UNITED STATES TAX CO

ADM .

COQ 74 D

T .C . Memo .

2008-2 2

UNITED STATES TAX CO

T

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GZ:.

JACK E . AND RUTH I . CHRISTIANS,

etit' o ers V .

COMMISSIONER OF INTERNAL REVENU , Re p nden t

cket No . 21555-07 .

bert Alan Jones ,

Gary Begun,

Fil ed Se pt ember 29, 2008 .

for petitioners .

for respondent .

MEMORANDUM OPINION

J'kCOBS,

Judge : ' This matter is before the Co urt on

respo

ent ' s motion for summary judgment f iled pu rsuant to Rul e

121 .

Petitioners

filed a response opposin

res po ndent's motion .

his case was assigned to Judge Julia n I .

dispo sition of respondent's motion for sum nary

of th e Chief Judge on Aug . 12, 2008 .

Ja cobs fo r

VEd

EP 2 9 2008

u gment by orde r

a

- 2 The issues presented are : (1) Whether petitioners, each of whom

was indicted and subsequently convicted under section 7201 fo r

willfully attempting to evade and defeat a large part of the

income tax due * * * for the calendar year 1995, by filing

and causing to be filed * * * a false and fraudulent joint

U .S . Individual Income Tax Return, Form 1040, wherein

approximately TWO MILLION NINE HUNDRED FORTY SIX THOUSAND

FIFTY dollars ($2,946,050) of income was excluded from the

return causing an underpayment of approximately EIGHT

HUNDRED TWENTY FOUR THOUSAND EIGHT HUNDRED NINETY FOUR

Dollars ($824,894)in taxes ,

are collaterally estopped from contesting their liability for the

civil fraud penalty under section 6663 for the same taxable year ;

and (2) whether petitioners are entitled to a $25,600 charitable

contribution deduction for taxable year 1995 .

All section references are to the Internal Revenue Code

(Code) as amended, and all Rule references are to the Tax Court

Rules of Practice and Procedure .

Background

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference . The parties stipulated

that any appeal in this case will lie to the Court of Appeals for

the Sixth Circuit .

The Court of Appeals for the Sixth Circuit, in United States

v . Christians , 105 Fed . Appx . 748 (6th Cir . 2004), affirmed

petitioners' convictions under section 7201 . The Court of

Appeals identified the relevant facts to be as follows .

- 3 In 1995, Meijer, Inc ., a large

etail , entered into

gotiations with the Christians [p e ition s herein] for

the purchase of their Michigan home

nd an accompanying 20acre tract of land . On the day befo e Mei ' , r made its final

offer of approximately $3 .1 million, the C

istians created

C rnerstone Management Trust, naming thems Ives as trustees,

a d deeded their property to the tru t for',$10 . The

C ristians accepted Meijer's $3 .1 million })f1fer .

A few days before the closing on

C ristians created Ottawa Trust, agai

trustees . After receiving a check w r

rnerstone Management Trust for $3,0

ristians deposited the funds in Ott

I the months following the sale, the

b the money to Barclays Bank in the

ultimately sending over $3 million t h

the nd sale, the

nam'' themselves a s

tten to the

2,69 94, th e

wa Tust's account .

Chri tians moved most

ayma Islands ,

re .

On April 15, 1996, the Christian

filed thei r

i dividual IRS Form 1040, which omit t d an reference to the

al-property sale or to the gain rea ized from it . [2l The

ristians also filed an IRS Form 104

for Cornerston e

nagement Trust . This return disclo ed the property sale,

lculated the tax due at over $1 .1 m llio, and was signed

b Jack Christians . Instead of payin the t x, however,

Jack Christians attached a disclaimer

whi h read in part :

""he assessment and payment of income taxe is voluntary

W th no distraint . . . . The above na i ed taxpayer(s )

spectfully disclaim any liability a : d decline to volunteer

ncerning assessment and payment of

ny [ a ] . " The

1 sclaimer closed by suggesting tha t

f th axpayer "shows

e tax to be zero," then the IRS has the b igation o f

i sessing any tax deficiency .

C

The IRS audited the Christians,

operate, even after Agent Rogowski

vestigation Division became involve

forced an administrative summons to

ristians produced documentation reg

operty sale and the trusts . The do

e Christians maintained control of

result, retained control over the t

operty and the proceeds from the s a

ho ref used t o

f the RS's Criminal

A it r a court

their records, th e

rdin he rea l

umen s revealed that

he t o trusts and, as

ansf r of their rea l

e.

After meeting with Agent Rogowsk

and la ter receiving

accountant's advice that the proce ds o he sal e

ie return showed a total tax of $9,4869 .

- 4 belonged on their individual tax return, the Christians

filed an amended 1995 return using an IRS Form 1040X on July

17, 1997 . The return listed the tax due at approximately

$1 .1 million,(31 stated that the "admitted tax liability is

zero," then added a tax disclaimer nearly identical to the

one attached to Cornerstone Management Trust's earlier

return .

On February 27, 2002, a grand jury indicted the

Christians on a single count of willfully attempting to

evade the payment of income tax due from the sale of their

property "by filing . . . a false and fraudulent joint U .S .

Individual Income Tax Return, Form 1040" in violation of 26

U .S .C . §7201 . The jury returned a guilty verdict against

both defendants . The court sentenced them each to 27-month

prison sentences . [ Id . at 749-750 ; joint appendix refs .

omitted . ]

On their 1995 return petitioners claimed a $25,600

charitable contribution deduction consisting of $600 in cash and

$25,000 of other property . Attached to the return was a Form

8283, Noncash Charitable Contributions, which described the

donated property as a house in good condition with a fair market

value of $25,000 and identified the donee as the Evangelistic

Center of Grand Rapids, Michigan . A letter of thanks and a

receipt for $25,000, both signed by Pastor Harry Dunn of the

Evangelistic Center, were attached to the return . In their

amended 1995 return, filed July 17, 1997, in addition to

increasing the amount of their adjusted gross income to include

the gain from the sale of property to Meijer, Inc ., petitioners

claimed an additional $120,025 charitable contribution deduction .

3The amended return increased petitioners' adjusted gross

income by $2,948,000, with the explanation "Ottawa Revocable

Living Trust Not Included in Original Filing of Form 1040", and

showed $1,118,112 as the correct amount of total tax .

- 5 Respondent issued a notice of defici ncy ti June 29, 2007 .

Respondent determined that petitioners' i come should b e

incr sed by $2,948,000 to reflect the sa e of p operty t o

Meij , Inc ., and disallowed the $25,600 hari a le contribution

deduction claimed in the original return . The r suiting tax,

acco ing to respondent, is $845,049, leaving eficiency of

$835, 80 after taking into account the amount

of tax ($9,469)

showr on the original return . Respondent acknowledges that

petitioners made a payment of $824,894 on Janua 24, 2003, which

will be applied to the deficiency amount . Resp' dent also

determined that petitioners are liable for the ction 6663 civil

fraud penalty in the amount of $626,685 .

Petitioners admit that the gain from the sale of property to

Meijer, Inc ., is includable in their income fori1995 and

generated tax . They assert, however, that their tax liability

was n understated but rather was reported by e ns of tw o

retur --a Form 1040, U .S . Individual Income Ta Return, and a

Form 41, U .S . Income Tax Return for Estates a 'd Trusts, filed

by Co erstone Management Trust .

titioners concede in their response oppo i g respondent's

motio that "the law is not generally in t eir a or", but they

maint n "they should be allowed to contes the f and penalty on

the b is of the facts which establish tha no r udulent tax

retur were filed but rather the Petition rs r if sed to pay the

- 6 original amounts due, and moved their assets out of the

jurisdiction of the United States to frustrate collection efforts

by the IRS . "

In summarizing their position, petitioners state :

This is clearly a willful refusal to pay, tax protest type

case not a fraudulent attempt to evade liability . Although

convicted of violating IRC §7201, it is clear tha t

Petitioners were engaged in conduct to attempt to validate

their incorrect positions that no taxes were due and owing

at that time .

This should not result in collateral preclusion by

fraud . It was not necessary under §7201 for the jury to

find a fraudulent filing to sustain or support the

conviction . Therefore, the facts should be viewed as

admitted by Respondent, thus precluding summary judgment on

the issue .

Petitioners also assert that they are entitled to contest

respondent's disallowance of their $25,600 claimed charitable

contribution . Finally, petitioners claim that their $824,894

payment of January 24, 2003, extinguished their tax liability .

Discussion

As a preliminary matter, we note that summary judgment is

intended to expedite litigation and avoid unnecessary and

expensive trials .

Fla . Peach Corp . v . Commissioner , 90 T .C . 678,

681 (1988) . The Court may grant summary judgment where there is

no genuine issue of any material fact and a decision may be

rendered as a matter of law . Rule 121(b) ;

Sundstrand Corp . v .

Commissioner , 98 T .C . 518, 520 (1992), affd . 17 F .3d 965 (7th

Cir . 1994) . The moving party bears the burden of proving that no

- 7 genu' a issue of material fact exists, an

the C M urt will view

any factual material and inferences in th

light most favorabl e

to t nonmoving party .

Dahlstrom v . Com Ussidner , 85 T .C . 812 ,

e made even if

821 985) . A partial summary adjudicati n may

it does not dispose of all the issues in

he ca

Naft 1 v . Commissioner, 85 T .C . 527, 529

1985)

Rule 121(b) ;

Rule 121(d )

provi es that where the moving party prop rly m

a motion for summary judgment, "an advers

upon the mere allegations or denials of

es and support s

part Y may not res t

s ch party's pleading, "

but must set forth specific facts, by aff i avit or otherwise ,

"showing that there is a genuine issue f

now turn to the first of the two

1 sues-

amely, whether

petit' ners' convictions for income tax ev sionu der section

7201 llaterally estop them from litigati g th' issue of thei r

liabi ty for the civil fraud penalty und e

Montana v . United States , 440 U .S .

sec i n 6663 .

147, 1 3-154 (1979) ,

the S reme Court provided guidance on the appl c tion of th e

doctr e of collateral estoppel as follows

"U d r collatera l

estop 1, once an issue is actually and ne

essa i y determined by

a court of competent jurisdiction, that de

ermi a ion i s

conclusive in subsequent suits based on a

iffe e it cause o f

actin involving a party to the prior liti , ati o

The two Code sections involved herein are e tion 6663 an d

secti 7201 . Section 6663 provides :

1

- 8 SEC . 6663 . IMPOSITION OF FRAUD PENALTY .

(a) Imposition of Penalty .--If any part of any

underpayment of tax required to be shown on a return is due

to fraud, there shall be added to the tax an amount equal to

75 percent of the portion of the underpayment which is

attributable to fraud .

(b) Determination of Portion Attributable to Fraud .-If the Secretary establishes that any portion of an

underpayment is attributable to fraud, the entire

underpayment shall be treated as attributable to fraud,

except with respect to any portion of the underpayment which

the taxpayer establishes (by a preponderance of the

evidence) is not attributable to fraud .

(c) Special Rule for Joint Returns .--In the case of a

joint return, this section shall not apply with respect to a

spouse unless some part of the underpayment is due to the

fraud of such spouse .

An "underpayment" for purposes of section 6663 is defined in

section 6664(a), in relevant part, as the amount by which the tax

imposed exceeds the amount shown as the tax by the taxpayer on

his return .

The record shows, and petitioners admit, that they filed a

1995 individual tax return on which they did not report the gain

from the sale of their property to Meijer, Inc ., or the tax

imposed on the gain . However, petitioners assert that their tax

liability was not understated but rather was reported by means of

two returns--a Form 1040 and a Form 1041 filed by Cornerston e

Management Trust . Petitioners made this same assertion in

appealing their convictions under section 7201 . The Court of

Appeals for the Sixth Circuit rejected this argument, stating :

- 9

this

nclusion [that

po i t ng out that

not

0 tain a fals e

th C r erstone

ch dild disclose the tax

wed and proceeded to disclaim any 1 abilitt for it . Th e

overnment prosecuted the Christian s fo r 1 ome tax evasion

ith respect to their individual tax retu

not the return

11

f Cornerstone Management Trust . An

the i

individua l

turn neither acknowledged nor pai d the t

due . No doubt ,

jury could have concluded that the ackn o

edgment of the

le and the tax due on the Cornerst ne M a

gement Trus t

rm undermined a finding that the C risti

s acte d

llfully and committed an affirmati

act off evasion . But

view of the Christians ' prior tax - filin `experiences ,

eir sudden decision no longer to us

an ccountant, their

eation of the sham trusts and offsh re a c unts and their

n-cooperative conduct once the Gove nmen' inquired about

e sale, the Christians cannot tenab y ar ,u that the jury

s compelled to reach such a conclus on o' he basis of the

rnerstone tax filing . [ United Stat s V . 1C ristians, 10 5

d . Appx . at 752] .

Nor may the Christians sidestep

hey willfully evaded their taxes] b

heir 1995 individual tax return did

tatement when read in conjunction w

anagement Trust's IRS Form 1041, wh

are mindful that petitioners, in t eir tmended return ,

admit d an underpayment of tax for 1995 .

See Badaracco v .

Commi ioner, 464 U .S . 386, 399 (1984) .'

heref e, there is no

doubt that there was an "underpayment of t .x re a red to be shown

on a turn" with respect to petitioners'

.995 urn as require d

by se ion 6663 .

titioners do not appear to argue th t th i amended

filed after they were notified tha the $ S's Crimina l

i ation Division had become involved, reme ed th e

lent underpayment with respect to th it on'final return .

as the Supreme Court noted in Bada acco Commissioner ,

464 U . S . 386, 394 (1984), "once a fraudule t ret n has bee n

filed ,

he case remains one of a false or fraud l ent return,'

regard1l ss of the taxpayer's later revised cond u

for purposes

of cri

nal prosecution and civil fraud l i 11 ilit

and " a

taxpay

by sub

who submits a fraudulent return d U s no

quent voluntary disclosure" .

purge the fraud

- 10 Section 7201 provides :

SEC . 7201 . ATTEMPT TO EVADE OR DEFEAT TAX .

Any person who willfully attempts in any manner to

evade or defeat any tax imposed by this title or the payment

thereof shall, in addition to other penalties provided by

law, be guilty of a felony and, upon conviction thereof,

shall be fined not more than $100,000 ($500,000 in the case

of a corporation), or imprisoned not more than 5 years, or

both, together with the costs of prosecution .

Petitioners were convicted of violating section 7201 . We

have repeatedly held that "A conviction for an attempt to evade

or defeat tax pursuant to section 7201, either upon a guilty plea

or upon a jury verdict, conclusively establishes fraud in a

subsequent civil tax fraud proceeding through the application of

the doctrine of collateral estoppel ."

Marretta v . Commissioner ,

T .C . Memo . 2004-128 (citing DiLeo v . Commissioner , 96 T .C . 858,

885 (1991), affd . 959 F .2d 16 (2d Cir . 1992) and Frey v .

Commissioner , T .C . Memo . 1998-226), affd . 168 Fed . Appx . 528 (3d

Cir . 2006) ; see also Montalbano v . Commissioner , T .C . Memo . 2007349 ("It is well established that a final criminal judgment for

tax evasion under section 7201 collaterally estops relitigation

of the issue of fraudulent intent in a subsequent proceeding over

the civil fraud penalty .") ;

Uscinski v . Commissioner , T .C . Memo .

2006-200 ("Because the elements of criminal tax evasion and civil

tax fraud are identical, petitioner's prior conviction under

section 7201 conclusively establishes the elements necessary for

finding fraud under section 6663 .") ;

Wilson v . Commissioner , T .C .

- 11 Memo 2002-234 ("We hold that the doctri n

lateral estoppel

bars * * [the taxpayer convicted under

7201] from

reli gating in the instant case the matt

gated i n

[the taxpayer's] criminal tax proceeding,

hether *

[the taxpayer] underpaid his tax for eac h

taxable years

* *

each such yea r

rd whether his underpayment of suc h

was due to fraud .") . Our holding in this

has been

affirmed by the Court of Appeals for th e

rcuit .

Commissioner,

208 F .3d 215 (6th Cir . 2000 )

publi ed opinion T .C . Memo . 1999 -71 ; Gr a

F .2d 3, 246 (6th Cir . 1983),

and cases c

Shah v .

withou t

issioner , 70 8

ereat, affg .

T .C . mo . 1981-1 . 5

for w . .lfully attempting to evade the pay m

etitioners, in their opposition to i

nt's motion fo r

summa judgment, rely on the dissenting o

n Gray v .

Commi ioner, 708 F .2d 243, 247 (6th Cir .

rritt, J .,

dissenting, affg . T .C . Memo . 1981-1 . The

in Gray , wh o

enter a guilty plea to income tax evasio

sec . 7201,

claim that he did not understand that hi

plea would

have llateral consequences in subsequent

roceedings .

The d sent objected to application of col

estoppel under

those ircumstances . Even were we to reco

differenc e

betwe a guilty plea and a jury verdict f

ses of

apply tion of collateral estoppel in thes

stances, which

we do ot, see Marretta v . Commissioner , T

. 2004-128 ,

affd . 68 Fed . Appx . 528 (3d Cir . 2006), p

rs' conviction s

were e result of a jury verdict of incom

asion under

sec . 01 rather than the result of guilty

o thos e

charges . In any event, apart from our own

nt, we would be

constrained by the majority position in Gr

mmissioner ,

supra , to apply the doctrine of collateral esto 1 to the cas e

at bar . See Golsen v . Commissioner , 54 T .

742, 757 (1970),

affd . 445 F .2d 985 (10th Cir . 1971) .

- 12 from the sale of their property by filing a false and fraudulent

joint tax return for 1995 in violation of section 7201 . As the

Court of Appeals noted, the petitioners' filing of a false Form

1040 constituted the affirmative act of evasion under section

7201 charged in the indictment .

United States v . Christians , 105

Fed . Appx . at 753 . Therefore, contrary to petitioners' claim,

the issue of whether they filed a false and fraudulent return for

1995 was in fact "actually and necessarily determined by a court

of competent jurisdiction",

Montana v . United States , 440 U .S . at

153 . Thus, petitioners are estopped from relitigating that issue

in this proceeding .

On the record presented, we find that there is no genuine

issue of material fact with respect to the section 6663 penalty

insofar as it relates to petitioners' 1995 underpaymen t

attributable to petitioners' failure to report the gain from the

sale of their property to Meijer, Inc ., in their 1995 return . We

thus hold that a decision may, and should, be entered agains t

petitioners on that issue as a matter of law . Accordingly, we

sustain respondent's determination to impose a penalty under

section 6663 with respect to the portion of petitioners' 1995

underpayment attributable to the omitted gain from the sale .

We now turn to that portion of petitioners' 1995

underpayment which is attributable to petitioners' $25,600

claimed charitable contribution deduction . Petitioners'

13 enti ement to the charitable contributio

ded C ion was not

addr sed in the criminal proceeding whic

res 1 ed in their

convictions under section 7201, and petit

oner isput e

resp dent's disallowance of the charitab e co t ibution

dedu ion . Summary judgment with respect to t hi

appr riate . A trial with respect to th i

matter is not

issu should proceed .

determination of the extent to whi h pet ' ioners have pai d

thei outstanding tax liability must awai

issue elating to the claimed charitable

the solution of the

pntri

tion deduction .

reflect the foregoing,

An orde rantin in part

and den in n ar t

respond nt's m tion for

summary

issued .

ud e t will be