Fleming v. Comm'r of Internal Revenue (In re Estate of Best)

Decision Date26 January 1981
Docket NumberDocket No. 267-76.
Citation76 T.C. 122
PartiesESTATE of ROBERT W. BEST, DECEASED, JOHN FLEMING, EXECUTOR, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

In the course of a criminal investigation of a lottery operation, the FBI obtained judicial authorization to intercept communications received by various participants in the lottery, including Best. The investigation resulted in Best's pleas of guilty to criminal charges relating to the conduct of an illegal gambling business. In the criminal proceedings involving the lottery operators, some testimony was received as to the contents of the intercepted communications. Both prior to and subsequent to the criminal proceedings, revenue agents prepared computations of Best's wagering tax liability, utilizing evidence derived from the intercepted communications. Petitioner sued for a refund of the resulting wagering excise taxes paid and moved to suppress the evidence obtained through the lawful FBI wiretaps, contending that the disclosure of such evidence to revenue agents violated the Federal wiretap statute. This motion was denied in Fleming v. United States an unreported case (S.D. Ga. 1975, 36 AFTR 2d 75-5737, 75-2 USTC par. 16,200), affd. per curiam 547 F.2d 872 (5th Cir.), cert. denied434 U.S. 831 (1977). Following Best's indictment and guilty plea, another revenue agent obtained the wiretap information from the FBI and prepared a computation of Best's income tax liability. Held:

1. As a result of the decision in Fleming v. United States petitioner is estopped from challenging the legality of the FBI's disclosure of the wiretap information to revenue agents investigating Best's income tax liability.

2. Even if collateral estoppel is not applicable herein, 18 U.S.C. sec. 2515 (1976) does not require the exclusion of the wiretap evidence in proceedings related to Best's income tax liability, since any privacy interest the decedent had in such information was eliminated by the disclosure of its substance in the criminal proceedings involving the participants in the lottery. Fleming v. United States followed. William J. Cooney and Stephen E. Silver for the petitioner.

Kimley R. Johnson and Joseph T. Chalhoub for the respondent.

OPINION

Raum, Judge:

The Commissioner determined the following deficiencies and additions to tax in respect of the decedent's 1970, 1971, and 1972 income taxes:

+-----------------------------------------------+
                ¦      ¦            ¦Additions to tax           ¦
                +------+------------+---------------------------¦
                ¦Year  ¦Deficiency  ¦sec. 6653(b), I.R.C. 1954  ¦
                +------+------------+---------------------------¦
                ¦      ¦            ¦                           ¦
                +------+------------+---------------------------¦
                ¦1970  ¦$227,915.80 ¦$113,957.90                ¦
                +------+------------+---------------------------¦
                ¦1971  ¦195,577.66  ¦97,788.83                  ¦
                +------+------------+---------------------------¦
                ¦1972  ¦150,646.69  ¦75,323.35                  ¦
                +-----------------------------------------------+
                

The deficiencies were primarily the result of the Commissioner's determination that the decedent had unreported net wagering income in each of the taxable years involved, and the Commissioner also determined that all or part of the resulting underpayments in tax were due to fraud. By stipulation of the parties, the deficiencies and additions to tax have been reduced to the following amounts: 1

+-----------------------------------------------+
                ¦      ¦            ¦Additions to tax           ¦
                +------+------------+---------------------------¦
                ¦Year  ¦Deficiency  ¦sec. 6653(b), I.R.C. 1954  ¦
                +------+------------+---------------------------¦
                ¦      ¦            ¦                           ¦
                +------+------------+---------------------------¦
                ¦1970  ¦$70,172.06  ¦$35,086.03                 ¦
                +------+------------+---------------------------¦
                ¦1971  ¦61,887.14   ¦30,943.57                  ¦
                +------+------------+---------------------------¦
                ¦1972  ¦56,829.94   ¦28,414.97                  ¦
                +-----------------------------------------------+
                

The case was submitted solely upon the basis of a stipulation of facts.

The decedent's unreported net wagering income, as determined in the notice of deficiency, was computed by a revenue agent with the use of wiretap information which had been legally obtained by the FBI. The principal issue presented for decision by this fully stipulated case is whether the FBI's purportedly unlawful disclosure of the wiretap information to IRS agents bars the introduction of any evidence obtained from the wiretaps and also deprives the notice of deficiency prepared by such agents of its customary presumption of correctness. In resolving these issues, we are faced with the question, inter alia, of whether a prior wagering excise tax refund suit involving petitioner determined the factual and legal questions presented herein and should be given collateral estoppel effect by this Court.

The decedent, Robert W. Best, whose estate is the petitioner herein, died a resident of Augusta, Ga., on April 29, 1974. His executor, John Fleming, is also a resident of Augusta, Ga.

During the years 1970, 1971, and 1972, Best was involved with a lottery operation in Augusta, Ga., which was operated by three equal partners, Best, F. C. Weathersby, Jr., now deceased, and Joseph L. Sheehan. This operation generated net income after payment of expenses in the amounts of $331,355, $328,850, and $269,817, for 1970, 1971, and 1972, respectively.

Best received distributions of “income” from the partnership during 1970, 1971, and 1972 in the amounts of $100,451.67, $99,616.67, and $79,939, respectively, which amounts were not reported on his Federal income tax returns. The parties have stipulated that these amounts of “taxable income” 2 were omitted from Best's returns, fraudulently, and with intent to evade and defeat taxes.

During 1972, Best was the subject of an investigation by the Federal Bureau of Investigation (FBI) concerning wagering activities in the Augusta, Ga., area. Pursuant to proper authorization, the U.S. District Court for the Southern District of Georgia issued orders permitting the wiretap of certain telephone numbers used in the operation of a gambling business. Partly as a result of information obtained from various telephone conversations during September 1972 and October 1972, arrest warrants were issued from the U.S. District Court, Southern District of Georgia, on November 10, 1972. The execution of these warrants on November 10, 1972, resulted in seizure by the FBI of certain physical evidence, including adding machine tapes, calendar pads, notebooks, and other documents used in the numbers operation. The legality of the interception of the telephone communications3 and of the seizures subsequently made upon execution of the arrest warrants is not disputed.

Best and other persons were subsequently indicted on April 30, 1973, and charged with violations of 18 U.S.C. secs. 1955, 371, and 372 (1976). On September 27, 1973, Best pleaded guilty to two counts of an indictment against him, and others in the numbers operation likewise entered pleas of guilty. The counts of the indictment to which Best pleaded guilty charged him with the offenses of “Conducting, financing, managing, supervising, directing, or owning all or part of an illegal gambling business” and “Conspiracy to violate the gambling laws of the United States” during a period commencing September 7, 1971. Pursuant to his guilty plea, the District Court adjudged Best guilty of both counts. Best was sentenced to 4 years of imprisonment, which sentence was suspended, placed on probation for 5 years, and fined a total of $30,000.

At the time of the pleas and in connection with imposition of sentence, some testimony was received in open court concerning both the physical evidence which had been seized and the contents of the intercepted telephone conversations, and those matters were then disclosed. In connection with Best's entry of his plea of guilty, Agent Edward D. Collins, a special agent of the FBI, gave testimony relating to Best's participation in the numbers operation. Agent Collins testified that at some time after October 15, 1970, the FBI began an investigation of a lottery in Augusta and found that five or more persons were involved and that they were bringing in between an average of five thousand, between five and six thousand dollars a day.” Agent Collins further testified that a telephone at Best's home was used in the numbers operation and that Best had purchased and arranged for the service of most of the adding machines seized in the November 10, 1972, raid of the numbers operation. Agent Collins stated that in the conversations intercepted, we found that defendant Best was more or less operating and supervising the whole operation.”

In April of 1973, prior to the return of the indictment against Best, information regarding the amount or volume of the wagering activity involved in the numbers operation was furnished by personnel of the Department of Justice, U.S. Attorney's Office, and the FBI to special agents of the Internal Revenue Service for the purpose of making a determination of Federal excise tax liability. The information furnished to the special agents regarding the amount of wagering activity involved in the numbers operation was based upon the physical evidence seized by the FBI and also upon an analysis of the transcripts of the intercepted telephone conversations. The information furnished to the special agents was passed by them through official Internal Revenue Service channels and provided to an Internal Revenue Service Audit Division group, and, in turn, was furnished by the appropriate group supervisor to Revenue Agent Larry Shumake in Atlanta, Ga. Based on this information, Agent Shumake, under the provisions of section 6020(b), I.R.C. 1954, prepared and filed wagering...

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  • London v. Commissioner
    • United States
    • U.S. Tax Court
    • September 29, 1998
    ...(9th Cir. 1985); Griffin v. United States [79-1 USTC ¶ 16,310], 588 F.2d 521, 524-526 (5th Cir. 1979); Estate of Best v. Commissioner [Dec. 37,628], 76 T.C. 122, 141-142 (1981). In these cases, like Fleming v. United States, supra, the subject communications were lawfully intercepted during......
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    ... ... 525-26 (5th Cir. 1979); Fleming v. United States, ... 547 F.2d 872, 873-74 (5th ... U.S. 831 (1977); Estate of Robert W. Best v ... Commissioner, 76 T.C ... , subpoena, or law enforcement powers or internal ... security functions " 50 US.C. §403-3(d)(1) ... ...
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