Dahlstrom v. Comm'r of Internal Revenue

Decision Date19 November 1985
Docket NumberDocket No. 19904-83.
Citation85 T.C. No. 47,85 T.C. 812
PartiesKARL L. DAHLSTROM and CLARA J. DAHLSTROM, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

Held, Ps' motion under Rule 90(c), Tax Court Rules of Practice and Procedure, to enlarge the time in which to answer R's requests for admission, Ps' motion under Rule 90(e) to withdraw or modify deemed admissions and Ps' motion for a protective order will be denied. HELD FURTHER, R's motion to compel responses to R's interrogatories to Ps and to compel production of documents or to impose sanctions under Rule 104(c) will be granted. HELD FURTHER, R's motion for summary judgment under Rule 121 will be denied. Karl L. Dahlstrom and Clara J. Dahlstrom, pro se.

DAVID W. JOHNSON and SHERI WILCOX, for the respondent.

OPINION

NIMS, JUDGE:

This matter is before the Court on Petitioners' Motion for Extension of Time to Answer Requests for Admission, Petitioners' Motion to Withdraw Admissions, Petitioners' Motion for a Protective Order, Respondent's Motion for Summary Judgment pursuant to Rule 121 1 and Respondent's Motion to Compel Responses to Respondent's Interrogatories to Petitioners and to Compel the Production of Documents or to Impose Sanctions under Rule 104(c).

Respondent determined deficiencies in and addition to petitioners' Federal income tax as follows:

+--------------------------------+
                ¦    ¦          ¦Additions to tax¦
                +----+----------+----------------¦
                ¦Year¦Deficiency¦sec. 6653(b)    ¦
                +----+----------+----------------¦
                ¦1977¦$155,733  ¦$77,866.50      ¦
                +----+----------+----------------¦
                ¦1978¦341,689   ¦170,844.50      ¦
                +----+----------+----------------¦
                ¦1979¦788,152   ¦394,076.00      ¦
                +--------------------------------+
                

Petitioners Karl L. Dahlstrom (petitioner) and Clara J. Dahlstrom, husband and wife, resided in Texas at the time their petition was filed.

During the years in issue, petitioner promoted and sold a tax shelter program he had devised utilizing foreign trust organizations. On June 2, 1981, a grand jury empaneled in the Western District of Washington indicted petitioner for aiding and assisting others in the preparation of false income tax returns and unlawfully impeding and impairing the lawful functions of the Internal Revenue Service as a result of his promotion and sale of this tax shelter program. On March 8, 1982, the District Court for the Western District of Washington convicted petitioner of these charges. The Ninth Circuit, however, reversed petitioner's conviction in United States v. Dahlstrom, 713 F.2d 1423 (9th Cir. 1983), cert. denied 466 U.S. 980 (1984), finding that the evidence was insufficient to support the conviction.

Subsequent to petitioner's criminal conviction, respondent conducted a civil examination of petitioners' income tax returns for the years in issue. On November 22, 1982, the United States filed an ex parte motion with the District Court for the Western District of Washington requesting disclosure to the Examination Division of the Internal Revenue Service of all documents and records relating to petitioner which were presented to the grand jury. On December 7, 1982, the Court entered an order pursuant to Rule 6(e), Federal Rules of Criminal Procedure, authorizing disclosure of the requested documents and records. Before the grand jury materials were delivered to respondent, however, the Court vacated its Rule 6(e) order and granted a continuance to allow petitioner to respond to respondent's disclosure motion. The District Court subsequently entered a Rule 6(e) order granting respondent's motion for disclosure on January 26, 1983.

On March 12, 1984, the Ninth Circuit, relying on United States v. Baggot, 463 U.S. 476 (1983), vacated the District Court's January 26, 1983, disclosure order and instructed respondent to return all grand jury materials previously disclosed. Respondent subsequently returned these materials to the Tax Division of the Department of Justice.

On April 15, 1983, respondent issued to petitioners a notice of deficiency in which he determined that petitioners had failed to pay tax on substantial amounts of income earned from the sale of the above-mentioned tax shelter program. Respondent further determined that all or part of the tax underpayment was due to fraud. On July 12, 1983, petitioners filed a petition disputing the income tax deficiencies and additions to tax for fraud set forth in the notice of deficiency. On October 21, 1983, respondent timely filed an answer denying petitioners' assignment of errors and affirmatively alleging that all or part of petitioners' underpayment of tax for the years in issue was due to fraud. Petitioners timely filed a reply denying respondent's affirmative allegations of fraud on December 19, 1983.

On May 21, 1984, petitioners received respondent's letter informally requesting that petitioners answer certain questions, produce certain documents and stipulate certain facts relevant to the issues in dispute. Petitioners refused to cooperate with these informal discovery requests, claiming that the information requested was based on grand jury materials which the Ninth Circuit had ordered respondent to return.

On June 8, 1984, as a result of petitioners' failure to cooperate with respondent's informal discovery requests, respondent served on petitioners requests for admission pursuant to Rule 90, a request for production of documents pursuant to Rule 72 and interrogatories pursuant to Rule 71. Respondent also notified petitioners by letter that the discovery requests were not based on grand jury materials.

On July 30, 1984, having received no response to his formal discovery requests, respondent filed a motion to compel responses to respondent's interrogatories to petitioners and to compel the production of documents or to impose sanctions under Rule 104(c). On September 10, 1984, petitioners filed numerous objections in response to that motion. On September 11, 1984, petitioners filed a motion for a protective order requesting the Court to limit respondent's discovery to taxable year 1979 and served on respondent objections to the requests for admission. However, because petitioner's response to the requests for admission was served on respondent more than 30 days after service of the requested admissions, the facts and exhibits set forth therein were deemed admitted on July 9, 1984, pursuant to Rule 90(c). Freedson v. Commissioner, 65 T.C. 333, 334-336 (1975), affd. 565 F.2d 954 (5th Cir. 1978). 2 The admitted facts and exhibits establish the following:

On April 2, 1973, petitioners executed a document entitled ‘Declaration of Trust of this Constitutional Trust‘ in the name of ‘Trust Publications‘. On the same date petitioners, as trustees of Trust Publications, also executed Trustees' Declaration of Purpose of this Constitutional Covenant‘.

During 1977, 1978 and 1979, petitioner promoted and sold a tax shelter program he had devised utilizing foreign trust organizations. Sales of the program took the form of sales of memberships in an organization that petitioner had formed called the American Law Association (ALA). Purchasers of memberships were entitled to receive instruction and materials relating to the tax shelter program at seminars conducted by the ALA. Members attending these seminars were charged fees ranging from $6,000 to $12,000.

During 1977, petitioner had signatory authority on bank accounts in the name of Trust Publications at the Citizen's State Bank, Bryan, Texas and the First Bank of Snook, Snook, Texas. Fees totalling $244,372.10 from the sale of ALA memberships were deposited in these accounts during 1977.

During 1978, in addition to the bank accounts identified above, petitioner had signatory authority on bank accounts in the name of Trust Publications at the University National Bank in Bryan, Texas. Membership fees totalling $483,757.62 were deposited in these accounts during 1978.

During 1979, membership fees of $938,221.39 were deposited in the bank accounts in the name of Trust Publications at the First Bank of Snook and the University National Bank.

From 1978 through 1980, amounts totalling $1,063,100 were transferred from the bank accounts in the name of Trust Publications at the Bank of Snook and the University National Bank to two bank accounts in the names of International Clearing House and Information Services International, respectively. Petitioner had signatory authority on both accounts. During this same period, amounts totalling $1,063,000 were subsequently transferred from the bank accounts in the name of International Clearing House and Information Services International to eight numbered bank accounts in the name of Val International on which petitioner possessed signatory authority. Amounts totalling $863,000 were then transferred from the Val International Accounts to three bank accounts in the names of Lark Enterprises, Yellow Rose Properties and Southern Utilities on which petitioner also possessed signatory authority. The remaining $200,000 in the Val International accounts was used to purchase a certificate of deposit in the name of ‘Val International Account #8.‘

For fiscal years ended March 31, 1977, March 31, 1978, March 31, 1979 and March 31, 1980, petitioner filed Forms 1041 (U.S. Fiduciary Income Tax Return) in the name Trust Publications on which he reported as gross profit the membership fees deposited in the Trust Publications bank accounts. On the 1978, 1979 and 1980 returns, petitioner deducted royalty payments totalling $1,153,100. A substantial portion of these royalty payments consisted of amounts transferred from the Trust Publications bank accounts to the bank accounts in the name of International Clearing House and Information Services International. Petitioner also claimed deductions totalling $59,243.45 for the trustee fees he received.

On their 1977, 1978 and 1979 Federal income tax returns, petitioners...

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