Chagra v. C. I. R., 080691 FEDTAX, 17826-85

Docket Nº:17826-85.
Opinion Judge:DAWSON, JUDGE: PANUTHOS, SPECIAL TRIAL JUDGE:
Party Name:JAMIEL AND ELIZABETH CHAGRA, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Towner Leeper and John Leeper, for the petitioners. Phillip A. Pillar, for the respondent.
Case Date:August 06, 1991
Court:United States Tax Court

62 T.C.M. (CCH) 347

JAMIEL AND ELIZABETH CHAGRA, Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 17826-85.

United States Tax Court

August 6, 1991

Ps were involved in drug and gambling activities during some of the years 1977 through 1981. Ps expended large sums of money during 1977, 1978, 1980, and 1981. During 1980, P, Jamiel Chagra, gambled extensively in Las Vegas winning and losing large sums of money. Both Ps were ultimately incarcerated upon their conviction for various felonies. (Jamiel Chagra was convicted of various drug related crimes and Elizabeth Chagra was convicted of conspiracy to obstruct justice and conspiracy to murder a Federal Judge.)

Ps failed to report all their income from gambling and drug activities for some of the years in issue. Ps also failed to keep records of their income-producing activities for some of the years in issue.

R reconstructed Ps' income by use of the source and expenditure of funds method for 1977, 1978, 1980 and 1981. R utilized the specific item method for 1979, relying on a newspaper article referring to P's gambling activities. R also determined that the underpayment of tax for the taxable years in issue was due to fraud under sec. 6653(b), I.R.C.

HELD: 1. Ps' income redetermined for the taxable years 1977, 1978, 1980, and 1981.

2. R's determination for 1979 was arbitrary and capricious and R failed to satisfy his burden of going forward with the evidence as to the existence of unreported income.

3. The underpayment of tax for the taxable years 1977, 1978, and 1980 was due to fraud within the meaning of sec. 6653(b), I.R.C.

4. Respondent failed to prove that the underpayment of tax for 1979 was due to fraud.

5. Respondent failed to prove that the underpayment of tax for 1981 was due to fraud.

6. R's determination as to disallowed deductions for 1978 through 1981 are sustained.

Towner Leeper and John Leeper, for the petitioners.

Phillip A. Pillar, for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

DAWSON, JUDGE:

This case was assigned to Special Trial Judge Peter J. Panuthos pursuant to section 7443A(b) and Rules 180, 181, and 183. [1] The Court agrees with and adopts his opinion which is set forth below.

OPINION OF THE SPECIAL TRIAL JUDGE

PANUTHOS, SPECIAL TRIAL JUDGE:

Respondent, in his notice of deficiency mailed on March 14, 1985, determined the following deficiencies and additions to tax in petitioners' Federal income taxes:

Sec. 6653(b)
Year Deficiency Addition to Tax
1977 $ 6,724 $ 3,362
1978 828,080 414,040
1979 1,267,118 663,559
1980 527,106 263,553
1981 8,983 4,492
In his amendment to answer, respondent claimed additional deficiencies and additions to tax as follows:
Sec. 6653(b)
Year Deficiency Addition to Tax
1977 $531,504 $265,752
1978 955,014 477,507
1980 85,120 42,560
The issues for decision are: (1) Whether petitioners are liable for deficiencies in Federal income tax for their taxable years 1977 through 1981 due to their failure to report income from drug dealing and/or gambling; (2) whether petitioners are liable for additions to tax under section 6653(b) for their taxable years 1977 through 1981; (3) whether petitioners are entitled to deductions for attorney's fees in the taxable years 1978, 1979, 1980, and 1981, and cost of goods sold in the taxable year 1979; and (4) whether the statute of limitations bars the assessment and collection of the deficiencies for the taxable years 1977 and 1978. [2] FINDINGS OF FACT Some of the facts have been stipulated. The stipulations of fact filed by the parties are incorporated herein by this reference. Chagra resided at the Federal Correctional Institute at Otisville, New York, at the time the petition was filed in this case. Mrs. Chagra resided at the Federal Correctional Institute at Alderson, West Virginia, at the time the petition was filed. Petitioners Jamiel " Jimmy" Chagra (sometimes hereinafter referred to as Chagra or petitioner) and Elizabeth Chagra (Mrs. Chagra) were formally married in Florida on January 9, 1978. However, they lived together in El Paso, Texas, from April 1974, to January 1978. Patricia de la Torres is Chagra's sister. Joseph Chagra and Lee Chagra are petitioner's brothers. During the years at issue, Joseph Chagra and Lee Chagra were lawyers practicing in El Paso, Texas. Lee Chagra was murdered in his law offices on December 23, 1978. Petitioner was indicted for drug smuggling and drug importation charges on February 29, 1979, and convicted on August 15, 1979 (the " Chagra drug trial" ). He was sentenced in 1980 to 30 years' imprisonment without parole. On March 18, 1983, Mrs. Chagra was sentenced to 5 years imprisonment for conspiracy to obstruct justice, and 30 years for conspiracy to murder a Federal judge. Joseph Chagra pled guilty to conspiracy to murder a Federal judge. As part of his plea bargain agreement, Joseph Chagra received a 10-year sentence, which he has served. The deficiencies and additions to tax at issue in this case result from respondent's determination that petitioners failed to report the profits they received from drug trafficking and gambling during the years in issue, and from respondent's disallowance of certain deductions claimed by petitioners. Respondent reconstructed petitioners' income for taxable years 1977, 1978, 1980, and 1981 using the source and expenditure of funds method. For their taxable year 1979, petitioners' income was reconstructed using the specific item method. 1. 1977 Respondent's source and expenditure of funds computation as set forth in the notice of deficiency and as supplemented in his amendment to answer is summarized as follows:
Per Notice of Per Amendment
Deficiency to Answer
Sources of Funds
Adjusted gross income per return $ 90,000 $ 90,000
Other nontaxable sources of funds -0- -0-
________ ________
Total Sources of Dunds $ 90,000 $ 90,000
Expenditures of Funds
Jewelry-Fort Lauderdale, Florida $107,500 $107,500
Jack Eisenberg-American Finance 10,000 10,000
Attorney-Bogota, Colombia -0- 10,000
Living expenses-Bogota, Colombia -0- 5,000
Capital Acquisitions rental -0- 9,000
1,000 lbs marijuana-Gary Fournier -0- 150,000
Cash to Wallace in Colombia 11/77 -0- 5,000
Cash to Wallace in Florida 11/77 -0- 10,000
Cash to Wallace to Barros-Marijuana -0- 80,000
Cash to Barros-Wife-Marijuana -0- 20,000
Connell/Taylor 1 Kilogram of Cocaine -0- 70,000
Cash to Raul Royce in Colombia-Cocaine -0- 40,000
Cash to Myers -0- 12,000
Balance of $1,000,000 to Raul Royce -0- 353,000
________ ________
Total Expenditure of Funds $117,500 * $881,500
Understatement of Income $ 27,500 ** $791,500
Jewelry (reduced) $64,575
Capital Acquisitions reduced $ -0-
Betty Wallace (new item) $10,000
a. EXPENDITURES RELATING TO ILLEGAL DRUG ACTIVITY During 1977, petitioner was involved with others in the importation and sale of cocaine and marijuana. Mrs. Chagra was aware of petitioner's activities in this regard. In the summer of 1977, petitioner met with Henry Wallace (Wallace) to discuss marijuana smuggled into the United States from Mexico in which petitioner had an interest. Petitioner informed Wallace that he expected to receive approximately $150,000 in proceeds from the shipment. About 6 weeks later, Wallace delivered approximately 6 ounces of cocaine to petitioner in partial payment of the proceeds of the marijuana shipment. Wallace and petitioner met several times thereafter to discuss importing marijuana and cocaine into the United States. Also during the summer of 1977, petitioner was arrested and imprisoned for approximately 3 weeks in Colombia. In June 1977, petitioner paid $10,000 to his lawyer in Santa Marta, Colombia. Petitioner also expended $5,000 for personal living expenses while in Colombia. In November 1977, petitioner flew to Colombia, where he received 6 kilograms of cocaine from Wallace. Petitioner gave Wallace $5,000. Wallace and petitioner discussed using the proceeds of the sale of cocaine to finance the importation of marijuana in boats from Colombia to the United States. Petitioner and Wallace entered into a deal with Jose Barros wherein Wallace would pay $100,000 as partial payment for 30,000 pounds of marijuana. Shortly thereafter, petitioner sent $80,000 to Wallace in Colombia in partial payment for the marijuana to be smuggled into the United States on a boat called the Dona Petra. Another $20,000 was paid by petitioner to Barros' wife. In December 1977, petitioner paid Raul Royce, who had travelled to the United States from Colombia, $40,000 in partial payment for the 6 kilograms of cocaine previously furnished to petitioner. In that same month, petitioner and Wallace were in Florida where petitioner paid Wallace $10,000. About the time the Dona Petra was ready to be unloaded, petitioner was unloading marijuana from other boats in the Caribbean. Some of the boats, including the Dona Petra, were seized by the Drug Enforcement Agency (DEA) while still loaded with marijuana. b. OTHER EXPENDITURES In the latter part of 1977, petitioner purchased two items of jewelry, a platinum ring with several diamonds, and a ladies' Rolex watch set with diamonds. Petitioner paid approximately $30,000 for the ring and $1,000 for the watch. c. THE 1977 RETURN AND OTHER TAX MATTERS Petitioner filed his Federal income tax return for 1977 on August 18, 1878. Petitioner claimed the status of " married filing separately." A Form 1040X for 1977 was submitted on March 26, 1982, on which a net operating loss carryback was reported. The Form 1040X sought a refund in the amount of $33,405. It reflects a filing status of " married filing jointly" and is purportedly signed by Elizabeth Chagra. The Internal Revenue Service (IRS) did not process the amended return. Mrs. Chagra did not otherwise submit an...

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