Breman v. Comm'r of Internal Revenue , Docket No. 6390-74.

• Decision Date: 08 April 1976
• Docket Number: Docket No. 6390-74.
• Citation: 66 T.C. 61
• Parties: M. WILLIAM BREMAN AND SYLVIA G. BREMAN, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

66 T.C. 61

M. WILLIAM BREMAN AND SYLVIA G. BREMAN, PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 6390-74.

United States Tax Court

Filed April 8, 1976.

Held: 1. Respondent, having discovered after a decision of this Court for petitioners' fiscal year 1964 had become final that petitioners' return for that year was fraudulent, is entitled to issue a second notice of deficiency determining an additional deficiency in tax and an addition to tax for fraud even though the decision of this Court entered pursuant to a stipulation of the parties in the case brought from a determination of deficiency based on the adjustment of an item disclosed on petitioners' tax return would, absent fraud, be res judicata as to petitioners' fiscal year 1964. Sec. 6212, I.R.C. 1954, provides for such a second notice in the case of fraud and since the second notice is a notice issued pursuant to sec. 6212, when a petition is filed from this second notice this Court has jurisdiction under sec. 6213, I.R.C. 1954, to redetermine the deficiency and addition to tax under sec. 6653(b), I.R.C. 1954, for petitioners' fiscal year 1964.

2. The addition to tax for fraud provided for by sec. 6653(b), I.R.C. 1954, is properly applied to the difference in the correct tax liability of petitioners for their fiscal year 1964 and the tax liability shown by petitioners on their return for that year. Karl W. Windhorst, for the petitioners.

Maurice W. Gerard, for the respondent.

OPINION

Scott, Judge:

Respondent determined a deficiency in petitioners' Federal income tax and an addition to the tax of M. William Breman under the provisions of section 6653(b), I.R.C. 1954,¹ for their taxable year ended November 30, 1964, in the amount of $14,239.45 and $22,184.19, respectively. The issues for decision are:

(1) Whether the decision entered by this Court on April 5, 1968, pursuant to stipulation of the parties, determining a deficiency in petitioners' income tax for their fiscal year ended November 30, 1964, in the amount of $30,128.93, forecloses under the doctrine of res judicata the assertion of a further deficiency and an addition to tax under section 6653(b) for the same taxable year.

(2) If the assertion of a further deficiency is not foreclosed by the prior decision of this Court for petitioners' fiscal year ended November 30, 1964, is the deficiency which may be asserted limited to the addition to tax under section 6653(b).

(3) If the assertion of a deficiency and an addition to tax under section 6653(b) is not foreclosed by the prior decision of this Court for petitioners' fiscal year ended November 30, 1964, should the addition to tax under section 6653(b) be computed only on the deficiency asserted in the notice which forms the basis of the instant case or should it be computed on the difference between petitioners' correct income tax liability and the tax as shown on petitioners' income tax return for their taxable year ended November 30, 1964.

All of the facts have been stipulated and are found accordingly.

Petitioners, husband and wife, whose legal residence was in Atlanta, Ga., at the time the petition in this case was filed, filed a joint Federal income tax return on March 15, 1965, for their taxable year ended November 30, 1964, with the District Director, Internal Revenue Service, in Atlanta, Ga.

On January 17, 1966, respondent issued to petitioners a statutory notice of deficiency determining a deficiency in their Federal income tax for their taxable year ended November 30, 1964, in the amount of.$50,395.97. The deficiency was based on the determination of respondent that $98,157 of an amount distributed to petitioners in 1964 by Georgia Screw Products Corp. constituted ordinary dividend income and not capital gain as reported by petitioners. Respondent increased petitioners' taxable income as reported by the amount of the dividend he determined to result from the distribution and decreased the resulting amount of income by the amount of capital gain reported by petitioners as gain from a liquidating distribution of Georgia Screw Products Corp.

Petitioners filed a timely petition to this Court assigning error to the respondent's determination of deficiency for their taxable year ended November 30, 1964, as set forth in his notice of deficiency dated January 17, 1966. This petition was assigned docket No. 1883-66. Respondent filed a timely answer to petitioners' petition. Petitioners and respondent reached a basis of settlement in docket No. 1883-66, reducing the additional dividend from the $98,157 set forth in the notice of deficiency to $68,710. After making the necessary adjustments to capital gain income as reported, this settlement resulted in a deficiency in petitioners' income tax for their fiscal year ended November 30, 1964, of $30,128.93. The parties filed with this Court a proposed decision based on the settlement they had reached for a deficiency in petitioners' income tax for their taxable year ended November 30, 1964, in the amount of $30,128.93. On April 5, 1968, this Court entered a decision in docket No. 1883-66 determining the stipulated deficiency of $30,128.93 in petitioners' income tax for their taxable year ended November 30, 1964. Neither respondent nor petitioners filed an appeal from the decision of this Court entered April 5, 1968.

During the taxable year ended November 30, 1964, petitioner M. William Breman received dividend income from Breman Steel Col., Inc., in the amount of $20,854.31, representing the receipt of proceeds from the sale of scrap steel by Breman Steel Co., Inc. This $20,854.31 of dividend income was not reported on petitioners' Federal income tax return for their taxable year ended November 30, 1964. The omitted dividend income of $20,854.31 was not included as an adjustment in the statutory notice of deficiency dated January 17, 1966, on which the case of M. William Breman and Sylvia G. Breman, docket No. 1883-66 was based, nor was it included in computing the deficiency reflected in the decision of this Court entered April 5, 1968, in that case. The fact that petitioner M. William Breman had received dividend income from Breman Steel Co., Inc., in the amount of $20,854.31 which had not been reported on petitioners' Federal income tax return for their taxable year ended November 30, 1964, was not known by respondent at the time petitioners' case, docket No. 1883-66, was settled and at the time the decision therein was entered on April 5, 1968. The omission of this dividend income from petitioners' Federal income tax return for their taxable year ended November 3 , 1964, was not discovered by agents of respondent until some time on or after October 18, 1968.

Respondent, on April 29, 1974, mailed to petitioners a second notice of deficiency, which is the basis of the petition filed in this case. In this second notice of deficiency respondent determined the deficiency as heretofore set forth against petitioners for their taxable year ended November 30, 1964, based on the inclusion in their income of $20,854.31 of dividend income which was not reported on their Federal income tax return for their fiscal year 1964. In this same notice of deficiency respondent determined an addition to tax of petitioner M. William Breman in the amount heretofore set forth. Petitioners concede that respondent is correct in asserting the addition to tax under the provisions of section 6653(b) and that the basis for asserting this addition to tax is the omission of the $20,854.31 of dividend income.

Petitioners' primary position is that the decision of this Court entered on April 5, 1968, in docket No. 1883-66 determining a deficiency in their income tax for their taxable year ended November 30, 1964, constitutes a bar under the doctrine of res judicata to the assertion of additional deficiencies, including addition to tax under section 6653(b), in petitioners' tax liability for their taxable year 1964. Petitioners in the alternative contend that if the prior decision of this Court is not a complete bar to the assertion of any deficiency, then the only deficiency that may properly be asserted is the addition to tax under section 6653(b) and that this addition to tax should be limited to 50 percent of the amount of deficiency of $14,239.45 determined in the deficiency notice issued by respondent on April 29, 1974. ²

Respondent takes the position that the provisions of section 6212(c)(1) ³ specifically except from the restriction against issuance of a second notice of deficiency where a petition has been filed with this Court, the case of fraud. Respondent contends that the legislative history of section 274(f) of the Revenue Act of 1926, which contains substantially the same restriction on issuance of an additional notice of deficiency after a petition has been filed in this Court as is contained in section 6212(c)(1), supports his position that in the case of fraud he is entitled to issue a second notice of deficiency even though a decision in a prior case for the same year has been entered by this Court and that decision has become final. Respondent further contends that in the second notice he is authorized to determine both a deficiency in tax and an addition to tax for fraud and that the addition to tax is properly based on the difference in the tax liability shown by the petitioners on their return as filed and the correct tax liability as finally determined.

Petitioners recognize that section 6212(c) does provide an exception in the case of fraud to the determination of an additional deficiency in income tax for the same taxable year even though a petition has been filed with this Court from the first notice of deficiency, but argue that the doctrine of res judicata takes precedence over this statutory provision. Petitioners state that since in their case we are not concerned with collateral estoppel but rather with a proposed tax for the same taxable year, the...