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T.C. Memo. 2025-97

VINCENT J. FUMO,

Petitioner

COMMISSIONER OF INTERNAL REVENUE,

Respondent

__________

Docket Nos. 17603-13, 17614-13.

Filed September 24, 2025.

__________

Mark E. Cedrone, for petitioner.

Jeannine A. Zabrenski, Roman M. Olchowecky, Harry J. Negro, Noelle

White, Timothy R. Prosky, Kristina L. Rico, Laura A. Price, Timothy J.

Driscoll, and Jordan D. Kohl, for respondent in docket No. 17603-13.

Timothy R. Prosky, Kristina L. Rico, Laura A. Price, Timothy J. Driscoll,

Patricia P. Wang, and Jordan D. Kohl, for respondent in docket

No. 17614-13.

TABLE OF CONTENTS

MEMORANDUM FINDINGS OF FACT AND OPINION ..................... 4

FINDINGS OF FACT .............................................................................. 7

Petitioner’s Background ................................................................ 7

II.

Creation of Citizens Alliance ........................................................ 8

III.

Petitioner’s Properties................................................................. 10

Philadelphia Residence .................................................... 10

New Jersey Properties ...................................................... 11

Riverview Farm ................................................................ 11

Served 09/24/25

[*2]

IV.

Florida Properties ............................................................. 12

Martha’s Vineyard ............................................................ 13

Petitioner’s Offices and Staff Structure ..................................... 13

Philadelphia Senate Office ............................................... 13

Citizens Alliance ............................................................... 15

Harrisburg Senate Office ................................................. 16

General Support Staff ............................................ 16

Senate Democratic Appropriations

Committee .............................................................. 21

Senate Democratic Computer Services

Committee .............................................................. 21

Senate Contractors ........................................................... 23

Private Investigator ............................................... 23

Political Campaign Consultants ........................... 23

“Ghost Contractors” ............................................... 25

Fumo for Senate ............................................................... 26

Other Personal Services ................................................... 27

Activities of Citizens Alliance ..................................................... 27

Travel to Cuba .................................................................. 28

Political Polling ................................................................. 29

Ventnor Dunes Project ..................................................... 30

VI.

FBI Investigation ........................................................................ 32

VII.

Criminal Trial.............................................................................. 33

VIII. IRS Civil Examination ................................................................ 34

[*3]

IX.

Tax Court Proceedings ................................................................ 36

OPINION ................................................................................................ 38

Burden of Proof............................................................................ 38

II.

Period of Limitations ................................................................... 39

III.

Unreported Income...................................................................... 40

IV.

Unreported Income from the Senate ............................... 42

Excess Compensation Engineered by

Petitioner ................................................................ 43

Personal Services Rendered to Petitioner............. 46

Senate Contractors ................................................ 57

Unreported Income from Citizens Alliance ..................... 61

Tools ....................................................................... 61

Consumer Goods .................................................... 62

Farm Equipment .................................................... 63

Cell Phone Expenses .............................................. 65

Vehicles .................................................................. 66

Services Supplied by Citizens Alliance Staff ........ 68

Citizens Alliance’s Payments to Frank

Wallace ................................................................... 69

Political Polling ...................................................... 70

Ventnor Dunes Project........................................... 71

10.

Travel to Cuba........................................................ 73

Excise Tax Liability..................................................................... 74

Governing Statutory Structure ........................................ 74

[*4]

Period of Limitations ........................................................ 76

Analysis ............................................................................. 77

“Economic Benefits” ............................................... 78

“Consideration Received” ....................................... 78

Petitioner’s Arguments .......................................... 80

Penalties and Additions to Tax ................................................... 81

Civil Fraud Penalty .......................................................... 81

Supervisory Approval ............................................ 81

Existence of Fraud ................................................. 82

Additions to Tax for Failure to File ................................. 88

MEMORANDUM FINDINGS OF FACT AND OPINION

LAUBER, Judge: In 1978 petitioner was elected a Pennsylvania

state senator, representing the first district in Philadelphia. After he

was reelected many times, his tenure ended in 2008 when he was indicted on Federal criminal charges. In March 2009 he was convicted on

137 counts including mail fraud, wire fraud, obstruction of justice, conspiracy to obstruct justice, and violation of section 7206(2) for willfully

aiding or assisting in filing false tax returns. 1 The principal victims of

his fraud were the Pennsylvania State Senate (Senate) and Citizens Alliance for Better Neighborhoods (Citizens Alliance), an organization exempt from Federal income tax under section 501(a) and (c)(3).

The criminal proceedings lasted a long time, with two appeals to

the U.S. Court of Appeals for the Third Circuit and multiple rulings by

the U.S. District Court for the Eastern District of Pennsylvania. When

the dust settled, petitioner was sentenced to 61 months of prison and

1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C. (Code), in effect at all relevant times, regulation references are

to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times,

and Rule references are to the Tax Court Rules of Practice and Procedure. We round

all monetary amounts to the nearest dollar.

[*5] community service. The total loss to the Senate was calculated as

$2,517,274, and petitioner was held to be responsible for 100% of that

loss. The total loss to Citizens Alliance was ultimately calculated as

$1,566,528, and petitioner was determined to be responsible for at least

75% of that loss.

After petitioner’s convictions were affirmed on appeal, the Internal Revenue Service (IRS or respondent) commenced an examination

concerning his civil tax liabilities. The audit was conducted by two

teams, one focusing on income tax and the other on excise tax. The latter

examination was based on section 4958, which imposes an excise tax on

a “disqualified person” who engages in “excess benefit transaction[s]”

with a charity. See § 4958(a)(1). In both examinations, the IRS revenue

agents relied heavily on information compiled by the Federal Bureau of

Investigation (FBI) that was introduced into evidence during the criminal case.

In May 2013 the IRS issued petitioner Notices of Deficiency for

income tax and excise tax, and he timely petitioned this Court. In

Docket No. 17603-13 the IRS determined income tax deficiencies for

2001–2005 plus a civil fraud penalty under section 6663(a) for each year.

In Docket No. 17614-13 the IRS determined excise tax deficiencies for

2002–2004, on the theory that petitioner had engaged in excess benefit

transactions with Citizens Alliance. In the excise tax case the IRS also

determined additions to tax under section 6651(a)(1).

The IRS revised its initial determinations via Amended Answers

and made certain concessions in the excise tax case. The amounts currently in dispute appear to be as follows:

Year

Income Tax

§ 6663(a)

Penalty

Excise Tax

§ 6651(a)(1)

Addition to Tax

2001

$284,402

$213,302

–

2002

337,647

253,235

$63,649

$15,912

2003

309,947

232,460

72,262

18,066

2004

168,803

126,602

6,209

1,552

2005

190,667

131,902

–

In the income tax case the IRS contends that petitioner extracted

taxable benefits both from Citizens Alliance and from the Senate. The

Citizens Alliance benefits, allegedly totaling $725,990 during 2001–

2004, included personal services and physical property, chiefly

[*6] consumer goods, household items, and tools, that petitioner purchased using the charity’s credit cards or cash. Petitioner also enjoyed

personal use of the charity’s assets, including cars, trucks, and farm

equipment. Respondent seeks to tax petitioner on the value of such assets to the extent used, not only by him personally, but also by his family

members, Senate staff, political contractors, and political allies.

The IRS contends that petitioner during 2001–2005 extracted

$2,862,568 of taxable benefits from the Senate. These benefits fall into

three general categories:

•

Excess compensation that petitioner caused the Senate to pay

his Senate staff. He achieved this diversion of funds by falsely

certifying to the Senate (personally or through his chief of

staff) that these employees (1) had job qualifications they did

not possess or (2) would discharge official duties they did not

discharge or lacked the ability to discharge properly.

•

The value of services performed by petitioner’s Senate staff

that benefited him directly or indirectly. Direct benefits included services that staff performed for petitioner, his family

members, his political campaigns, and women with whom he

was romantically involved. Indirect benefits included personal services rendered to his acquaintances, his political allies, and political candidates whom he favored.

•

The value of services performed by political consultants and

contractors whom petitioner caused the Senate to hire, but

who in reality worked largely or exclusively for him, his political campaigns, and his political allies.

Relying heavily on determinations made by the courts in the criminal case, respondent contends that some or all of the underpayments of

tax required to be shown on petitioner’s tax returns were “due to fraud.”

See § 6663(a). Respondent accordingly contends that petitioner is liable

for 75% civil fraud penalties on the underpayments determined in the

income tax case and that no period of limitations applies in either case.

See § 6501(c)(1) (“In the case of a false or fraudulent return with the

intent to evade tax, the tax may be assessed . . . at any time.”).

By Order served February 28, 2020, we ruled that collateral estoppel would prevent petitioner from relitigating numerous facts that

were indisputably litigated and resolved against him in the criminal

case. But the criminal case did not determine, for Federal income tax

[*7] purposes, the amounts of gross income petitioner received during

2001–2005 or the excess benefits he extracted from Citizens Alliance.

The principal issues we must decide concern the proper quantification

of the taxable benefits petitioner received and the existence vel non of

fraud.

FINDINGS OF FACT

The following facts are based on the parties’ pleadings and Motion

papers, seven Stipulations of Facts with attached Exhibits, and the testimony and documents admitted into evidence at trial. Included among

the stipulated Exhibits is the complete transcript of petitioner’s testimony from his criminal trial, as well as the transcripts of testimony from

numerous other witnesses (some now deceased) who testified during the

criminal case. Petitioner resided in Pennsylvania when his Petitions

were timely filed. Absent stipulation to the contrary, appeal of these

cases would lie to the Third Circuit. See § 7482(b)(1)(A).

Petitioner’s Background

Petitioner earned an undergraduate degree in biology from Villanova University, a law degree from Temple University, and a master’s

degree in business administration from the Wharton School. He embarked on a career in politics shortly after obtaining his law degree. He

worked initially in the Pennsylvania state government and served as a

“ward leader” in South Philadelphia. He was elected to the Senate in

1978, representing the first district of South Philadelphia.

Petitioner quickly rose through the ranks of Senate leadership.

He first assumed an influential position on the Senate Democratic Appropriations Committee (SDAC). The Democratic caucus elected him

chair of SDAC in 1984, and he held this position for the remainder of his

Senate career. SDAC had responsibility for negotiating general and capital fund budgets and computing the fiscal impact of proposed legislation. During 2001–2005 SDAC itself had an annual budget of $4.9 million. Petitioner had authority to decide how those funds would be allocated, including for payment of salaries to his Senate staff.

As chair of SDAC petitioner occupied a top Senate leadership position. This entitled him to serve on the Committee on Management

Operations (COMO). As a member of COMO petitioner helped set financial operating rules and employment policies for the Senate, including matters affecting staff payroll and employee leave time.

[*8] Petitioner subsequently became head of the Senate Democratic

Computer Services Committee (SDCS). This committee was responsible

for purchasing computer equipment and providing information technology (IT) support to the Senate Democratic caucus, which consisted of

roughly 21 members. Unique among the Senate offices that SDCS

served, petitioner’s office had its own dedicated email domain,

fumo.com.

Petitioner developed deep roots in Philadelphia throughout his

career. Early on he worked as a high school teacher, a criminal defense

lawyer, and a licensing specialist for the State government. As his fame

and fortune grew he served as counsel to Dilworth Paxson, a

Philadelphia-based law firm, and as board chair of First Penn Bank,

which had been founded by his grandfather. In both capacities he focused, not on day-to-day operations, but on high-level strategy and client

generation.

Petitioner’s community involvement included service on the

boards of corporations and philanthropic groups in Philadelphia. He

served as a board member or trustee of Independence Blue Cross, the

Pennsylvania Higher Education Assistance Agency, the Delaware River

Port Authority, and the Independence Seaport Museum. As explained

in greater detail below, he was also the founder of Citizens Alliance, a

charity that provided services to residents of the Senate district he represented.

Petitioner married twice. From his first marriage he has two children, Vincent E. Fumo and Nicole Fumo Marrone. When his first marriage ended in divorce he married Jane Scaccetti. The couple had one

child, Allison (Allie) Fumo. Petitioner and Ms. Scaccetti divorced in December 2000. He dated Dorothy “Dottie” Egrie during 1999–2004 and

later dated Terry Reilly. We will sometimes refer to them as his “girlfriends.”

II.

Creation of Citizens Alliance

In 1991, at petitioner’s direction, three members of his Senate

staff incorporated the First District Environmental Defense Fund,

which later became Citizens Alliance. As originally organized, its purpose was to maintain and improve the appearance of petitioner’s Senate

district by cleaning streets, removing graffiti, shoveling snow, carting

away trash, and performing other services that benefited his constituents. In August 1999 the IRS issued a determination letter granting the

[*9] organization tax-exempt status under section 501(a) and (c)(3). Citizens Alliance maintained that status during the years at issue.

In 2001 Citizens Alliance created a wholly owned subsidiary, CA

Holdings, Inc. (CA Holdings). Numerous subsidiary entities were later

formed underneath it, including 1210 Enterprises, Inc., Hi Tech Ventures, Inc., Passyunk Avenue Revitalization, Inc., Moya Ventures, Inc.,

Pine Tree Realty, Inc., CA Real Property Six, Inc., and Eastern Leasing

Corp. (Eastern Leasing). These subsidiaries, which had no employees,

were created to hold title to various Citizens Alliance assets, which included real estate and automobiles. Petitioner created these subsidiaries as for-profit entities in part to avoid disclosure of their assets and

income on Citizens Alliance’s tax returns, which were open to public inspection. See § 501(c)(3).

Frank DiCicco, then a member of petitioner’s Senate staff, was

one of Citizens Alliance’s incorporators and served as its president from

1991 through 1999. Ruth Arnao, another staff member, was also an incorporator. She initially served as secretary of the organization and during 2001–2004 was its executive director.

Petitioner himself was never an officer, director, trustee, or employee of Citizens Alliance or its subsidiaries. But he used his power

and influence as SDAC chairman to obtain funding for the organization

from a variety of public and private sources. During 1991–2004 he was

instrumental in securing at least $15 million in public grants for Citizens Alliance and a comparable volume of funding from private sources.

During his criminal trial petitioner admitted that he “did have a

significant role” in Citizens Alliance. While he “did not make all the

decisions,” he “did make a lot of decisions on important topics.” As he

explained: “I don’t have a title or a job. Do I have influence? Yes.” When

asked by his defense attorney to describe his relationship with Citizens

Alliance, he stated: “I viewed it as my non-profit. I viewed it as my entity, my baby. Gave it birth and nursed it along, got involved more with

strategy and ideas. You know, that’s how we viewed it. And we ran it

out of our office.” On cross-examination he testified similarly: “I created

it. I helped it. I guided it. I gave it strategy. I gave it my time and

effort. I raised money for it. If it weren’t for me, it wouldn’t exist.”

The prosecutor during the criminal trial read to petitioner the

definition of “disqualified person” as it appeared in the 2002 Instructions

for Form 990 and Form 990–EZ, at 11: “A disqualified person, regarding

[*10] any transaction, is any person who was in a position to exercise

substantial influence over the affairs of the . . . organization at any time

during a 5-year period ending on the date of the transaction.” Petitioner

replied: “I did have substantial influence over the organization. So according to that I am a disqualified person.”

III.

Petitioner’s Properties

Petitioner owned real property in Pennsylvania, New Jersey, and

Florida, and he took annual vacations in Massachusetts. Significant

portions of the goods and services he extracted from the Senate and from

Citizens Alliance related to his residences and vacation destinations.

Philadelphia Residence

Petitioner has called Philadelphia home for his entire life. He

purchased a primary residence at 2220 Green Street (Green Street

home) in 1994, and he resided there throughout the tax years at issue.

The Green Street home was a stately 10,000-square-foot residence that

included a basement and subbasement, three floors of living space, a

deck, a backyard, a two-car garage, and a shooting range. It required

renovations upon purchase, so petitioner and his family did not move in

until 1998. The renovations were time-consuming, and petitioner instructed Senate staffer Christian Marrone to oversee renovations. See

infra pp. 14–15.

Staff were a fixture at the Green Street home, coming and going

as needed to assist with the vast number of personal requests petitioner

directed to them. Senate staff ran errands, let contractors into the

home, outfitted the home with technology, performed housekeeping duties, and planned and hosted political fundraising events. SDCS staff

once reported to the home to address a problem relating to internet connectivity for laptops owned by Allie Fumo and one of petitioner’s girlfriends, which took about 20 hours to resolve. Other technology-related

requests involved installing a video game system in petitioner’s home

office and a cooling fan in his home entertainment cabinet. Another staff

member was once required to report to the Green Street home during

Senate work hours to label all light switches in the three-floor residence.

Citizens Alliance staff likewise performed personal tasks, such as snowremoval services and decoration of the home for Christmas.

[*11] B.

New Jersey Properties

Petitioner owned two properties on the New Jersey shore: a home

in Margate and an apartment building in Ventnor. These are adjacent

towns that share shoreline on the Absecon barrier island. Petitioner’s

Margate home was close to the beach and had an ocean view. His Ventnor building was on the bay. The distance between the two properties

was 2 miles, and both were 62 miles from Philadelphia.

Petitioner and his friends referred to the Ventnor property as “the

docks” because it had water access by means of a dock. Petitioner

moored boats there and spent considerable time tinkering on his boats.

He rented out the five units in the Ventnor building, generally to friends

and colleagues, including Ms. Arnao. She purchased one of the Ventnor

condominiums from him in 2001.

One of petitioner’s hobbies was fixing things, and he was a devoted aficionado of tools and equipment. During 2001–2005 he outfitted

the garage next to Ms. Arnao’s unit with a vast array of tools, which

precisely matched the universe of tools amassed in his other residences.

Virtually all these tools were purchased at the expense of Citizens Alliance. Petitioner spent much of his time at Ventnor working on his boats

and making repairs to his beach properties.

Petitioner and Ms. Arnao regularly used the beach properties to

entertain friends, campaign contributors, and political allies. The entertaining during the summer consisted of weekly barbeques with approximately 20 guests and two major parties attended by about 100 people. He and Ms. Arnao purchased supplies for these parties with shopping sprees at Sam’s Club and other nearby retailers, typically financed

at Citizens Alliance’s expense. Petitioner frequently arranged for Citizens Alliance staff, whose office was 62 miles away, to collect trash from

his beach properties.

Riverview Farm

Petitioner purchased Indian Springs Farm in Halifax, Pennsylvania, in January 2003. He renamed the property Riverview Farm, which

he held through a limited liability company. The farm was conveniently

located near Harrisburg, where petitioner maintained his office in the

Pennsylvania State Capitol.

When he acquired Riverview Farm, it included a farmhouse, a

guest house, and a storage barn, all in a state of disrepair. He renovated

[*12] the existing structures and added three additional barns, a carpentry workspace, a skeet shooting range, and a pond. Once the renovations to the main house were substantially complete, he resided at the

farm when the Senate was in session.

The improvements to Riverview Farm required a great deal of

earthmoving and construction equipment. For this purpose petitioner

again enlisted the assets and staff of Citizens Alliance. He arranged for

its employees to transport various pieces of equipment from Philadelphia to the farm, including lawn mowers, a backhoe, Bobcat construction

equipment, a dump truck, and Polaris all-terrain vehicles (ATVs). Some

of this equipment remained on the farm essentially full time. Other

items were shuttled back and forth between Harrisburg and Philadelphia as needed.

For day-to-day management of the farm, including supervision of

construction, petitioner enlisted staff from his Harrisburg Senate office.

Numerous Senate employees participated in the farm’s management, in

great ways and small. One Senate staffer and his wife lived on the farm

full time for a period.

Florida Properties

Petitioner owned vacation homes in Florida. He purchased a

beachfront property on Jupiter Island in 1994, which he held until December 2006. In early 2005 he bought a home in Fort Lauderdale. When

visiting these properties, he was often accompanied by Ms. Arnao, her

husband, and Ms. Egrie, with whom he was then romantically involved.

The Jupiter Island residence included a garage that housed his

extensive tool collection and other equipment. On the roof he mounted

sophisticated weather-forecasting equipment, which included software

that needed constant attention. Both homes had pools and home offices,

which petitioner caused to be outfitted with Senate computer equipment.

Petitioner visited his Florida properties primarily in the Winter

while the Senate was not in session. Senate staff frequently made his

and Ms. Egrie’s travel arrangements, which he often changed at the last

minute. His drivers, who were paid by the Senate, regularly chauffeured Ms. Egrie to and from the airport in Philadelphia.

While in Florida petitioner needed many items, both Senate- and

personal-related, and he arranged for these items to be shipped to him

[*13] using a Federal Express account paid by the Senate. Staff obliged

and shipped a myriad of items, ranging from hairspray to a Weber grill.

When petitioner was out of town, he assigned Senate staff to take care

of his personal business matters in Philadelphia.

Martha’s Vineyard

Petitioner enjoyed regular vacations in Martha’s Vineyard, Massachusetts. He typically took a 2-week trip to the island every August,

inviting friends, family, political allies, and others to join. Courtesy of a

friend, petitioner and his guests were usually transported to the island

by private jet.

In connection with these trips, members of petitioner’s Senate

staff shuttled, by car from Philadelphia, luggage, computer equipment,

and other items that could not fit into the private jet. Two or three cars

were often needed to haul these items. Senate staff devoted numerous

hours to configuring computer and wireless networks for petitioner in

Martha’s Vineyard and making vacation arrangements for him and his

guests, including restaurant reservations and yacht trips. Petitioner

enjoyed these yacht trips, sometimes week long, which he arranged by

exploiting his board membership on the Independence Seaport Museum.

IV.

Petitioner’s Offices and Staff Structure

Petitioner’s staff structure defies easy characterization: He did

not religiously adhere to conventional job classifications, and many staff

members wore multiple hats. In theory he had four business-related

offices—his Philadelphia Senate office, his Harrisburg Senate office, Citizens Alliance, and Fumo for Senate (his primary political campaign entity). But employees routinely divided their time among these organizations without differentiating between tasks performed for petitioner

in his official and personal capacities. Regardless of their roles, staff

members were required to follow petitioner’s directives without question. He expected them to be at his beck and call, no matter the time of

day or night. No one was allowed to leave the office at day’s end before

he did.

Philadelphia Senate Office

Petitioner’s principal Senate office in South Philadelphia was

housed at 1208 Tasker Street. He operated a satellite office at Eighth

and Clearfield Streets. That office was staffed by four people, including

his Senate-paid housekeeper.

[*14] The district office occupied the first floor and basement of 1208

Tasker. Fumo for Senate, petitioner’s campaign organization, was on

the second floor. Senior employees (including petitioner when in town)

worked in the basement. The constituent services arm operated out of

the first floor.

Charlie Hoffman served as chief of staff for the district office during 2001–2005. Ms. Arnao rose through the ranks from secretary to become deputy chief of staff. In many ways she functioned as the linchpin

of petitioner’s multifaceted political operation. She served as his confidante, accompanied him on his travels, purchased beach property adjoining his, and ultimately became his codefendant in the criminal case.

Ms. Arnao’s principal salary was paid by the Senate, but she also

served as executive director of Citizens Alliance, in which capacity she

received a salary and supervised its staff. Before terminating her Senate employment in 2004, she devoted numerous hours to political campaign activities and to other tasks that benefited petitioner personally.

She married Mitchell Rubin in 2005, one of the political consultants petitioner hired as a “ghost contractor” for the Senate.

The district office employed two receptionists, Maria Powers and

Gaetana “Gay” Secreto. Tracy D’Alonzo, Edward Hanlon, and Jonathan

Rowan led constituent services. The following senior staff worked from

the basement: Roseanne Pauciello, Gina Novelli, Lillian Cozzo, Mr. DiCicco, Maryann Quartullo, Jamie Spagna, and Janine Travelina. Senior

staff members devoted many hours to work that benefited petitioner’s

political campaigns, Citizens Alliance, and petitioner personally.

Unlike other members of the Senate and against Senate policy,

petitioner put his personal drivers on the Senate payroll. He had two

chauffeurs in Philadelphia: Louis (Lou) Leonetti and David Nelson.

Apart from official duties, they ran countless personal errands for him

and his family members. These included buying groceries, picking up

dry cleaning, shuttling items to Martha’s Vineyard and the New Jersey

shore, securing Christmas decorations for his home, running errands for

his girlfriends, and driving his youngest daughter to and from school.

Mr. Marrone joined petitioner’s district office staff as an intern

upon graduating from college in 1997. Mr. Marrone ultimately became

petitioner’s son-in-law, marrying Nicole Fumo in March 2003. As directed by petitioner, Mr. Marrone performed numerous tasks unrelated

to his Senate job, including significant work relating to petitioner’s

[*15] political campaigns. One of his major projects was supervising the

renovation and remodeling of petitioner’s Green Street home. He maintained responsibility for such matters until he left Senate employment

in August 2002.

Petitioner’s closest political ally, Mr. DiCicco, worked in the district office until he was elected to the Philadelphia City Council sometime before 2001. His son, Christian DiCicco, assumed Mr. Marrone’s

position in 2002 when the latter terminated his Senate employment. Petitioner provided Mr. DiCicco with personal benefits at Senate and Citizens Alliance expense, including use of vehicles, assistance with Mr.

DiCicco’s political campaigns, weekly campaign accounting, running errands, use of private investigation services, technology services, and a

Sam’s Club membership. Three other members of the district office—

Carl Engelke, Pat Freeland, and John Hawkins—regularly performed

campaign-related activities for petitioner. Trish Kirby performed data

entry for contributions to petitioner’s political campaigns.

Citizens Alliance

Citizens Alliance staff overlapped with the district office staff.

Ms. Arnao, the deputy chief of staff for the district office, supervised the

daily operations of Citizens Alliance in her capacity as its executive director. Roseann Anthony, another Senate staffer, served as the charity’s

secretary. Other Senate staff oversaw its finances.

Citizens Alliance owned property on Wharton Street near the district office. Its staff worked in a second-floor office, and some vehicles

and equipment were stored in a garage area. Work orders were sent to

foreman Tracy Burris, who supervised about 15 laborers.

The tasks completed by the laborers generally did not require specialty skills or craftsmanship. Most tasks involved physical labor designed to improve the appearance of petitioner’s Senate district, e.g.,

painting walls, planting trees, picking up litter, shoveling snow, and removing graffiti. When specialized projects arose, Citizens Alliance typically hired contractors who supplied their own materials and labor.

Mr. Burris was solely responsible for securing tools and equipment for Citizens Alliance projects. These included shovels and earthmoving equipment, a power washer, chemicals needed for graffiti removal, exterior paints, and paint applicators. Mr. Burris purchased

most of these items in person from retail outlets including Wilensky

Locks and Hardware, Grainger, Old City Paints, and the Home Depot

[*16] in South Philadelphia. By contrast, tools acquired for petitioner’s

personal use were almost always purchased online by Citizens Alliance

or Senate office staff.

Harrisburg Senate Office

Petitioner maintained his Harrisburg Senate office in the state

capitol building. This office had three notional components: general support staff, SDAC staff, and SDCS staff.

General Support Staff

Paul Dlugolecki was the chief of staff for petitioner’s Harrisburg

office during 2001–2005. He also served the executive chair of SDAC

during this period. Among his duties, Mr. Dlugolecki was responsible

for overseeing payroll matters—including salaries, promotions, and

leave time—for employees in petitioner’s Harrisburg and Philadelphia

offices. Three other staff members—Alison Pinto, Charles Sholders, and

Sue Swett—provided administrative support services. Gary Tuma was

the principal Harrisburg employee tasked with assisting petitioner with

his political campaigns.

Petitioner required utmost loyalty from his Senate employees,

both in Philadelphia and Harrisburg. One mechanism for achieving

such unwavering loyalty was engineering inflated salaries for his most

dependable staff members.

The Senate mandated that employees be paid according to a pay

plan to ensure uniform treatment. During 2001–2005 the pay plan was

updated and replaced. Both plans classified employees into jobs and

placed them in salary ranges keyed to their initial classification. Classifications were based on the employee’s job qualifications and the duties

he or she would discharge. Senate members were required to follow the

pay plan when awarding salaries. If an appropriate classification did

not exist for a particular employee, members could request one from

COMO, to which petitioner belonged.

Petitioner never felt obligated to follow the pay plans in effect

during 2001–2005. He did not read the new pay plan, despite being a

member of the committee that adopted it. He stated that he “never

cared” about the pay plan, viewing it as a tool that he “didn’t particularly

like . . . in any way, shape or form.” Instead, he was determined to give

his staff members what he “thought they deserved in way of pay.”

[*17] Senate staff generally received a salary increase on the anniversary of their hiring. Petitioner rejected this practice and set his employees’ anniversary date as June 30, the end of his personal fiscal year. He

gave each staff member an arbitrary cost of living adjustment that he

computed, rather than adopting the Senate’s proposed adjustment. He

then awarded “merit raises” to his most loyal employees. He distributed

a list of his proposed salaries to the chiefs of staff for the Philadelphia

and Harrisburg offices, then negotiated salaries with them based on the

“office politics involved.”

Upon determining a final salary for each employee, petitioner delegated the processing of salaries to Mr. Dlugolecki, who was authorized

to sign the required forms on petitioner’s behalf. Mr. Dlugolecki endeavored to fit each employee into a pay plan classification that carried the

salary petitioner wanted for that employee. If an employee did not fit

under any classification, petitioner sought an exemption from COMO.

Mr. Dlugolecki then submitted all paperwork to the chief clerk, who approved payroll for the Senate. Petitioner succeeded in diverting Senate

funds to his staff in the form of excessive salaries because the chief

clerk’s office trusted the submissions it received from him.

In the income tax Notice of Deficiency the IRS calculated these

amounts on the basis of summary charts used during the sentencing

phase of petitioner’s criminal case. After estimating the employee’s actual salary for each year, the prosecutors used the Senate pay plan in

effect during that year to determine the salary that employee should

have received, given his or her qualifications and duties performed. The

excess compensation diverted to each employee—i.e., the loss to the Senate—represented the difference between these amounts.

The summary charts used during the criminal case covered calendar years 1998–2003, whereas the tax years at issue here are 2001–

2005. In preparing the Notice of Deficiency, the IRS calculated the excess compensation includible in petitioner’s income for 2001–2005 by

reference to the average of the overpayments shown on the summary

charts for each employee. In his Amended Answers and at trial, respondent refined these computations using information on the employees’ Forms W–2, Wage and Tax Statement, to calculate the total compensation they had actually received from the Senate during 2001–2005.

Respondent also adjusted his calculations to reflect the fact the employment contracts ran on a fiscal year basis.

[*18] The evidence at trial established that petitioner engineered excessive salaries for 8 of his staff members, 6 of whom worked in the Philadelphia district office and 2 of whom worked in his Harrisburg office.

We find that he wrongfully diverted Senate funds to them in exchange

for their loyalty and personal services. The employees who received

these excessive salaries were as follows:

•

The Senate issued Ms. Arnao Forms W–2 for 2001–2004 showing

total wages of $287,608. Her highest annual salary, which she

received in 2003, was at least $88,643. Under the old pay plan in

effect during 2001–2003, she was classified as “Executive Assistant IV,” a position that would have required her to establish policy, meet constituents, and prepare detailed reports incorporating

complex statistical material. Ms. Arnao fulfilled only one of the

listed duties: meeting constituents. Her proper job classification

under the Senate pay plan would have been “Field Representative,” and her maximum annual salary would have been $34,449.

•

The Senate issued Ms. Pauciello Forms W–2 for 2001–2005 showing total wages of $443,412. Ms. Pauciello served as a personal

assistant to petitioner in the Philadelphia district office. Under

the pay plan, the appropriate annual salary for an employee with

that job classification would have been roughly $55,000 on average. In 2005 Ms. Pauciello instead received a salary of $106,187,

which corresponded to the position of chief of staff, a position actually held by Mr. Hoffman. The pay plan required 12 years of

experience and a bachelor’s degree for that position. She possessed neither.

•

The Senate issued Ms. Quartullo Forms W–2 for 2001–2005 showing total wages of $201,640. Ms. Quartullo, who was Ms. Pauciello’s subordinate, held a secretarial position in the Philadelphia

district office. Under the Senate pay plan, the appropriate annual

salary for a person with that job classification would have been

roughly $29,000 on average. Instead, she was classified and paid

as “Research Analyst II” for 2001–2003. This job classification

required the employee to hold a law degree, but Ms. Quartullo’s

highest level of education was high school. At trial she testified

that she did not qualify for the “Research Analyst II” position and

did not perform the duties that job required.

•

The Senate issued Lillian Cozzo Forms W–2 for 2001–2005 showing total wages of $333,111. Her highest annual salary was

[*19] $70,141 in 2003. She was classified as “Executive Assistant IV”

under the old pay plan and “Legislative Support, Level LS3” under the new plan. This job classification required the employee to

perform “high-level public legislative research” and prepare “first

drafts of sensitive legislation.” Ms. Cozzo never discharged any

of these duties. Her actual duties were secretarial and involved

scheduling petitioner’s appointments and travel arrangements,

processing mail, overseeing leave balances for staff members,

maintaining call logs, and answering phones. Under the Senate

pay plan, her appropriate job classification would have been Administrative Level A4 and her maximum annual salary would

have been $40,630.

•

The Senate issued Mr. Leonetti Forms W–2 for 2001–2005 showing total wages of $169,006. Mr. Leonetti was one of petitioner’s

drivers in the Philadelphia district office. Senate policy prohibited members from hiring staff with the sole responsibility of driving. Apart from chauffeuring petitioner, Mr. Leonetti’s duties

consisted of running errands and performing clerical tasks. Under the Senate pay plan, his appropriate job classification would

have been “Legislative Clerk Messenger” or “Clerk I” and his

maximum annual salary would have been approximately

$23,000. Instead, he was classified as “Administrative Assistant II” and received a salary as high as $36,511 in 2005.

•

The Senate issued Mr. Nelson Forms W–2 for 2001–2005 showing

total wages of $247,527. Mr. Nelson was petitioner’s other driver

in the Philadelphia district office. Apart from chauffeuring petitioner, Mr. Nelson’s duties (like Mr. Leonetti’s) consisted of running errands and performing clerical tasks. Under the Senate

pay plan, his appropriate job classification would have been “Legislative Clerk Messenger” or “Clerk I” and his maximum annual

salary would have been approximately $30,905. Instead, he was

classified under the old plan as “Administrative Officer IV” and

under the new plan as “Constituent Relations Level CR4,” receiving a maximum salary of $54,400 in 2005.

•

The Senate issued Charles Sholders Forms W–2 for 2001–2005

showing total wages of $218,515. Mr. Sholders served as petitioner’s driver in Harrisburg and as resident manager of petitioner’s Riverview Farm. Mr. Sholders’s actual work for the Senate was clerical in nature. His proper job classification under the

pay plan should have been “Legislative Clerk Messenger” or

[*20] Clerk I” and his maximum annual salary would have been

roughly $25,000. Instead, he was classified as “Administrative

Level A5” and later as “Constituent Relations CR4” and paid a

maximum annual salary of $50,127.

•

The Senate issued Ms. Swett Forms W–2 for 2001–2005 showing

total wages of $379,964. Ms. Swett was petitioner’s longtime secretary in the Harrisburg office, having served with him since the

year he was first elected. Her proper job classification under the

pay plan should have been “Administrative Level L5” and her

maximum salary should have been $50,531. Instead, she was

classified as “Executive Assistant IV” and later as “Policy Development I” and paid a maximum annual salary of $84,209. Ms.

Swett did not discharge the duties required for those positions,

which included the performance of high-level public policy research and the possession of educational qualifications she did

not have.

The following table summarizes the amounts that the employees

listed above received in wages during years 2001–2005 and the amounts

they should have received under the Senate pay plans in effect for the

relevant years:

Employee

Office

Total

Wages per

Forms W–2

Appropriate

Wages per Senate Pay Plan

Amount Improperly Diverted to

Employee

Ruth Arnao

Philadelphia

$287,608

$116,127

$171,481

Roseanne

Pauciello

Philadelphia

443,412

251,003

192,409

Maryann

Quartullo

Philadelphia

201,640

144,924

56,716

Lillian Cozzo

Philadelphia

333,111

201,113

131,998

Lou Leonetti

Philadelphia

169,006

99,254

69,752

David

Nelson

Philadelphia

247,527

133,168

114,359

Charles

Sholders

Harrisburg

218,515

104,566

113,949

Sue Swett

Harrisburg

379,964

220,915

159,049

$2,280,783

1,271,070

$1,009,713

Total

[*21]

Senate Democratic Appropriations Committee

SDAC’s mission was twofold: calculate the economic impact of

proposed legislation and work with the Senate Republican Appropriations Committee to prepare the general fund budget for the State Government. Fiscal impact statements, prepared by budget analysts, calculated the financial effects of proposed bills for Senators to use in evaluating legislation. This work occurred year round. The budget process

was more seasonal, but it involved long hours as deadlines approached.

During 2001–2005, SDAC had at least six budget analysts—Gerald Sabol, Vincent Rossi, Randy Albright, Sandy Leopold, Jennifer

Boger, and Christian Soura. Mr. Rossi, supported by Messrs. Albright

and Soura, worked on budgets for administrative agencies, chiefly those

dealing with transportation. That team responded to requests from petitioner’s constituents that related to transportation issues. All other

constituent services were provided by the Philadelphia district office.

Senate Democratic Computer Services Committee

SDCS handled procurement of computer equipment and provided

IT support to the offices of all Democratic senators, including petitioner.

Deborah Maguire served as executive director of SDCS during the years

at issue. But petitioner did not route his computer and IT requests

through Ms. Maguire. Rather, he relied on five other SDCS staffers,

some of whom worked in Harrisburg and some in Philadelphia.

Leonard Luchko oversaw technology in the Philadelphia district

office, where he was stationed. Petitioner viewed Mr. Luchko as his personal IT assistant and expected him to be available whenever petitioner

was in Philadelphia.

Donald (Don) Wilson was employed as a computer specialist for

SCDS during 2001–2005. Like Mr. Luchko, he was stationed in Philadelphia and provided IT support to petitioner’s district office. Petitioner

regarded Mr. Wilson as his other personal IT assistant. If Mr. Luchko

was not available to assist petitioner, Mr. Wilson subbed in for him.

Mr. Wilson spent many hours providing computer assistance, not

only to petitioner but also to petitioner’s family, friends, girlfriends, political allies, and favored political candidates. He installed wireless networks, routers, computers, printers, stereo systems, security cameras,

and other equipment at petitioner’s Green Street home and his Ventnor

and Margate beach properties. He made three annual 5-day trips to

[*22] Florida to perform similar tasks there, including the installation

of weather forecasting equipment on petitioner’s roof. He made two

trips to Martha’s Vineyard to shuttle luggage that did not fit on the private jet on which petitioner flew. He installed and repaired radios, DVD

players, and GPS systems in petitioner’s cars and in vehicles used by his

family and girlfriends. He rendered computer services to petitioner’s

2004 reelection campaign and to other politicians that petitioner supported.

Mark Eister joined SDCS in 1999. By 2001 he had begun devoting

essentially his full time to the needs of the Harrisburg office, with particular attention to petitioner’s personal needs. He routinely worked on

home computer networks and laptops—for petitioner, his family members, and his girlfriends—at five different locations. He often ran personal errands for petitioner. He once traveled from the Harrisburg office

to put the winter cover on the hot tub at Riverview Farm.

Dan Coyne joined SDCS in 1996 and was employed by the committee through 2005. He provided some IT support to the Harrisburg

office, but he rendered most of his services to petitioner personally. He

performed regular maintenance—including software and security updates, network extensions and repairs, and the addition of new functionality—to the computer and cell phone networks located in petitioner’s

homes, cars, vacation destinations, and Riverview Farm. He also

worked on political campaigns in which petitioner had an interest.

Petitioner directed that computer equipment, cell phones, and

BlackBerries—all purchased by SDCS—be distributed to his staff, family members, girlfriends, and political consultants for their personal use.

Doing so violated Senate policy, which permitted computers to be issued

only to Senate employees and cell phones to be issued only to senators

and their chiefs of staff. Unlike any other Senate office supported by

SDCS, petitioner had his own email domain, fumo.com, and he allowed

non-Senate employees to communicate using that domain by providing

them email addresses. He directed SDCS to set up an ex-girlfriend’s

email account so that all her messages were secretly forwarded to him.

Petitioner was obsessed with digital security, earning the nickname “Senator R2–D2” in the Senate. (“R2–D2” is a futuristic robot that

appears in Star Wars movies.) Petitioner repeatedly directed SDCS

staff to investigate security issues associated with his home computer

networks and his fumo.com domain. When petitioner learned of the FBI

investigation, he directed SDCS staff to “wipe” all staff cell phones and

[*23] computer equipment to prevent the disclosure of incriminating information. See infra pp. 32–33.

Senate Contractors

By virtue of his official positions, petitioner was able to direct the

hiring of independent contractors who were paid by the Senate. Many

of these contractors did little or no actual legislative work. To the extent

they performed services at all, those services were rendered chiefly to

petitioner personally, to his political campaigns, and to the campaigns

of other politicians he supported.

Private Investigator

Frank Wallace was employed by the Senate as a contractor during

1999–2005. The stated purpose of his contract was to serve as “Private

Investigator for the services of providing information analysis and consultion [sic] to the staff of the [Democratic] Senate Appropriations Committee.” Beginning in 2001 or earlier, however, Mr. Wallace’s sole mission was to render private investigation and related services to petitioner.

Some assignments that petitioner directed to Mr. Wallace involved investigating people in his personal life, e.g., his ex-wives, his exgirlfriends, and his butler. Other assignments involved efforts to gather

dirt on petitioner’s political foes or personal enemies. Mr. Wallace was

directed to investigate public officials who had criticized petitioner and

complaints made to police about a dumpster on petitioner’s property.

Mr. Wallace surveilled rallies held by petitioner’s political enemies and

monitored polling locations on election day. He swept petitioner’s home

and offices for listening devices or “bugs.” And he often provided physical security for political candidates whom petitioner supported. Many

of Mr. Wallace’s investigations were time intensive and required help

from an assistant, whom Mr. Wallace typically paid out of the Senate

contract. When the Senate contract was not sufficient to cover the assistant’s costs, Citizens Alliance paid for the services.

Political Campaign Consultants

Petitioner secured the retention of two political consultants who

were paid by the Senate. The first was Howard Cain, who worked as an

independent contractor during 2001–2005. Mr. Cain came on board after a brief stint as a Senate employee and volunteer for Fumo for Senate.

[*24] He contracted through his business, Venture Analysis, Inc. (Venture Analysis).

Under the contract, Mr. Cain was supposed to provide consulting

services on local community and governance issues. But he devoted virtually 100% of his time during 2001–2005 to political campaign work for

petitioner and his political allies. Ms. Quartullo testified before the

grand jury that Mr. Cain was a political adviser and that she knew of no

legislative work he had performed. Ms. Spagna knew Mr. Cain and described him as a “political consultant.” Mr. Cain testified that his contract omitted the actual purpose of his work because petitioner “couldn’t

have the state pay for political campaigns.”

Mr. Cain also assisted petitioner with personal matters. In September 2001 the position of Pennsylvania lieutenant governor became

vacant. The vacancy was filled by Senator Jubelirer, a Republican

whom petitioner disliked. Petitioner directed Mr. Cain and Christopher

Craig (a Senate attorney) to arrange a lawsuit against Senator Jubelirer, funded by an “anonymous donor.” Legal fees in the case totaled

around $17,000, and the “anonymous donor” turned out to be Citizens

Alliance. In October 2001 it issued a $20,000 check to Mr. Cain’s business, Venture Analysis, which paid $17,000 to the lawyer and kept the

difference.

Philip Press served as Senate contractor during 2002–2005. Petitioner met him while he was working on the Casey for Governor campaign. After brief service on petitioner’s district office staff, he was given

a series of Senate contracts at petitioner’s direction.

Mr. Press’s contracts said that he would provide consulting services regarding “e-commerce issues” and “local community and governance issues.” In fact his services consisted almost entirely of political

campaign work, for both petitioner and his political allies. Mr. Cain described him as a “foot soldier,” i.e., someone who accompanied petitioner

to political events and performed miscellaneous tasks for him.

Mr. Press represented in a 2003 email to Mr. Dlugolecki, the Harrisburg chief of staff, that he had done no legislative work. Ms.

Quatrullo and Ms. Spagna knew that Mr. Press was involved in “political campaigns” and could identify no legislative work he had performed.

Like Mr. Cain, he assisted petitioner by promoting candidates whom petitioner favored and opposing candidates whom petitioner disliked. In

[*25] so doing Mr. Press minted “political capital” for petitioner, an asset petitioner valued greatly.

“Ghost Contractors”

Petitioner retained two other contractors who were paid by the

Senate. We refer to these individuals as “ghost contractors” because

they performed no services of any kind for the Senate. Petitioner provided them contracts as a reward for their personal services to him, their

loyalty, and their close friendship.

Michael Palermo served as petitioner’s first chief of staff and later

as Deputy Director of the Pennsylvania Turnpike Commission. In 2000

petitioner hired him as a consultant to provide SDAC with “fiscal and

operational analysis of intrastate transportation issues.” He was paid

almost $230,000 for alleged consulting services during 2000–2004.

Mr. Palermo in fact performed no services whatsoever for the Senate. During legislative sessions he regularly hosted petitioner at his

Hummelstown, Pennsylvania, residence. When petitioner expressed interest in owning a farm, Mr. Palermo took the bit between his teeth. He

attended the auction to purchase Riverview Farm, oversaw eviction of

the existing tenant, supervised renovation and repairs, planned crop rotations, managed invoices, and arranged for the purchase of needed

equipment.

Mr. Palermo’s monthly invoices supplied no detail regarding the

nature of his work. They stated simply that he had devoted a specific

number of hours to “services rendered.” He eventually pleaded guilty to

a Federal conspiracy charge arising from his receipt of this no-work contract.

Mr. Rubin was a close friend of petitioner and the eventual husband of Ms. Arnao. With Fred Blum he owned and operated B&R Professional Services (B&R), which provided court reporting and process

service for law firms in the Philadelphia area. Through his work he was

well connected with individuals campaigning for political office, particularly judicial candidates and other politicians petitioner supported.

Beginning in October 1999 petitioner caused SDAC to contract with

B&R to provide “research . . . on legislative matters . . . [and] constituent

service.” To the extent Mr. Rubin provided any services at all, they were

not rendered to SDAC but to petitioner and his political allies.

[*26] Mr. Rubin received a contract from the Senate under which he

was paid $30,000 annually for four years. Like Mr. Palermo, he submitted monthly invoices to SDAC that stated simply “services rendered”

and the dollar amount of the invoice. No member of the SDAC staff,

petitioner’s Harrisburg staff, or petitioner’s Philadelphia district office

could identify any work Mr. Rubin or B&R had performed for the Senate.

In 2010 Mr. Rubin pleaded guilty to an obstruction of justice charge arising from his receipt of this no-work contract.

Fumo for Senate

Fumo for Senate, petitioner’s political campaign entity, was

housed on the second floor of 1208 Tasker Street, directly above his district office. There was no meaningful division of labor between these

two entities. Petitioner expected his Senate staff to assist as needed in

his Senate campaigns and related political events. They regularly did

so.

Petitioner formed and/or controlled several political action committees (PACs) that supported him and other candidates he favored.

These PACs included the Committee for Democratic Majority, Public

Service PAC, Bipartisan PAC, PA Leader (a Federal PAC), and PA 2100.

Petitioner’s Senate employees were tasked with managing the finances

of these PACs and processing contributions to bank accounts in their

names. Senate employees were sometimes required (or strongly encouraged) to make contributions to the PACs themselves.

Fumo for Senate sponsored two annual fundraisers, which were

planned and arranged from top to bottom by staff members in the Philadelphia district office. The first event, the Harry Truman Dinner, occurred on or near May 8, which was petitioner’s birthday and also the

birth date of the former president. The second fundraiser, in October,

was held at petitioner’s home. Petitioner’s Philadelphia staff devoted

hundreds of hours to these fundraisers annually.

Petitioner ran for reelection in 2004, and the duties of his Senate

staff then shifted even further in a political direction. Campaign-related

tasks took precedence over all other matters. Tasks included (among

other things) late nights canvassing prospective voters, participation in

lengthy conference calls, copious note taking during campaign meetings,

and transcription of those notes into minutes for distribution to campaign team members.

[*27] F.

Other Personal Services

Lisa Costello, a staff member in petitioner’s Philadelphia satellite

office, initially provided housecleaning services for petitioner at his

Green Street home. Nicole Barrett, who cleaned the Philadelphia district office once a week, subsequently took over for Ms. Costello. Ms.

Barrett cleaned the Green Street home two days a week and was paid

in cash by petitioner’s district office staff. When Ms. Barrett needed

cleaning supplies, she purchased them, and the staff reimbursed her in

cash.

Matthew Fonseca was hired as a butler for the Green Street home

after meeting petitioner on a yachting trip in Martha’s Vineyard. He

lived in the home and traveled to petitioner’s other homes as needed.

Mr. Fonseca was paid by check monthly by petitioner’s district office

staff.

Charles Sholders, a full-time Senate employee in the Harrisburg

office, worked on petitioner’s farm. He spent 80% of his time working at

the farm during the 6 months of the year when the Senate was not in

session. He received no compensation, apart from his Senate salary, for

this work. Mr. Sholders lived on the farm with his wife and family from

September 2003 through January 2005. In exchange for these accommodations, his wife, Margaret Sholders, assumed responsibility for looking after the horses and goats on the farm.

Lewis Jack, who was not a member of petitioner’s staff, also lived

and worked on Riverview Farm. He performed construction projects

that included renovation of the farmhouse and guesthouse, excavation

work, building barns, and doing utility work. At the direction of Mr.

Palermo and petitioner, Mr. Jack directed to Citizens Alliance all invoices relating to his work. When Mr. Jack told petitioner that he

needed a bulldozer on the farm, petitioner authorized Citizens Alliance

to pay for it. Mr. Jack acquired a used Caterpillar bulldozer for $13,900

in July 2003 and sold it to Citizens Alliance for $27,000. In December

2003 Citizens Alliance paid $16,000 to repair the bulldozer. The bulldozer never left the farm.

Activities of Citizens Alliance

In its early years Citizens Alliance funded its community betterment projects with grants from the State of Pennsylvania, which petitioner helped secure. Originally its initiatives were modest endeavors.

But the trajectory of its mission changed in 1998 when it received a $17

[*28] million grant from Pennsylvania Electric Co. (PECO). The utility

made that grant after petitioner agreed to drop a lawsuit against it. He

endeavored to conceal PECO’s donation from the public, fearing criticism from the press. It was ultimately uncovered after an investigation

by the Philadelphia Inquirer.

With this influx of cash, Citizens Alliance vastly expanded the

scope and scale of its activities. It opened two charter schools and undertook revitalization of a business district in south Philadelphia. But

a good portion of the cash was used to benefit petitioner and his political

allies. Petitioner contends that the benefits he received “were minuscule

in comparison” to the donations he obtained for Citizens Alliance. But

the criminal trial established that he received significant personal benefits from Citizens Alliance, ultimately resulting in an order that he pay

$1,165,317 in restitution to the charity.

Travel to Cuba

Petitioner arranged three trips to Cuba through Alliance for a Responsible Cuba Policy (ARCP), a charitable organization that advocated

termination of the U.S. embargo of Cuba. To facilitate these trips, petitioner directed Citizens Alliance to make (and during 2001–2003 it

made) payments of $39,000 to ARCP. These payments enabled petitioner and his friends to travel to Cuba largely free of charge.

The first trip arose when former U.S. Senator Arlen Spector invited petitioner to travel to Cuba with ARCP. To pay for this trip, Citizens Alliance transferred $12,000 to ARCP in October 2001. Petitioner

asked Mr. Rubin to accompany him, and they visited Cuba for 3 days in

November 2001. They incurred no expense for this trip apart from air

travel to and from Tampa, Florida.

The second trip occurred two months later. To pay for this trip,

Citizens Alliance transferred $10,000 to ARCP in January 2002. Petitioner did not intend to join this trip, but he wanted Robert Gross, a

close friend, to join. Mr. Gross selected Ed Jacobs, a New Jersey attorney and later Ms. Arnao’s criminal defense lawyer, to accompany him.

They visited Cuba on an ARCP-sponsored trip for 3 days in February

2002. Neither of them incurred any expense for this trip apart from air

travel to and from Tampa.

The third trip occurred six months later. To pay for this trip, Citizens Alliance (through CA Holdings) transferred $7,000 to ARCP in

September 2002. At petitioner’s invitation, two of his close friends,

[*29] Carmen DiCamillo and Gerald Catania, joined this trip. They

traveled to Cuba with ARCP from September 27 to 29, 2002. They incurred no expense for this trip apart from air travel and hotel costs in

Cuba. Although petitioner arranged no further trips to Cuba, Citizens

Alliance made additional payments to ARCP after the third trip, transferring $5,000 in November 2002 and another $5,000 in September

2003. The evidence at trial did not conclusively establish the purpose of

these two payments.

Apart from petitioner, the travelers on these trips had no

knowledge that Citizens Alliance was paying their way. The trip itineraries included cultural experiences and a few meetings with government

officials but no activities having any obvious connection to Citizens Alliance’s mission. Petitioner contended that the trips could strengthen

trading relationships for Philadelphia’s shipping industry, despite the

U.S. embargo against trade with Cuba.

Political Polling

Citizens Alliance paid $254,560 for political polling during 2002

and 2003, despite the bar against charities’ engaging in political campaign activities. See § 501(c)(3). These polls were conducted by Kiley &

Co. (Kiley) and Global Strategy Group, Inc. (GS Group). The polls generally tested voter attitudes toward candidates petitioner had endorsed

or was considering endorsing.

One set of polls, directed mainly to Philadelphia residents, asked

whether respondents were likely to vote for certain people for mayor of

Philadelphia, the city council, and other positions. A second set of polls

canvassed voter preferences about Kathleen Fitzpatrick, who was seeking a seat on the Philadelphia city council. A third set tested voter attitudes toward public officials in Bucks County (an eastern Philadelphia

suburb) and a Senate special election there. Polling expenses, with most

payments routed through CA Holdings, were as follows:

Year

Polling Company

Amount

2002

Kiley

$28,000

2002

Kiley

16,800

2002

GS Group

16,950

2002

GS Group

34,250

2002

GS Group

10,000

2002

GS Group

5,500

[*30]

2002

GS Group

15,500

2003

GS Group

39,899

2003

GS Group

33,536

2003

GS Group

54,125

Total

$254,560

Petitioner received a summary of the results of each poll. He did

not share the results with the candidates who were the subjects of the

polls. Rather, he kept the results to himself and his political consultants

to help them decide whom to support (or refrain from supporting) in

state and local political races.

Political polls provide a wealth of information about candidates,

and petitioner endorsed candidates as a means of amassing political

power. He caused Citizens Alliance to pay for this polling to enhance

his political stature, which could be tarnished if he backed the wrong

horse. He liked to say that he could “play in many sandboxes,” by which

he meant that he could mingle in different political circles. Citizens Alliance’s payment of polling expenses provided a “tool” that helped him

do this.

When Citizens Alliance’s accountants inquired about these polling expenses, Ms. Arnao at petitioner’s instruction replied that the polls

had been conducted to survey community attitudes and consisted of

“neighborhood questions.” As a public charity, Citizens Alliance was required to file annually Form 990, Return of Organization Exempt From

Income Tax. Neither on its 2002 nor on its 2003 return did Citizens

Alliance disclose the true nature or amount of its expenditures for polling. As a for-profit entity, CA Holdings was required to file annually

Form 1120, U.S. Corporation Income Tax Return. On its 2002 return it

deducted $151,425 for “community development consulting” expenditures, which were actually disguised political polling expenses.

Fumo for Senate ultimately reimbursed Citizens Alliance for

$215,161 of the polling expenses discussed above. One of petitioner’s

PACs reimbursed CA Holdings $41,000 to cover the balance of the expenses. These reimbursements were made on the theory that Citizens

Alliance had paid for the polling in error.

Ventnor Dunes Project

In 2001 the U.S. Army Corps of Engineers, in conjunction with

the New Jersey Department of Environmental Protection, embarked on

[*31] a plan to protect the Ventnor shoreline with dune construction

(Ventnor Dunes Project). Petitioner was alerted to this project by his

girlfriend, Ms. Egrie, who resided in the area. Petitioner opposed this

project, believing that the enlarged dunes might obstruct the ocean view

from his Margate home and lower its property value.

At petitioner’s direction, Mr. Craig, an attorney employed by the

Senate, helped organize entities to oppose the Ventnor Dunes Project.

Citizens Alliance funded the incorporation of these entities and contributed $30,000 to one of them. The entities thus formed included the Riparian Defense Fund (RDF), which represented that its mission was to

educate property owners about their riparian rights. RDF’s true mission

was to oppose dune construction in New Jersey shore towns. Another

entity was the Downbeach Community Development Corp. (DCDC); it

had nothing to do with community development but simply opposed

dune construction that petitioner disfavored. Petitioner appointed Ms.

Egrie as president and trustee of DCDC. He saw this appointment as

an opportunity for his girlfriend to enter local politics with the ultimate

goal of running for mayor of Ventnor.

In the hope of raising money more effectively, these and other

anti-dune organizations wanted to solicit tax-deductible contributions.

At petitioner’s direction, Citizens Alliance paid $28,926 to Pepper Hamilton, a Philadelphia law firm, to file IRS applications for section

501(c)(3) status. When the IRS requested more information about one

of the entity’s proposed activities, petitioner decided to abandon that effort. None of the entities was ever recognized by the IRS as a charity.

Petitioner enlisted his Senate staff and consultants, including

Ms. Arnao and Mr. Cain, to assist the anti-dune organizations. Mr. Cain

did research about which towns planned dune-related referenda and

strategized about how to affect their outcomes. Mr. Cain and other consultants handled questions from the press, printed and mailed 18,000

postcard flyers, ran newspaper ads, and created robocalls to residents.

Citizens Alliance paid $9,720 for the consultants’ efforts. It reported no

expenditures as having been made “attempting[] to influence legislation,” see § 501(c)(3), even though it had paid a total of $21,690 in efforts

to influence referenda in 2002.

All in all, Citizens Alliance paid $68,645 to oppose the Ventnor

Dunes Project. Although petitioner carefully concealed his involvement

at the time, he later insisted that Citizens Alliance’s activities benefited

his constituents, on the theory that some of them owned property on the

[*32] New Jersey shore. And he sought to rationalize Citizens Alliance’s

$30,000 cash contribution as “one section 501(c)(3) entity giving to another,” although none of the anti-dune entities was ever granted taxexempt status.

VI.

FBI Investigation

In late 2003 petitioner became concerned that he might be the

subject of an FBI investigation. His fears were triggered when he

learned that a subpoena had been issued to Ms. Arnao. His fears were

amplified when articles appeared in the Philadelphia Inquirer suggesting that he was under investigation for his relationship to Citizens Alliance.

Petitioner took several steps in response. First, he deployed Senate funds to find out whether any listening devices or “bugs” had been

planted in his residences or offices. Frank Wallace, the private investigator to whom petitioner issued a Senate contract, performed these

“sweeps.” As petitioner’s concern grew, he directed routine sweeps, not

only of his Green Street home, but also of Citizens Alliance’s headquarters and Ms. Arnao’s home.

Second, petitioner implemented a new policy regarding his staff’s

use of technology. He directed SDCS employees to program computers

with automatic encryption—commonly called “pretty good privacy”

(PGP)—and perform routine PGP or “Secure Clean” hard drive deletion

on all staff computers and cell phones. Manual file deletion merely removes access to a file. By contrast, PGP and Secure Clean programs

permanently remove or “wipe” files from the hard drive. These wiping

programs took hours to perform on each computer and made computer

performance sluggish.

At petitioner’s direction, SDCS staff implemented these wiping

programs on all staff equipment in the Philadelphia and Harrisburg offices. Messrs. Luchko and Wilson, the SDCS staffers stationed in Philadelphia, played the leading roles in these “wiping” programs. Petitioner indicated to Mr. Wilson that his objective was to prevent the Federal government from accessing Senate emails. SDCS staff routinely

monitored equipment manually to ensure that emails and sensitive data

had disappeared.

Mr. Luchko initiated an “email audit” policy at petitioner’s direction in 2004. This policy mandated that all Senate staff manually delete,

within a week of receipt, all emails they received from petitioner. Mr.

[*33] Luchko enforced this policy by personally reading staff emails.

This practice ran in conjunction with regular PGP and Secure Clean

wipes.

For his personal computer equipment petitioner sought a higher

level of protection. To that end he directed Messrs. Luchko and Eister

to implement what are sometimes called Department of Defense or

“DoD” wipes on all IT equipment maintained at his residences. DoD

wipes are more comprehensive than PGP wipes because they overwrite

content six times rather than three. Mr. Eister at trial described them

as the “mother of all wipes,” stating that they could take a full day to

perform.

During January 2005 the U.S. Attorney’s Office engaged in discussions with petitioner about the maintenance of digital evidence. But

he did not desist from wiping computers after these conversations.

Quite the contrary: He persuaded SDCS to purchase European virus

scanning software that alerts users if a government authority has remotely installed “Magic Lantern,” a keystroke-monitoring software that

reports activity back to the government.

Pursuant to a subpoena the FBI in February 2005 searched Citizens Alliance’s headquarters. The results of that search alerted Federal

authorities to the data erasure, prompting searches of petitioner’s Harrisburg and Philadelphia offices on February 18 and 19, 2005. Because

of the extensive wiping activity ordered by petitioner, the FBI recovered

very few email messages from the computer equipment used by petitioner and his staff. At petitioner’s direction SDCS supplied his office

with a new email server, and SDCS staff continued to enforce the security measures dictated by petitioner until April 20, 2005. Still, some

PGP wipes continued to occur as late as September 2005.

VII.

Criminal Trial

In February 2007 a grand jury in the Eastern District of Pennsylvania indicted petitioner on 139 counts of criminal activity. Sixty-four

counts charged him with intent to defraud the Senate; 34 counts, on

which Ms. Arnao was a codefendant, charged him with a scheme to defraud Citizens Alliance; 32 counts charged him with obstruction of justice or conspiracy to commit obstruction of justice; and 4 counts related

to facilitating tax evasion by Citizens Alliance.

In March 2009, following a 6-month trial, petitioner was convicted

on 137 counts, including the 4 Federal tax counts. After several appeals

[*34] related to sentencing, he was ultimately required to pay restitution of $2,517,274 to the Senate and restitution of $1,165,317 to Citizens

Alliance. These were the losses petitioner caused to those organizations,

as determined by the district court in the criminal case. 2

VIII. IRS Civil Examination

Following the termination of all criminal appeals, the IRS commenced examinations concerning petitioner’s civil tax liabilities for

2001–2005. The examination was conducted by two teams, one focusing

on income tax and the other on excise tax. The income tax case was

assigned to Revenue Agent (RA) Kenneth Kelly and RA Ken Rotan. At

that time Lloyd Doletski was RA Kelly’s group manager and thus his

immediate supervisor.

Chris Ricco, an attorney with the Office of Chief Counsel, was assigned to provide legal assistance to RA Kelly during the income tax examination. After reviewing the case file, Mr. Ricco recommended that

the 75% fraud penalty be asserted for each year. See § 6663(a). Mr.

Ricco’s recommendation to this effect was set forth in Workpaper 100-1,

Examining Officer’s Activity Record. In that document RA Kelly indicates that Mr. Ricco had recommended civil fraud penalties against petitioner as of August 7, 2012.

RA Kelly accepted Mr. Ricco’s recommendation and included the

fraud penalties in a draft Form 4549, Income Tax Examination Changes.

Mr. Doletski, RA Kelly’s immediate supervisor, reviewed the case file

and signed a 30-day letter that included the Form 4549. On October 3,

2012, the IRS mailed the 30-day letter to petitioner. That document

constituted the first formal communication to petitioner that the IRS

intended to assert fraud penalties against him.

On May 10, 2013, the IRS issued petitioner a Notice of Deficiency

for section 4958 excise tax for calendar years 2002–2004. It based these

deficiencies on its determinations that petitioner was a “disqualified

person” of Citizens Alliance and had engaged in “excess benefit transaction[s]” with it. See § 4958(a)(1). The excess benefits allegedly included

2 The monetary loss to Citizens Alliance was determined by the trial court to

be $1,566,528, and petitioner was ultimately ordered to pay 75% of that loss (Ms. Arnao

having been held partially responsible). However, the Third Circuit on the second appeal noted that petitioner “reaped approximately 96% of the gains or benefits arising

out of the [Citizens Alliance] fraud.” United States v. Fumo, 513 F. App’x 215, 220 (3d

Cir. 2013).

[*35] (among other things) consumer goods, use of vehicles and farm

equipment, personal services rendered by employees, trips to Cuba, political polling, and the Ventnor Dunes Project.

The Notice determined first-tier excise taxes under section

4958(a)(1), equal to 25% of the excess benefits, and additions to tax under section 6651(a)(1) for failure to timely file. 3 The additions to tax

were imposed because petitioner had neglected to file Form 4720, Return of Certain Excise Taxes on Charities and Other Persons Under

Chapters 41 and 42 of the Internal Revenue Code, for the three tax years

at issue. The excise tax deficiencies and additions to tax determined in

this Notice were as follows:

Year

Deficiency

§ 6651(a)(1)

Addition to Tax

2002

$71,330

$17,833

2003

96,006

24,001

2004

24,116

6,029

On May 14, 2013, the IRS issued petitioner a Notice of Deficiency

for income tax for 2001–2005, plus a fraud penalty for each year. The

deficiencies were determined on the basis of the taxable benefits petitioner had allegedly extracted from the Senate and Citizens Alliance,

plus adjustments to itemized deductions no longer at issue. The

amounts determined in this Notice were as follows:

Year

Deficiency

§ 6663(a)

Penalty

2001

$217,225

$162,919

2002

208,295

156,221

2003

164,706

123,529

2004

88,006

66,005

2005

67,905

50,929

3 The Notice also determined second-tier excise taxes under section 4958(b),

which are imposed at a 200% rate if excess benefit transactions are not timely corrected. Petitioner paid restitution of $1,165,317 to Citizens Alliance before the Notices

of Deficiency in these cases were issued. The IRS considered this payment to constitute

“correction” of the excess benefit transactions within the meaning of section 4958(f)(6).

Respondent has thus conceded the second-tier deficiencies determined under section

4958(b).

[*36] IX.

Tax Court Proceedings

Extensive motions practice occurred in both docketed cases. By

Order served March 21, 2019, we consolidated the two cases for trial,

briefing, and opinion. Several questions were decided by Order, and we

issued an Opinion in the excise tax case in May 2021. Fumo v. Commissioner, T.C. Memo. 2021-61, 121 T.C.M. (CCH) 1475. We address these

matters briefly below.

On October 10, 2019, respondent filed a Motion for Leave to File

Amended Answer in the income tax case, seeking to quantify more precisely the taxable benefits petitioner allegedly extracted from the Senate. First, respondent sought to calculate the alleged benefits from Senate consultants and contractors by reference to the actual start and end

dates of their contracts. Second, in situations where petitioner’s alleged

taxable benefits were determined by reference to an employee’s wages,

respondent sought to compute those wages using information on the employee’s Forms W–2, instead of the rough estimates used for sentencing

purposes during the criminal trial. Third, respondent sought to reallocate small amounts of alleged benefits from one year to another, as determined by the year of actual payment.

We granted respondent’s Motion for Leave on December 3, 2019.

As asserted in respondent’s First Amended Answer, the income tax deficiencies and fraud penalties determined for 2001–2005 were as follows:

Year

Deficiency

§ 6663(a)

Penalty

2001

$230,966

$173,225

2002

225,745

169,309

2003

195,627

146,730

2004

84,829

63,622

2005

76,627

57,470

On October 10, 2019, respondent filed a Motion for Partial Summary Judgment contending that (1) petitioner is collaterally estopped

from relitigating facts established in his criminal case, including the fact

that his fraudulent actions caused misappropriations from his victims;

and (2) his “misappropriations constitute taxable benefits received by

petitioner . . . as a matter of law.” On February 3, 2020, petitioner filed

a Motion for Partial Summary Judgment contending that respondent is

collaterally estopped, by the district court’s decision not to enter a

[*37] judgment of forfeiture, from asserting that petitioner received

gross income.

By Order served February 28, 2020, we denied both Motions. Regarding respondent’s Motion, we acknowledged that collateral estoppel

would prevent petitioner from relitigating many facts established during his criminal trial. But we declined to decide on summary judgment

what those facts might be, and we held that collateral estoppel in any

event would not prevent petitioner from contesting the dollar amounts

of unreported income respondent determined. Regarding petitioner’s

Motion, we held that respondent is not collaterally estopped from asserting that petitioner received gross income because there is no identity

between “proceeds” for purposes of 18 U.S.C. § 981 and “income” for purposes of section 61. Thus, the district court’s decision not to enter a

judgment of forfeiture should not be given collateral estoppel effect. 4

On May 22, 2020, the parties filed a Stipulation of Settled Issues

in the excise tax case, memorializing several concessions by respondent.

Respondent concurrently filed a Motion for Leave to File First Amendment to Answer; petitioner did not object to that Motion, and we granted

it on June 1, 2020. The combined effect of these two filings was to reduce

the excess benefits that respondent alleged in the excise tax case by

$60,396 for 2002, by $96,760 for 2003, and by $76,411 for 2004.

On February 3, 2021, respondent filed a Motion for Partial Summary Judgment in the excise tax case, seeking rulings that petitioner

was a “disqualified person” of Citizens Alliance within the meaning of

section 4958(a) and had received “excess benefits” from it during 2002–

4 Petitioner in his Posttrial Brief persists in contending that collateral estoppel

applies to prevent respondent from asserting that he received gross income. Further,

he asserts that the law-of-the-case doctrine has the same effect because the United

States declined to appeal the district court’s decision not to enter a judgment of forfeiture. Again we disagree. “The law-of-the-case doctrine generally provides that when

a court decides upon a rule of law, that decision should continue to govern the same

issues in subsequent stages in the same case.” Musacchio v. United States, 577 U.S.

237, 244–45 (2016) (internal quotations omitted) (quoting Pepper v. United States, 562

U.S. 476, 506 (2011)). The premise of the doctrine is that “the same issue presented a

second time in the same case in the same court should lead to the same result.”

LaShawn A. v. Barry, 87 F.3d 1389, 1393 (D.C. Cir. 1996) (emphasis omitted). Here,

the forfeiture question was presented in a separate case in a different court. And as

we held in our Order served February 28, 2020, the receipt of “proceeds” in a forfeiture

context is not equivalent to receipt of gross income under section 61. Cf. McHan v.

Commissioner, 558 F.3d 326, 332 (4th Cir. 2009) (finding that the outcome of a criminal

forfeiture proceeding was not preclusive with respect to gross income), aff’g T.C. Memo.

2006-84.

[*38] 2004. By Opinion served May 17, 2021, we granted respondent’s

Motion on the first point but denied it on the second, deferring to trial

any determination as to the amount of excess benefits petitioner received in his capacity as a “disqualified person.” Fumo, 121 T.C.M.

(CCH) at 1478.

After conclusion of the trial respondent filed in each case a Motion

to Conform the Pleadings to the Proof and lodged with each a Second

Amendment to Answer. On the basis of the evidence submitted at trial,

respondent sought to amend his Answer in the excise tax case to include,

as an excess benefit petitioner received, the value of a Jeep Wrangler

owned and maintained by Citizens Alliance but allegedly used exclusively by petitioner. Petitioner did not object to that Motion.

On the basis of the evidence submitted at trial, respondent sought

to amend his Answer in the income tax case to (1) allege a slight increase

in the unreported income petitioner derived from services performed for

his benefit by Senate employees and contractors, (2) include in petitioner’s gross income the fair rental value of three pieces of Citizens Alliance equipment used at his farm, and (3) include in petitioner’s gross

income political polling and other expenses allegedly paid by Citizens

Alliance at his direction. After receiving a response from petitioner, we

granted both Motions by Order served on May 19, 2023.

In the light of these Amendments to Answer and taking into account respondent’s concessions in the Stipulation of Settled Issues, the

amounts currently in dispute appear to be as follows:

Year

Income Tax

Deficiency

§ 6663(a)

Penalty

Excise Tax

Deficiency

§ 6651(a)(1)

Addition to Tax

2001

$284,402

$213,302

–

2002

337,647

253,235

$63,649

$15,912

2003

309,947

232,460

72,262

18,066

2004

168,803

126,602

6,209

1,552

2005

190,667

131,902

–

OPINION

Burden of Proof

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

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

[*39] erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933). Section 7491 provides that the burden of proof on a factual issue

may shift to the Commissioner if the taxpayer satisfies specified conditions. Among these conditions are that the taxpayer must have “introduce[d] credible evidence with respect to [that] factual issue,”

§ 7491(a)(1), and must have “complied with the requirements under this

title to substantiate any item,” § 7491(a)(2)(A). Petitioner has not satisfied these requirements with respect to any factual issue that has salience in deciding the questions presented. For the most part, the burden

of proof thus remains on him.

The burden of proof is on respondent “in respect of any new matter [and] increases in deficiency.” See Rule 142(a)(1). Respondent thus

bears the burden of proof with respect to the increased deficiencies alleged in his Amended Answers. Respondent likewise bears the burden

on the issue of fraud “and that burden of proof is to be carried by clear

and convincing evidence.” See Rule 142(b).

II.

Period of Limitations

Section 6501(a) generally requires the IRS to assess a tax within

three years after the return was filed. The period of limitations is extended to six years where the taxpayer omits from gross income an

amount “in excess of 25 percent of the amount of gross income stated in

the return.” § 6501(e)(1)(A). The Notice of Deficiency in the income tax

case was issued on May 14, 2013, more than six years after the period

of limitations began to run for 2005, the last of petitioner’s tax years at

issue.

Section 6501(c)(1) provides that, where a taxpayer has filed “a

false or fraudulent return with the intent to evade tax,” there is no period of limitations, and the tax “may be assessed . . . at any time.” “[T]he

determination of fraud for purposes of the period of limitations on assessment under section 6501(c)(1) is the same as the determination of

fraud for purposes of the penalty under section 6663 . . . .” Neely v. Commissioner, 116 T.C. 79, 85 (2001). As explained more fully in our discussion of the fraud penalty, we find that petitioner’s income tax returns

for 2001–2005 were fraudulent. See infra pp. 81–88. His income tax

liability for all four years may thus be assessed “at any time.”

§ 6501(c)(1).

The Notice of Deficiency in the excise tax case was issued on May

10, 2013, more than three years after the applicable period of limitations

[*40] had begun to run. As explained more fully in our discussion of the

excise tax issue, we find that petitioner’s excise tax liability for 2002–

2004 may likewise be assessed “at any time.” See infra pp. 76–77.

III.

Unreported Income

In cases of unreported income, the Commissioner must establish

an evidentiary foundation connecting the taxpayer with the incomeproducing activity or demonstrate that the taxpayer actually received

income. Anastasato v. Commissioner, 794 F.2d 884, 886–87 (3d Cir.

1986), vacating and remanding T.C. Memo. 1985-101; Walquist v. Commissioner, 152 T.C. 61, 67 (2019). “Once the Commissioner makes the

required threshold showing, the burden shifts to the taxpayer to prove

by a preponderance of the evidence that the Commissioner’s determinations are arbitrary or erroneous.” Walquist, 152 T.C. at 67–68 (citing

Helvering v. Taylor, 293 U.S. 507, 515 (1935)); see Texasgulf, Inc., &

Subs. v. Commissioner, 172 F.3d 209, 214 (2d Cir. 1999), aff’g 107 T.C.

51 (1996).

A taxpayer must maintain books and records establishing the

amount of his gross income. See § 6001. When a taxpayer does not keep

accurate books and records, the IRS may reconstruct his income “under

such method as, in the opinion of the Secretary, does clearly reflect income.” § 446(b); see Petzoldt v. Commissioner, 92 T.C. 661, 693 (1989).

Such reconstruction “need only be reasonable in light of all surrounding

facts and circumstances.” Petzoldt, 92 T.C. at 687.

The IRS reconstructed petitioner’s income using various types of

records, most of which had been collected by the FBI and presented to

the district court during the criminal case. These included bank records,

Citizens Alliance records, Senate records, law firm invoices, third-party

vendor information, employment contracts, and employee Forms W–2.

Because petitioner orchestrated a large-scale destruction of digital evidence during 2003–2005, very few emails and electronic documents were

recovered from Citizens Alliance or from petitioner’s Senate offices. See

supra pp. 32–33. Given his obstructive conduct, we can hardly say that

he kept accurate records.

A taxpayer’s gross income generally includes “all income from

whatever source derived.” § 61(a); see Charley v. Commissioner, 91 F.3d

72, 73–74 (9th Cir. 1996), aff’g in part, rev’g in part T.C. Memo. 1993558. “The starting point in all cases dealing with the question of the

scope of what is included in ‘gross income’ begins with the basic premise

[*41] that the purpose of Congress was ‘to use the full measure of its

taxing power.’” James v. United States, 366 U.S. 213, 218–19 (1961)

(quoting Helvering v. Clifford, 309 U.S. 331, 334 (1940)). Section 61 accordingly includes in gross income “all gains except those specifically

exempted.” James, 366 U.S. at 219.

“A gain ‘constitutes taxable income when its recipient has such

control over it that, as a practical matter, he derives readily realizable

economic value from it.’” Ibid. (quoting Rutkin v. United States, 343 U.S.

130, 137 (1952)). This is true regardless of whether the recipient obtains

title to property giving rise to the gain. Id. at 216–17. For gains that

take a form other than cash, a taxpayer’s gross income generally includes the difference between the fair market value of goods and services

he receives and the amount (if any) he paid for those items. See Treas.

Reg. § 1.61-2(d)(2).

Gross income under section 61(a) also includes items of income

that the taxpayer has constructively received. Estate of Geiger v. Commissioner, 352 F.2d 221, 231 (8th Cir. 1965), aff’g T.C. Memo. 1964-153.

“Under the constructive receipt doctrine ‘funds [or other property] which

are subject to a taxpayer’s unfettered command and which he is free to

enjoy at his option are constructively received by him whether he sees

fit to enjoy them or not.’” Estate of Caan v. Commissioner, 161 T.C. 77,

95 (2023) (alteration in original) (quoting Estate of Brooks v. Commissioner, 50 T.C. 585, 592 (1968)); accord Benes v. Commissioner, 42 T.C.

358, 381 (1964), aff’d, 355 F.2d 929 (6th Cir. 1966); see also Corliss v.

Bowers, 281 U.S. 376, 378 (1930); Treas. Reg. § 1.451-2(a).

In determining whether income is constructively received, “[i]t is

inconsequential that [the taxpayer] did not personally ‘make withdrawals’ or ‘receive disbursements.’” Harrington v. Commissioner, T.C.

Memo. 2021-95, 122 T.C.M. (CCH) 116, 121, aff’d, No. 22-9000, 2022 WL

17333080 (10th Cir. Nov. 30, 2022). A taxpayer need not actually withdraw cash for a gain to be taxable. See Treas. Reg. § 1.451-2(a). However, income is not constructively received if the taxpayer’s control of its

receipt is subject to substantial limitations or restrictions. See ibid.; see

also Harrington, 122 T.C.M. (CCH) at 121. A substantial limitation or

restriction does not include a limitation the taxpayer himself creates.

See Murphy v. United States, 992 F.2d 929, 931 (9th Cir. 1993) (holding

that a taxpayer constructively received income where “his failure to receive cash was entirely due to his own volition”); Fairbank v. Commissioner, T.C. Memo. 2023-19, at *27 (same); Harrington, 122 T.C.M.

(CCH) at 121 (same).

[*42] FBI Special Agents Humphreys and Nichilo, who testified very

credibly during trial of these cases, undertook during the criminal investigation the initial calculation of the losses that petitioner inflicted

on the Senate and Citizens Alliance. During the sentencing phase of the

criminal case, the district court relied on their analysis in determining

petitioner’s restitution obligation. The court estimated that the Senate

had suffered an aggregate loss of $2,517,274 and that Citizens Alliance

had suffered an aggregate loss of $1,566,528, of which the district court

deemed $1,165,317 attributable to petitioner. In the income tax Notice

of Deficiency respondent relied heavily on the FBI special agents’ analysis, and he later refined their calculations using evidence presented at

trial.

Although the exact method the FBI special agents employed depended on the particular type of income, they proceeded in the same

general fashion for all items. First, they examined the books and records

of the Senate and Citizens Alliance. When they encountered gaps or

“holes” in the record, as they frequently did, the FBI special agents subpoenaed information from third-party vendors and contractors. Upon

receiving those records, the FBI special agents approached petitioner’s

former employees to discern the extent to which the transactions benefited petitioner personally.

Unreported Income from the Senate

Petitioner received gross income in the form of personal services

rendered to him by employees and contractors paid by the Senate. This

income falls into three general categories. First, petitioner engineered

inflated salaries for certain staff members to ensure their loyalty and

compliance with his demands. By diverting cash to his staff members

in excess of their proper compensation under the Senate pay plan, petitioner exercised dominion and control over those funds to benefit himself. We conclude that 100% of this excess compensation was includible

in his gross income.

Second, petitioner caused his staff members to devote inordinate

amounts of time to tasks that benefited him personally or benefited his

political campaigns, his political allies, and political candidates he favored. On the basis of the trial evidence, we estimate the percentage of

each employee’s time that was so devoted, as opposed to constituting

legitimate Senate work. We then determine what amount should be included in petitioner’s gross income for this reason.

[*43] Third, petitioner caused the Senate to hire contractors and consultants who rendered the bulk of their services to petitioner and his

political campaigns. For the “ghost contractors,” who did no legislative

work at all, we include 100% of their compensation in petitioner’s gross

income. For the other contractors, we include a ratable portion of their

compensation in his gross income.

Excess Compensation Engineered by Petitioner

Petitioner falsely certified to the Senate inflated salaries for eight

employees in his Philadelphia and Harrisburg offices. He did so to ensure their loyalty and incentivize them to discharge, without complaint,

the personal tasks he incessantly assigned to them. As more fully explained supra pp. 18–20, the Senate funds petitioner improperly diverted to his staff in this manner are summarized in the following table:

Appropriate

Wages per

Senate Pay

Plan

Amount Improperly

Diverted to

Employee

Office

Total Wages

per Forms

W–2

Ruth Arnao

Philadelphia

$287,608

$116,127

$171,481

Roseanne

Pauciello

Philadelphia

443,412

251,003

192,409

Maryann

Quartullo

Philadelphia

201,640

144,924

56,716

Lillian Cozzo

Philadelphia

333,111

201,113

131,998

Lou Leonetti

Philadelphia

169,006

99,254

69,752

David

Nelson

Philadelphia

247,527

133,168

114,359

Charles

Sholders

Harrisburg

218,515

104,566

113,949

Sue Swett

Harrisburg

379,964

220,915

159,049

$2,280,783

$1,271,070

$1,009,713

Total

We conclude that the excess compensation shown above, totaling

$1,009,713, is includible in petitioner’s gross income because he exercised dominion and control over these funds by causing the money to be

diverted to his employees. The officer who served as chief clerk of the

Senate during 2001–2005 testified that he trusted the submissions he

received from senators regarding salaries, invoices, and related fiscal

matters. He credibly testified that he had no knowledge or reason to

[*44] believe that petitioner’s certifications regarding his employees’ job

qualifications were false.

Given these circumstances, we find that petitioner had, in practical effect, the unfettered ability to direct Senate funds to his employees

to ensure that they received (in his words) what he “thought they deserved in way of pay.” See Estate of Geiger v. Commissioner, 352 F.2d

at 231–32 (finding that taxpayer had constructive receipt of income

where she was the “force and the fulcrum” behind the misappropriations). Because the chief clerk routinely approved all salary requests

from Senators that appeared proper on their face, petitioner’s ability to

divert funds to his staff was not subject to any “substantial limitations

or restrictions.” See Treas. Reg. § 1.451-2(a); cf. Leslie v. Commissioner,

T.C. Memo. 2016-171, 112 T.C.M. (CCH) 313, 318 (finding that a substantial limitation existed where the taxpayer’s access to funds required

a court order to release the money), aff’d, 725 F. App’x 597 (9th Cir.

2018).

Petitioner’s income tax case resembles Bailey v. Commissioner, 52

T.C. 115 (1969), aff’d per curiam, 420 F.2d 777 (5th Cir. 1969). The taxpayer in that case misappropriated bank funds and had them deposited

directly into her brother’s account. We found that the taxpayer had

“complete dominion and control over the embezzled funds” and that this

was sufficient to make the funds includible in the taxpayer’s gross income. Id. at 119. We deemed it irrelevant that the taxpayer diverted

the funds to her brother rather than keep the money for herself. Ibid.

In his Posttrial Briefs, petitioner does not seriously dispute that

he engineered inflated salaries for his staff. Nor does he challenge the

detailed calculation of the amounts involved. Rather, he urges that

“[his] personal wealth did not increase as a result of excess compensation paid to Senate staffers.” At most, he says, he received only the “accrual of political capital,” which he characterizes as an intangible benefit

without quantifiable economic value.

We disagree. By diverting excess compensation to his staff, petitioner garnered more than “political capital.” He sought to assure—and

he in fact obtained—unquestioning loyalty from his staff, especially

when the going got tough. He incentivized his employees’ compliance in

rendering personal services that directly benefited him and his political

allies. And he “bought their silence” about improper or illegal behavior

in which he was engaging, including the use of Senate resources for his

political campaigns. These benefits plainly had economic value. And

[*45] while the fair market value of these benefits might be hard to calculate in isolation, petitioner has not shown that it was “arbitrary or

erroneous” for the Commissioner to use the excess compensation he engineered for his staff as an index of the value he received from them.

See Walquist, 152 T.C. at 67–68.

Petitioner alternatively contends that the excess compensation

should not be taxable to him because his employees presumably paid

Federal income tax on the full amounts of their salaries. But this does

not negate petitioner’s receipt of gross income, as the embezzlement

cases show. A taxpayer who embezzles money is taxable on these funds

upon receipt. See Yerkie v. Commissioner, 67 T.C. 388, 390 (1976) (“Although the proceeds of an embezzlement are not obtained lawfully, they

result in economic gains for the embezzler and, as such, are included in

his gross income for the year in which the funds were misappropriated.”

(citing James, 366 U.S. 213)).

An embezzler has many choices about what to do with the money

that he unlawfully secures. He can keep it, distribute it to family or

friends, or use it to pay salaries of contractors or employees. In the latter

scenarios, his contractors or employees will presumably pay tax on the

payments derived from the embezzled finds. Petitioner cites no authority—and we know of none—for the proposition that this immunizes the

embezzler from tax. See Walters v. Commissioner, T.C. Memo. 1998-111,

75 T.C.M. (CCH) 2007, 2018–19 (“[A]n embezzler must include embezzled funds in income even though the funds are lent or given to another.”).

The same logic applies here. The principal difference between the

embezzlement cases and the situation here is that petitioner unlawfully

engineered transfers of cash directly from the Senate to his employees,

rather than extracting cash from the Senate and distributing it to his

employees himself. Petitioner has offered no cogent reason why this

should make any difference in determining whether he received gross

income. See Smiley v. Commissioner, T.C. Memo. 2024-66, at *29–30;

Wood v. Commissioner, T.C. Memo. 2011-190, 102 T.C.M. (CCH) 146,

147; Jackson v. Commissioner, T.C. Memo. 1994-328, 68 T.C.M. (CCH)

112, 114; Cruea v. Commissioner, T.C. Memo. 1985-553, 50 T.C.M.

(CCH) 1377, 1380–81.

In short, the manner in which petitioner used the misappropriated funds is immaterial in determining whether those funds were includible in his gross income. By falsely certifying to the chief clerk that

[*46] his staff members had job qualifications they did not possess, he

diverted Senate funds to his employees in excess of the wages permitted

by the Senate pay plan. Because he exercised dominion and control over

these funds to benefit himself, those funds are includible in his gross

income.

Personal Services Rendered to Petitioner

Petitioner did not adhere to a traditional office structure for his

Philadelphia and Harrisburg offices. Employees were expected to perform a multitude of personal and political tasks and be “on call” at any

time of day or night. For many of his staff members, there was no distinction between their work for petitioner in his capacities as a sitting

Senator, as a private citizen, and as a candidate in a political campaign.

The IRS determined that petitioner is taxable on a ratable portion

of certain staff member’s salaries, corresponding to the percentage of

that person’s time devoted to tasks that personally benefited petitioner,

his political campaigns, and his political allies. In large part, we find

respondent’s determinations to be reasonable. With some adjustments

we find that petitioner realized gross income from personal and political

services rendered by the staff members discussed below.

Philadelphia District Office

The Philadelphia district office operated as the constituent services arm of petitioner’s Senate office. See supra p. 14. Fumo for Senate,

petitioner’s principal campaign organization, was located on the second

floor of the same building. Staff members routinely worked for both,

notwithstanding their job descriptions. And their work regularly overlapped with petitioner’s other political endeavors and his Citizens Alliance projects. As a result, many employees in the Philadelphia office

spent a significant portion of their workday discharging personal or political tasks for petitioner.

Needless to say, the percentage of time thus devoted cannot be

estimated with scientific precision. In selecting a reasonable percentage

for each employee, we have considered the district court’s findings during the sentencing phase of petitioner’s criminal case, the transcripts of

witness testimony during the criminal trial, the testimony we heard during trial of these cases, and the documentary evidence.

[*47]

Ruth Arnao

Ms. Arnao was the linchpin of petitioner’s overlapping staffs. Besides making demands on her directly, petitioner routinely funneled his

personal directives to other staff members through her. Responding to

his personal requests and ensuring that all other staff members did the

same was surely time consuming.

However, we do not agree with respondent that 100% of Ms.

Arnao’s time was spent on tasks that personally benefited petitioner, his

political campaigns, and his political allies. Ms. Arnao discharged routine staff management functions for the Philadelphia district office. And

she rendered legitimate services to petitioner’s constituents. Among

other things, she greeted visitors to the district office, arranged meetings, funneled constituent requests to the proper channels, notarized papers for constituents, and handled licensing issues that residents

brought to her attention.

While agreeing that Ms. Arnao did render legitimate constituent

services, respondent urges that she invariably did so wearing her “Citizens Alliance hat” rather than her “Senate hat.” We reject that argument. During 2001–2004 Ms. Arnao physically worked in the district

office for a good portion of most workdays. Her trial testimony, which

we found credible, convinced us that she rendered a significant portion

of her constituent services through the district office. Making our best

estimate based on the evidence we heard, we find that Ms. Arnao devoted 35% of her time to legitimate Senate business and 65% of her time

to tasks that benefited petitioner personally.

Ms. Arnao received total compensation of $287,608 from the Senate during 2001–2004. We conclude that 65% of that amount, or

$186,945, is includible in petitioner’ gross income. We have already determined that $171,481 of her wages is includible in his gross income as

excess compensation that he engineered for her. See supra p. 43. To

prevent double counting, we subtract the latter number from the former

and calculate $15,464 as the additional amount includible in his gross

income.

ii.

Roseanne Pauciello

Ms. Pauciello was a longtime friend of petitioner and a ward

leader in his Senate district. When she was not summering at her home

on the New Jersey shore, we find that she spent nearly all her time assisting petitioner with his political activities and tending to his personal

[*48] affairs. Mr. Cain, petitioner’s chief political consultant, was unaware that Ms. Pauciello earned a Senate salary because (as far as he

could tell) she worked exclusively on political matters. Her subordinate

Ms. Quartullo, who testified in petitioner’s criminal trial, could not identify any Senate work Ms. Pauciello performed apart from limited constituent work and meetings with “committee people.” Making our best

estimate based on the evidence we heard, we find that Ms. Pauciello devoted 20% of her time to legitimate Senate business and 80% of her time

to tasks that benefited petitioner personally.

Ms. Pauciello received total compensation of $443,412 from the

Senate during 2001–2005. We conclude that 80% of that amount, or

$354,730, is includible in petitioner’ gross income. We have already determined that $192,409 of her wages is includible in his gross income as

excess compensation he engineered for her. See supra p. 43. To prevent

double counting, we subtract the latter number from the former and calculate $162,321 as the additional amount includible in his gross income.

iii.

Maryann Quartullo

Ms. Quartullo held a secretarial position in the Philadelphia district office, working as Ms. Pauciello’s subordinate. The evidence established that Ms. Quartullo devoted significant time to bookkeeping for

petitioner’s personal business activities and campaign accounting for petitioner and his political allies. She also devoted considerable time to

purchasing consumer goods that petitioner requested. On the other

hand, she appears to have performed legitimate secretarial services for

Ms. Pauciello and to have rendered meaningful constituent services.

Making our best estimate based on the evidence we heard, we find that

Ms. Quartullo devoted 60% of her time to legitimate Senate business

and 40% of her time to tasks that benefited petitioner personally.

Ms. Quartullo received total compensation of $201,640 from the

Senate during 2001–2005. We conclude that 40% of that amount, or

$80,656, should reasonably be included in petitioner’ gross income.

However, the adjustment respondent has determined with respect to

Ms. Quartullo is limited to $56,716, the excess compensation he engineered for her. See supra p. 43. Treating that determination as a concession, we hold that petitioner must include in gross income only

$56,716 on account of services rendered by Ms. Quartullo.

[*49]

iv.

Lillian Cozzo

Ms. Cozzo made petitioner’s travel arrangements, including vacation travel plans for him, his girlfriends, and other friends who accompanied him. She ran errands and scheduled meetings for petitioner’s

political campaign and the campaigns of other candidates. But the evidence established that she performed legitimate work for the Senate,

which included rendering constituent services, keeping track of petitioner’s daily schedule when he was in Philadelphia, and maintaining a

log of Philadelphia district office employees’ leave balances. Making our

best estimate based on the evidence we heard, we find that Ms. Cozzo

devoted 50% of her time to legitimate Senate business and 50% of her

time to tasks that benefited petitioner personally.

Ms. Cozzo received total compensation of $333,111 from the Senate during 2001–2005. We conclude that 50% of that amount, or

$166,556, should reasonably be includible in petitioner’ gross income.

However, the adjustment respondent has determined with respect to

Ms. Cozzo is limited to $131,998, the excess compensation he engineered

for her. See supra p. 43. Treating that determination as a concession,

we hold that petitioner must include in gross income only $131,998 on

account of services rendered by Ms. Cozzo.

Jamie Spagna and Gina Novelli

Ms. Spagna and Ms. Novelli had largely overlapping duties, focusing chiefly on petitioner’s personal and business affairs. Both served

as assistants to Ms. Arnao and undertook bookkeeping and campaign

accounting for petitioner or his political allies. They ran errands for petitioner and planned and executed his biannual political fundraisers under Ms. Arnao’s direction. Ms. Spagna was primarily responsible for

purchasing—and shipping to petitioner at his various residences and

vacation destinations—the tools and consumer goods that he desired. In

an email explaining the duties Ms. Novelli and Ms. Spagna were expected to perform, Ms. Arnao listed 17 specific tasks. Not a single task

referred to legitimate Senate work.

Respondent appears to contend that Ms. Spagna and Ms. Novelli

devoted 100% of their time to petitioner’s personal and political affairs.

We find that allocation untenable. They could not have spent the entirety of every work week on non-Senate-related tasks. Both credibly

testified that they attended to various constituent requests and participated in community meetings. Making our best estimate based on the

[*50] evidence we heard, we find that Ms. Spagna and Ms. Novelli devoted 40% of their time to legitimate Senate business and 60% of their

time to tasks that benefited petitioner personally.

Ms. Spagna and Ms. Novelli received from the Senate during

2001–2005 total wages of $167,119 and $57,018, respectively. Neither

received any excess compensation. We accordingly include in petitioner’s gross income 60% of their aggregate wages, or $100,271 and

$34,211, respectively.

vi.

Lou Leonetti

Mr. Leonetti was one of petitioner’s drivers in the Philadelphia

district office. We find that the bulk of his chauffeuring activity related

to petitioner’s personal and political affairs rather than his legitimate

Senate business. Apart from chauffeuring petitioner, his duties consisted of running errands and performing clerical tasks. Respondent

contends that Mr. Leonetti devoted 60% of his time to petitioner’s personal and political affairs, and we find this percentage reasonable.

Mr. Leonetti received total compensation of $169,006 from the

Senate during 2001–2005. We conclude that 60% of that amount, or

$101,404, should reasonably be includible in petitioner’ gross income.

However, the adjustment respondent has determined with respect to

Mr. Leonetti is limited to $69,752, the excess compensation petitioner

engineered for him. See supra p. 43. Treating that determination as a

concession, we hold that petitioner must include in gross income only

$69,752 on account of services rendered by Mr. Leonetti.

vii.

David Nelson

Mr. Nelson was petitioner’s other driver in the Philadelphia district office. We find that the bulk of his chauffeuring activity related to

petitioner’s personal and political affairs rather than his legitimate Senate business. Apart from chauffeuring petitioner, his duties consisted of

running errands and performing clerical tasks. Respondent contends

that Mr. Nelson devoted 60% of his time to petitioner’s personal and political affairs, and we find this percentage reasonable.

Mr. Nelson received total compensation of $247,527 from the Senate during 2001–2005. We conclude that 60% of that amount, or

$148,516, should reasonably be includible in petitioner’ gross income.

However, the adjustment respondent has determined with respect to

Mr. Nelson is limited to $114,359, the excess compensation petitioner

[*51] engineered for him. See supra p. 43. Treating that determination

as a concession, we hold that petitioner must include in gross income

only $114,359 on account of services rendered by Mr. Nelson.

viii.

Lisa Costello

Lisa Costello was a staff member in petitioner’s Philadelphia satellite office at Eighth and Clearfield Streets. Apart from her Senate

work, she provided housecleaning services for petitioner at his Green

Street home. Respondent determined that she devoted 25% of her time

to these housekeeping duties. We find that allocation reasonable, particularly since respondent has not sought any allocation for housecleaning services provided by Ms. Barrett. See supra p. 27. Ms. Costello received from the Senate during 2001 total wages of $28,964. She received

no excess compensation. We accordingly include in petitioner’s gross

income 25% of her wages, or $7,241.

ix.

Petitioner’s Arguments

Petitioner advances four principal arguments against the conclusions reached above. First, he seeks to diminish the amount of time his

employees spent managing his personal, business, financial, and political affairs. However, the evidence at trial established that his Philadelphia district office staff completed all the accounting and recordkeeping

for his personal investments, his law firm expenses, his vacation properties, his Riverview Farm, his political campaigns, and his PACs. They

did all the accounting for Citizens Alliance, its subsidiaries, and their

real estate holdings. They did significant accounting work for the PACs

and campaigns of his political allies. Apart from performing accounting

services, making disbursements, and the like, petitioner’s employees

were required to produce periodic summary reports for his use. And

they spent countless hours discharging the personal tasks he repeatedly

assigned to them. The value of these services constitutes gross income

to petitioner. He is correct that the precise allocation of his employees’

time cannot be calculated with mathematical precision. But he has not

shown by a preponderance of the evidence that the Commissioner’s reconstruction of his income (as modified by the adjustments we have

made) was “arbitrary or erroneous.” See Walquist, 152 T.C. at 67–68.

Second, petitioner urges that his employees performed the services described above as volunteers, or that they did all this work outside

of their Senate workday. Their uniform testimony at trial was to the

contrary. His staffers viewed these personal and political tasks as part

[*52] of their job duties. They did not regard their fulfillment of these

tasks as gifts or favors to petitioner.

Third, petitioner contends that the percentage of staff time devoted to personal and political tasks, while indicative of the loss incurred

by the Senate, has no relevance in determining his gross income. Again

we disagree. “Gross income includes income realized in any form,

whether in money, property, or services.” Treas. Reg. § 1.61-1(a). Petitioner derived an economic benefit equal to the fair market value of the

personal and political services provided to him by his staff. He would

have had to pay out of pocket for these services had his staff not provided

the services at Senate expense.

Finally, petitioner contends that he should not be taxable on the

value of services rendered by his staff to his family members, his girlfriends, his political allies, and other third parties. As explained above,

however, it is ultimately irrelevant where petitioner chose to divert the

misappropriated funds. See supra pp. 45–46. Services rendered to petitioner’s family members and girlfriends are taxable to the same extent

as services rendered to petitioner himself. See Estate of Geiger v. Commissioner, 352 F.2d at 231–32; Bailey, 52 T.C. at 119. And he would not

have directed staff to render services to his political allies—the other

objects of his bounty—unless he thought he would profit thereby. We

reject his argument that gaining such “political capital” was an intangible benefit that had no economic value.

Harrisburg Offices

Charles Sholders

Mr. Sholders served as petitioner’s driver in Harrisburg and as

the manager of petitioner’s Riverview Farm. His involvement with the

farm became so demanding that he and his wife eventually moved onto

the property. He cared for the horses, made 4-hour roundtrips to purchase farm equipment, oversaw the planting of crops, and facilitated delivery of Citizens Alliance equipment to the farm. He performed these

tasks during his Senate workday because most work needed to be completed during daylight hours when contractors were available. He spent

about 80% of his workday on the farm when the Senate was not in session. When the Senate was in session, he performed clerical work and

served as petitioner’s driver. Respondent determined that he devoted

80% of his time to tasks that benefited petitioner personally. We find a

70% allocation to be reasonable in the light of the trial evidence.

[*53] Mr. Sholders received total compensation of $218,515 from the

Senate during 2001–2005. We conclude that 70% of that amount, or

$152,961, should reasonably be includible in petitioner’ gross income.

However, the adjustment respondent has determined with respect to

Mr. Sholders is limited to $113,949, the excess compensation petitioner

engineered for him. See supra p. 43. Treating that determination as a

concession, we hold that petitioner must include in gross income only

$113,949 on account of services rendered by Mr. Sholders.

ii.

Sue Swett

Ms. Swett, petitioner’s longtime secretary in the Harrisburg district office, performed duties similar to those discharged by Ms. Arnao

and Ms. Cozzo in Philadelphia. She made dinner and travel reservations, ordered various consumer goods as petitioner desired, and funneled personal requests from petitioner to the relevant Harrisburg staff

members. She acted as a liaison for petitioner for all work being completed on the farm, whether by Senate staffers, petitioner’s personal

staff, or independent contractors. She spent portions of her Senate

workday ordering farm equipment. And she visited the farm almost

daily—usually during Senate work hours—and updated petitioner on

the progress of various projects. Respondent contends that she devoted

80% of her time to tasks that benefited petitioner personally. That allocation seems high to us; we find that a reasonable allocation is 65%, the

same figure we have determined for Ms. Arnao.

Ms. Swett received total compensation of $379,964 from the Senate during 2001–2005. We conclude that 65% of that amount, or

$246,977, should reasonably be includible in petitioner’ gross income.

However, the adjustment respondent has determined with respect to

Ms. Swett is limited to $159,049, the excess compensation petitioner engineered for her. See supra p. 43. Treating that determination as a

concession, we hold that petitioner must include in gross income only

$159,049 on account of services rendered by Ms. Swett.

iii.

Gerald Sabol

Mr. Sabol was a budget analyst on the SDAC staff in Harrisburg.

In 2003 he became deeply involved in Riverview Farm. His responsibilities included the “layout of the pastures and fields, planting and fertilizing, caring for and feeding livestock, rehabilitating structures on the

farm, fencing, creating a pond, and designing barns.” Farm matters

needed to be addressed during the workday, and Mr. Sabol indicated in

[*54] emails to Mr. Dlugolecki (the chief of staff) that he had little time

to complete Senate budget work because of the toll the farm was taking

on him. Respondent determined that Mr. Sabol spent 60% of his Senate

workday on farm-related business for petitioner. Petitioner does not

dispute that percentage allocation, which we deem conservative.

Mr. Sabol received from the Senate during 2003 total wages of

$78,372. He received no excess compensation. We accordingly include

in petitioner’s gross income 60% of his wages, or $47,023.

iv.

Daniel Coyne

Mr. Coyne was an IT specialist on the SDCS staff in Harrisburg.

He provided some IT support to petitioner’s Harrisburg office, but he

rendered most of his services to petitioner personally. He performed

regular maintenance—including software and security updates, network extensions and repairs, and the addition of new functionality—to

the computer and cell phone networks in petitioner’s homes, cars, vacation destinations, and Riverview farm.

Mr. Coyne also devoted significant time to political campaigns in

which petitioner had an interest. Petitioner offered Mr. Coyne’s computer services to Bob Casey’s gubernatorial campaign. Mr. Coyne configured the campaign email server, set up computers and telephones,

and secured campaign worksites. The evidence in the criminal trial indicated that this campaign work “consumed” Mr. Coyne, and he testified

that it was “a very tough time.” Mr. Coyne then transitioned into a support role for petitioner’s 2004 reelection campaign, in which Senate employees were “all hands on deck.” Respondent determined that Mr.

Coyne devoted 50% of his Senate workday to tasks benefiting petitioner,

and we find this allocation reasonable, indeed conservative.

Mr. Coyne received from the Senate during 2001 and 2002 total

wages of $50,503. He received no excess compensation. We accordingly

include in petitioner’s gross income 50% of his wages, or $25,252.

Don Wilson

Mr. Wilson was employed as a computer specialist for SCDS during 2001–2005, but he was stationed in the Philadelphia district office.

Petitioner regarded Mr. Wilson as one of his personal IT assistants. Mr.

Wilson spent many hours providing computer assistance, not only to petitioner, but to his family, friends, girlfriends, political allies, and favored political candidates. Mr. Wilson installed wireless networks,

[*55] routers, computers, printers, stereo systems, video game boxes, security cameras, and other equipment at petitioner’s Green Street home

and his Ventnor and Margate beach properties. He made three 5-day

trips to Florida and two trips to Martha’s Vineyard to perform similar

tasks there. He installed and repaired radios, DVD players, and GPS

systems in petitioner’s cars and in the vehicles used by his family and

girlfriends.

The scale of Mr. Wilson’s services to petitioner ratcheted up in

2004 and 2005. He spent long hours providing computer and IT services

to petitioner’s 2004 reelection campaign and to campaigns of four other

candidates petitioner favored. When petitioner was alerted to the FBI

investigation, he tasked Mr. Wilson (along with Mr. Luchko) with implementing “wiping” programs on computers and ensuring staff compliance with petitioner’s security directives.

Respondent determined that Mr. Wilson during 2001–2003 devoted 30% of his Senate workday to tasks benefiting petitioner personally. This percentage rose to 60% during 2004 and 50% in 2005. Petitioner has not shown these allocations to be unreasonable. The allocations determined by respondent produce a weighted average of roughly

43% as applied to Mr. Wilson’s aggregate 5-year salary.

Mr. Wilson received from the Senate during 2001–2005 total

wages of $204,327. He received no excess compensation. We accordingly

include in petitioner’s gross income roughly 43% of his wages, or

$88,058.

vi.

Petitioner’s Arguments

Petitioner does not dispute that the five staff members listed

above provided personal services to him, and he has not shown that the

allocation percentages we have determined are unreasonable. Rather,

he advances substantially the same arguments that he urged when insisting that excess compensation he engineered for his employees should

not be included in his gross income. He contends that his staff members

performed their services as volunteers or outside their normal Senate

workday, that he should not be taxable on services rendered to his family, friends, and political allies, and that his employees’ behavior, while

relevant in ascertaining the loss incurred by the Senate, is irrelevant in

determining his gross income. We have rejected these arguments previously, see supra pp. 51–52, and we reject them again now.

[*56] In making these percentage allocations from petitioner’s Philadelphia and Harrisburg staffs, we acknowledge that our estimates are

necessarily just that—estimates. But we note that the IRS did not make

any allocations from other staff members who rendered political and/or

personal services to petitioner. Four other members of the district office—Mr. Engelke, Ms. Freeland, Mr. Hawkins, and Ms. Kirby—

regularly performed campaign-related activities for petitioner and/or

data entry for contributions to his political campaigns. See supra p. 15.

Mr. Marrone performed significant work relating to petitioner’s political

campaigns and supervised the renovation and remodeling of his Green

Street home. See supra pp. 10, 14–15. Gary Tuma from the Harrisburg

office likewise assisted petitioner with his political campaigns. See supra p. 16. Mr. Craig, a Senate attorney, assisted him with the Jubelirer

lawsuit and the Ventnor Dunes Project. See supra pp. 24, 31. Messrs.

Luchko and Eister, both employed by SDAC, served as petitioner’s personal IT assistants and spent many hours implementing the computer

wiping programs he directed. See supra pp. 21–22, 32–33. To the extent

the IRS refrained from imputing gross income to petitioner on account

of these other staffers’ work, its aggregate allocations were conservative

(i.e., favorable to petitioner).

Summarizing our conclusions above, we find that petitioner for

2001–2005 must include $1,489,554 of unreported income with respect

to services performed by his Philadelphia and Harrisburg staff. Of this

total, $1,009,713 represents the excess compensation he diverted to 8

employees. See supra p. 43. The balance, or $479,841, represents percentage allocations to account for time his staff devoted to his personal

matters, his political activities, and the activities of his political allies.

See supra pp. 46–55. The results are shown in the table below:

Office

Form W–2

Wages

Excess

Compensation

Additional

Time-Based

Allocation

Total Gross

Income to

Petitioner

Ruth Arnao

Philadelphia

$287,608

$171,481

$15,464

$186,945

Roseanne Pauciello

Philadelphia

443,412

192,409

162,321

354,730

Maryann Quartullo

Philadelphia

201,640

56,716

-0-

56,716

Lillian Cozzo

Philadelphia

333,111

131,998

-0-

131,998

Lou Leonetti

Philadelphia

169,006

69,752

-0-

69,752

David Nelson

Philadelphia

247,527

114,359

-0-

114,359

Charles Sholders

Harrisburg

218,515

113,949

-0-

113,949

Sue Swett

Harrisburg

379,964

159,049

-0-

159,049

Jamie Spagna

Philadelphia

167,119

–

100,271

Employee

[*57]

Gina Novelli

Philadelphia

57,018

–

34,211

Lisa Costello

Philadelphia

28,964

–

7,241

Gerald Sabol

Harrisburg

78,372

–

47,023

Daniel Coyne

Harrisburg

50,503

–

25,252

Don Wilson

Philadelphia

204,327

–

88,058

$479,841

$1,489,554

–

Total

–

$1,009,713

Senate Contractors

By virtue of his official positions, petitioner was able to direct the

hiring of independent contractors who were paid by the Senate. Most of

these contractors did little or no actual legislative work. To the extent

they performed services at all, those services were rendered chiefly to

petitioner personally, to his political campaigns, and to the campaigns

of other politicians he supported. Petitioner falsely submitted these contracts for approval by the chief clerk knowing that little to no Senate

work would occur.

Frank Wallace

Mr. Wallace was retained by the Senate as a contractor from the

early 1990s through 2005. The stated purpose of his contract was to

serve as “Private Investigator” who would provide consulting and “information analysis” to SDAC. Beginning in 2001 or earlier, however, Mr.

Wallace’s mission was to render private investigation and related services to petitioner.

dirt on petitioner’s political foes or personal enemies. Mr. Wallace, for

example, was directed to investigate public officials who had criticized

petitioner and complaints made to police about a dumpster on petitioner’s property. Mr. Wallace swept petitioner’s home and offices for

listening devices or “bugs.” And he often provided physical security for

political candidates whom petitioner supported.

Respondent contends that 100% of Mr. Wallace’s time was devoted to tasks that benefited petitioner in his personal capacity. That

allocation seems high: It seems that Mr. Wallace occasionally did provide physical security to petitioner when outside the office on legitimate

Senate business. We find a reasonable allocation to be 90%.

[*58]

Howard Cain

Mr. Cain was retained as an independent contractor by the Senate after a brief stint as a Fumo for Senate volunteer. He contracted

through his business, Venture Analysis. The contract recited that Mr.

Cain would provide consulting services on local community and governance issues. But he devoted essentially all his time during 2001–2005

to personal and political campaign work for petitioner and his political

allies. According to Mr. Cain, his contract omitted the actual purpose of

his work because petitioner “couldn’t have the state pay for political

campaigns.”

Mr. Cain’s testimony indicated that he may have performed some

legitimate work for the Senate. But his testimony was vague about

when that work occurred, and it appeared to us that it occurred mainly

during the 1980s and 1990s. Petitioner in his Posttrial Briefs does not

cite a single example of any legitimate Senate work performed by Mr.

Cain during 2001–2005, the tax years at issue.

Two members of the Philadelphia office staff testified during the

criminal case that Mr. Cain performed services as a “political consultant” for petitioner. See supra p. 24. The political character of his work

is highlighted by his involvement in the Jubelirer lawsuit and the Ventnor Dunes project. See supra pp. 24, 31. In both cases he sought to

advance petitioner’s personal position, while being paid by Citizens Alliance. Petitioner has not carried his burden of proving that respondent

erred in treating 100% of the services rendered by Mr. Cain under his

Senate contract as benefiting petitioner personally.

Philip Press

Mr. Press was retained as an independent contractor by the Senate during 2002–2005. Petitioner met him while he was working on the

Casey for Governor campaign. After brief service on petitioner’s district

office staff, he was given a series of Senate contracts at petitioner’s direction. These contracts said that Mr. Press would provide consulting

services regarding “e-commerce issues” and “community governance issues.”

In fact, Mr. Press’s services consisted almost entirely of political

campaign work, for both petitioner and his political allies. Mr. Cain described him as a “foot soldier” for petitioner, i.e., someone who accompanied petitioner to political events and performed miscellaneous tasks for

him. A witness during the criminal trial described him as a “body man”

[*59] and “foot soldier” who performed political tasks for petitioner, his

political allies, and political candidates he favored.

Mr. Press represented in a 2003 email to chief of staff Mr. Dlugolecki that he had done no legislative work. Ms. Quartullo and Ms. Spagna knew that Mr. Press was involved in “political campaigns” and could

identify no legislative work he had performed. Like Mr. Cain, Mr. Press

assisted petitioner by promoting candidates whom petitioner favored

and opposing candidates whom petitioner disliked.

Petitioner in his Posttrial Briefs cites only one example of legitimate Senate work that Mr. Press performed during 2002–2005. Respondent determined that 100% of the services Mr. Press performed under his Senate contracts benefited petitioner personally. Petitioner has

not carried his burden of proving that allocation to be unreasonable.

Michael Palermo

Mr. Palermo was one of the two “ghost contractors” to whom petitioner awarded (or caused to be awarded) Senate consulting contracts.

During 2000–2004 he was hired as a consultant to provide SDAC with

“fiscal and operational analysis of interstate transportation issues.” He

in fact performed no services whatsoever for the Senate.

During legislative sessions, Mr. Palermo regularly hosted petitioner at his Hummelstown residence. When petitioner expressed interest in owning a farm, Mr. Palermo helped make that happen. He attended the auction to purchase Riverview Farm, oversaw eviction of the

existing tenant, supervised renovation and repairs, planned crop rotations, managed invoices, and arranged for the purchase of needed equipment. His monthly invoices supplied no detail regarding the nature of

his work, simply stating that he had devoted a specific number of hours

to “services rendered.” He eventually pleaded guilty to Federal conspiracy charges arising from his receipt of this no-work contract arranged

by petitioner.

Respondent determined that 100% of the services Mr. Palermo

performed under his Senate contract benefited petitioner personally.

Petitioner has identified no legitimate work Mr. Palermo actually performed for the Senate during 2001–2004. We accordingly find respondent’s allocation to be reasonable.

[*60]

Mitchell Rubin

Mr. Rubin was a close friend of petitioner and the eventual husband of Ms. Arnao. With Fred Blum he owned and operated B&R, which

supplied support services for law offices. Mr. Rubin was an important

political fundraiser for petitioner and his political allies, particularly

those campaigning for judicial office.

Beginning in October 1999 petitioner caused SDAC to contract

with B&R to provide “research . . . [and] constituent service.” Under this

contract Mr. Rubin was paid $30,000 annually for four years. To the

extent Mr. Rubin provided any services at all, they were not rendered to

SDAC, but to petitioner and his political allies. Like Mr. Palermo, he

submitted monthly invoices to SDAC that simply stated “services rendered” and the dollar amount of the invoice.

No member of the SDAC staff, petitioner’s Harrisburg staff, or

petitioner’s Philadelphia district office could identify any work Mr. Rubin or B&R had performed for the Senate. In 2010 Mr. Rubin pleaded

guilty to obstruction of justice charges arising from his receipt of this nowork contract arranged by petitioner.

We find that Mr. Rubin performed no services for the Senate. Rather, petitioner used the contract as a tool to divert Senate funds to Mr.

Rubin as a reward for his friendship, political assistance, and fundraising services. In his Posttrial Brief petitioner points to a filing by the

Federal government in Mr. Rubin’s criminal case which suggests that

Mr. Rubin acted as a “liaison” between petitioner’s Senate office and

other entities. Contrary to petitioner’s view, this observation supplies

no evidence that Mr. Rubin performed Senate-related work, and petitioner has failed to cite a single example of any legislative tasks Mr.

Rubin actually discharged. We accordingly sustain respondent’s determination that 100% of the services Mr. Rubin performed under his Senate contract benefited petitioner personally.

In the income tax Notice of Deficiency respondent calculated the

amounts received by each contractor in the same fashion as the amounts

received by Senate employees, by taking the average of the total

amounts shown on the summary charts for each contractor and including that amount in petitioner’s gross income for each year. Additionally,

because the contracts were awarded at various times during the calendar year, these amounts did not tally with the payments actually received by the contractors during 2001–2005. Respondent refined his

[*61] calculations in his first Amended Answer using the Senate-issued

contracts to correct these errors. Applying the percentage allocations

we have determined against the corrected amounts of the Senate’s annual payments to each contractor, we determine additional inclusions in

petitioner’s gross income as follows:

2001–2005 Contract Payments

Benefit to

Petitioner

Gross Income

to Petitioner

Frank Wallace

$199,564

90%

$179,608

Howard Cain

386,750

100

386,750

Philip Press

165,625

100

165,625

Michael Palermo

229,500

100

229,500

Mitchell Rubin

112,500

100

112,500

–

$1,073,983

Employee

Total

Unreported Income from Citizens Alliance

Although organized as a public charity, Citizens Alliance operated largely as a “constituent service” arm of petitioner’s Philadelphia

district office. But besides rendering services to local residents, Citizens

Alliance conferred numerous benefits on petitioner, his personal friends,

and his political allies. These included tools, consumer goods, farm

equipment, legal services, political polling, and travel expenses.

Tools

Petitioner used Citizens Alliance to fund the collections of tools

he amassed at his residences. These tools were ordered online by his

staff members in Philadelphia and Harrisburg. The resulting expenses

were defrayed by Citizens Alliance, generally by charges to its credit

cards.

Given the destruction of most Citizens Alliance records by petitioner’s “wiping” programs, FBI Special Agent Humphreys subpoenaed

the vendors from whom the tools were purchased. Mr. Burris, the foreman at Citizens Alliance, helped the FBI determine which purchases

were for the benefit of the organization rather than petitioner personally. The FBI special agents were conservative in allocating tool purchases to petitioner. For example, if tools were purchased online,

shipped to the New Jersey shore, or purchased in multiple matched sets,

the FBI special agents presumed they were for petitioner’s benefit.

[*62] On the basis of the FBI’s reconstruction, the IRS determined that

petitioner during 2001–2004 diverted the following amounts from Citizens Alliance to purchase tools for his own use:

Year

Dollar Value of Tools

2001

$29,328

2002

13,751

2003

19,721

2004

3,690

Total

$66,490

At trial and in his Posttrial Briefs, petitioner admits to having

received the tools. He concedes that the aggregate purchase price for

the tools constitutes taxable income to him, and he does not dispute the

dollar amounts shown above. We accordingly sustain respondent’s determination that these amounts are includible in his gross income for

2001–2004.

Consumer Goods

Petitioner used Citizens Alliance to fund the purchase of other

consumer goods. During the summer he and Ms. Arnao hosted weekly

barbeques and two major parties at his New Jersey beach properties.

Up to 100 guests were invited, including personal friends, campaign contributors, and political allies. He and Ms. Arnao purchased groceries

and supplies for these parties with shopping sprees at nearby retailers,

typically financed at Citizens Alliance’s expense.

On visits to Sam’s Club petitioner and Ms. Arnao charged to Citizens Alliance’s credit cards other personal items they desired. Petitioner selected additional consumer goods from catalogs or retail websites and directed his Senate staff to have them shipped to him. Citizens

Alliance was likewise charged for these items, which included such diverse items as vacuum cleaners, a camcorder, mapping software, leather

goods, items for petitioner’s boats, a Weber grill, and hairspray.

On the basis of evidence compiled by FBI Special Agent Nichilo

respondent determined that petitioner during 2001–2004 diverted the

following amounts from Citizens Alliance to purchase consumer goods

for his use:

[*63]

Year

Dollar Value of Consumer Goods

2001

$8,979

2002

10,653

2003

3,882

2004

508

Total

$24,022

In his Posttrial Brief, petitioner conceded that “certain Citizens

Alliance expenditures . . . specifically . . . consumer goods . . . may constitute income.” He acknowledged as much at trial, and he offered no

evidence to counter the amounts shown above. We accordingly sustain

respondent’s determination that these amounts are includible in his

gross income for 2001–2004.

Farm Equipment

During 2003 petitioner directed that Citizens Alliance provide or

purchase farm equipment for his personal use on Riverview Farm. He

also directed that Citizens Alliance fund the repair of certain equipment.

These outlays included:

•

Purchase of a bulldozer for $27,000 after Mr. Jack informed petitioner that he required this equipment to excavate the property; 5

•

Repairs to the bulldozer totaling $16,000, five months after it was

purchased;

•

A Polaris ATV owned by Citizens Alliance that was used on the

farm during 2003;

•

A backhoe owned by Citizens Alliance that remained on the farm

from June through October 2003 and required repairs exceeding

$1,000;

•

A Bobcat owned by Citizens Alliance that remained on the farm

from June 2003 through February 2005; and

•

A dump truck owned by Citizens Alliance that remained on the

farm for approximately two months during 2003.

5 The used bulldozer was evidently not worth $27,000. See supra p. 27. But

that was the amount Citizens Alliance paid at petitioner’s direction.

[*64] FBI Special Agent Nichilo calculated fair rental values for the

Citizens-Alliance-owned equipment that was shuttled to the farm. For

this purpose he calculated rental rates using the Blue Book for Construction Equipment, which publishes rental figures for such items. He

then multiplied the applicable rate by a conservative estimate of how

long the equipment remained on the farm.

In the Notice of Deficiency respondent determined that petitioner

received $48,237 in gross income from the purchase of the bulldozer, repairs to it, and accessories purchased and added to the Polaris ATV. In

his Second Amendment to Answer respondent alleged an increased deficiency of $20,422 to account for the fair rental values of the backhoe,

the Bobcat, and the dump truck, which were omitted from the Notice of

Deficiency. (Respondent excluded the purchase price of the Polaris ATV

itself, evidently because it was acquired many years previously and fully

depreciated.) The total amount of gross income that respondent asserts

for 2003 is thus $68,659.

We find that petitioner recognized gross income in an amount

equal to what Citizens Alliance paid to purchase and repair the bulldozer. Although he insists that the bulldozer was meant to return to

Philadelphia for Citizens Alliance’s use, we are not convinced. Citizens

Alliance had no use for a bulldozer. The projects it completed using its

own laborers were limited to neighborhood beautification and repairs; it

invariably contracted out major projects that would require excavation.

Ms. Arnao’s testimony at trial confirmed that a bulldozer could not fit

through the narrow streets of South Philadelphia where Citizens Alliance’s garage was located. We find that the bulldozer was purchased

solely for petitioner’s benefit and that the cost of purchasing and repairing it constituted gross income to him. See Estate of Geiger v. Commissioner, 352 F.2d at 231 (“Income . . . is not restricted to cold cash in a

taxpayer’s fist.”). Likewise, the accessories mounted to the Polaris ATV

for use on his farm constitute income to him, as they were never used to

benefit Citizens Alliance.

In his Posttrial Briefs petitioner acknowledges that he used the

backhoe, the Bobcat, and the dump truck on his farm. But he urges that

he derived no taxable benefit because he was simply “borrowing” the

equipment. In the real world one does not “borrow” heavy-duty construction equipment; one rents it. By “borrowing” the equipment petitioner saved thousands of dollars by avoiding the need to hire contractors to complete the work that Mr. Jack was doing on the farm. Petitioner is taxable on the fair rental values of the equipment whose use he

[*65] enjoyed. See, e.g., Hornung v. Commissioner, 47 T.C. 428, 437, 440

(1967) (finding that the taxpayer’s “free use” of two Ford Thunderbird

convertibles constituted gross income).

Respondent bears the burden of proof with respect to the fair

rental values of the backhoe, the Bobcat, and the dump truck. We find

that he has satisfied this burden. For all the equipment in question, we

sustain respondent’s determination that $68,659 is includible in petitioner’s 2003 gross income on account of farm equipment funded by Citizens Alliance.

Cell Phone Expenses

During 2002–2004 Citizens Alliance paid the cell phone bills for

Nicole Fumo (petitioner’s daughter), Mr. Marrone (his son-in-law), and

Messrs. Nelson and Leonetti (his two drivers in Philadelphia). In his

Second Amendment to Answer, respondent alleged increased deficiencies on the ground that the expenses thus paid by Citizens Alliance constituted gross income to petitioner. Respondent based these amounts on

the trial testimony and account records introduced into evidence at trial,

as follows:

Year

Gross Income to Petitioner

2002

$3,982

2003

2,245

2004

2,665

Total

$8,892

The Senate did not authorize the issuance of Senate phones to

members’ chauffeurs, who were not supposed to be on the Senate payroll

anyway. And the Senate did not authorize the issuance of cell phones

to Senators’ family members or low-level staff (Mr. Marrone was so employed until 2002). But petitioner wished to have these four people at

his beck and call immediately. Unwilling to pay the cost of their cell

phone service himself, he directed Citizens Alliance to pay the freight.

Doing so had no rational connection to its charitable mission.

We conclude that petitioner realized an economic benefit by deploying Citizens Alliance’s funds to finance cell phone service for his

daughter, his son-in-law, and his two drivers. See Estate of Geiger v.

Commissioner, 352 F.2d at 231 (“These beneficiaries were the objects of

[his] bounty, not the [organization’s].”). Petitioner plainly benefited by

[*66] guaranteeing that his chauffeurs could respond to his directives at

once. And he benefited by ensuring instantaneous communication with

his daughter and with Mr. Marrone (who was charged with supervising

renovations to the Green Street home).

Petitioner urges that the cell phone owner was the direct beneficiary of the subsidized phone service. While that may be true, petitioner

was the indirect beneficiary. See Bailey, 52 T.C. at 119. He exercised

dominion and control over Citizens Alliance’s funds to provide free cell

phone service to the objects of his bounty. That is sufficient to include

these amounts in his gross income. Finding that respondent has carried

his burden of proof on this point, we sustain the inclusion of an additional $8,892 in petitioner’s gross income for 2002–2004.

Vehicles

Through Eastern Leasing, its for-profit subsidiary, Citizens Alliance purchased six vehicles at petitioner’s direction:

•

A Ford Ranger purchased for $21,070;

•

A Ford pickup truck purchased for $17,196;

•

A Jeep Wrangler purchased for $25,630;

•

A Lincoln Navigator purchased in 2000 for $52,789;

•

A Chrysler minivan purchased in 2001 for $36,697; and

•

A Cadillac Escalade purchased in 2003 for $34,635.

Notes appearing on the purchase documents for each vehicle reference “Senator Fumo” as the buyer. All documents showing repairs to

the vehicles list him as the customer. While the vehicles were titled to

Eastern Leasing or Citizens Alliance, the evidence establishes that petitioner directed their purchase, a fact he does not contest. Citizens Alliance, usually through Eastern Leasing, paid all expenses relating to

these cars and trucks, including repairs, insurance, upgrades to navigation systems, parking tickets, and payments for toll violations incurred

by the vehicle drivers.

Ms. Arnao, who had served as executive director of Citizens Alliance, testified credibly on this subject at trial. She indicated that only

two of the vehicles listed above were regularly used by the laborers the

[*67] charity employed—the Ford Ranger and pickup truck. Both were

used by Citizens Alliance’s workmen to perform constituent services,

with the latter being used “all the time” for that purpose before being

sold to Mr. Palermo in 2004.

The Jeep Wrangler was driven primarily by Ms. Arnao. But she

was the executive director of the organization at the time. Citizens Alliance issued her Form 1099–MISC, Miscellaneous Income, reflecting

the value of its use, and she included that amount as income on her Form

1040, U.S. Individual Income Tax Return. Respondent has not convinced us that Ms. Arnao’s use of this vehicle justifies an inclusion in

petitioner’s gross income.

We find that the Chrysler minivan was predominantly used by

petitioner himself. The Senate provided him with a Cadillac, but he

regularly drove the minivan for personal travel. Ms. Egrie testified that

she never saw anyone besides petitioner or Ms. Arnao driving the

minivan. Mr. Nelson (one of petitioner’s drivers) and Mr. Fonseca (petitioner’s butler) both thought he owned the minivan.

The evidence established that the other two cars—the Cadillac

Escalade and Lincoln Navigator—were used almost exclusively by petitioner, his Senate staff, his consultants, and/or his political allies, including Frank and Christian DiCicco. The cars were rarely seen at the

Citizens Alliance headquarters and were typically parked at petitioner’s

Philadelphia district office or his properties on the New Jersey shore.

Petitioner’s Senate staffers and his political consultants had essentially

unfettered access to these vehicles. Staff members’ use became so pervasive that Ms. Arnao had to distribute a “vehicle sign-out sheet” to all

employees in the district office.

While conceding that he “permitted Citizen Alliance funds to be

used to purchase” the Escalade and the Navigator, petitioner urges that

he “certainly did not assume actual command over the cars or over the

funds used to purchase the cars.” This is a recurring theme in his

Posttrial Briefs—that he should be taxable only on benefits that he personally received in the form of tangible property or cash. But the law is

well established that a person is taxable, not only on property he receives himself, but on the value of property he causes to be diverted to

the objects of his bounty. See Estate of Geiger v. Commissioner, 352 F.2d

at 231; Bailey, 52 T.C. at 119; Cruea, 50 T.C.M. (CCH) at 1380–81.

[*68] By providing his staff with free use of two cars, petitioner enabled

them to discharge quickly and efficiently the errands and other personal

tasks he incessantly assigned them. By giving his staff and political

allies access to these prestige vehicles, he cemented their loyalty to him

and enhanced their status as his emissaries. Petitioner is correct that

the value of these intangible benefits, considered in isolation, would be

hard to calculate scientifically. But the Commissioner did not act arbitrarily or unreasonably in using, as an index of the value petitioner received, the value of the property he diverted to the objects of his bounty.

See Estate of Geiger v. Commissioner, 352 F.2d at 231.

We accordingly conclude that petitioner must include in his gross

income the value that he, his staff, his political consultants, and his political allies derived from use of the Chrysler minivan, the Cadillac Escalade, and the Lincoln Navigator. Respondent calculated this value as

the sum of the purchase prices for the Chrysler and the Escalade (the

vehicles purchased during 2001–2005), plus the insurance, maintenance, and other costs associated with all three vehicles. Although it

may have been more accurate to use the lease value of all three vehicles,

rather than the purchase prices for only two, petitioner does not challenge the details of these calculations. We accordingly find the following

amounts includible in his gross income:

Year

Gross Income

2001

$47,708

2002

11,038

2003

45,661

2004

12,195

Total

$116,602

Services Supplied by Citizens Alliance Staff

Citizens Alliance employees provided petitioner with personal

services connected with his residences and vacation destinations, including his Green Street home, his New Jersey beach properties, and his

Riverview Farm. Citizens Alliance employees regularly hauled items to

and from the beach properties and the farm. These assignments included moving a hot tub, hauling a canoe, transporting heavy farm

equipment, and delivering a washer/dryer to Mr. Palermo’s home in

Hummelstown. Petitioner typically departed from the New Jersey shore

on Sunday night, and a town ordinance prohibited leaving trash

curbside until Monday evening. His solution was to direct Citizens

[*69] Alliance staff to drive its garbage trucks 62 miles to his New Jersey properties to pick up the trash generated by his weekend parties.

FBI Special Agent Humphreys quantified the value of these services on the basis of the mileage driven (using mapping software), toll

expense incurred, and labor. To calculate the labor value she conservatively estimated that one employee per vehicle completed each trip, then

applied Citizens Alliance’s lowest hourly wage to the estimated time

necessary to complete the trip. Petitioner does not dispute the details of

these calculations, which we find reasonable and in several respects conservative (i.e., favorable to petitioner). These calculations produce income inclusions as follows:

Year

Gross Income

2001

$2,662

2002

1,741

2003

4,028

Total

$8,431

The value of the services Citizens Alliance employees provided to

petitioner constitutes gross income to him. The Code specifies that gross

income includes income derived from services. § 61(a)(1); see Commissioner v. Glenshaw Glass, 348 U.S. 426, 431 (1955); Treas. Reg. § 1.611(a) (“Gross income includes income realized in any form, whether in

money, property, or services.”). Petitioner acknowledges in his Posttrial

Brief that these services constituted income to him, and we sustain the

income inclusions set forth in the table above.

Citizens Alliance’s Payments to Frank Wallace

Petitioner engineered Senate contracts for Frank Wallace, who

performed private investigation services for petitioner. See supra pp. 23,

57–58. During 2002 the work Mr. Wallace and his assistant performed

for petitioner resulted in charges that exceeded the maximum amount

payable under the Senate contract. Petitioner directed Citizens Alliance

to pick up the difference.

During May 2002 Citizens Alliance paid Mr. Wallace $3,250, evidenced by checks for $1,000 and $2,250. An email from Ms. Spagna confirms that he picked up these checks at the Philadelphia district office.

During petitioner’s criminal trial Mr. Wallace testified that he knew of

[*70] no connection between Citizens Alliance’s mission and his investigative work.

Because petitioner caused diversion of these funds to the private

investigator who worked exclusively for him, the amounts are includible

in his gross income. We find that respondent has carried his burden of

proof on this issue, which he raised in his Second Amendment to Answer. We accordingly sustain inclusion of this $3,2

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