Berkery v. Comm'r of Internal Revenue, Docket Nos. 13900-82

• Decision Date: 29 July 1988
• Docket Number: Docket Nos. 13900-82,22182-82.
• Citation: 91 T.C. 179,91 T.C. No. 17
• Parties: JOHN BERKERY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

91 T.C. 179

91 T.C. No. 17

JOHN BERKERY, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 13900-82

22182-82.

United States Tax Court

Filed July 29, 1988.

Respondent determined that petitioner received income during 1980 and 1981 from distributing phenyl-2-propanone, a controlled substance, and that petitioner did not report such income.

HELD: Respondent's determinations, as embodied in statutory notices of deficiency, are entitled to presumption of correctness — information was not disclosed to revenue agent in violation of Fed. R. Crim. P. 6(e) and then used to make assessments and prepare notices of deficiency, and respondent introduced sufficient evidence to support application of the presumption. HELD FURTHER: Petitioner has not proved that respondent's determinations in these cases are incorrect. Ronald F. Kidd, Thomas W. Ostrander, and Mark E. Cedrone, for the petitioner.

Ina S. Weiner and Lynn L. Casimir, for the respondent.

WELLS, JUDGE:

These cases are before us on petitioner's motion to vacate our decisions in these cases, which we took under advisement when such motion was filed. The parties have filed a Joint Stipulation, in which they agreed that the Court's decisions in these cases should be vacated, and that ‘based on the record as previously submitted and closed in April of 1987,‘ we should consider the issues advanced by petitioner that we did not consider in our opinion at 90 T.C. 259 (1988). ¹

We herewith vacate those decisions, ² and therefore will consider the following issues: (1) whether respondent's determinations in these cases, as embodied in his statutory notices of deficiency, should be presumed correct; and (2) whether for taxable years 1980 and 1981, petitioner failed to report taxable income from forged illegal transactions involving P-2-P, and therefore is liable for deficiencies in and additions to Federal income taxes.

SUPPLEMENTAL FINDINGS OF FACT

RESPONDENT'S DETERMINATIONS AND TAX COURT PROCEEDINGS

In Berkery v. Commissioner, 90 T.C. 259 (1988), we found facts, including certain stipulated facts, pertinent to the issues decided therein. Unless otherwise stated herein, we adopt those facts for purposes of these supplemental findings of fact. For clarity, we will restate the facts found in Berkery v. Commissioner, supra, that are pertinent to our supplemental opinion herein.

At all times relevant to these cases, the Special Enforcement Unit of the Internal Revenue Service's Examination Division employed Harry J. Schmidt (‘Schmidt‘) as a revenue agent. The Special Enforcement Unit conducts audits and investigations of individuals alleged to be involved in illegal activities, and uses its findings for purposes of civil tax examinations.

In December 1981, Schmidt was informed by an agent of the Internal Revenue Service's Criminal Investigation Division (‘C.I.D.‘) about various documents seized from petitioner by the United States Customs Department (‘Customs ‘). Those documents were forwarded to Schmidt, and included the following: two passports, one in petitioner's name (i.e., John C. Berkery) and one in the name of John Carlyle, another name used by petitioner; banking records indicating that petitioner had bank accounts in several foreign countries; and documents relating to the formation and operation of three Panamanian corporations. After reviewing the seized documents, as well as Bureau of Labor statistics and petitioner's tax returns, Schmidt determined that petitioner was not reporting all of his income on his tax returns, that petitioner was attempting to leave the United States and move his assets out of the United States, and that by leaving the United States and moving his assets out of the United States, petitioner would compromise future efforts of the Internal Revenue Service to collect taxes allegedly owed by petitioner. Based on Schmidt's determinations, on December 14, 1981, a termination assessment was made against petitioner for the period from January 1, 1981, through December 11, 1981.

Later, Schmidt read a newspaper article dated January 10, 1982, that reported that law enforcement sources thought they had developed enough evidence to indict petitioner and other individuals on charges of conspiring to distribute phenyl-2-propanone (‘P-2-P‘), an ingredient used to manufacture methamphetamine. ³ Schmidt then made telephone calls to the Federal Bureau of Investigations (‘F.B.I.‘) and the Department of Justice to find out whether the newspaper article was accurate. At such time, Schmidt was not able to contact agency officials familiar with petitioner's case, and left telephone messages for such officials, asking that they return his telephone calls. Schmidt's telephone calls, however, were not returned.

Petitioner was indicted by a grand jury on January 13, 1982, on the following charges: (1) one count of unlawfully conspiring to distribute P-2-P and to possess P-2-P with the intent to distribute such P-2-P (hereinafter referred to as ‘unlawfully conspiring to distribute and possess P-2-P‘), in violation of 21 U.S.C. section 846; (2) nine counts of unlawfully possessing P-2-P with the intent to distribute such P-2-P (hereinafter referred to as ‘unlawfully possessing P-2-P‘), in violation of 21 U.S.C. section 841; and (3) four counts of unlawfully distributing methamphetamine, in violation of 21 U.S.C. section 841. ⁴

Each of the nine indictment counts in which petitioner was charged with unlawfully possessing P-2-P specified a different occasion on which the alleged offense occurred, and the number of gallons of P-2-P that petitioner possessed on such occasion. Those counts indicated that petitioner unlawfully possessed a total of 104 gallons of P-2-P in 1980, and a total of 108 gallons of P-2-P in 1981.

It was stated in the one indictment count in which petitioner was charged with unlawfully conspiring to distribute and possess P-2- P that petitioner ‘would and did buy P-2-P from Ronald Raiton at a price of $60,000 to $70,000 per purchase or $2,500 per gallon of P-2- P.‘ It was also stated in that same count that petitioner ‘would and did resell the P-2-P purchased from Ronald Raiton at a price of $5,500 to $7,500 per gallon.‘

On January 14, 1982, Schmidt was contacted by the C.I.D. and was informed by that division that an indictment was returned against petitioner on the prior day. Schmidt then contacted Louis Pichini (‘Pichini‘), of the United States Department of Justice. Schmidt asked Pichini several questions, to which Pichini responded that he could provide Schmidt with a copy of the indictment; Pichini then provided a copy of the indictment to Schmidt.

Schmidt also made telephone calls to F.B.I. ‘representatives,‘ attempting to obtain information about petitioner's criminal case, but those representatives were not available to speak with Schmidt and did not return telephone messages left by Schmidt. Schmidt then visited F.B.I. offices to attempt to obtain information about petitioner's criminal case. He was told by a secretary, however, that no information was available for him.

After obtaining the indictment in petitioner's criminal case, Schmidt prepared a report concerning petitioner's taxable year 1980, to which his reviewer, William Stunder, added certain comments, and Schmidt also prepared a report concerning petitioner's taxable year 1981. The report prepared for petitioner's taxable year 1980 was dated January 20, 1982, and the report prepared for petitioner's taxable year 1981 was dated January 21, 1982. (Hereinafter, each of these reports will be referred to in the singular as an ‘examination report,‘ and both of these reports will be referred to in the plural as the ‘examination reports.‘)

In the examination report for petitioner's taxable year 1980, Schmidt determined that petitioner bought 104 gallons of P-2-P for $2,500 per gallon during such year. Schmidt further determined in such report that petitioner sold those 104 gallons of P-2-P for $7,500 per gallon during such year, and that petitioner therefore had a ‘net profit‘ of $520,000 ⁵ from his P-2-P sales during his taxable year 1980. Schmidt concluded in such report that a jeopardy assessment was warranted for petitioner's taxable year 1980.

In the examination report for petitioner's taxable year 1981, Schmidt determined that petitioner bought 108 gallons of P-2-P for $2,500 per gallon during such year. Schmidt further determined in such report that petitioner sold those 108 gallons of P-2-P for $5,500 per gallon during such year, and that petitioner therefore had a ‘net profit‘ of $324,000 ⁶ from his P-2-P sales during his taxable year 1981. After recognizing that there had already been a termination assessment for a portion of petitioner's taxable year 1981, Schmidt concluded in such report that a second termination assessment was warranted for petitioner's taxable year 1981. ⁷

A jeopardy assessment was made with respect to petitioner's taxable year 1980, and a second termination assessment was made with respect to petitioner's taxable year 1981. Both assessments were based upon the examination reports.

On March 18, 1982, a statutory notice of deficiency was sent to petitioner with respect to his taxable year 1980, and on June 10, 1982, a statutory notice of deficiency was sent to petitioner with respect to his taxable year 1981. Just as the foregoing assessments, both notices were based upon the examination reports.

Subsequently, petitioner's counsel filed petitions with this Court on behalf of petitioner in a timely manner. Petitioner was a fugitive from justice at such time, and he remained a fugitive from justice at the time these cases were tried and briefed.

We filed an opinion in these cases on February 16, 1988. Petitioner is no longer a fugitive from justice. ⁸

GOVERNMENT ‘STING‘ OPERATION

Ronald Raiton (‘Raiton‘), a P-2-P dealer, began cooperating with Federal law enforcement officials in or about April 1981. His cooperation...