Abatti v. C.I.R., 092878 FEDTAX, 6529-76

Docket Nº:6529-76, 6559-76, 6627-76, 4138-77, 4139-77.
Opinion Judge:GOFFE, Judge:
Party Name:TONY ABATTI and SHEILA GRUIS, formerly known as SHEILA ABATTI, ET AL,[1] Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:James O. Hewitt, Harry D. Steward and Joseph L. Marshall, for the petitioners. Charles W. Jeglikowski and William K. Shipley, for the respondent.
Case Date:September 28, 1978
Court:United States Tax Court
 
FREE EXCERPT

37 T.C.M. (CCH) 1597

TONY ABATTI and SHEILA GRUIS, formerly known as SHEILA ABATTI, ET AL,[1] Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 6529-76, 6559-76, 6627-76, 4138-77, 4139-77.

United States Tax Court

September 28, 1978

The Commissioner issued statutory notices of deficiency to petitioners in which he ‘ determined from the books and records of petitioners' partnership and subchapter S corporations that petitioners had additional income and losses in lieu of the amounts reported on the returns.’ The statutory notices did not incorporate by reference any revenue agents' reports. The income and losses reported by petitioners on their returns coincided with petitioners' distributive shares reflected on the books and records and tax returns of the partnership and subchapter S corporations. At trial respondent admitted that he relied upon Sec. 482, I.R.C. 1954, and that he determined that certain transactions among the related business entities were false. Held: Under the circumstances of these cases the failure of the Commissioner to specify reliance on Sec. 482 in his statutory notices is prejudicial to petitioners' ability to prepare for trial; petitioners did not receive ‘ fair warning’ of respondent's reliance on Sec. 482 within the rationale of Rubin v. Commissioner, 56 T.C. 1155 (1971), affd. 460 F.2d 1216 (2d Cir. 1972); and respondent is precluded from relying on Sec. 482 at trial. Held further: The language of the statutory notices giving reasons for the adjustments to petitioners' income being contrary to the stipulated facts, the grounds proposed by respondent at trial to support the adjustments to petitioners' income constitute new ‘ issues,‘ not new ‘ theories'; the statutory notices lose their presumptive correctness; and respondent bears the burden under Rule 142(a), Tax Court Rules of Practice and Procedure of proving affirmative allegations which he was permitted to plead at the commencement of the trial.

Respondent offered certain schedules prepared in part by petitioners' accountant through the revenue agent who received them during one conference. The accountant invoked his privilege in refusing to testify under the Fifth Amendment, U.C. Constitution. Held: The offer of proof by respondent was insufficient to demonstrate their relevancy or to demonstrate that they were admissions of petitioners; the proffered exhibits constitute hearsay; the conferences constituted negotiations to compromise a claim within the meaning of Rule 408 of the Federal Rules of Evidence and admissibility, therefore, is denied. Held further: Respondent's evidence is insufficient to sustain his burden of proving deficiencies in tax and is insufficient to sustain his burden of proving fraud.

James O. Hewitt, Harry D. Steward and Joseph L. Marshall, for the petitioners.

Charles W. Jeglikowski and William K. Shipley, for the respondent.

GOFFE, Judge:

The Commissioner, in his statutory notices of deficiency, determined the following deficiencies in income tax and additions to tax against petitioners:

Addition to Tax
Docket Taxable Deficiency Sec. 6653(b)
No. Petitioner Year in Tax 2
6529-76 Tony Abatti and Sheila Gruis, formerly known as Sheila Abatti 1971 $123,373.42 $ 61,686.71
6559-76 Tony Abatti 1972 624,442.50 312,221.25
6627-76 Ben Abatti and Margaret L. Abatti 1971 123,703.74 61,851.87
1972 623,911.59 311,855.79
4138-77 Tony Abatti and Ninfa Abatti 1973 428,605.00 214,302.50
4139-77 Ben Abatti and Margaret L. Abatti 1973 431,149.00 215,574.50
At trial respondent moved for leave to amend his answers in two of the cases to claim increased deficiencies. Over objections of petitioners, leave was granted to amend the answers in the following cases to pray for the deficiencies indicated:
Addition
Docket Taxable Deficiency to Tax
No. Petitioner Year in Tax Sec. 6651(b)
6529-76 Tony Abatti and Sheila Gruis, formerly known as Sheila Abatti 1971 $124,260.10 $62,130.05
6627-76 Ben Abatti and Margaret L. Abatti 1971 124,012.90 62,006.45
After amendments to the answers were filed the total deficiencies in income tax and fraud penalty involved aggregated.$3,534,471.63. It is necessary at the outset to describe certain procedural steps preceding the trial because they bear upon some of the issues presented. On December 20, 1977, the Court issued notices to the parties setting the cases for trial in San Diego, California, on the trial session commencing March 27, 1978. The Court was not advised of the possibility of a continuance until the cases were called at the calendar call on March 27, 1978, in San Diego at which time respondent moved for a general continuance. Counsel for respondent relied upon the following grounds: the possibility that one of his crucial witnesses might be unable to testify because of the danger of self-incrimination; the heavy workload of Mr. Hatfield, the former revenue agent who examined petitioners' income tax returns; and the possibility that bank documents subpoenaed by respondent might not be available for presentation at trial. Counsel for respondent also advised the Court that the parties were exploring settlement possibilities and he stated, ‘ respondent would submit that the likelihood of settlement is extremely great.’ Counsel for petitioners, Mr. Charles A. Pinney, Jr., who filed the petitions in the cases, stated ‘ I vehemently oppose this motion for the following reasons:‘ the audit has been in progress since 1972; the petitions were filed in 1976; when the Court's trial status request was received regional counsel of the Internal Revenue Service was contacted who advised him that it had not received the files; on December 2, 1977, Mr. Pinney replied to the Court's trial status request that, ‘ Petitioners have repeatedly requested that this matter be set for trial. Regional Counsel refuses to discuss the case or settlement since special investigators are conducting an audit and the petitioner requests this matter be set for trial notwithstanding the IRS delays; ‘ on the Friday before the calendar call, counsel for respondent advised Mr. Pinney that a witness might refuse to testify because of the possibility of self-incrimination in a criminal matter but none is pending; and petitioners were willing to stipulate to the deficiencies in tax but not to the fraud penalties. Counsel for respondent moved to have the cases continued to the June 26, 1978, trial session of the Court in San Diego and if it were so continued respondent would be ready but ‘ the act of trial in this case may be moot because as I have stated before, we are extremely close to a settlement of this case and the time period within which we are suggesting should resolve certain matters which should perhaps make settlement a true possibility in this case.’ Counsel for petitioners estimated a trial time of one day and counsel for respondent estimated a trial time of three days. The Court reluctantly granted the continuance and granted the request of counsel for respondent that the cases be set for trial on the June 26, 1978, trial session because of the magnitude of the deficiencies and the likelihood that the next trial session in San Diego would not be set before 1979. On April 14, 1978, a United States Grand Jury in San Diego returned a 15 count indictment in which it charged Petitioner Ben Abatti with attempting to evade income tax by filing fraudulent income tax returns for the taxable years 1971, 1972 and 1973 and with willfully subscribing to false returns for the taxable years 1971, 1972 and 1973. It also indicted petitioners' accountant, Mr. Mickey H. Macklin, with assisting and advising in the preparation of fraudulent income tax returns of Ben and Margaret L. Abatti for the taxable years 1971, 1972 and 1973, an income tax return for Tony and Sheila Abatti for the taxable year 1971, an income tax return for Tony Abatti for the taxable year 1972, and an income tax return for Tony and Ninfa Abatti for the taxable year 1973. On June 1, 1978, petitioners advised the Court that they had discharged their attorney, Mr. Pinney, and had employed as counsel Mr. James O. Hewitt, who entered his appearance as counsel for petitioners. On June 7, 1978, counsel for the parties, Messrs. Hewitt and Jeglikowski, contacted the Court in a conference telephone call. Counsel for respondent advised the Court that respondent was not ready to go to trial on the June 26 trial session because respondent relied upon the representations of petitioners' former counsel, Mr. Pinney, that he would agree to a continuance, that he would stipulate to certain work papers of Mr. Macklin, and that Mr. Pinney agreed to the deficiencies in tax which Mr. Hewitt was not willing to do. Mr. Hewitt strongly opposed a continuance (denying that Mr. Pinney had agreed to a continuance) and pointing out to us again the extreme hardship placed upon petitioners by the sizeable deficiencies being unresolved. We advised the parties that a continuance would be denied. Because of the substantial estimated trial time and the possibility of trial of other cases set on the San Diego trial session we also advised the parties that the trial date was advanced to June 21 and we entered an order to that effect on June 9, 1978. On June 15, 1978, respondent filed a written motion for continuance. It basically set forth the grounds asserted by counsel for respondent in the telephone conference call with petitioners' counsel and the Court and, in addition, represented that Mr. Pinney, subsequent to May 5, 1978, but before he withdrew as counsel, told Mr. Herbert Hoffman, an assistant United States attorney in San Diego, that...

To continue reading

FREE SIGN UP