91 T.C. 273 (1988)
Respondent, in a statutory notice dated May 24, 1977, determined deficiencies and additions to petitioners' income tax as follows:
| Year | Deficiency | Sec. 6653(b) addition |
|---|---|---|
| 1968 | $26,141.28 | $13,070.64 |
| 1969 | 1,504,622.39 | 752,311.20 |
| 1970 | 693,487.00 | 346,743.50 |
The issues for our consideration are: (1) Whether petitioners are collaterally estopped from relitigating certain facts found by the Federal District Court in an action for an accounting brought by Hughes Tool Co. against petitioner John Meier, (2) whether petitioners failed to report income from the sale of mining claims to Hughes Tool Co. during taxable years 1969 and 1970; (3) whether deposits to bank accounts and cash investments made by petitioners during 1968 and 1969 constituted taxable income in those years; (4) whether any part of any underpayment of tax for the years 1968, 1969, and 1970 is due to fraud; and (5) whether the statute of limitations bars the assessment and collection of the deficiencies and additions to tax for the years 1968, 1969, and 1970.
At the time of filing their petition in this case, petitioners resided in British Columbia, Canada.
The factual predicate for this case, at least as to the mining claim transactions, is relatively simple. However, for a number of reasons, drawing the facts from the record has been an unnecessarily complicated and arduous task. For purposes of clarity, a simplified macroscopic factual picture is presented prior to our detailed findings.
Petitioner John Meier (Meier) was employed by Hughes Tool Co. (Hughes). In that capacity, he was apparently directed to acquire silver mining claims. In derogation of his duty to his employer, Meier, through agents or co-conspirators, purchased such claims for nominal amounts, and then sold them to Hughes at immensely inflated prices. The sales proceeds were then channeled overseas, at petitioner's direction and for his benefit, to avoid detection by his employer and to avoid the incidence of the U.S. income tax.
The major underlying source of the determined deficiencies concern five mining transactions, namely: (1) The Bogdanich sale; (2) the Hatsis sale; (3) the Belaustegui sale; (4) the Bida and Belaustegui sale; and (5) the Globe Minerals, Inc., sale. Some of the individuals involved in the mining transactions were:
Anthony Hatsis (Hatsis) — a co-conspirator of Meier, and president of Globe Minerals, a corporation involved in buying and selling mining claims.
James Cowley (Cowley) — attorney for Hatsis.
John Suckling (Suckling) — attorney for petitioner.
Charles Adams (Adams) — a tax attorney used to help plan the transfer of the sales proceeds overseas.
Robert Kahan (Kahan) — a CPA used to help plan the overseas transfers.
Joseph Foley (Foley) — attorney for Hughes.
Bogdanich, Bida, and Belaustegui — these individuals were apparently "straw men" that acquired the claims from the original owners for Meier and Hatsis and then were named as sellers in the Hughes transactions.
The Bogdanich Sale — $2,900,000
This sales agreement was dated May 15, 1969. Most of the claims that were eventually sold through Meier to Hughes were originally sold to Bogdanich for consideration of $99,000 and 100,000 shares of Westland Minerals stock (a company controlled by Hatsis). The full consideration was never paid. These mining claims were in turn sold for $2,900,000 to CPLD, a corporate shell of Hughes used to avoid publicity. The proceeds were deposited in an escrow account with Cowley as the escrow holder. Meier acted as agent for Hughes. Of the total consideration, Bogdanich received $150,000. John Suckling was paid $900,000 which was placed in his client's trust account. Hatsis was paid $350,000. Petitioner knew of the vast disparity between the relatively nominal acquisition cost of the mining claims and the inflated sale price to Hughes.
The Hatsis Sale — $850,000
On June 17, 1969, Hatsis purchased these claims from Columbia Investment Corp. for $25,000 and 30,000 shares of Globe Minerals stock. Under an agreement dated June 20, 1969, Hatsis agreed to sell these claims to Hughes, through Meier, for $850,000. After legal and escrow fees, the escrow holder, Continental Bank & Trust Co., distributed approximately $751,000 to Hatsis, $480,000 of which was paid to Maatschappij Intermovie, N.V. (Intermovie), a Dutch corporation.
The Belaustegui Sale — $1,500,000
Belaustegui acquired his interest in these mining claims for no consideration. Belaustegui then assigned his interest to an alleged venture of Hatsis, Belaustegui, and Everd Van Walsum (Van Walsum). By agreement dated September 4, 1969, Hughes, through John Meier, purchased these claims with Belaustegui named as the seller for $1,500,000. The escrow holder issued approximately $1,497,000 to Belaustegui, who turned the money over to James Cowley, who distributed $477,000 to Hatsis and $900,000 to Van Walsum.
The Bida and Belaustegui Sale — $1,900,000
The mining claims for this transaction were acquired for $25,000. Hatsis advanced most of the purchase price. By agreement dated October 20, 1969, Bida and Belaustegui, the named sellers, sold these claims to Hughes through John Meier for $1,900,000. The escrow holder issued $1,881,000 to the named sellers, who turned the money over to Cowley. Cowley reimbursed Hatsis for the purchase price and distributed $165,000 to Bida and Belaustegui. Cowley also distributed $1,150,000 ultimately to Intermovie and approximately $550,000 to Hatsis.
Globe Minerals, Inc., Sale — $1,400,000
The mining claims for this sale were acquired for $57,000, advanced by Suckling from the $900,000 he had received from Meier in the Bogdanich sale. By agreement dated December 2, 1969, Globe Minerals, Inc. (Globe), the named seller, sold these claims to Hughes for $1,400,000. An agent for Globe received $1,387,000 from the escrowee, who delivered it to Cowley, who in turn delivered it to Van Walsum.
In all the above-described transactions, the mining claims were purchased for relatively nominal consideration and subsequently sold to Hughes at greatly inflated prices. Meier, as Hughes' agent for these transactions, signed the escrow agreements in the Hatsis, Belaustegui, and Belaustegui-Bida transactions and was extensively involved in these transactions on behalf of Hughes. Petitioner also signed numerous other documents on behalf of Hughes in negotiating and consummating these transactions. Meier directly acknowledged his authority to acquire claims for Hughes and negotiated with Foley to provide a shell corporation (CPLD) to avoid publicity in the Bogdanich sale.
The total sales proceeds received from Hughes for the mining claims involved in the five transactions was $8,550,000. After reductions for escrow expenses and authorized payments, sales proceeds netted $8,401,587.72 for distribution from the various escrowees. Suckling, Intermovie, and/or Van Walsum received a total of $4,816,976.02 from the five sales, as follows:
| Hatsis sale | $480,000.00 |
|---|---|
| Bogdanich sale | 900,000.00 |
| Belaustegui sale | 900,000.00 |
| Bida-Belaustegui sale | 1,150,000.00 |
| Globe Minerals sale | 1,386,976.02 |
| Total | 4,816,976.02 |
During the time these sales were taking place, Suckling engaged Charles Adams, Everd Van Walsum, and Robert Kahan, among others, to do some "tax planning" for Meier. While Meier could not appear, directly or indirectly, to be the owner of these funds, he undertook to retain control over these funds that were ultimately deposited into trust, or were placed under the control of other individuals or corporations for his benefit. When the initial overseas transfers took place, Meier's "advisers" did not know the source of the funds.
Hatsis told Meier that he was entitled to share with Meier in the funds that went overseas from the mining transactions. Van Walsum met with Hatsis at least 10 times about the possibilities of transferring money to Europe. Hatsis told him how it was to be divided. Van Walsum said the "set up was to get the money out of the country, and make certain investments * * * the people we were doing that for, which are Mr. Meier and Mr. Hatsis." Hatsis also told Van Walsum how much money out of every transaction was to go overseas. The group — Suckling, Adams, Van Walsum, Kahan — was working for two clients, Meier and Hatsis, who "were the final owners of the funds [handled] through the whole system."
The diversion scheme, planned by Meier and his "advisers," included the use of dormant and/or newly incorporated foreign entities. Sales proceeds from mining transactions were transferred to foreign corporations intended to appear as the owners of the proceeds. Documentation reflecting these transfers was subsequently created to corroborate the transfers. The named sellers of mining claims appeared to be acting for the foreign corporations.
The funds were transferred overseas in a convoluted manner. They were first transferred to Intermovie, a Dutch corporation, to minimize taxes in the Netherlands. The funds were, in turn, transferred to Inrespro, a Bahamian corporation, to minimize Netherlands' tax. Intermovie retained a 4-percent fee for services under the pretense that it had acquired the properties sold for Inrespro.
The next step was the transfer of $1,100,000 from Inrespro to Curacao. These funds were used to establish trusts for the benefit of Meier and his family (Meier family trust and the Calliandra trust). Even though the terms of the trust provided that the trust corpus was to revert to the Van Walsum Management Co. at the end of the 10-year term, Van Walsum considered the funds to be Meier's.
At one point during the diversion scheme, Meier became impatient and demanded payments from and increased control over the overseas assets. Meier claimed he was entitled to complete control over the overseas funds and asserted that it was "[his] money." Meier asserted control over the use of the funds as he saw fit. For example, in addition to the $900,000 that Suckling received from Meier and the trust arrangements, Meier directed a foreign company (Inriego) that had received some of the funds to transfer certain money in accord with his instructions. Also, Meier met with Van Walsum during the period these transactions were taking place to arrange for the placement of the funds which insured that the funds would be for Meier's use and benefit.
In the notice of deficiency, respondent determined that petitioner did not report any of the funds diverted from Hughes and increased petitioner's income by one-half of the sales proceeds received by Intermovie, as follows:
| Sale | Sales price | To Intermovie | Petitioner's share |
|---|---|---|---|
| 1969 | |||
| Bogdanich | $2,900,000 | $900,000 | $450,000 |
| Hatsis | 765,000 | 480,000 | 240,000 |
| Belaustegui | 1,500,000 | 900,000 | 450,000 |
| Bida/Belaustegui | 1,891,000 | 1,150,000 | 575,000 |
| Total | 1,715,000 | ||
| 1970 | |||
| Globe Minerals | 1,400,000 | 1,386,976 | 540,988 |
| Total | 540,988 |
The one-half share of proceeds was predicated on an equal partnership with Hatsis. Petitioner did not report any income from such sales on his returns for 1969 or 1970.
In 1968 and 1969, petitioner dealt extensively in cash transactions involving the purchase of several parcels of real estate and the investment in a corporation formed to construct a convalescent home.
In 1968, petitioners deposited $62,348, $22,680 in currency, in a bank account at the Bank of Las Vegas. Petitioner also received a check for $15,000 from Basic Industries, Inc., which he deposited in an account with Irving Trust Co. Petitioners reported $48,076 and $66,399 gross income on their 1968 and 1969 returns, respectively. These amounts did not include the deposits discussed above or the funds diverted from Hughes.
On March 17, 1972, Hughes Tool Co. filed a complaint in the U.S. District Court for the Central District of Utah naming the following defendants: (1) Anthony Hatsis; (2) Toledo Mining Co.; (3) Globe, Inc.; (4) John H. Meier; (5) John R. Suckling; (6) Charles W. Adams; (7) E.B. Van Walsum; (8) Malaga Investments, Ltd.; (9) Inrespro, Ltd.; and (10) Maatschappij Intermovie, N.V. The complaint contained, among others, the following allegations: That the "defendants conspired among themselves and with each other to sell to [Hughes] mining claims * * * for amounts of money far in excess of the value of said properties." "That defendant Meier was one of the agents of [Hughes], who was induced by defendants to forsake his fiduciary duties." The complaint goes on to allege the various sales already referred to in this opinion. The complaint concludes with the request for an accounting seeking that "each of [the] defendants should be required to account" for the "wrongful benefits * * * believed to be in excess of $8,000,000.00."
After an unsuccessful attempt to dismiss the proceeding, Meier filed an answer on June 8, 1973, generally denying most of the allegations in the complaint and asserting various defenses. Meier also attempted, unsuccessfully, to stay the proceeding pending the outcome of a criminal income tax evasion indictment outstanding against him. The reason advanced in support of a stay was based upon Fifth Amendment privilege. Ultimately, petitioner's request for a stay was denied by the Court of Appeals for the Tenth Circuit and the Supreme Court.
On December 21, 1977, Judge Aldon J. Anderson caused to be filed a "MEMORANDUM OPINION IN LIEU OF FINDINGS OF FACT AND CONCLUSIONS OF LAW [Under Rule 52(a), F.R.C.P.]." Judge Anderson's Memorandum Opinion contains a summarization of the facts and specific findings of fact and law as set forth therein. (The Memorandum Opinion is attached hereto and marked as "Appendix A.") Judge Anderson found as ultimate facts —
that * * * Meier occupied a trusted fiduciary position with [Hughes] for the acquisition of mining properties; that * * * Meier breached that duty by secretly diverting funds from the five sales to his own use and benefit and to the damage of [Hughes]; that there is no legal basis under which * * * Meier could have properly received for his own use and benefit any of such money; and that * * * Meier must account for the funds entrusted to his care in relation to these transactions. [Hughes Tool Co. v. Meier, 489 F. Supp. 354, 369 (D. Utah 1977).]
Respondent seeks to offensively utilize the doctrine of collateral estoppel to estop petitioner from denying the diversion of funds from Hughes for his own use. Once the diversion of these funds for petitioner's use and control is established, the failure to report said amounts for Federal tax purposes may be readily shown. Respondent also attempts to utilize the diversion of funds and substantial understatement of income along with other findings from our record to, in toto, carry his burden of showing that the understatement was fraudulent. In addition to relying on the doctrine of collateral estoppel, respondent offered a substantial amount of documentary evidence and testimony.
In an effort to achieve "judicial economy" we first consider whether petitioner is collaterally estopped from relitigating certain facts found by the District Court in Hughes Tool Co. v. Meier, 489 F. Supp. 354 (D. Utah 1977), affd. per curiam No. 78-1565 (10th Cir., Apr. 24, 1980). Collateral estoppel and the related doctrine of res judicata have the dual purpose of protecting litigants from the burden of relitigating an identical issue and of promoting judicial economy by preventing unnecessary or redundant litigation. Under the doctrine of res judicata, or claim preclusion, a judgment on the merits in a prior suit bars a second suit which involves the same parties or their privies and is based on the same cause of action. On the other hand, under the doctrine of collateral estoppel, or issue preclusion, the judgment in the prior suit precludes, in the second cause of action, litigation of issues actually litigated and necessary to the outcome of the first action. Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 (1979) (Parklane).
Thus, collateral estoppel is used to foreclose an adversary from relitigating an issue the adversary previously litigated unsuccessfully in a different action. Until recently, however, the scope of collateral estoppel was limited by the doctrine of mutuality of parties — neither party could use the judgment as an estoppel against the other unless both parties were bound by the judgment. Parklane at 326-327. In Parklane, the Supreme Court abandoned the requirement of mutuality and sanctioned the use of collateral estoppel both offensively and defensively. Offensive use occurs when a party asserting a claim (respondent herein) relies upon collateral estoppel to estop a "defendant" (petitioner herein) from denying the findings of a prior proceeding. Defensive use occurs when estoppel is interposed as a defense to "plaintiff's" claim. Parklane at 326 n. 4. Trial courts are given broad discretion to determine when collateral estoppel should be applied offensively. Parklane at 331.
In Montana v. United States, 440 U.S. 147 (1979) (Montana), the Supreme Court refined the Parklane parameters for use of collateral estoppel. In Montana, the Court used a three-prong test. First, whether the issues presented in the subsequent litigation are in substance the same as those in the first case; second, whether controlling facts or legal principles have changed significantly since the first judgment; and third, whether other special circumstances warrant an exception to the normal rules of preclusion. Montana at 155. See Estate of Best v. Commissioner, 76 T.C. 122, 134 (1981). Application of the doctrine in this manner "[precludes] parties from contesting matters that they have had a full and fair opportunity to litigate [and] protects their adversaries from the expense and vexation attending multiple lawsuits, conserves judicial resources, and fosters reliance on judicial action by minimizing the possibility of inconsistent decisions." Montana at 153-154.
Collateral estoppel may be utilized in connection with matters of law, matters of fact, and mixed matters of law and fact. Historically, with regard to factual matters, a distinction was made between (1) "ultimate" and (2) "evidentiary" or "intermediate" facts. This distinction was made with respect to the first proceeding (in which the fact is initially found) and the second proceeding (in which one of the parties attempts to establish the same fact by means of collateral estoppel). Early case law differed over whether the facts found in the first proceeding were limited to those which were "ultimate" or included both "ultimate" and "intermediate" facts. See The Evergreens v. Nunan, 141 F.2d 927, 928-929 (2d Cir. 1944) (Evergreens).
In Evergreens at 929-931, the Circuit Court of Appeals for the Second Circuit considered, for the first time, whether the fact to be established by means of collateral estoppel in the second proceeding was likewise limited to ultimate facts in the context of the second proceeding. Although the Circuit Court did not express a preference as to whether the facts had to be found as ultimate in the context of the first proceeding, they held that the fact established must be an ultimate fact in the context of the second proceeding. Evergreens at 930-931. We adopted this rule in Amos v. Commissioner, 43 T.C. 50, 54 (1964), affd. 360 F.2d 358 (4th Cir. 1965).
Contemporary case law and commentary have been critical of the Evergreens approach and the limitation of collateral estoppel to ultimate facts, either as taken from the first proceeding or as applied in the second proceeding. Comment j to Restatement, Judgments 2d, section 27 (1982), is especially instructive on the difficulties resulting from applying the Evergreens rule.
Determinations essential to the judgment. It is sometimes stated that when a determination is a necessary step in the formulation of a decision and judgment, the determination will not be conclusive between the parties if it relates only to a "mediate datum" or "evidentiary fact" rather than to an "ultimate fact" or issue of law. It has also been stated than [sic] even a determination of "ultimate fact" will not be conclusive in a later action if it constitutes only an "evidentiary fact" or "mediate datum" in that action. Such a formulation is occasionally used to support a refusal to apply the rule of issue preclusion when the refusal could more appropriately be based on the lack of similarity between the issues in the two proceedings. If applied more broadly, the formulation causes great difficulty, and is at odds with the rationale on which the rule of issue preclusion is based. The line between ultimate and evidentiary facts is often impossible to draw. Moreover, even if a fact is categorized as evidentiary, great effort may have been expended by both parties in seeking to persuade the adjudicator of its existence or nonexistence and it may well have been regarded as the key issue in the dispute. In these circumstances the determination of the issue should be conclusive whether or not other links in the chain had to be forged before the question of liability could be determined in the first or second action.
The appropriate question, then, is whether the issue was actually recognized by the parties as important and by the trier as necessary to the first judgment. * * *
[Restatement, Judgments 2d, sec. 27 (1982). Emphasis added.]
Most recently, the Court of Appeals for the District of Columbia expressed its preference for the Restatement test over the Evergreens rule. Synanon Church v. United States, 820 F.2d 421 (D.C. Cir. 1987). The court noted "many courts, including the Second Circuit itself, have ignored the Evergreens rule, and they have measured the scope of preclusion, not by a distinction between ultimate and mediate facts, but rather by focusing more directly on the quality and extensiveness of litigation in the first action." (Fn. ref. omitted.) Synanon Church v. United States, supra at 426-427. See Wickham Contracting Co. v. Board of Education of City of New York, 715 F.2d 21 (2d Cir. 1983); Coward v. Colgate-Palmolive Co., 686 F.2d 1230 (7th Cir. 1982), cert. denied 460 U.S. 1070 (1983); Gibson v. Missouri Pacific Railroad, 579 F.2d 890 (5th Cir. 1978), cert. denied 440 U.S. 921 (1979); Singer v. A. Hollander & Son, 202 F.2d 55 (3d Cir. 1953) (ignoring Evergreens rule); Phillips v. United States, 502 F.2d 227 (4th Cir. 1974), vacated on other grounds 424 U.S. 961, cert. denied 429 U.S. 1024 (1976); Considine v. United States, 645 F.2d 925 (Ct. Cl. 1981); Overseas Motors, Inc. v. Import Motors, Ltd., 375 F. Supp. 499 (E.D. Mich. 1974), affd. 519 F.2d 119 (6th Cir. 1975), cert. denied 423 U.S. 987 (1975) (criticizing Evergreens rule). Also, recent opinions of this Court have questioned the vitality and correctness of the Evergreens rule. See Peck v. Commissioner, 90 T.C. 162, 169 (1988).
We find the reasoning in the Restatement to be the better view. Thus, we will no longer follow Amos v. Commissioner, supra, to the extent it prescribes a test based on "ultimate" versus "evidentiary" facts in applying the doctrine of collateral estoppel or issue preclusion.
We now consider the extent to which the doctrine of collateral estoppel may apply in this case. We first focus on the first prong of the Montana test, i.e., the issues decided and necessary to the decision in the Hughes accounting proceeding. Montana v. United States, 440 U.S. 147 (1979); Commissioner v. Sunnen, 333 U.S. 591 (1948). Collateral estoppel cannot apply if the party against whom it is asserted did not have a full and fair opportunity to litigate the issue for which the doctrine is being asserted in the earlier proceeding. Allen v. McCurry, 449 U.S. 90 (1980).
Petitioner is correct in pointing out that his tax liability was not in issue in the earlier proceeding, and neither did the District Court decide whether he fraudulently omitted income. However, collateral estoppel applies to issues of fact or law previously litigated. Parklane Hosiery Co. v. Shore, 439 U.S. 322 (1979); Montana v. United States, supra.
It is clear that the factual predicate for petitioner's diversion of funds for his own use and control and the accounting action are identical, even though the resulting legal and tax consequences might differ. Both causes of action are based on petitioner's sale of mining claims at inflated prices to Hughes. Every significant fact considered in the Hughes litigation is at issue in this case.
To better evaluate whether petitioner had a full and fair opportunity to litigate this issue in the earlier accounting action we must consider the nature and purposes of such an action. An accounting is essentially an equitable remedy which is civil in nature. It is designed to prevent unjust enrichment by requiring the disgorgement of any benefits or profits received as a result of a breach of fiduciary duty. The right to an equitable accounting arises generally from defendant's possession of money or property which, because of some particular relationship between himself and plaintiff, he is obliged to surrender. 1A C.J.S., Accounting, sec. 15 (1985); 1 Am. Jur. 2d, Accounts and Accounting, sec. 50 (1962).
As with other equitable actions, plaintiff must show that his remedy at law is inadequate. Dairy Queen, Inc. v. Wood, 369 U.S. 469 (1962). "Before an order for an accounting is entered, a plaintiff must show that his remedy at law is inadequate, that a fiduciary relationship between the plaintiff and the defendant exists, and that plaintiff is or may be entitled to the money or property of the plaintiff that has come into defendant's hands." Hughes Tool Co. v. Meier, 489 F. Supp. 354, 374 (D. Utah 1977). "In a suit in accounting in equity * * * the defendant [must] account for all money or property of the plaintiff that has come into his hands." Simper v. Scorup, 78 Utah 71, 1 P.2d 941, 945 (1931).
Generally, there are two parts to an accounting proceeding. First, the party seeking an accounting must establish a right to an accounting. Plaintiff must show an inadequate legal remedy, fiduciary relationship, and the other prerequisites noted above. If this is shown, the court will order an accounting. After this order, the second part of the action proceeds. "After the order for an accounting, interlocutory in character, is entered, the burden shifts to defendant to show that the plaintiff, in fact, is not entitled to the money or property." Hughes Tool Co. v. Meier, supra at 374.
The District Court found that Meier had breached his fiduciary duty to Hughes by converting Hughes' funds to his own use and control. The court ordered Meier to account to Hughes for such funds. The key element in both cases is the diversion of Hughes' funds to Meier's use and control. It is clear that Meier's motivation and purposes in defending against the allegations in the accounting action are identical to his need to show that respondent's determination that he derived income from these same transactions is in error.
The extent of the controversy here is largely due to petitioners' failure to stipulate facts as required by Rule 91. Making our task even more difficult, petitioners omitted any proposed findings of fact in their brief. Moreover, petitioners filed a 15-page reply brief which did not specifically respond to nearly 80 pages of proposed factual findings set forth in respondent's 124-page opening brief. The District Court in the Hughes case found —
that the defendant Meier occupied a trusted fiduciary position with the plaintiff for the acquisition of mining properties; that the defendant Meier breached that duty by secretly diverting funds from the five sales to his own use and benefit and to the damage of his principal; that there is no legal basis under which defendant Meier could have properly received for his own use and benefit any of such money; and that the defendant Meier must account for the funds entrusted to his care in relation to these transactions. * * *. [Hughes Tool Co. v. Meier, supra at 369. [Emphasis added.]]
There is a complete identity of factual issues in this case. Respondent must prove an underpayment exists of which some portion is due to fraud. Rule 142(b). However, as to the underlying deficiency, petitioner has the burden of showing that he did not receive the additional amounts of income determined by respondent. Also, petitioner bears the burden of proof with respect to the amount of the underpayment of his tax liability determined in the notice of deficiency. Welch v. Helvering, 290 U.S. 111 (1933); Rule 142(a).
Our analysis here is largely an application of familiar principles of taxation to the facts as found by the District Court. Gross income includes gains derived from dealings in property. Sec. 61(a)(3). The District Court found that Meier's agents diverted proceeds from the sale of mining claims for Meier's benefit. Because income is taxed to the true owner (Lucas v. Earl, 281 U.S. 111 (1930)), and the funds were handled for petitioner's benefit and control, such funds constitute income to petitioner. See Warren v. United States, 613 F.2d 591 (5th Cir. 1980); United States v. Pfister, 205 F.2d 538 (8th Cir. 1953); Huntington National Bank v. Commissioner, 90 F.2d 876 (6th Cir. 1937). Respondent, by introducing petitioners' returns, has established that petitioners failed to report this income.
Also, petitioner argues that because he validly claimed the Fifth Amendment privilege in the Hughes Tool case, he did not receive a full and fair opportunity to litigate in that action. Thus, he argues, collateral estoppel should not apply. See Allen v. McCurry, supra.
We believe, however, despite petitioner's self-imposed testimonial incapacity, he was afforded a full and fair opportunity to litigate.
Despite invoking the Fifth Amendment, petitioner was able to vigorously defend in the District Court action. He thoroughly cross-examined witnesses, either in depositions or at trial. He made numerous objections to the testimony offered by Hughes. He moved, on various occasions, to dismiss for lack of jurisdiction, for a stay pending an outcome in the criminal case, and for the trial judge to recuse himself. He appealed to the Court of Appeals for the 10th Circuit based on alleged errors in the holding of the District Court. In short, he used all the legal and procedural means available to him to defend in the accounting action.
Petitioner was unsuccessful in the District Court accounting action not for lack of an opportunity, but on the substantial weight of the factual evidence presented against him. Indeed, the question of whether petitioner had diverted the funds to his own use and control was an essential issue in the accounting action, as well as in the criminal indictment for evasion and the issues in this civil tax case. Moreover, petitioner's loss in defending the accounting action or this proceeding would not collaterally estop him in a criminal proceeding. In the context of discussing collateral estoppel, we must also assume, as the District Court did when petitioner raised the Fifth Amendment issue in Hughes Tool Co. v. Meier, supra at 374, that "'the prevailing rule' in Baxter v. Palmigiano, 425 U.S. 308 (1976), [is] that 'the Fifth Amendment does not forbid adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence offered against them.'" See also Singleton v. Commissioner, 606 F.2d 50, 52 n. 3 (3d Cir. 1979), affg. a Memorandum Opinion of this Court.
Petitioner's position seems to be that there can never be a full and fair opportunity to litigate in a civil case so long as there is a related criminal action pending. Petitioner misapprehends the scope of the Fifth Amendment privilege. The Fifth Amendment protects against compulsory self-incrimination. Fisher v. United States, 425 U.S. 391 (1976). However, it does not prevent an accused from testifying, and the privilege may be waived. Raffel v. United States, 271 U.S. 494 (1926). In both civil and criminal actions, a party having the privilege must weigh the benefits of his testimony against the possibility of giving incriminating evidence in discovery, or on direct or cross-examination. See Barnes v. United States, 412 U.S. 837 (1973); Raffel v. United States, supra.
Thus, as part of a party's litigating strategy, there is a choice of whether or not to testify. It was petitioner's choice whether or not to avail himself of this opportunity. Petitioner asserted the privilege and must bear the consequences of such action. Moreover, while the amendment prevents self-incrimination, it does not prevent testimony by others. See California Bankers Association v. Shultz, 416 U.S. 21 (1974); Couch v. United States, 409 U.S. 322 (1973).
It appears that petitioner may have benefited from asserting the privilege, rather than it impairing his opportunity to litigate. Petitioner, in the Hughes accounting action, could validly refuse to answer interrogatories and deposition requests, and would not be compelled to produce documents. Hughes had to obtain materials and testimony from third parties.
Petitioner also refused to testify in the present case, based on the Fifth Amendment privilege. In the absence of new facts that might have been brought to light had petitioner testified in this case, there is nothing to suggest a different factual result. In addition, petitioner was afforded the opportunity in this case to bring in testimony by others supporting a theory that Hughes consented to the sales, or any other admissible evidence he wished to offer. In short, petitioner's asserting the Fifth Amendment privilege did not impair his ability to litigate in the District Court or in this Court. The adverse result in the prior action was based upon the overwhelming evidence presented against petitioner.
The second prong of the Montana test is whether the controlling facts and legal principles have changed significantly since the first action. We find that there have been no such changes. As previously discussed, collateral estoppel in this case relates primarily to factual issues, thus the legal principles are largely unaffected. The factual underpinnings of the earlier action are identical to the present proceeding. The only factual matter that may differ is a claimed defense of petitioner in this case. Petitioner alleges that Howard Hughes authorized such transactions at the behest of the Central Intelligence Agency. We left the record open for the deposition testimony of respondent's former agent Kaminski, whom petitioner contends would substantiate his claim. Petitioner failed to advance any testimony or other evidence in support of such claims during the trial or within the extended time that the record was left open. Thus, the second prong of the test has been met.
The third prong of the Montana test is whether there are any special circumstances that would warrant exception to the normal rules of preclusion. Petitioner has not presented any such circumstances. Petitioner had ample incentive to litigate, both here and in the District Court, because of the large amounts of money involved. In addition, the waste of judicial resources occasioned by the retrial of identical factual issues mitigates against petitioner.
Petitioners rely upon two Memorandum Opinions of this Court in further support of their contention that collateral estoppel should not apply. In Cipparone v. Commissioner, T.C. Memo. 1985-234, it was held that a conviction in State Court for bribery did not collaterally estop the taxpayer from litigating the amount of money received, because mere benefit, not receipt of any specific amount of money, was all that was necessary to a conviction under the statute. Because respondent failed to prove that the taxpayer actually received any money, we declined to sustain the fraud addition. Petitioner's reliance on this opinion is misplaced. In the instant case, the District Court clearly found that petitioner, through his agents, diverted substantial amounts of money for his own benefit and control. In addition, the crux of an accounting action is that plaintiff is entitled to a specific amount of money that has come into the defendant's hands. Hughes Tool Co. v. Meier, 489 F. Supp. 354, 374 (D. Utah 1977).
Petitioners' reliance on Mosteller v. Commissioner, T.C. Memo. 1986-505, also is misplaced. In that case, we declined to sustain the fraud addition based upon the taxpayer's conviction of larceny by false pretenses in a bid-rigging scheme. There we stated "Mere evidentiary facts in the criminal case, as opposed to ultimate facts, would not be established in this case under the principle of collateral estoppel by judgment." Because we have declined to place emphasis on the ultimate/evidentiary distinction in applying collateral estoppel, this rationale is not controlling in the instant case. In any event, Meier has chosen to put every fact in issue. Considerations of judicial economy should preclude petitioner from relitigating those issues of fact previously found. In addition, in Mosteller, respondent failed to establish by clear and convincing evidence that amounts received in the bid-rigging scheme were not in fact reported. In this case, it has been established that the items creating the underpayments were not reported on petitioners' income tax returns.
We accordingly hold that petitioner is collaterally estopped from denying the facts which support the finding that he had diverted funds from Hughes to his own use and control, as found by the District Court.
We next address the considerable evidentiary objections petitioner made both at trial and on brief. During trial, petitioner made innumerable objections based, for the most part, on relevancy and hearsay.
Petitioner objected to the relevancy of most of the evidence offered by respondent. Apparently, petitioner's relevancy objections are based on the assertion that petitioner was not involved with the transactions at all. Relevant evidence is evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence. Fed. R. Evid. 401. The evidence submitted by respondent in this action tends to implicate petitioner in the scheme to defraud both Hughes and the Federal Government. We will not reward petitioner for his skill in hiding his role in the project. Moreover, the opinion of the District Court shows that petitioner was involved in the above-described activity. Thus, petitioner's relevancy objections are not well founded.
The next set of objections involves the hearsay rule. Respondent sought to introduce transcripts of trial testimony and depositions from the earlier proceeding. This evidence is admissible under Rule 804(b) of Federal Rules of Evidence because it was shown that the declarants were unavailable to testify in this proceeding. In addition, because the factual predicate for both cases is identical, petitioner had the same motive and opportunity to develop both direct and cross-examination. Moreover, because of the lapse of time, this evidence might be more reliable than contemporaneous "live" testimony.
Concerning the hearsay objections, Rules 801(d)(2)(C), (D), and (E), and 803(6) of Federal Rules of Evidence, provide the basis for compliance with and/or exception to the hearsay rule concerning the questioned documents. Most of the records in question concerned the "business" transactions between Hughes, petitioner, and the other related individuals and entities, which included named businesses and trusts. The documents are, accordingly, either admissions by petitioner's agents, statements by petitioner's "co-conspirators" or "business records." Due to the macroscopic or "broad brushed" nature of petitioner's presentation (including his objections), both at trial and on brief, we are not compelled or disposed to address each document individually.
The final category of objections involves documentary evidence. Petitioner stipulated that some of the documents were authentic, but reserved hearsay and relevancy objections. The relevancy objections were identical to those posed in connection with the testimony and are disposed of on the same grounds as the testimonial objections. Fed. R. Evid. 401. Following a pattern, petitioner asserted a barrage of hearsay and authenticity objections to most of the documents offered by respondent.
As to the authenticity objections, respondent relies on the former recorded trial testimony and depositions of petitioner's agents and "co-conspirators" in the mining transactions to authenticate the documents. We are satisfied, from our reading of the former testimony and the interrelationship of the documents, that these documents were adequately authenticated and tested.
We now consider whether petitioner derived income from the Hughes' mining transactions in 1969 and 1970. Gross income includes all income from whatever source derived, including gains from dealings in property. Sec. 61. Income is taxed to the person who owns it. Lucas v. Earl, 281 U.S. 111 (1930).
While the funds were nominally in the hands of other individuals or entities, the District Court found that the sales proceeds were in the practical control of petitioner through his agents. Based upon the ultimate findings of fact by the District Court, petitioner is estopped from denying he derived taxable income from the mining transactions. This is true whether income is defined as a gain derived from dealings in property, sec. 61(a)(3), or as an "accession to wealth, clearly realized, over which the [taxpayer has] complete dominion." Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955). Because petitioner asserted control over the diverted funds that were used for his benefit, he is properly taxable on that income. This is so even though the money was diverted illegally and petitioner had an obligation to account for the money. James v. Commissioner, 366 U.S. 213 (1961).
Petitioner argues that there is no adequate foundation for asserting that he understated his income, and further, that the evidence establishes that Hatsis was the architect of the entire scheme. Therefore, none of the funds should be attributed as income to him. Petitioner also attacks the correctness of the determination that there was an equal partnership with Hatsis. Petitioner's arguments are unsupported by this record (and are at odds with the ultimate findings of the District Court).
With respect to transactions other than the mining transactions in 1968 and 1969, respondent increased petitioners' income based on amounts of cash deposits and other cash expenditures. Petitioners argue that this method is invalid, and respondent must use a net worth method of reconstruction, requiring beginning and ending net worth computations, which respondent has not proven. See Holland v. United States, 348 U.S. 121 (1954).
The net worth method of reconstructing income is not the only method available to respondent. The Supreme Court, in United States v. Johnson, 319 U.S. 503 (1943), authorized the use of the cash expenditures method. This method was described in DeVenney v. Commissioner, 85 T.C. 927, 930-931 (1985), as follows:
The cash expenditures method is based upon the assumption that the amount by which a taxpayer's cash expenditures during a taxable period exceed his known sources of income for that period is taxable income, unless the taxpayer can show his expenditures were made from some nontaxable source of funds. A proposed deficiency determined by use of the cash expenditures method is presumptively correct, and the burden of proof is upon the taxpayer to demonstrate otherwise. Welch v. Helvering, 290 U.S. 111 (1933); Rule 142(a); Burgo v. Commissioner, 69 T.C. 729, 743 (1978). To meet this burden, petitioners must prove either that someone else made the expenditures or that the funds used were obtained from nontaxable sources, e.g., loans, gifts, inheritances, or assets on hand at the beginning of the taxable period. [Citations omitted.]
In Holland v. United States, [supra], the Supreme Court sanctioned use of the net worth method of income reconstruction subject to certain safeguards. This method is substantially analogous to the cash expenditures method. The Supreme Court's safeguards may be summarized as follows:
(1) Respondent must track down relevant leads which might show alternative sources of nontaxable income if such leads are reasonably susceptible to being checked, and
(2) respondent must give proof of a likely source of taxable income.
Thus, the * * * satisfaction of the safeguards enumerated above [must be determined] in light of the facts and circumstances known to [respondent] subsequent to the filing of the petition.
Thus, petitioners' position that the cash expenditures method is not valid is incorrect. Before the safeguards in Holland are triggered, petitioner must either explain the source of or provide alternative nontaxable sources for the discrepancy in his expenditures and his reported income. This explanation commences respondent's investigative requirements under Holland.
Petitioner failed to provide any explanations for such discrepancy which would require respondent's investigation. We hold that petitioners failed to carry their burden of proving they did not understate their income as determined by respondent in the notice of deficiency.
Respondent argues that petitioner's failure to report diverted funds and other income on his tax returns for 1968, 1969, and 1970 is fraudulent. If any part of any underpayment for the taxable years is due to fraud, the addition under section 6653(b) will apply, not only to the underpayment attributable to fraud, but to the entire underpayment. Fraud must be proved by clear and convincing evidence. Sec. 7454; Rule 142(b). The existence of fraud is a question of fact to be resolved upon consideration of the entire record. Gajewski v. Commissioner, 67 T.C. 181 (1976), affd. without published opinion 578 F.2d 1383 (8th Cir. 1978); Mensik v. Commissioner, 328 F.2d 147 (7th Cir. 1964), affg. 37 T.C. 703 (1962), cert. denied 379 U.S. 827 (1964). Fraud is never presumed, but rather must be established by some independent evidence. Beaver v. Commissioner, 55 T.C. 85 (1970). Fraud may be proven by circumstantial evidence and reasonable inferences drawn from the facts because direct proof of the taxpayer's intent is rarely available. Spies v. United States, 317 U.S. 492 (1943); Rowlee v. Commissioner, 80 T.C. 1111 (1983); Stephenson v. Commissioner, 79 T.C. 995 (1982), affd. 748 F.2d 331 (6th Cir. 1984). The taxpayer's entire course of conduct may establish the requisite fraudulent intent. Rowlee v. Commissioner, supra; Stone v. Commissioner, 56 T.C. 213 (1971).
In a recently decided case, Bradford v. Commissioner, 796 F.2d 303 (9th Cir. 1986), affg. T.C. Memo. 1984-601 (Bradford), the Court of Appeals for the Ninth Circuit reaffirmed that it is appropriate to infer fraudulent intent from various kinds of circumstantial evidence and set forth a nonexclusive list of the "badges of fraud" that demonstrate fraudulent intent. These include: (1) The understatement of income; (2) inadequate records; (3) failure to file tax returns; (4) implausible or inconsistent explanations of behavior; (5) concealment of assets; and (6) failure to cooperate with tax authorities. The following are additional indicia of fraud: (1) Engaging in illegal activities; (2) attempting to conceal these activities; (3) dealing in cash; and (4) failing to make estimated tax payments. Bradford v. Commissioner, supra at 307-308.
Respondent has established that Meier's returns for the years involving the mining transactions were fraudulent. The first indicia of fraud in Bradford is understating income. We have already found that petitioner diverted funds of Hughes to his own use and control and that said funds constituted substantial income from the mining transactions during the 1969 and 1970 taxable years. Through introducing petitioners' returns into evidence, respondent has shown the failure to report any of this income. The failure to report said income resulted in large understatements of income on petitioners' 1969 and 1970 joint returns.
Part of the evidence relied upon by respondent to carry his burden of establishing fraud has been established through the offensive use of collateral estoppel. Accordingly, we must consider the burden of proof required in both proceedings. Civil tax fraud must be proven by clear and convincing evidence. Sec. 7454; Rule 142(b).
Section 27, Restatement, Judgments 2d (1982), and the holding in Synanon Church v. United States, 820 F.2d 421 (D.C. Cir. 1987), state the general rule that a fact found in a first case may be established by means of collateral estoppel either as an evidentiary or ultimate fact in the second case. Subsection (4) of section 28, Restatement, Judgments 2d (1982), recommends an exception in the following circumstances where "The party against whom preclusion is sought had a significantly heavier burden of persuasion with respect to the issue in the initial action than in the subsequent action; the burden has shifted to his adversary; or the adversary has a significantly heavier burden than he had in the first action."
Accordingly, we consider the standard of proof for an accounting action brought in a Federal District Court in Utah.
As previously indicated, plaintiff in an accounting action must show that through fraud or breach of a fiduciary duty, or both, he is entitled to money or property held by the defendant. There is no explicit burden of proof for accounting actions in Utah. However, where fraud is alleged it must be proven by clear and convincing evidence. Holland v. Moreton, 10 Utah 2d 390, 353 P.2d 989 (1960); Lynch v. MacDonald, 12 Utah 2d 427, 367 P.2d 464 (1962).
Fraud and breach of fiduciary duty can be separate bases for instituting an accounting action. An agent commits a breach of his fiduciary duty if he sells property to or buys property from his principal without full disclosure to his principal. Tatsuno v. Kasai, 70 Utah 203, 259 P. 318 (1927). See also Restatement, Agency 2d, secs. 387-389 (1957). It would appear that such a breach becomes fraudulent when accompanied by intentional nondisclosure and bad faith. See comment "a" to Restatement, Agency 2d, section 389 (1957). Conduct similar to that of petitioner's has been found to be fraudulent by Utah courts in several cases.
Tatsuno v. Kasai, supra, involved the defendant's acting as agent for the purchase and sale of mining stocks by the plaintiff. In that case, plaintiff directed defendant to sell the stock at $4 per share. Defendant, without selling the stock, remitted $4 per share to the plaintiff, and subsequently sold the stock for $4.07 per share. Defendant also sold to plaintiff shares belonging to defendant for $1 per share when the market price was $0.75 per share. Plaintiff commenced an accounting action. The trial court concluded that the purported sales and purchases were fraudulent and voidable. The Supreme Court of Utah affirmed, noting the duty of honesty between principal and agent, and stated that it was "clearly shown * * * [that defendant] took plaintiff's stock in breach of his trust for his own use and benefit and to the injury and detriment of the plaintiff." Tatsuno v. Kasai, 259 P. at 322. The court also held that in such circumstances a fiduciary or trust relationship is involved, which is more than a principal and agent relationship.
In Holland v. Moreton, supra, plaintiff granted defendant a one-fourth interest in certain unpatented mining claims in exchange for defendant's acting as agent to patent and sell the claims. Defendant colluded with the purchaser, and agreed to sell plaintiff's three-fourth's interest at $100,000, while defendant sold his interest to the purchaser for $287,000. When plaintiff discovered this, he commenced an action for fraud. The trial court vacated a jury verdict in favor of plaintiff, including punitive damages for fraud. The Supreme Court of Utah reversed, reinstating the jury verdict.
Lynch v. MacDonald, supra, like Tatsuno v. Kasai, supra, was an action for an accounting. In that case, a joint venture was formed to purchase oil and gas leases. One of the joint venturers, a geologist, found such properties at a price of $4 per acre. He informed the seller that the venture was interested in the properties and that he had quoted the venture a price of $7 per acre, rather than $4; the $3 differential was to be paid to him without the knowledge of the other participants of the joint venture. The trial court ordered an accounting, finding that the joint venture was the victim of a fraud perpetrated by the geologist and aided and abetted by the seller. The Supreme Court of Utah affirmed, finding that fraud was established "by clear, satisfactory, and convincing proof" and that all of the essential elements of actionable fraud were present.
The trial court in the Hughes case did not state with acuity the standard of proof it used. Although fraud was not expressly alleged, Hughes contended that Meier was its agent in the acquisition of mining claims, that Meier abandoned his fiduciary duty to Hughes and, together with others, sold the mining claims to Hughes at inflated prices and secretly participated in the redistribution of money to and for the benefit of defendant Meier and others. Hughes Tool Co. v. Meier, 489 F. Supp. 354, 359 (D. Utah 1977).
All of the classic indicia of fraud are present in the Hughes case; a misrepresentation by Meier about the price and/or value of the mining claims, in addition to concealing his role on both sides of the transaction, reliance on his representations by Hughes, and damage to Hughes. See Pace v. Parrish, 122 Utah 141, 247 P.2d 273 (1952). The facts of this case are strikingly similar to those in Tatsuno v. Kasai, supra; Holland v. Moreton, supra; and Lynch v. MacDonald, supra.
The District Court in Hughes Tool Co. v. Meier, supra, found that Meier held a fiduciary position, that he breached such position by secretly diverting funds from the sales for his own use and benefit and to the damage of his principal, and that there was no basis upon which he could keep the funds. Under these circumstances, plaintiff (Hughes) established fraud through the breach of Meier's fiduciary duty.
The District Court in Hughes Tool Co. used language in its opinion indicating that the quantum of proof would have, at a minimum, met a clear and convincing standard. The Court held as follows: "In view of the foregoing findings, the court concludes as a matter of law defendant Meier must * * * render an accounting." Hughes Tool Co. v. Meier, supra at 369. Emphasis supplied.
Defendant Meier appears to misapprehend the quantity and quality of the evidence which has been presented in this case to date * * *. As the court rehearsed in great detail * * * there is substantial evidence in the record upon which to base a ruling fixing liability on defendant * * *. That is, plaintiff established [the sales transactions and that the funds were the responsibility of Meier]. [Hughes Tool Co. v. Meier, supra at 373.]
"The court is of the opinion that all of the evidence in this matter shows that the sum of * * * is due the plaintiff." Hughes Tool Co. v. Meier, supra at 374. Although not entirely clear, we conclude that the standard of proof required in this type proceeding in Utah is "clear and convincing." Based upon our review of Judge Anderson's opinion and the record in the District Court proceeding, we believe that Hughes Tool was held to a "clear and convincing" standard of proof in establishing that Meier, through a breach of his fiduciary duty, secretly diverted Hughes' funds for his own use and control.
Another indicia of fraud in Bradford is the failure to keep records or keeping inadequate records. In this case, many of the documents were back-dated or dated "as of" a certain date, to retroactively reflect the transactions in the light petitioner wanted them to appear, i.e., making the foreign corporations the owners of the claims. Additionally, Meier's role on both sides of these transactions is not reflected in the records (of necessity, to conceal his involvement). In the context of this case, the records of the transactions are inadequate and were intended, at the very least, to conceal information from petitioner's employer and likely from the taxing authorities, including respondent.
Another indicia noted in Bradford is the concealment of assets. This is a highly probative factor here. The sales proceeds were almost immediately transferred overseas after the execution of the transactions. In addition, the documentation makes it appear that the foreign corporations were the owners of the funds, while the funds were under the control of and for the benefit of petitioner. We find it highly indicative of fraudulent intent that the funds, after being channeled through two different foreign corporations, ended up in a trust for the benefit of petitioner. This conduct, calculated to mislead and conceal, is indicative of fraud. Spies v. United States, 317 U.S. 492 (1943). Gajewski v. Commissioner, 67 T.C. 181 (1976), affd. without published opinion 578 F.2d 1383 (8th Cir. 1978).
Petitioner contends that his so-called "fraudulent intent," because of the transfer of funds, was merely "tax planning" by a group of knowledgeable advisers. We find that the use of the foreign entities, in the context of this case, was a sham or subterfuge to disguise the real owner, avoid identification of petitioner, and to evade Federal income taxes.
A final factor relevant here is whether the activity was illegal. While we know of no State criminal charges filed in connection with this case, petitioner rather egregiously breached his fiduciary duty to his employer, to the extent of benefiting by several million dollars. We find that this situation is not significantly different than a case involving embezzlement or other kind of theft. The lack of potential for criminal punishment or penalty seems to be a distinction without a difference in this setting; petitioner's activities are no less illegal or improper.
Respondent need not prove the precise amount of the underpayment resulting from fraud. Otsuki v. Commissioner, 53 T.C. 96, 105 (1969). In any event, some amount of underpayment has been established for the years 1969 and 1970. We conclude, therefore, based on the facts in the record, that petitioner intended not only to conceal his activities from his employer, Hughes, but also fraudulently intended to evade Federal income tax.
The next issue involves the statute of limitations on assessment. The notice of deficiency was mailed more than 3 years after the filing of the returns for the years at issue. See sec. 6501(a), (b)(1). However, in the case of a false or fraudulent return filed with the intent to evade tax, the tax may be assessed at any time. Sec. 6501(c)(1). Petitioner is subject to the section 6653(b) addition for 1969 and 1970 because there were fraudulent understatements. Therefore, we hold that the statute of limitations does not bar assessment and collection of tax for 1969 and 1970. The statute of limitations does, however, act as a bar to assessment or collection of the tax due for the 1968 taxable year. Respondent has not proven an addition for fraud for 1968 nor has any other defense regarding the statute of limitations been proven by respondent.
Respondent has determined that petitioner underreported his income for 1968 because petitioner's bank deposits exceeded his reported income by approximately $29,000. In addition, petitioner engaged in large numbers of cash transactions during 1968, 1969, and 1970. Bradford v. Commissioner, 796 F.2d 303 (9th Cir. 1986), affg. T.C. Memo. 1984-601. However, for taxable year 1968, respondent has not established the quantum of evidence sufficient to prove fraud and thereby lift the bar of the statute of limitations. While the Hughes episode provided highly probative evidence of fraudulent intent for 1969 and 1970, this does not flow to years unrelated to those transactions. This finding renders moot respondent's determination that petitioner omitted interest income and other items of income for 1968.
To reflect the foregoing,
Decision will be entered for the respondent in part and the petitioners in part.