, 279 U.S. 716
(1929); Amos v. Commissioner, 47 T.C. 65 (1966); Tucker
v. Commissioner, 69 T.C. 675 (1978).

Accordingly, the $529,298.71 of interest earned on petitioner's

funds deposited with the District Court is taxable to petitioner

in 1992 when it was received by the IRS and applied to his unpaid

tax assessments.

Issue 6. Petitioner's Losses

Petitioner next contends that he suffered various business

losses during the tax years in issue which he never claimed.

These include funds which petitioner claims were stolen from his

Panamanian bank accounts and losses on various aircraft and

business investments. Thus, petitioner claims there were

resulting net operating losses which reduce his tax liabilities.

Petitioner has the burden of proving both the right to and

the amount of the net operating loss deductions pursuant to

section 172. See Rule 142(a); Welch v. Helvering, 290 U.S. 111,
- 37 -

115 (1933). The taxpayer's burden of establishing his

entitlement to a net operating loss deduction includes the burden

of substantiation. See Hradesky v. Commissioner, 65 T.C. 87, 90

(1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976). The Court

is not bound to accept unverified, undocumented testimony of the

taxpayer. See id.

At trial, the principal evidence presented in support of his

claim was petitioner's own discursive testimony. Petitioner also

submitted written narratives to chronicle his losses, along with

photocopies of certain records.

We do not find petitioner to be a credible witness, and we

give his testimony no weight. The photocopied records are not

sufficient evidence from which the Court can determine the amount

of and the right to deductions or losses for prior years.

Petitioner has therefore failed to meet his burden of proof.

Petitioner is not entitled to the asserted net operating losses

for the years in issue.

Issue 7. Fraud

Respondent determined that petitioner is liable for the

addition to tax for fraud under section 6653(b) for the years

1978 through 1983 and 1985 through 1988.5 Respondent determined

that petitioner is liable for the fraud penalty pursuant to

5
Petitioner concedes that the addition to tax for fraud
applies for 1981.
- 38 -

section 6663 for 1989. Petitioner asserts that he had a good

faith belief that his 1980 plea agreement gave him immunity from

civil taxes and thus precludes a finding of fraud.

Section 6653(b) as applicable to 1978 through 1981 imposes

an addition to tax of 50 percent of the underpayment if any

portion of the underpayment is due to fraud. For 1982, 1983, and

1985, section 6653(b)(1) imposes an addition to tax of 50 percent

of the underpayment if any portion of the underpayment is due to

fraud, and section 6653(b)(2) imposes an additional amount equal

to 50 percent of the interest with respect to the portion of the

underpayment attributable to fraud. For 1986 and 1987, section

6653(b)(1)(A) imposes an addition to tax of 75 percent of the

portion of the underpayment attributable to fraud, and section

6653(b)(1)(B) imposes an additional amount equal to 50 percent of

the interest with respect to such portion. For 1988, section

6653(b) imposes an addition to tax of 75 percent of the

underpayment attributable to fraud. For 1989, the fraud penalty

imposed under section 6663 is equal to 75 percent of the portion

of the underpayment attributable to fraud.6 For the years 1986

through 1989, if respondent proves that any portion of the

underpayment is attributable to fraud, the entire underpayment

shall be treated as attributable to fraud, unless petitioner can

6
See supra note 2.
- 39 -

establish by a preponderance of the evidence that a portion is

not attributable to fraud. See secs. 6653(b)(2), 6663(b).

The Commissioner has the burden of proving fraud by clear

and convincing evidence. See sec. 7454; Rule 142(b); Parks v.

Commissioner, 94 T.C. at 660. First, the Commissioner must prove

that there is an underpayment. See Parks v. Commissioner, supra.

Second, the Commissioner must show that the taxpayer intended to

evade taxes by conduct intended to conceal, mislead, or otherwise

prevent tax collection. See Stoltzfus v. United States, 398 F.2d

1002, 1004 (3d Cir. 1968); Parks v. Commissioner, supra at 661;

Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983).

Petitioner has stipulated that he failed to report

significant amounts of interest income. In addition, he has

failed to establish that these amounts are offset by unreported

deductions. Therefore, we conclude that respondent has presented

sufficient evidence that petitioner underpaid his taxes for the

years in issue.

Next, respondent must prove by clear and convincing evidence

that petitioner had fraudulent intent. See Parks v.

Commissioner, supra at 664. Fraud is defined as an intentional

wrongdoing designed to evade tax believed to be owing. See

Edelson v. Commissioner, 829 F.2d 828, 833 (9th Cir. 1987), affg.

T.C. Memo. 1986-223. The existence of fraud is a question of

fact to be resolved upon consideration of the entire record. See
- 40 -

DiLeo v. Commissioner, 96 T.C. at 874. Fraud is never presumed

and must be established by independent evidence of fraudulent

intent. See Edelson v. Commissioner, supra.

The Commissioner may prove fraud by circumstantial evidence

because direct evidence of the taxpayer's intent is rarely

available. See Stephenson v. Commissioner, 79 T.C. 995, 1005-

1006 (1982), affd. per curiam 748 F.2d 331 (6th Cir. 1984). The

courts have developed a number of objective indicators or

"badges" of fraud, such as: (1) A pattern of substantial

understatements of income, (2) inadequate books and records, (3)

implausible or inconsistent explanations of behavior, (4)

engaging in illegal activities, (5) failure to cooperate with tax

authorities, (6) concealing assets, and (7) dealing in excessive

amounts of cash. See Bradford v. Commissioner, 796 F.2d 303,

307-308 (9th Cir. 1986), affg. T.C. Memo. 1984-601; Estate of

Mazzoni v. Commissioner, 451 F.2d 197, 202 (3d Cir. 1971), affg.

T.C. Memo. 1970-37. We consider all the facts and circumstances

of each case to decide whether fraudulent intent is present. See

King's Court Mobile Home Park, Inc. v. Commissioner, 98 T.C. 511,

516 (1992); Recklitis v. Commissioner, 91 T.C. 874, 910 (1988).

Upon examination of the entire record, we conclude that

petitioner's underpayments of Federal income taxes for the years

1978 through 1983 and 1985 through 1989 are attributable to
- 41 -

fraud. Furthermore, petitioner has not established that any

portions of the underpayments are not attributable to fraud.

A pattern of consistent underreporting of income for several

years, especially when accompanied by other circumstances showing

intent to conceal, such as illegal narcotics trafficking, is

strong evidence of fraud. See Holland v. United States, 348 U.S.

121 (1954); Patton v. Commissioner, 799 F.2d 166, 171 (5th Cir.

1986), affg. T.C. Memo. 1985-148; Estate of Mazzoni v.

Commissioner, supra; Anderson v. Commissioner, 250 F.2d 242, 250

(5th Cir. 1957), affg. on this issue and remanding T.C. Memo.

1956-178. Petitioner consistently underreported his income.

Petitioner failed to keep adequate records, a badge of

fraud. See Bradford v. Commissioner, supra; Lollis v.

Commissioner, 595 F.2d 1189, 1192 (9th Cir. 1979), affg. T.C.

Memo. 1976-15.

Petitioner's testimony was not credible. Petitioner's claim

that he had a good faith belief that his 1980 plea agreement gave

him prospective civil tax immunity is unpersuasive. Petitioner

was convicted of criminal tax evasion for 1981, a year that

postdated his plea agreement. It may be inferred that the jury

found that his violation of the reporting requirements of the

Code for that year was willful. Cf. United States v. Harvey, 869

F.2d at 1449 n.15.
- 42 -

Petitioner's engaging in illegal drug activities is evidence

that he intended to evade tax. See Bradford v. Commissioner,

supra at 308; Patton v. Commissioner, supra.

Petitioner did not cooperate with respondent's examining

agents. Instead, petitioner refused to provide any of his

banking and corporate records and attempted to transfer his funds

from the Cayman Islands to other secret accounts in Panama. A

taxpayer's failure to cooperate with the Commissioner's examining

agents is a badge of fraud. See Bradford v. Commissioner, supra.

Concealing assets is evidence of fraud. See id.

Petitioner's home, automobile, and various other assets were held

by corporations in order to conceal ownership.

Extensive dealing in large amounts of cash, as petitioner

did, also constitutes evidence of fraud. See Estate of Mazzoni

v. Commissioner, supra.

We conclude that the record contains clear and convincing

evidence of petitioner's intent to conceal, mislead, or otherwise

prevent the collection of taxes on the unreported income for the

years in issue. We hold that the understatements of tax

attributable to the unreported income were due to fraud.

Accordingly, we sustain respondent's determination that
- 43 -

petitioner is liable for additions to tax, and a penalty for,

fraud.7

Issue 8. Addition to Tax Under Section 6654

Respondent determined an addition to tax under section 6654

for underpayment of individual estimated tax for the years 1978

through 1983 and 1987 through 1989.

Respondent stipulated that petitioner filed Federal income

tax returns for the years 1978 through 1983. Petitioner did not

file Federal income tax returns for the years 1987 through 1989.

The Commissioner's determinations are presumptively correct,

and the taxpayer bears the burden of proving otherwise. See Rule

142(a); Welch v. Helvering, 290 U.S. at 115. Petitioner did not

address this issue and has therefore failed to meet his burden.

Accordingly, we sustain the addition to tax under section 6654

for the years 1987 through 1989. We do not sustain, however, the

additions to tax pursuant to section 6654 for the years 1978

through 1983. It was stipulated that petitioner filed Federal

income tax returns for those years. Therefore, we lack

jurisdiction over the additions to tax pursuant to section 6654

for the years 1978 through 1983. See sec. 6662(b)(2)

(redesignated sec. 6665).

7
On the basis of this holding, the period of limitations has
not expired for any year in which it would otherwise be in issue.
- 44 -

Issue 9. Addition to Tax Under Section 6661

Respondent determined an addition to tax under section 6661

for the years 1982, 1983, 1985, and 1986.

For returns due after December 31, 1982 (but before January

1, 1990), section 6661 provides for an addition to tax equal to

25 percent of the amount of any underpayment attributable to a

substantial understatement. An understatement is "substantial"

if it exceeds the greater of (1) 10 percent of the tax required

to be shown on the return or (2) $5,000. The understatement is

reduced to the extent that the taxpayer (1) has adequately

disclosed his or her position, or (2) has substantial authority

for the tax treatment of an item. See sec. 6661; sec. 1.6661-

6(a), Income Tax Regs. Petitioner again bears the burden of

showing that he is not subject to the addition to tax determined

by respondent. See Rule 142(a); Cochrane v. Commissioner, 107

T.C. 18, 29 (1996).

Petitioner has presented no evidence to show that respondent

erroneously determined the addition to tax under section 6661.

Accordingly, we hold that petitioner is liable for the addition

to tax under section 6661 for 1982, 1983, 1985, and 1986.

Issue 10. Addition to Tax Under Section 6651(a)(1)

Respondent determined an addition to tax under section

6651(a)(1) for failure to file a timely return for 1992.
- 45 -

Section 6651(a)(1) provides for an addition to tax for

failure to file a timely return. The addition to tax is equal to

5 percent of the amount required to be shown as tax on the

return, with an additional 5 percent for each additional month or

fraction thereof during which the failure continues, not

exceeding 25 percent in the aggregate.

A taxpayer may avoid the addition to tax by establishing

that the failure to file a timely return was due to reasonable

cause and not willful neglect. See Rule 142(a); United States v.

Boyle, 469 U.S. 241, 245-246 (1985). Petitioner did not address

this issue. Accordingly, we sustain respondent's determination

of an addition to tax under section 6651(a)(1) for 1992.

To reflect the foregoing,

Appropriate orders will

be issued, and decisions will

be entered under Rule 155.

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4332323. Public record. Not legal advice.