George Maciel appeals from a decision of the United States Tax Court, which upheld an Internal Revenue Service (“IRS”) Notice of Deficiency for the 1990, 1991, and 1992 tax years. In a separate proceeding, Maciel pled guilty to criminal tax charges. As part of its sentencing decision in that case, the federal district court found that Maciel had not fraudulently intended to evade the payment of taxes. Maciel contends that, under the doctrine of collateral estoppel, the sentencing court’s finding should have precluded relitigation of the fraud issue befоre the tax court. Further, Maciel contends that, even if relitigation is not precluded, the tax court erred in finding that he acted fraudulently when he failed to report income from a 1990 business sale. Finally, Maciel challenges the tax court’s denial of various business deductions. We reject Maciel’s preclusion and fraud claims, but we hold that he is entitled to deduct certain bona fide business expenses.
I. Background
During a routine audit in 1994, the IRS determined that Maciel had significantly understated his income on several tax returns. The agency referred Maciel’s case for criminal prosecution. After initially charging Maciel with two felony counts of tax evasion in violation of 26 U.S.C. § 7201, the government filed a superseding information on September 23, 1998, charging Maciel with two felony counts of willfully filing a false return in violation of 26 U.S.C. § 7206(1). Unlike § 7201, which requires proof that the defendant “willfully attempted] ... to evade or defeat” the payment of tax, § 7206(1) requires only proof that the defendant “[wjillfully ma[de] and subscribed” a materially false return. 26 U.S.C. §§ 7201, 7206(1);
see also United States v. Boulware,
Maciel entered a plea agreement with the government in which he pled guilty to both § 7206(1) counts and admitted signing tax returns he knew to be inaccurate for both the 1991 and 1992 tax years. The plea agreement stated that one of two Sentencing Guidelines calculations would apply. The first provided for a base offense level of ten “if the offense was committed in order to facilitate evasion of a tax.” U.S.S.G. §§ 2T1.3(a)(l), 2T4.1 (1992). The second provided for a base offense level of six if “otherwise.” Id. § 2T1.3(a)(2). In either case, the government agreed to include a two-point reduction for acceptance of responsibility, resulting in an adjusted offense level of either eight or four. The government also agreed to “recommend that any sentence imposed be satisfied by home detention and electronic monitoring.”
The presentence report (PSR) subsequently concluded that Maciel had intended to evade taxation and therefore was subject to the higher § 2T1.3(a)(l) sentencing guideline. The PSR, however, determined that Maciel’s adjusted offense level was nine, rather than eight as calculated in the plea agreement, because it considered Maciel’s conduct not only in 1991 and 1992 — the tax years covered by the plea agreement — but also in 1990. Maciel’s total underpayment during those three years increased his offense level by one point.
At his April 13, 1999, sentencing hearing, Maciel urged the district court to reject the PSR’s conclusion that he had fraudulently intended to evade taxation or, in the alternative, to consider only the tax losses from 1991 and 1992. The government responded, without significant elabo
The district court announced its decision at the conclusion of the sentencing hearing. With respect to Maciel’s intent, the court explained:
I think on balance I am satisfied that the intent here was not primarily to avoid payment of tax. I think the intent may well have been to divert corporate money to personal use which is not a good thing and certainly is not something that the Court should countеnance and particularly since it did have a consequence in terms of the accuracy of Mr. Maciel’s tax returns.
But I don’t think that the conduct looked at in its totality suggests that the reason Mr. Maciel diverted the money was to avoid paying money to the Internal Revenue Service. I think that’s the finding that the Court would have to make. So I think we’re looking at the lower of the two calculations.
Based on the government’s recommendation, the court sentenced Maciel to three months of home detention. The court also imposed three years of probation, noting that Mаciel had not yet “worked out the matters with the IRS.” As a special condition of his probation, Maciel was required to “comply and cooperate with the Internal Revenue Service in a good faith effort to pay any outstanding tax liability including any assessed penalty and interest ... not limited to the two tax years that are charged in the information.”
The IRS informed Maciel of his outstanding liability in a Notice of Deficiency sent on June 13, 2000. According to the IRS, Maciel owed more than $300,000 in back taxes for 1990-92 and nearly $250,000 in civil penalties pursuant to 26 U.S.C. § 6663. Section 6663 imposes penalties when “any part of any underpayment of tax required to be shown on a return is due to fraud.”
Maciel took issue with the Commissioner’s Notice of Deficiency and petitioned the tax court for a redetermination. He subsequently filed a motion for summary judgment, asserting that the IRS was es-topped from relitigating “the issue of fraud or intent to evade tax by factual determination by the District Court at [Maciel’s] sentencing hearing and the judgment of the District Court based on those factual determinations.” According to Maciel, absent a showing of fraud, the statute of limitations barred the IRS from assessing back taxes for thе years at issue. See 26 U.S.C. § 6501(a), (c)(2). The tax court denied Maciel’s motion without opinion, and a two-day bench trial followed on December 12 and 13, 2001.
In an opinion filed February 4, 2004, the tax court generally affirmed the deficiencies and penalties levied against Maciel.
See Maciel v. Comm’r,
II. Preclusion
Maciel maintains that the doctrine of collateral estoppel (issue preclusion) required the tax court to adopt the finding of the district court at Maciel’s criminal sentencing hearing that Maciel did not intend tо evade taxation. We consider de novo the availability of collateral estoppel.
See Littlejohn v. United States,
The doctrine of collateral estop-pel promotes judicial economy and protects parties from the burden of succеssive litigation by barring the relitigation of issues in certain circumstances.
See Parklane Hosiery Co. v. Shore,
In deciding whether an opportunity to litigate is “full and fair,” a court must make a practical judgment based on at least two considerations. First, the court must compare the procedures in the prior and subsequent actions. If “procedural opportunities unavailable in the first action ... could readily cause a different result” in the second action, then the results of the first action generally should not be given preclusive effect.
Parklane Hosiery,
The Second Circuit has not confined
Monarch’s
reasoning to situations in which the government seeks to apply a favorable sentencing decision in subsequent civil litigation. In
United States v. U.S. Currency in the Amount of $119,984,
The decisions in
Monarch
and
$119,984
considered efficiency as well as fairness. The Second Circuit concluded that giving preclusive effect to sentencing findings would be unlikely to produce meaningful judicial economy benefits. Indeed, the opposite might wеll be true. Anticipating the possibility of preclusion in future civil litigation, parties would have an incentive to conduct lengthy mini-trials on tangential issues, producing “sentencing proceedings of mushrooming complexity” and delaying the resolution of criminal cases.
Monarch,
The Second Circuit’s approach is entirely consistent with this circuit’s decision in
Allen v. City of Los Angeles,
In this case, we conclude that Maciel has failed to overcome the presumption against giving collateral estoppel effect to a sentencing finding. Maciel’s argument that the government was not, in fact, prejudiced by the procedural differences in the sentencing and civil contexts is unpersuasive. The parties understood that the criminal and civil actions against Ma-ciel were proceeding on separate tracks, with the Department of Justice spearheading the criminal prosecution and the IRS determining Maciel’s civil liability. Both Maciel and the government recognized that the IRS would have an opportunity after the criminal proceedings concluded to investigate Maciel’s conduct and assess civil penalties. In his plea agreement, Maciel expressly agreed to pay “all taxes ... and penalties that may be due, as finally determined by an Internal Revenue Service audit process and any administrative or judicial process.” During the sentencing hearing itself, Maciel’s counsel acknowledged that the issue of Maciel’s outstanding tax liability and penalties remained “pending on the civil level.”
Moreover, it is apparent that the government had virtually no incentive to litigate the fraud issue at sentencing. In some cases, the government’s obligation to seek a sentence consonant with a criminal defendant’s culpability will be incentivе enough to ensure that relevant issues are litigated vigorously.
See $119,984,
Maciel contends that the situation is somewhat more complicated because the PSR, after concluding that Maciel committed fraud and including his 1990 underpayment in its “tax loss” calculation, ultimately recommended an adjusted offense level of nine rather than eight, resulting in а sentencing range of 4-10 months rather than 0-6 months. In Maciel’s view, the PSR’s calculation gave the government an
III. Omission of Income from Sale of M & V Investments
Maciel insists that even if it was proper for the tax court to allow relitigation of the fraud issue, the court erred when it found fraud in his failure to report income from the sale of one of his business enterprises, M & V Investments. Maciel and a partner, Peter Viviano, formed M & V Investments in 1987. Shortly thereafter, M & V Investments acquired two businesses: a corporation named Newark Wreсkers, Inc., which was purchased for $50,000 cash, and an unincorporated business named Tri-City Truck Parts, which was purchased for $150,000 cash plus a $200,000 note. In 1990, Maciel sold his 50% stake in M & V Investments to Vivi-ano, apparently after the two men had a falling out. The price was $200,000, which Maciel received from Viviano in the form of three cashier’s checks for $100,000, $75,000, and $25,000. As part of the sale agreement, Viviano discharged Maciel from his obligation to repay the outstanding note.
Maciel failed to report income from the M & V Investments sale on his 1990 income tax return. However, Maciel’s accountant attached the following statement to Schedule K-l of the return:
The above named taxpayer was involved in a partnership for part of the 1990 tax year. The partnership was Tri-City Truck Parts. The taxpayer did not receive his Schedule K-l (share of partnership income & deductions) for 1990. Several attempts were made to reach the designated partner of Tri-City Truck Parts (Peter Viviano). All attempts were unsuccessful. As a result the above named taxpayer was unable to report his share of the partnership’s activity for the 1990 tax year.
According to Maciel, this disclosure statement provides clear proof that he did not commit fraud with respect to his income from the sale of M & V Investments.
We have defined tax fraud as “ ‘intentional wrongdoing on the part of the taxpayer with the specific intent to avoid a tax known to be owing.’ ”
Estate of Trompeter v. Comm’r,
To the extent Maciel challenges the tax court’s interpretation of the law, our review is de novo. Specifically, we review de novo Maciel’s contention that a taxpayer who discloses information about an omitted item of income cannot be found to have acted fraudulently as a matter of law. Maciel relies principally on the Eighth Circuit’s decision in
Benderoff v. United States,
Because Maciel’s disclosure did not preclude a finding of fraud as a matter of law, we review for clear error the tax court’s factual determination that Maciel intended to evade taxation.
See, e.g., id.
at 770 (“We review the Tax Court’s factual determinations, including ... findings regarding fraudulent behavior, for clear error.”). Under the clear error standard, we will reverse the tax court only when we are “left with the definite and firm conviction that there was no clear and convincing evidence of fraud.”
Akland v. Comm’r,
As the tax court noted, Maciel’s disclosure statement was “at the very least vague and ill-informing.”
Maciel,
IY. Deductions for Newark T & B and Alviso Racing
Finally, Maciel contends that the tax court erred when it refused to permit deductions associated with two of Maciel’s unincorporated businesses, Newark Truck and Body (“Newark T & B”) and Alviso Rock/HK Racing (“Alviso Racing”). Ma-ciel did not report any income from these businesses for the 1990-92 tax years. He claims that, in calculating his taxable income and tax liability from these business activities, the tax court should have offset certain bona fide expenses. With respect to Newark T & B, Maciel seeks a depreciation deduction of $8,813 per year аnd a deduction of $2,621.43 for utilities expenses incurred in 1992. With respect to Alviso Racing, Maciel seeks to deduct $17,847.23 of expenses for 1990, $15,065.23 for 1991, and $30,283.07 for 1992.
It is the taxpayer’s burden to substantiate claimed deductions.
See Boyd Gaming Corp. v. Comm’r,
It is undisputed that Newark T & B conducted its business at a property that Maciel purchased in 1990 for $200,000. According to Maciel’s documentary evidence, when the County of Alameda assessed this property, it allocated $80,900 of the purchase price to land and the remaining $119,100 to “improvements” (i.e., the buildings out of which Newark T & B operated). Maciel also provided evidence of his closing costs. Because the land itself is not depreciable, Maciel’s total de-preciable basis in the property — consisting of improvements and a portion of the closing costs — was $120,121. Using the applicable straight-line mеthod for depreciating real property over a useful life of 31.5 years, Maciel calculated depreciation deductions of approximately $3,800 per year. See 26 U.S.C. §§ 167-168 (1992). The record indicates that Maciel did not claim these depreciation deductions in his 1990-92 personal or corporate income tax returns.
The tax court’s opinion does not expressly consider Maciel’s depreciation-related documents. Instead, the tax court’s analysis of the issue consists of a single line in a footnote: “[T]here is insufficient evidence in the record with which we can calculate any depreciation to which [Ma-ciel] might be entitled.”
Maciel,
Maciel points to similar documentary evidence of his 1992 utility expenses for Newark T & B. The problem here, however, is that the record does not ex-
With respect to Alviso Racing, Maciel offers a number of account statements, invoices, and bank records to establish his deductible expenses. The documents show, for example, that Maciel regularly purchased racing equipment from Kaeding Performance, Inc., as well as from Shaver Specialty, Inc., a supplier of racing engines. The tax court concluded that it was “unable to determine whether the expenses detañed in the invoices were for the benefit of petitioner’s racing business or for one of his related businesses.” Id. at *13. The court noted that most of the invoices were made out to “Alviso,” which could have referred to Ma-ciel’s trucking corporation, Alviso Rock, Inc., rather than to Maciel’s racing business. Id. at *13 n. 44. It is clear, however, that Maciel was purchasing racing equipment rather than trucking equipment and that Maciel paid for the equipment using checks drawn on Maciel’s “Alviso Rock/HK Racing” bank account. Furthermore, there is no indication that Maciel deducted these expenses on his corporate tax returns. We therefore conclude thаt the tax court clearly erred when it denied Maciel’s claimed deductions for Alviso Racing.
Conclusion
We hold that the tax court properly refused to give preclusive effect to the sentencing court’s fraud finding, and we affirm on the merits the tax court’s determination that Maciel acted fraudulently when he faded to report income from the sale of M & V Investments. We reverse the tax court’s finding that Maciel was not entitled to deductions for depreciation and for expenses associated with his racing business. The Commissioner is directed to permit those deductions and to adjust Maciel’s total liability accordingly.
AFFIRMED in part; REVERSED in part. Each side to bear its own costs.