Krakowski v. Commissioner
| Decision Date | 16 June 1993 |
| Docket Number | Docket No. 16695-91. |
| Citation | 65 T.C.M. 2969 |
| Parties | Barbara A. Krakowski v. Commissioner. |
| Court | U.S. Tax Court |
John Kennedy Lynch, 711 Statler Office Tower, Cleveland, Ohio, for the petitioner. John E. Budde, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency in petitioner's Federal income tax for the taxable year 1987 in the amount of $12,759.
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable year at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
The sole issue before the Court is whether petitioner is taxable on an amount of $40,000 that was paid to her in 1987 by the former treasurer of her late husband's campaign committee, who had embezzled that amount and more from the campaign funds.
Some of the facts have been stipulated and are so found. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.
Petitioner is a secretary-receptionist-word processor, whose residence at the time she filed her petition in this case was in Cleveland, Ohio. Petitioner is the widow of Jerome F. Krakowski (Krakowski), who had been elected to and served as the Cleveland Clerk of Courts from 1982 until his death. As a candidate for that office, Krakowski received contributions from the public to pay expenses associated with his election and reelection campaigns. These campaign contributions were deposited into the "Krakowski for Clerk Committee" checking account at the Ohio Savings Association. This checking account was established for the deposit of such campaign contributions and for the payment of such campaign expenses. Charles E. Graley (Graley) was the treasurer of Krakowski's campaign committee and was the sole signatory on the campaign committee checking account. Graley was a longtime friend of the Krakowski family and was appointed by Krakowski and served under him as deputy clerk of the Cleveland courts.
In early October of 1985, Krakowski was scheduled for surgery. He was somewhat apprehensive about the outcome of that surgery. He drafted a will at that time leaving everything to petitioner. He told petitioner that there was about $60,000 in his campaign fund that would be available to take care of her. At that time, it was State and local practice for a candidate to retain for his personal use any unused campaign contributions. At that time, personal use of such funds was not prohibited by State or local law.
Krakowski died on April 10, 1986. Unbeknownst to petitioner, during the period from 1982 through 1986, Graley had embezzled $57,701.12 from the "Krakowski for Clerk Committee" checking account. After Krakowski's death, Graley told petitioner that the campaign funds were invested in a certificate of deposit (CD) that had not yet come due. Actually, there was less than $1,000 in the campaign committee checking account at the time of Krakowski's death, and Graley closed the account shortly after Krakowski's death. For the next few months, Graley tried desperately to obtain funds to replenish the money he had embezzled.
In the meantime, Graley assisted petitioner in handling her husband's estate. Petitioner did not have an attorney to advise her at that time. The Estate of Jerome F. Krakowski (the estate), Probate No. 991128, was opened on April 22, 1986, 12 days after Krakowski's death. The estate claimed assets in an amount less than $25,000 and filed a nontaxable Ohio Estate Tax Return. The assets claimed on the Ohio Estate Tax Return did not include the campaign funds which petitioner believed were invested in a CD and which she expected to receive as Krakowski's widow when the CD matured. The estate was closed on June 18, 1986, upon an Application for Release of Assets Without Administration.
Sometime in late 1986 or early 1987, petitioner met Graley at lunchtime, expecting to go to the bank to "roll over" the CD in which the campaign funds were supposedly invested. Instead Graley confessed to her that he had embezzled the funds, but he promised he would repay the money to her. On August 19, 1987, Graley paid petitioner $20,000 which she deposited into a personal bank account and then invested in a CD in her name. Graley had borrowed that $20,000 from a bank, apparently representing to the bank that the money was to be used for home improvements.
Sometime after August 19, 1987, and before October 28, 1987, an investigative reporter for the local newspaper broke the story about Graley's embezzling the Krakowski campaign funds. On October 28, 1987, Graley paid petitioner another $20,000. He obtained those funds from his stepfather and from a female acquaintance. Petitioner also deposited this $20,000 in a personal bank account and then invested the funds in a CD in her name.
Because Graley had closed the campaign committee bank account shortly after Krakowski's death, the campaign committee account did not exist at the time Graley paid petitioner the $40,000. Graley paid the $40,000 to petitioner in the belief that petitioner, as sole beneficiary of the estate, would have been entitled to any and all monies remaining in the campaign fund at the time of Krakowski's death.
In 1987, Graley was investigated for the falsification of the "Krakowski for Clerk Committee" election reports. On June 22, 1988, Graley was indicted for 10 counts of grand theft of the campaign funds, forgery, and uttering. A court audit of the campaign committee account indicated that Graley had misappropriated in excess of $57,000. On November 21, 1988, Graley pleaded guilty to two counts of theft and four counts of forgery. He was sentenced to 9½ years imprisonment. However, the sentence of imprisonment was suspended, and he was placed on probation for 5 years and ordered to make restitution to the Krakowski for Clerk Committee in the amount of $17,481.37. The restitution amount reflected the $40,000 Graley had already paid to petitioner.
On June 15, 1989, the State of Ohio filed a motion to amend judgment, requesting an increase in the amount of restitution. Although, at the time of Krakowski's death, any money remaining in a candidate's campaign fund became property of his estate, by the time Graley paid the $40,000 to petitioner in 1987, the State law had been changed. Effective September 17, 1986, campaign committees were prohibited from distributing funds to any person for personal benefit or gain. The Cuyahoga County prosecutor's office successfully argued, therefore, that the $40,000 Graley paid to petitioner did not represent restitution of monies Graley misappropriated from the campaign committee.
On August 9, 1989, the Ohio court ordered that the amount of Graley's restitution be increased to $57,701.12.1 By that same order, the court appointed J. Ross Haffey (Haffey) as successor treasurer of the Krakowski for Clerk Committee to receive the restitution payments and ordered him to donate the collected restitution to an appropriate charity as defined by law. Graley then initiated a series of actions to force petitioner to return to the campaign committee the $40,000 he had paid to her, to be credited against his $57,701.12 restitution obligation.
On November 14, 1989, the Internal Revenue Service (IRS) contacted petitioner about the $40,000 she had received in 1987 and had not reported on her Federal income tax return for that year. Thereafter, her attorney took steps to have the estate reopened. On December 29, 1989, the estate was reopened, and petitioner was appointed as executrix. On May 15, 1990, petitioner filed an Inventory and Appraisal and a Schedule of Assets, which listed the $40,000 received from Graley as an asset of the estate. At that time, Graley was still trying to have the $40,000 credited against the $57,701.12 amount of restitution he had to repay to the committee. On June 14, 1990, Graley filed an exception to the inventory, claiming that the $40,000 was not an asset of the estate.
In the meantime, the State of Ohio sought to have Graley's probation revoked and his sentence ordered into execution. Under Ohio law, an individual could be placed on probation for a maximum of 5 years. Graley was to remain on probation until restitution had been made in full. Based on his income, Graley could not make complete restitution of the $57,701.12 until the year 2050, which meant he could not pay the increased amount of restitution within the maximum 5-year probation period. On July 2, 1990, Graley's probation was revoked, and he was incarcerated in the Lorain Correctional Institution. Although petitioner was present at Graley's parole revocation hearing, she did not volunteer to pay the $40,000 over to the campaign committee at that time.
Petitioner consulted with her attorney, Matthew Lynch, who advised her of steps she could take so that Graley would receive credit for the $40,000. On August 30, 1990, Matthew Lynch acknowledged receipt of two checks from petitioner. Each check was in the amount of $20,000, payable to Matthew J.D. Lynch, Trust Account to be conveyed to the Krakowski for Clerk Committee. One check was dated August 29, 1990, and the other was dated August 30, 1990. On September 5, 1990, Matthew Lynch remitted $40,000 to Haffey, as successor treasurer of the Krakowski for Clerk Committee. Haffey agreed to accept the $40,000 without prejudice to any claim that petitioner may have had, either individually or in her capacity as executrix of the estate. Haffey further agreed to hold the funds for a period of 60 days to allow petitioner to take whatever action she deemed appropriate to enforce her claim, if any, against the committee.
On March 1, 1991, the Probate Court granted petitioner's motion to amend the inventory of the estate. Pursuant to the Probate Court's order, the inventory item entitled "Funds Received from Charles Graley" valued...
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