Sestak v. Comm'r of Internal Revenue
| Decision Date | 25 April 2022 |
| Docket Number | 17285-18 |
| Parties | MICHAEL T. SESTAK, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
Michael T. Sestak, pro se.
Joel D. McMahan and A. Gary Begun, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
This case arises from a statutory notice of deficiency issued to petitioner for tax year 2012. The issues for decision are (1) whether petitioner is entitled to a deduction with respect to a loss on the sale of his foreign real estate holdings as part of his criminal forfeiture with the United States and (2) whether petitioner is liable for the civil fraud penalty under section 6663.[1]
This case was tried during the Jacksonville, Florida, remote trial session of the Court. At trial the parties stipulated most of the relevant facts, which are so found, including the bribery proceeds petitioner received during tax year 2012. Petitioner is a U.S. citizen and resided in Florida when he timely filed his Petition.
On November 15, 2000, petitioner received a bachelor of arts degree in social sciences and history from Thomas Edison State College. On January 27, 2003, he received a master of arts degree in politics from New York University, and in August 2009 he received a diploma from the U.S. War College Distance Education Program.
Petitioner was employed by the U.S. Department of State from May 2003 until March 2014 and had had previous overseas assignments in Bogota, Colombia, Madrid, Spain, and Krakow, Poland. Between August 2010 and September 2012 petitioner was employed as a consular officer by the State Department at the U.S Consulate in Ho Chi Minh City, Vietnam. While employed as a consular officer, he served as chief of the Consulate's Nonimmigrant Visa Unit. Petitioner's responsibilities included reviewing U.S. visa applications, conducting interviews, and issuing U.S. visas to applicants.
In 2010 petitioner met a fellow U.S. citizen and resident of Vietnam named Binh Vo. Mr. Vo and petitioner devised a scheme whereby they would receive compensation in exchange for petitioner's facilitating approval of nonimmigrant visas to the United States through his position as a consular officer. Petitioner agreed to accept compensation from applicants-or their families-in exchange for approval of nonimmigrant visas to the United States.
This scheme required petitioner to use fake or code names, special email accounts, and cellphones for communication with Mr. Vo. Mr. Vo would inform petitioner in advance of the identity of each foreign national who agreed to pay money in exchange for a U.S. visa, and petitioner would then attempt to personally handle the applicant's visa application, including conducting the applicant's interview. In several instances petitioner issued visas to applicants who had been previously denied visas. From February to September 2012 petitioner approved 410 visa applications directed to him by Mr. Vo and others participating in the fraudulent scheme.
Initially, petitioner was compensated for his part in this fraudulent scheme in cash, which he stored in a safe at his residence in Vietnam. However, as the bribery proceeds continued to grow, petitioner asked Mr. Vo to maintain custody of them and to assist him in moving the funds to petitioner's bank account in Thailand. This request involved making wire transfers of funds through intermediaries in China and elsewhere. In all petitioner received wire transfers totaling $3, 227, 501 to his bank account in Thailand during 2012.
In an attempt to hide his bribery proceeds from the U.S. Government, petitioner acquired real property in Thailand, and from June to December 2012 he purchased nine real estate properties for a total of approximately $3.2 million. Petitioner also arranged for his sister-who lived in the United States-to receive $150, 000 of his bribery proceeds, which she used to purchase a home in Yulee, Florida.
On or about September 24, 2012, petitioner submitted signed responses to a "Questionnaire for National Security Positions (SF86 Format)" in which he falsely claimed he held no foreign financial interests and did not own, anticipate owning, or plan to purchase real estate in a foreign country. On October 19, 2012, petitioner was interviewed by two diplomatic security special agents from the State Department in the District of Columbia. During his interview, petitioner was asked by the special agents whether he was aware of any State Department officials who had unexpectedly come into a lot of money, not in line with regular salary, while he was stationed at the U.S. Consulate in Ho Chi Minh City. At the time of his interview with the special agents, petitioner gave false answers in an effort to conceal the existence of the fraudulent scheme and the proceeds derived therefrom.
In early 2013 petitioner timely filed his 2012 Form 1040, U.S. Individual Income Tax Return, reporting therein wages of $122, 029 as an employee of the State Department. However, petitioner failed to report on this tax return the $3, 227, 501 in bribery proceeds he received. Petitioner is a well-educated man who had been employed by the State Department and worked overseas for many years. Consequently, we find that when he filed his 2012 tax return, he knew (or should have otherwise known) that he was required to recognize his bribery proceeds as income; and he intentionally did not do so to continue his participation in the fraudulent scheme.
The State Department uncovered the fraudulent scheme, and petitioner was arrested by local authorities in Thailand. Petitioner was then extradited to the United States, where he was subsequently named a defendant in a criminal complaint filed in the U.S. District Court for the District of Columbia, in a case brought by the U.S. Department of Justice. Ultimately, petitioner pleaded guilty to one count of conspiracy to commit offenses against the United States and to defraud the United States, one count of bribery of a public official, and one count of conspiracy to engage in a monetary transaction in property derived from specified unlawful activity.
On November 1, 2013, petitioner entered into a written plea agreement with the United States. As part of the plea agreement he also executed a preliminary consent order of forfeiture imposing a forfeiture money judgment of $6, 021, 441 in favor of the United States, which included forfeiture of his real estate holdings in Thailand and other assets held by his co-defendants. Under his plea agreement, he agreed that his real estate holdings in Thailand represented bribery proceeds traceable to the fraudulent visa scheme, constituted property involved in the conspiracy to engage in a monetary transaction to which he pleaded guilty, and were subject to forfeiture pursuant to 18 U.S.C. § 981(a)(1)(C), 18 U.S.C. § 982(a)(1) and (6), 21 U.S.C. § 853(p), and 28 U.S.C. § 2461. Pursuant to the written plea agreement and under the terms of the preliminary consent order of forfeiture, petitioner agreed to cooperate and voluntarily sell his real estate holdings in Thailand and to transfer the net proceeds to the United States to satisfy a portion of the money judgment entered against him.
As part of his plea agreement petitioner retained an independent appraiser and agent to appraise, market, and sell the real estate holdings in Thailand. Subject to the approval of the United States, the properties were to be sold at any price and only to unrelated third parties. It was also agreed that in the event the net proceeds from the sale of the real estate holdings in Thailand collectively exceeded $3, 255, 840, then 50% of the excess would be used by petitioner to pay any federal income tax due for tax years 2012 and 2013. Ultimately, petitioner sold his real estate holdings during 2013 to 2015, and in connection with the sales of his real estate holdings in Thailand and other criminal forfeitures, the United States received $1, 551, 134.[2]
The IRS first corresponded with petitioner by letter dated September 21, 2015, concerning the civil resolution of his criminal proceedings. The IRS audited petitioner's 2012 return, and through IRS Letter 950 (a 30-day letter) dated December 6, 2017, along with Form 4549-A, Income Tax Examination Changes, the IRS first asserted the civil fraud penalty against petitioner. Revenue Agent (RA) Janett Ballentine, during the audit, made the initial determination to assert the civil fraud penalty under section 6663 against petitioner. RA Ballentine obtained prior written supervisory approval to assert the civil fraud penalty pursuant to section 6663 from her immediate supervisor, Patrick L. Freeman, Jr., before she formally communicated the penalty to petitioner.
OPINIONAt trial petitioner readily acknowledged receipt of the stipulated bribery proceeds during tax year 2012. However, he argues that the liquidation of his real estate holdings in Thailand was not a forfeiture, because the properties were located outside of the United States and, therefore, outside the jurisdiction of the U.S. court system. Petitioner contends that because the proceeds from the sales of his real estate holdings were voluntarily transferred at a loss to the United States as part of his plea agreement, he is entitled to deduct the loss from his bribery proceeds.[3] In furtherance of his argument, petitioner refers the Court to Stephens v Commissioner, 905 F.2d 667, 671 (2d Cir. 1990), rev'g on other grounds 93 T.C. 108 (1989), and contends that his payments to the United States are appropriately classified as compensatory and are, therefore, tax deductible. Next, petitioner contends that he purchased eight of the nine real estate...
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