Jack E. & Ruth I. Christians, Petitioner

T .C . Memo . 2008-2 2 UNITED STATES TAX CO T ADM .

COQ 74 D T r-+-.--~ a GZ:.

JACK E . AND RUTH I . CHRISTIANS, etit' o ers V .

COMMISSIONER OF INTERNAL REVENU , Re p nden t cket No . 21555-07 . Fil ed Se pt ember 29, 2008 .

bert Alan Jones , for petitioners .

Gary Begun, 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 . Ja cobs fo r dispo sition of respondent's motion for sum nary of th e Chief Judge on Aug . 12, 2008 .

u gment by orde r VEd

EP 2 9 2008

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 .

In 1995, Meijer, Inc ., a large gotiations with the Christians [p e the purchase of their Michigan home acre tract of land . On the day befo offer of approximately $3 .1 million, C rnerstone Management Trust, naming a d deeded their property to the tru C ristians accepted Meijer's $3 .1 million })f1fer .

etail , entered into ition s herein] for nd an accompanying 20- e Mei '', r made its final the C istians created thems Ives as trustees, t for',$10 . The 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 i dividual IRS Form 1040, which omit t al-property sale or to the gain rea ristians also filed an IRS Form 104 nagement Trust . This return disclo lculated the tax due at over $1 .1 m b Jack Christians . Instead of payin Jack Christians attached a disclaimer ""he assessment and payment of income W th no distraint . . . The above na i . spectfully disclaim any liability a : ncerning assessment and payment of 1 sclaimer closed by suggesting tha t e tax to be zero," then the IRS has i sessing any tax deficiency .

filed thei r d an reference to the ized from it . [2l The for Cornerston e ed the property sale, llio, and was signed the t x, however, whi h read in part :

taxe is voluntary ed taxpayer(s ) d decline to volunteer ny [ a ] . " The f th axpayer "shows the b igation o f 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 accountant's advice that the proce and la ter receiving ds o he sal e ie return showed a total tax of $9,4869 .

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 . 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 .

. . a false and fraudulent joint U .S .

] 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 .

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 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 genu' a issue of material fact exists, an the C Murt 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 , 821 985) . A partial summary adjudicati n may e made even if it does not dispose of all the issues in he ca Rule 121(b) ; Naft 1 v . Commissioner, 85 T .C . 527, 529 1985) Rule 121(d ) provi es that where the moving party prop rly m es and support s a motion for summary judgment, "an advers part Y may not res t upon the mere allegations or denials of 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 sec i n 6663 .

Montana v . United States , 440 U .S .

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 :

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 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 wed and proceeded to disclaim any 1 overnment prosecuted the Christian s ith respect to their individual tax f Cornerstone Management Trust . An turn neither acknowledged nor pai d jury could have concluded that the le and the tax due on the Cornerst rm undermined a finding that the C llfully and committed an affirmati this po i nclusion [that t ng out that 0 tain a fals e r erstone not th C ch dild disclose the tax abilitt for it . Th e fo r retu ome tax evasion not the return the i the t ackn o ne M a risti individua l due . No doubt , edgment of the gement Trus t s acte d act off evasion . But view of the Christians ' prior tax - filin `experiences , eir sudden decision no longer to us eation of the sham trusts and offsh n-cooperative conduct once the Gove e sale, the Christians cannot tenab s compelled to reach such a conclus rnerstone tax filing . [ United Stat d . Appx . at 752] .

an ccountant, their re a c unts and their nmen' inquired about y ar ,u that the jury on o' he basis of the s V . 1C ristians, 10 5 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 .

464 U . S filed , regard1l of cri taxpay by sub as the Supreme Court noted in Bada acco Commissioner , . 386, 394 (1984), "once a fraudule t ret n has bee n he case remains one of a false or ss of the taxpayer's later revised nal prosecution and civil fraud l i who submits a fraudulent return d fraud l cond u ilit s no ent return,' for purposes purge the fraud and " a U quent voluntary disclosure" .

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 . 2007- 349 ("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 .

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 [the taxpayer's] criminal tax proceeding, gated i n hether * [the taxpayer] underpaid his tax for eac h taxable years * * rd whether his underpayment of suc h each such yea r was due to fraud .") . Our holding in this has been affirmed by the Court of Appeals for th e rcuit .

Shah v .

Commissioner, 208 F .3d 215 (6th Cir . 2000 ) withou t publi ed opinion T .C . Memo . 1999 -71 ; Gr a issioner , 70 8 F .2d 3, 246 (6th Cir . 1983), and cases c ereat, affg .

T .C . mo . 1981-1 . 5 for w . .lfully attempting to evade the pay m etitioners, in their opposition to i summa judgment, rely on the dissenting o Commi ioner, 708 F .2d 243, 247 (6th Cir . dissenting, affg . T .C . Memo . 1981-1 . The enter a guilty plea to income tax evasio claim that he did not understand that hi have llateral consequences in subsequent The d sent objected to application of col those ircumstances . Even were we to reco betwe a guilty plea and a jury verdict f apply tion of collateral estoppel in thes we do ot, see Marretta v . Commissioner , T affd . 68 Fed . Appx . 528 (3d Cir . 2006), p were e result of a jury verdict of incom sec . 01 rather than the result of guilty charges . In any event, apart from our own constrained by the majority position in Gr supra , to apply the doctrine of collateral at bar . See Golsen v . Commissioner , 54 T . affd . 445 F .2d 985 (10th Cir . 1971) .

nt's motion fo r n Gray v . rritt, J ., in Gray , wh o sec . 7201, plea would roceedings . estoppel under differenc e ses of stances, which . 2004-128 , rs' conviction s asion under o thos e nt, we would be mmissioner , esto 1 to the cas e 742, 757 (1970), 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 matter is not appr riate . A trial with respect to th i issu should proceed .

determination of the extent to whi h pet ' ioners have pai d thei outstanding tax liability must awai the solution of the issue elating to the claimed charitable pntri tion deduction .

reflect the foregoing, An orde rantin in part and den in n ar t respond nt's m tion for summary ud e t will be issued .