Kramer v. Commissioner

• Citation: 72 T.C.M. 1270
• Decision Date: 19 November 1996
• Docket Number: Docket No. 22785-90.,Docket No. 22457-91.
• Parties: Jack J. Kramer v. Commissioner. Jack S. Kramer<SMALL><SUP>1</SUP></SMALL> and Maxine C. Kramer v. Commissioner.
• Court: United States Tax Court

72 T.C.M. 1270

T.C. Memo. 1996-513

Jack J. Kramer v. Commissioner.

Jack S. Kramer¹ and Maxine C. Kramer v. Commissioner.

Docket No. 22785-90.

Docket No. 22457-91.

United States Tax Court.

Filed November 19, 1996.

Sidney A. Soltz,² for the petitioners. Stanley P. Kaplan,³ for the petitioner in Docket No. 22785-90. Kathleen L. Donohue, Ellen T. Friberg, and Eli J. Dicker, for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

BEGHE, Judge:

Respondent determined deficiencies in petitioners' Federal income taxes and additions to tax for the taxable years 1985 to 1987 as follows:

                1. Jack S. & Maxine C. Kramer—docket No. 22457-91
                                                                                 Additions to Tax
                                                                       -----------------------------------
                                                                          Sec.        Sec.         Sec
                Year                                      Deficiency   6651(a)(1)   6653(a)(1)   6653(a)(2)
                1985 ..................................     $25,766    $10,191.50   $2,304.75       1
                2. Jack J. Kramer—docket No. 22785-90
                                                                                Additions to Tax
                                                               -------------------------------------------------
                                                                   Sec.            Sec.         Sec.      Sec
                Year                              Deficiency   6653(b)(1)(A)   6653(b)(1)(B)    6654      6661
                1986 ..........................    $338,783      $254,087            1         $15,981   $84,696
                1987 ..........................      69,977        52,483            1           3,571    17,494
                1 Equals 50 percent of interest due on the entire deficiency
                1 50 percent of the statutory interest applicable on $338,783 and $69,997 for 1986 and 1987, respectively, from
                the due date of the return to the date of assessment of the tax or, if earlier, the date of the payment
                

After concessions, the following deficiencies and additions remain in dispute:

                Additions to Tax
                                                                       ------------------------------------
                                                                          Sec.         Sec.         Sec
                Year                                      Deficiency   6651(a)(1)   6653(a)(1)   6653(a)(2)
                1985 ..................................    $25,177     $6,294.25    $2,275.30        1
                1 Equals 50 percent of interest due on the amount of the deficiency.
                

                Additions to Tax
                                                         -------------------------------------------------------
                                                             Sec.            Sec.
                Year                        Deficiency   6653(b)(1)(A)   6653(b)(1)(B)    Sec. 6654    Sec. 6661
                1986 ....................    $287,224     $368,323.70          1         $14,225.36   $71,806.00
                1987 ....................       7,290       10,836.00          1             556.53     1,822.50
                1 50 percent of the statutory interest applicable on $287,224 and $7,290 for 1986 and 1987, respectively, from the
                due date of the return to the date of assessment of the tax or, if earlier, the date of the payment.
                

All section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated. All references to petitioner are to petitioner Jack Kramer. All references to petitioners for tax year 1985 are to petitioner and Maxine C. Kramer (Maxine), his wife.

The issues for consideration are: (1) Whether petitioners are liable for a deficiency in income tax for tax year 1985, and whether petitioner is so liable for tax years 1986 and 1987; (2) whether petitioners are liable for additions to tax for failure to file and negligence for 1985; and (3) whether petitioner is liable for additions to tax for fraud, underpayment of estimated tax, and substantial understatement for 1986 and 1987.

We hold, based upon the parties' stipulations, respondent's concessions at trial, the entire record, and the findings below, that petitioner has deficiencies that are less than those recomputed by respondent for 1985 and 1986 and the same as respondent recomputed for 1987. We also hold petitioner liable for all determined additions computed on the reduced deficiencies.

We further hold, based upon the parties' stipulations, respondent's concessions at trial, the entire record, and the findings below, that Maxine has no deficiency for 1985 and is therefore not liable for any additions to tax for that year.⁴

FINDINGS OF FACT

Some of the facts have been stipulated, and are so found. The stipulation of facts and attached exhibits are incorporated herein. The cases were consolidated for trial, briefing, and opinion.

When petitioners filed their petition for 1985, petitioner resided in the Federal Correction Institution at Jesup, Georgia, and Maxine resided in North Miami Beach, Florida. When petitioner filed his petition for 1986 and 1987, he resided in the Metropolitan Correctional Center, Miami, Florida. Throughout 1985-87, petitioner was married to Maxine; they divorced in 1993 after having lived separately since 1989. Petitioner and Maxine have two children, Benjamin (Ben) and Mark. Ben is a convicted drug smuggler, serving a life sentence without possibility of parole. His younger brother, Mark, was convicted and subsequently imprisoned for his role in attempting to help Ben escape from Federal custody.

For 1985, after obtaining the appropriate extensions, petitioner and Maxine signed and filed a Form 1040 that they styled a "tentative return". The Form 1040 contained no detail concerning income and deductions, although it did list $20,329 on line 56 as the "total tax". The Form 1040 also displayed the following legend at the bottom of page one: "Ongoing Grand Jury Investigation May Materially Affect Tax Liability". Max Forman (Forman), an accountant who performed services for Ben's enterprises, signed the form as tax preparer. Petitioner was aware of his obligation to file Federal income tax returns for 1986 and 1987, but he did not do so for either year.

1. Background

When respondent issued the notices of deficiency, petitioner was serving a prison sentence stemming from his criminal convictions on racketeering and associated charges of conspiracy to commit racketeering and travel and use of facilities to distribute the proceeds of unlawful activity. Petitioner had participated in a series of schemes to launder the profits from Ben's illegal marijuana smuggling operations.

Petitioner became involved in Ben's criminal enterprises as early as 1977, after Ben was first arrested and convicted for marijuana smuggling. Petitioner carried $80,000 in cash of Ben's marijuana smuggling profits to Bel Air, California, to "invest" in an enterprise controlled by Sam Gilbert. Ben received his $80,000 back from an entity called Commercial Factors when he was released from prison in 1981. After this initial episode, petitioner maintained a social and business relationship with Sam Gilbert.

By November 1983, petitioner had become deeply involved in laundering Ben's marijuana smuggling profits. He met with Sam Gilbert in a Beverly Hills hotel to discuss a plan to launder $12 million in drug smuggling profits⁵ through a British Virgin Islands (BVI) entity, to a bank in Liechtenstein. This bank turned the funds into a seemingly legitimate "construction loan" so that Ben, through various entities, was able to invest the proceeds in the Bell Gardens Bicycle Club, Inc. (the card club), a legal, State regulated gambling enterprise, without revealing his participation. Another BVI entity, Troon Mortgage Investments, N.V. (Troon Mortgage), run by Shaun (or Shawn) Murphy (Murphy), subsequently held the note as a vehicle through which Ben could recover the $12 million principal, 15 percent interest on the loan, and an additional 15-percent "kicker".

Ben and Sam Gilbert, along with M. Dale Lyon (Lyon) and Michael Gilbert, the "front men" used to obtain the gambling license for the card club, later formed the entities used to conceal Ben's supposed ownership role in the card club. Sam Gilbert's attorney, Stephen Fainsbert (Fainsbert), performed many of the legal services necessary to create and operate these entities.⁶

During early 1984, petitioner participated in several meetings that monitored the card club's financing and construction. He also used Forman's⁷ services and those of an attorney, Emerson Allsworth⁸ (Allsworth), to oversee his and Ben's financial interests. Both Allsworth and Forman, while not initially involved in the actual money laundering, became increasingly aware of the nature of the activities underlying the card club's financing and Ben's actual ownership role.

The card club opened in October 1984. By 1985, Lyon and Sam Gilbert were sending its profits, approximately $1.6 million over the course of 1985 and 1986, back to Ben through their various partnerships, such as LCP Associates. Some of these profits flowed into a trust account controlled by Allsworth. Some went directly to petitioner and some went through Allsworth's trust account and then to petitioner. At least $505,000 flowed through petitioners' joint checking account at Safra Bank in 1986. To further conceal Ben's ownership role in the card club, some of these payments took the form of "loans" to petitioner that he signed for on what Allsworth called "drugstore pads".

Throughout the early 1980's, Ben competitively raced offshore power boats, an expensive sport popular in south Florida at the time. In 1982, Ben created an entity, Apache Racing Team, Inc., through which to conduct his boat racing and building activities, although it was later administratively dissolved while he was still racing and building powerboats. Other entities were created on an ad hoc basis.⁹ Allsworth was instrumental in creating many of these entities. Petitioner...