T.C. Memo. 2006-54



                      UNITED STATES TAX COURT



               ELLIS E. NEDER, JR., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2925-94.                 Filed March 23, 2006.



     Ellis E. Neder, Jr., pro se.

     Stephen R. Takeuchi, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   By notice of deficiency dated November 22,

1993, respondent determined a deficiency in petitioner’s Federal

income tax of $673,145 for 1985, and additions to tax for fraud
                                 - 2 -

under section 6653(b)(1) and (2) and for substantial

understatement of tax under section 6661.1

     Petitioner was convicted of various crimes related to bank

loans he obtained and filing false tax returns for 1985 and 1986.

The issues for decision are:

     1.   Whether petitioner is collaterally estopped from

disputing that he failed to report income in 1985.      We hold that

he is to the extent discussed herein.

     2.   Whether the statute of limitations bars assessment of

tax for 1985.     We hold that it does not.

     3.   Whether, as respondent contends, petitioner’s Federal

income tax deficiency for 1985 is $673,145.       We hold that it is.

     4.   Whether petitioner is liable for the addition to tax

for fraud for 1985.     We hold that he is not.

     5.   Whether petitioner is liable for an addition to tax for

substantial understatement for 1985.     We hold that he is.

                           FINDINGS OF FACT

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

A.   Petitioner

     Petitioner was incarcerated in Seagoville, Texas, when the

petition was filed.     His permanent residence was in Jacksonville,

Florida, before and after his incarceration.


     1
        Unless otherwise indicated, section references are to
sections of the Internal Revenue Code as applied in 1985. Rule
references are to the Tax Court Rules of Practice and Procedure.
                                 - 3 -

     Petitioner was an attorney and was admitted to the practice

of law.   During 1985, petitioner had a money market account at

Jacksonville Savings and Loan Association (money market account)

and a bank account at Atlantic National Bank of Florida (Atlantic

National account).

B.   Petitioner’s Real Estate Activities

     Petitioner was involved in several real estate development

projects in 1985 which we refer to as Southern Grove I, Southern

Grove II, Beach Harbor I, and River Creek.   He financed those

projects with bank loans that he obtained in 1985 totaling

$822,500 for Southern Grove I, $525,000 for Southern Grove II,

$1,125,000 for Beach Harbor I, and $1,186,750 for River Creek.

     Petitioner used shell corporations to buy land from third

parties and immediately resell the land at inflated prices to

limited partnerships that he controlled.   He concealed from

lenders the fact that he controlled the shell corporations, that

he had purchased the land at prices substantially lower than the

inflated resale prices, and that the limited partnerships had not

made substantial downpayments.

     Petitioner used part of the loan proceeds to buy property

from third party sellers and to pay other development costs.     In

addition, petitioner’s attorney wrote checks paying part of the

loan proceeds to petitioner’s shell corporations.   In 1985,

petitioner endorsed some of those checks and deposited the
                                  - 4 -

following amounts of the loan proceeds in his money market

account or his Atlantic National account: $447,764 from the

Southern Grove I loan; $148,253.74 from the Southern Grove II

loan; $347,646.45 from the Beach Harbor I loan; and $432,689.60

from the River Creek loan.

C.     Petitioner’s Federal Income Tax Return for 1985

       Brooks, Brooks & David, certified public accountants,

prepared petitioner’s 1985 Form 1040, U.S. Individual Income Tax

Return.      Petitioner filed that return on December 4, 1987.

Petitioner reported $75,000 in wages, $14,883 in interest, and

$72,670 in gross rents received.      Petitioner did not report the

amounts of the loan proceeds that were deposited in his accounts

in connection with the transactions described in paragraph B,

above.      Petitioner reported a loss of $18,558 on Schedule C,

Profit or (Loss) From Business or Profession, and a loss of

$17,670 on Schedule E, Supplemental Income and Loss.      Petitioner

reported adjusted gross income of $53,625, itemized deductions

totaling $64,703, taxable income of minus $14,198, and no tax

due.

D.     Petitioner’s Indictment and Conviction

       1.     Indictment

       In August 1991, petitioner was indicted by a grand jury in

the United States District Court in Jacksonville, Florida.

Petitioner was charged with the following crimes relating to his
                               - 5 -

financing of the real estate development projects identified

above:   Bank, wire, and mail fraud; conspiracy to defraud a

financial institution; submitting false statements (overvalued

land appraisals) to Federally insured financial institutions;

racketeering; and obtaining land acquisition and construction

loans under false pretenses.   Petitioner was also charged in

counts 86 and 87 with violating section 7206(1) (willfully filing

false tax returns) for 1985 and 1986.2   Count 86 of the

indictment alleged in pertinent part:

     the defendant * * * did knowingly and willfully make
     and subscribe a U.S. Individual Income Tax Return, Form
     1040, for the calendar year 1985, * * * which return
     the defendant did not believe to be true and correct as
     to every material matter, in that the said return
     reported a total income of $53,625 for said calendar
     year, whereas, as the defendant then well knew and
     believed, he had received additional income in the
     approximate amount of $1,361,361.79 and had not
     reported such income in his tax return.

          In violation of Title 26, United States Code,
     Section 7206(1).

Count 87 of the indictment was substantially like count 86.     It

charged that petitioner knowingly failed to report income of

$4,268,767.83 on his 1986 tax return.

     At the criminal trial, the Government called an Internal

Revenue Service special agent (the special agent) as a witness.

     2
        Sec. 7206(1) makes it a felony for a person to willfully
make and subscribe any return, statement, or other document,
which contains or is verified by a written declaration that it is
made under the penalties of perjury, and which such person does
not believe to be true and correct as to every material matter.
                              - 6 -

At a sidebar during the Government’s direct examination of the

special agent, the trial judge made clear that the issue under

section 7206(1) was whether petitioner had knowingly made a false

statement on his 1985 and 1986 returns, not the amounts of

petitioner’s unreported income.   The trial judge in the criminal

case instructed the jury with respect to counts 86 and 87 as

follows:

          Title 26, United States Code, Section 7206(1),
     makes it a crime for anyone willfully to make a false
     statement on an income tax return. “Willfully” means
     with intent to violate a known legal duty.

          The Defendant Neder can be found guilty of that
     offense as charged in Counts Eighty-six and Eighty-
     seven, only if all of the following elements are proved
     beyond a reasonable doubt:

     First:    That the Defendant signed an income tax return
               that contained a written declaration that it was
               made under penalties of perjury;

     Second:   That in this return the Defendant falsely reported
               a total income in his 1985 return of $53,625 and
               in his 1986 return a minus $980,377;

     Third:    That the Defendant knew the statement was false;
               and

     Fourth:   That the Defendant made the statement on purpose,
               and not as a result of accident, negligence or
               inadvertence.

The trial judge did not ask the jury to decide the amount of

petitioner’s unreported income.
                               - 7 -

     2.   Conviction and Sentencing

     Petitioner was convicted of conspiracy to defraud a

financial institution, bank fraud, mail fraud, wire fraud, making

false statements to financial institutions, racketeering, and

filing false tax returns for 1985 and 1986.    He was sentenced to

12 years and 3 months in prison and 5 years of probation, and he

was ordered to make restitution totaling more than $25 million to

various financial institutions.   Petitioner’s prison sentence

included 3 years for filing a false tax return for 1985.

     3.   Petitioner’s Criminal Appeals

     The United States Court of Appeals for the Eleventh Circuit

affirmed petitioner’s convictions.     United States v. Neder, 

(11th Cir. 1998).   The United States Supreme Court (1)

held that an error in jury instructions relating to the charge

that petitioner had filed false tax returns under section 7206(1)

for 1985 and 1986 was harmless; (2) affirmed petitioner’s

convictions under section 7206(1) for 1985 and 1986; and (3)

reversed and remanded various non-tax counts for determinations

whether certain errors were harmless.     Neder v. United States,

(1999).   On remand, the Court of Appeals held that the

errors with regard to petitioner’s non-tax convictions were

harmless and affirmed those convictions.    United States v. Neder,

(11th Cir. 1999).
                                - 8 -

     Petitioner filed with the District Court a motion for new

trial on the ground that the Government had improperly failed to

disclose certain exculpatory evidence and improperly used false

testimony of petitioner’s attorney.      The District Court denied

petitioner’s motion.    The Court of Appeals affirmed the District

Court’s ruling.

     In December 2001, petitioner filed with the District Court a

motion to vacate, set aside, or correct his sentence and judgment

of conviction.    Petitioner alleged in the motion that he was a

victim of prosecutorial misconduct because the Government had

failed to disclose material, exculpatory evidence, including

evidence that his attorney had contracted to buy a condominium at

one of petitioner’s developments and that petitioner had provided

the deposit.   The District Court denied petitioner’s motion.     The

Court of Appeals affirmed the District Court’s ruling.

Petitioner filed a petition for writ of certiorari, which was

denied.   The judgment of conviction entered against petitioner is

final.

                               OPINION

A.   Whether Collateral Estoppel Applies, and If So, to What
     Extent

     1.   Background

     The parties dispute whether petitioner is collaterally

estopped by his criminal convictions from denying certain facts.
                               - 9 -

If collateral estoppel applies, the judgment in a prior action

precludes relitigation in a second action of issues actually

litigated and necessary to the outcome of the first action.

Parklane Hosiery Co. v. Shore, 

, 326 (1979); Meier v.

Commissioner, 

, 282 (1988).

     Collateral estoppel applies if:   (1) The issues presented in

subsequent litigation are in substance the same as those decided

in earlier litigation; (2) there is a final judgment rendered by

a court of competent jurisdiction in the earlier litigation; (3)

the doctrine is invoked against a party (or their privies) to the

prior judgment; (4) the parties actually litigated the issues and

the resolution of these issues was essential to the prior

decision; and (5) the controlling facts and applicable legal

principles are unchanged from those in the prior litigation.

Brotman v. Commissioner, 

, 148 (1995); Peck v.

Commissioner, 

, 166-167 (1988), affd. 

(9th Cir. 1990).   Collateral estoppel does not apply if “special

circumstances” are present which give reason to doubt the quality

or fairness of procedures followed in prior litigation.     Montana

v. United States, 

, 162 (1979); Meier v.

at 291-292.   The parties agree that

requirements (2), (3), and (5) are met.
                                - 10 -

     2.   Whether Special Circumstances Are Present

     Petitioner contends that collateral estoppel does not apply

because the Government lost or destroyed exculpatory evidence

that was critical to his criminal defense and that the prosecutor

and other attorneys engaged in misconduct at his criminal trial.

     Petitioner previously litigated his claims of misconduct by

the prosecutor and attorneys.    The District Court and the Court

of Appeals rejected those claims.    Petitioner’s evidence in this

case supporting these claims was vague and uncorroborated.

Petitioner has not shown that the procedures in his criminal

trial were unfair.   We conclude that no special circumstances

exist to bar the application of collateral estoppel here.

     3.   Effect of Application of Collateral Estoppel

     Petitioner contends that the issues in this case and the

criminal case are not substantially the same and thus that

collateral estoppel does not apply because this is a civil case.

We disagree.   A person convicted of a crime can be collaterally

estopped in a later civil case from disputing matters necessary

to the criminal conviction.     Appley v. West, 

, 1026

(7th Cir. 1987); Otherson v. Dept. of Justice, 

, 271

(D.C. Cir. 1983); Brooks v. Commissioner, 

, 431

(1984), affd. without published opinion 

(9th Cir.

1985).
                             - 11 -

     We conclude that petitioner is collaterally estopped from

denying that he used mail and electronic means to obtain loans

from financial institutions by fraud and misrepresentation, and

that he was convicted of 1 count of conspiracy to defraud a

financial institution, 12 counts of bank fraud, 9 counts of mail

fraud, 10 counts of wire fraud, 37 counts of making false

statements to financial institutions, and 2 counts of

racketeering under 18 U.S.C. section 1962(c) and (d) (2000).

     Petitioner is also estopped from denying that he was

convicted of violating section 7206(1) for 1985 and 1986, and

more specifically, that (1) he signed a tax return under the

penalties of perjury; (2) he did not believe the return to be

correct as to every material matter; and (3) he acted willfully.

See United States v. Edwards, 

, 651 (11th Cir. 1985).

     4.   Whether Petitioner Is Collaterally Estopped From
          Disputing That He Had Income in 1985 Equal to the
          Portion of the Loans He Put in His Accounts

     Respondent contends that, as a result of his conviction

under section 7206(1), petitioner is collaterally estopped from

denying that he received and knowingly failed to report

$1,372,3603 of income in 1985.   We disagree.

     The trial judge in petitioner’s criminal case made clear

that the jury was not asked to decide the amount of petitioner’s


     3
        The amount of unreported income alleged in the indictment
was $1,361,361.79.
                               - 12 -

unreported income for 1985.    The prosecution’s sole grounds for

contending that petitioner filed a false tax return for 1985 was

that petitioner did not report as income deposits into his

personal accounts of parts of the loan proceeds.   Since these

were the only allegations that petitioner’s return was false, it

was essential to petitioner’s criminal conviction under section

7206 that the jury concluded that to some extent the money

deposited in petitioner’s accounts was income to petitioner.

Collateral estoppel applies only to the extent a finding was

necessary to the result in petitioner’s criminal case.   We

conclude that petitioner is barred by the doctrine of collateral

estoppel from disputing that he received but intentionally failed

to report some amount of unreported income in 1985.

B.   Whether the Statute of Limitation Bars Assessment of Tax

     Petitioner filed his 1985 tax return on December 4, 1987.

The notice of deficiency was mailed slightly less than 6 years

later, on November 22, 1993.   Petitioner contends that the notice

of deficiency was untimely because it was mailed more than 3

years after petitioner filed his 1985 return on December 4, 1987.

     Section 6501 bars sending a notice of deficiency more than 3

years after the later of (1) the date the tax return was filed,

or (2) the due date of the tax return unless an exception to the

three-year time limit applies.   However, the Commissioner has 6

years to send the notice of deficiency if the Commissioner proves
                              - 13 -

by a preponderance of the evidence that an omitted amount

exceeding 25 percent of the gross income reported was properly

includable in gross income.   Sec. 6501(e)(1)(A); Burbage v.

Commissioner, 

, 553 (1984), affd. 

(4th

Cir. 1985); Philipp Bros. Chems., Inc. v. Commissioner, 

, 254-255 (1969), affd. 

(2d Cir. 1970).

Petitioner reported gross income in the amount of $162,553 in his

1985 return; 25 percent of this amount is $40,638.25.    As stated

above at paragraph A-4, petitioner is collaterally estopped from

denying that he received some amount of unreported income in

1985.   Petitioner nominally borrowed funds for commercial

purposes, yet he deposited $1,372,360 of the proceeds into his

personal accounts.   He did not need that portion of the proceeds

to buy the property for which the loans nominally were made.      He

exaggerated the value of the collateral provided for the loans.

These violations of the usual obligations of a borrower are

sufficient to show by a preponderance of the evidence that he did

not intend to fully repay the loans.    Given the massive amount of

the deposits ($1,372,360), we infer that petitioner received

income of more than $40,638.25 from his deposits of loan proceeds

into his personal accounts in 1985.    Petitioner introduced no

evidence to the contrary.   Thus, we conclude that petitioner

omitted more than 25 percent of his gross income, and respondent
                               - 14 -

timely mailed the notice of deficiency within 6 years of the date

petitioner filed his 1985 tax return.

C.   Whether Respondent’s Determination of Petitioner’s Income
     Tax Deficiency for 1985 Is Correct

     Respondent determined that petitioner failed to report

taxable income in the amount of $1,376,353 for 1985 and that he

has a deficiency in tax in the amount of $673,145 for 1985.

Respondent’s determination of petitioner’s deficiency is presumed

to be correct, and petitioner bears the burden of proving

otherwise.    See Rule 142(a)(1); Welch v. Helvering, 

(1933).4

     Before relying on this presumption, the Commissioner must

introduce evidence linking the taxpayer to an income-producing

activity.    Weimerskirch v. Commissioner, 

, 361, 362

(9th Cir. 1979), revg. 

(1977).   Respondent has done

this.    Petitioner conducted transactions that led to the deposits

of large amounts of money into his personal accounts, and, as

discussed above, petitioner is collaterally estopped from denying

that he received some income from those deposits.


     4
        Petitioner does not contend that respondent’s
determination is arbitrary. See Helvering v. Taylor, 

(1935).

     The parties do not discuss the burden of proof. Because the
notice of deficiency was issued in 1994, i.e., before July 22,
1998, sec. 7491 does not apply. See Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206, sec.
3001(a), 112 Stat. 726.
                                - 15 -

     Petitioner offered no evidence showing that respondent’s

determination was erroneous.5    We conclude that petitioner’s

deficiency for 1985 is the amount that respondent determined.

D.   Whether Petitioner Is Liable for the Addition to Tax for
     Fraud

     1.    Background

     Respondent contends that petitioner is liable for the

addition to tax for fraud under section 6653(b) for 1985.6       Fraud

is actual, intentional wrongdoing designed to evade a tax

believed to be owing.    Webb v. Commissioner, 

, 377

(5th Cir. 1968), affg. T.C. Memo. 1966-81.    To prevail under

section 6653(b)(1), the Commissioner must prove by clear and

convincing evidence:    (1) Petitioner underpaid tax for 1985, and

(2) some part of the underpayment is due to fraud.    Secs.

6653(b), 7454(a); Rule 142(b); Parks v. Commissioner, 

, 660-661 (1990); Petzoldt v. Commissioner, 

, 699

(1989).   The fact that petitioner failed to meet his burden of

proof on the underlying deficiency in this case does not relieve

respondent of the burden to prove, by clear and convincing


     5
        Petitioner made no argument about respondent’s
determination. At trial and in his posttrial briefs, he argued
only that respondent had unclean hands and that the Government
had lost or destroyed exculpatory evidence.
     6
        For 1985, the addition to tax for fraud consists of 50
percent of the underpayment amount, sec. 6653(b)(1), plus 50
percent of the interest due on the portion of the underpayment
attributable to fraud, sec. 6653(b)(2).
                                - 16 -

evidence, both elements of fraud.    Fairchild v. United States,

, 947 (5th Cir. 1957); Olinger v. Commissioner, 

(5th Cir. 1956), affg. in part and revg. in part T.C.

Memo. 1955-9; Drieborg v. Commissioner, 

, 218 (6th

Cir. 1955), affg. in part and revg. in part a Memorandum Opinion

of this Court; Estate of Beck v. Commissioner, 

, 363

(1971); Otsuki v. Commissioner, 

, 106 (1969).

     2.   Fraudulent Intent

     Respondent bears the burden of proving by clear and

convincing evidence that petitioner had fraudulent intent.     Sec.

7454(a); Rule 142(b).   Fraudulent intent may be proved by

circumstantial evidence because direct evidence of fraud is

rarely available.   Niedringhaus v. Commissioner, 

, 210

(1992); Petzoldt v. 

; Gajewski v.

Commissioner, 

, 200 (1976), affd. without published

opinion 

(8th Cir. 1978).

          a.   Section 7206 Conviction

     Respondent contends that petitioner’s conviction under

section 7206(1) for 1985 shows that petitioner’s underpayment of

tax for 1985 is due to fraud.    We disagree.   A section 7206(1)

conviction is a badge of fraud.     Bradford v. Commissioner, 

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

Wright v. Commissioner, 

, 641, 643 (1985).     However, a

finding of fraudulent intent is not essential to a conviction
                              - 17 -

under section 7206(1), and a conviction under section 7206(1)

does not establish that the taxpayer had fraudulent intent to

underpay tax even if the sole allegation that the return was

false was that the taxpayer had knowingly omitted a substantial

amount of income.   Wright v. 

at 643.7

     Respondent contends that petitioner’s failure to report

millions of dollars of income for 2 years is a badge of fraud.

We disagree.   Respondent has not shown the amount of petitioner’s

underpayment by clear and convincing evidence.    Two years of

conduct is not a pattern for purposes of establishing a badge of

fraud.   See Loftin & Woodard, Inc. v. United States, 

, 1239 (5th Cir. 1978) (2 years do not “a pattern make”).

          b.   Convictions Relating to Bank Loans

     Respondent contends that testimony by the special agent at

petitioner’s criminal trial clearly and convincingly shows that

petitioner fraudulently intended to evade tax.   We disagree.

     First, it is well established that conviction under section

7206(1) is not sufficient to establish fraud.    See United States

v. 

; Wright v. 

.


     7
        We have found taxpayers convicted under sec. 7206(1) not
to be liable for fraud where the sole allegation that the return
was false was that the taxpayer knowingly omitted a substantial
amount of income. See, e.g., Kemp v. Commissioner, T.C. Memo.
2004-153; McGowan v. Commissioner, T.C. Memo. 2004-146;
Wickersham v. Commissioner, T.C. Memo. 1999-276; McCulley v.
Commissioner, T.C. Memo. 1997-285; Cox v. Commissioner, T.C.
Memo. 1985-324; Rinehart v. Commissioner, T.C. Memo. 1983-184.
                              - 18 -

     Second, we did not have an opportunity to observe the

special agent’s testimony.   Respondent called no witnesses in

this case, did not establish that witnesses with personal

knowledge of the facts were unavailable, and did not examine

petitioner regarding the fraud issue even though petitioner

testified at the trial in this case.

     Third, parties in our Court sometimes stipulate that

testimony from another case will be received into evidence as if

it were testimony in our case.   See, e.g., Am. Lithofold Corp. v.

Commissioner, 

, 914 (1971); Sparkman v. Commissioner,

T.C. Memo. 2005-136 n.4; Sexcius v. Commissioner, T.C. Memo.

1996-175 n.3; Estate of Baxter v. Commissioner, T.C. Memo. 1992-

4; Rhodes v. Commissioner, T.C. Memo. 1977-33; Haimowitz v.

Commissioner, T.C. Memo. 1971-241 n.2.   The testimony of one of

respondent’s agents at petitioner’s criminal trial was attached

to the stipulation in this case, but petitioner made clear at the

start of the trial that he did not intend to stipulate that the

prior testimony was admissible as if it were testimony in this

case.   Absent a meeting of the minds of the parties on this

point, we do not consider the testimony from the criminal case as

if it were testimony in this case.

     We sustained respondent’s determination that part of the

proceeds of several loans that petitioner deposited in his bank

accounts was income to him in 1985; however, neither the
                                   - 19 -

determination nor the record provides clear and convincing

evidence that petitioner omitted the loan proceeds from income

with fraudulent intent.        C.B.C. Super Markets, Inc. v.

Commissioner, 

, 896 (1970).

          c.      Petitioner’s Testimony in His Criminal Case

     Respondent contends that petitioner’s testimony at his

criminal trial that he relied on advice of counsel that the loans

were not income shows that he fraudulently intended to evade tax

because his prior testimony was not credible.       Respondent cites

no case in which any court considered testimony in another case

as a badge of fraud in a civil tax case.       Petitioner’s testimony

at his criminal trial is not a part of our record.       We have

already considered the appropriate role and effect of

petitioner’s criminal conviction on the fraud issue in this case.

Respondent provides no reason or authority for separately

considering petitioner’s testimony at his criminal trial as a

badge of fraud.

          d.      Conclusion

     Respondent has not shown by clear and convincing evidence

that petitioner intended to evade tax for 1985 that he knew he

owed.

E.   Whether Petitioner Is Liable for the Addition to Tax for
     Substantial Understatement

     Petitioner contends that he is not liable for the addition

to tax under section 6661(a) for substantial understatement.       In
                                - 20 -

1985, section 6661(a) imposed an addition to tax of 25 percent of

the amount of any underpayment attributable to a substantial

understatement of income tax.    Petitioner bears the burden of

proving that he is not liable for the addition to tax under

section 6661.   Rule 142(a).

     Petitioner offered no evidence or argument that he is not

liable for the addition to tax under section 6661(a) for 1985.

We conclude that petitioner is liable for the section 6661(a)

addition to tax for 1985.

     To reflect the foregoing,


                                               Decision will be

                                          entered under Rule 155.