1990 U.S. Tax Ct. LEXIS 13">*13
94 T.C. 96">*96 OPINION
Respondent determined deficiencies in and additions to petitioners' Federal income taxes as follows:
Additions to tax | ||||
Year | Deficiency | Sec. 6653(a)(1) 1 | Sec. 6653(a)(2) | Sec. 6661 |
1981 | $ 10,196 | $ 510 | * | |
1982 | 39,612 | 1,981 | $ 9,903 |
The case was submitted fully stipulated under Rule 122. The issues are (1) whether petitioners may deduct 1990 U.S. Tax Ct. LEXIS 13">*14 under
Petitioners resided in Barrington Hills, Illinois, when they filed their petition. Clarice Accardo is a party only because she filed a joint income tax return with her husband. All references to "petitioner" in the singular will be to Anthony J. Accardo.
On June 3, 1981, petitioner and 15 other defendants were indicted by a Federal grand jury in Florida. The relevant portions of the indictment read --
94 T.C. 96">*97 THE GRAND JURY CHARGES:
* * * *
3. From on or about October 1970 and continuously thereafter until December 31, 1977, in the Southern District of Florida and elsewhere, the defendants ANTHONY ACCARDO * * * [and others] did knowingly, willfully, and unlawfully conspire, combine, confederate, and agree together, with each other, and with other persons known and unknown to the Grand Jury, to conduct1990 U.S. Tax Ct. LEXIS 13">*15 and participate, directly and indirectly, in the conduct of the affairs of the Laborers Union through a pattern of racketeering activity in violation of Title
4. It was part of the conspiracy that the defendants and co-conspirators would be employed by or associated with an enterprise which was engaged in, and the activities of which affected interstate commerce, to wit: the Laborers Union, including its subordinate bodies and affiliated benefit plans.
5. It was further part of the conspiracy that the defendants and co-conspirators would commit and cause to be committed multiple acts of racketeering activity, to wit: the unlawful payment and receipt of things of value relating to questions and matters concerning employee welfare benefit plans, in violation of Title
6. It was further part of the conspiracy that some of the defendants and the co-conspirators would, directly and indirectly, give, offer, and promise to give and offer fees, kickbacks, commissions, gifts, loans, money, and other things of value to other defendants and co-conspirators who were administrators, 1990 U.S. Tax Ct. LEXIS 13">*16 officers, trustees, custodians, counsel, agents, and employees of employee welfare benefit plans, with other defendants and co-conspirators aiding, abetting and counseling both of the previous groups, because of, and with intent to influence, the actions, decisions, and other duties of such defendants and co-conspirators as administrators, officers, trustees, custodians, counsel, agents and employees relating to questions and matters concerning such plan, that is, granting of welfare benefit plan dental, vision and life insurance business.
7. It was further part of the conspiracy that the defendant ANTHONY ACCARDO would agree to and support the operation of a kickback scheme involving the Laborers Union initially in Chicago and Florida and eventually nationwide in return for payments of money.
* * * *
39. During 1975 defendant ANTHONY ACCARDO had a conversation with Joseph Hauser in which he advised Joseph Hauser that the insurance business of the Laborers Union would be controlled by "the 94 T.C. 96">*98 family" with * * * ACCARDO controlling the midwestern United States * * * .
* * * *
All in violation of Title
THE GRAND JURY FURTHER CHARGES:
* * * *
2. Through the aforesaid pattern of racketeering activity, the defendants ANTHONY ACCARDO * * * [and others] have acquired and maintained interests in violation of Title
3. The interests of the defendants subject to forfeiture to the United States include any and all proceeds of the pattern of racketeering alleged in Count One and any and all interests, securities, claims, and property and contractual rights acquired through the use of these proceeds, including $ 2,064,066.32 paid and received as kickbacks as set forth in [the indictment] * * * .
4. The defendants are jointly and severally liable to the United States for this forfeiture.
Petitioner was acquitted by the jury on June 30, 1982. On their Federal income tax returns for 1981 and 1982, petitioners deducted legal fees of $ 17,500 and $ 207,000, respectively, that they incurred defending petitioner against the charges.
1990 U.S. Tax Ct. LEXIS 13">*18 Title
(a) Whoever violates any provision of
The only assets, if any, that petitioner was attempting to protect against forfeiture under
In any event, we hold for respondent. No allocation is necessary because no part of the legal fees is deductible. Petitioner's situation is no different from that of any defendant in a criminal or civil trial who faces a potential fine or monetary judgment that must be paid out of income-producing assets such as savings accounts, certificates of deposit, or stocks. In
argued that if he had been required to pay the original [gift tax] deficiency he would have been forced to liquidate his stockholdings, which were his main source of income, and that his legal expenses [contesting the deficiency] were therefore incurred in the "conservation" of income-producing property and hence deductible under * * * [the predecessor of
The
It would mean that the expense of defending almost any claim would be deductible by a taxpayer on the ground that such defense was made to help him keep clear of liens whatever income-producing property he might have. For example, it suggests that the expense of defending an action based upon personal injuries caused by a taxpayer's negligence 94 T.C. 96">*100 while driving an automobile for pleasure should be deductible. [
Accordingly, petitioner's position is inconsistent with
1990 U.S. Tax Ct. LEXIS 13">*21 Petitioner's position also is inconsistent with the holding in
the characterization, as "business" or "personal," of the litigation costs of resisting a claim depends on whether or not the claim
In the instant case, the claim arose in connection with petitioner's alleged racketeering activities, rather than in connection with the certificates of deposit or the condominiums. Forfeiture of the certificates of deposit or the condominiums was merely a possible 1990 U.S. Tax Ct. LEXIS 13">*22 consequence of a failure to defeat the claim. Accordingly,
Petitioners assert they are not liable for the additions to tax for negligence under
Petitioners1990 U.S. Tax Ct. LEXIS 13">*23 had a substantial understatement of income tax in 1982. Sec. 6661(b)(1)(A). Accordingly, they are liable for the section 6661 addition to tax unless one of the exceptions of section 6661(b)(2)(B) applies. The exception of section 6661(b)(2)(B)(i) will not apply because as discussed above there was no substantial authority for petitioner's treatment of the legal fees. The exception of section 6661(b)(2)(B)(ii) will not apply because petitioners' 1982 return merely stated "Legal fees re conservation of property held for production of income," which is not adequate disclosure of the relevant facts affecting the tax treatment of the legal fees. Accordingly, petitioners are liable for the addition to tax under section 6661.
We do not rule on petitioners' relevancy objection to petitioner's testimony before a Senate subcommittee because we have not relied on that testimony.
1. All section references are to the Internal Revenue Code of 1954 as amended and in effect for the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩
*. 50 percent of the interest due on the deficiency↩
2. The taxpayer now would be allowed a deduction under