Casey
v.
Comm'r of Internal Revenue

United States Tax CourtOct 28, 1986
87 T.C. 847 (U.S.T.C. 1986)
87 T.C. 84787 T.C. No. 54

Docket No. 42107-84.

1986-10-28

CHARLES DON CASEY, Sole Shareholder of Don Casey Co., Inc., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Howard A. Weinberger, for the petitioner. William P. Hardeman for the respondent.


The Commissioner determined that the DC Co. owed certain deficiencies and that it was liable for the addition to tax for fraud under sec. 6653(b), I.R.C. 1954. The parties agreed that the statute of limitations had run unless the Commissioner proved fraud. After the trial, the Court rendered a bench opinion announcing that the Commissioner had failed to prove fraud and that therefore the company was not liable for the deficiency. Thereafter, the company filed a motion for reimbursement of its litigaion costs under sec. 7430, I.R.C. 1954. HELD, in pursuing the litigation in this Court, the Commissioner was unreasonable within the meaning of sec. 7430, I.R.C. 1954, and consequently, the company is entitled to reimbursement of its litigation costs. Howard A. Weinberger, for the petitioner. William P. Hardeman for the respondent.

OPINION

SIMPSON, JUDGE:

This matter is now before us on a motion by the petitioner for reimbursement of its litigation costs under section 7430 of the Internal Revenue Code of 1954. The principal issue for decision is whether the Commissioner was unreasonable within the meaning of that section in pursuing the litigation in this Court.

The petitioner, Don Casey Co., Inc. (the company), was a Texas corporation with its principal office located in Garland, Tex. The company's corporate charter was revoked on August 10, 1983, by the Secretary of State of the State of Texas, and it has been inactive and defunct since that time. Charles Don Casey is the sole shareholder of the company and resided in Dallas, Tex., at the time the petition was filed in this case.

The company filed its Federal corporate income tax return on the basis of a fiscal year ending March 31, and it filed its Federal income tax return for the fiscal year ending March 31, 1980, with the Internal Revenue Service Center, Austin, Tex. The company maintained its books and records and filed its Federal income tax returns by use of the accrual method of accounting. We will sometimes identify the company's taxable year by reference to the year in which it ends.

The company was in the silver reclamation business. It recovered silver from used film and processed it into silver bars. It also purchased silver scrap from other processers and silver bars which needed further refining. All silver was sold as silver bars.

In late 1981 or early 1982, the Internal Revenue Service commenced a criminal investigation of the company as a result of a confidential report that the company had willfully omitted income in excess of $2 million. The IRS issued a summons to Mr. Casey to produce the books and records of the company. His attorney, Howard A. Weinberger, advised the IRS that the records would be made available in his office. Two special agents, including Russell Shelton, came to Mr. Weinberger's office on March 17, 1982, and all of the records then possessed by Mr. Weinberger, including the general ledger of the company, were made available to the special agents. The agents removed many of the records, but they did not take the general ledger. Mr. Shelton conducted the investigation, and he does not remember seeing the complete general ledger until shortly before the trial.

Subsequently, the IRS recommended that Mr. Casey be charged with a violation of Section 7206(1) for willful filing of a false return. The recommendation was based on the alleged failure to report two sales of silver to a subsidiary of General Motors (GM) in March 1980. The first GM sale was on March 4, 1980, and was for $1,361,243.11. The second GM sale was allegedly on March 31, 1980, and was for $809,470.06. In concluding that those sales were not reported, the agent relied upon a financial statement of the company for March 1980. That statement reported:

+----------------------------------------+ ¦Sales - silver bars (rec'd)¦$636,180.58 ¦ +---------------------------+------------¦ ¦Sales - silver flake (cust)¦422,953.47 ¦ +---------------------------+------------¦ ¦Sales - silver film flake ¦554,938.53 ¦ +---------------------------+------------¦ ¦Sales - manufactured items ¦41,545.40 ¦ +---------------------------+------------¦ ¦Total sales ¦1,655,617.98¦ +----------------------------------------+

On November 15, 1983, Mr. Weinberger met in Washington, D.C., with an attorney representing the Department of Justice. At that meeting, Mr. Weinberger took the position that the first GM sale had in fact been recorded in the general ledger and included in the reported income. In support of his position, he produced excerpts from the general ledger showing that such sale was recorded as having occurred on March 4, 1980. He also took the position that the second GM sale was not reported for 1980 because the price was not agreed upon until after March 31, 1980. The Justice attorney asked whether Mr. Weinberger would agree to a further investigation, and Mr. Weinberger agreed. The special agent was contacted by the Justice attorney and told of Mr. Weinberger's position and evidence. Nevertheless, the special agent never made any further investigation; he never requested to see the general ledger, and he never interviewed any other witnesses with respect to the general ledger, nor requested any other documents. Mr. Casey was never charged with any criminal violation.

On November 20, 1984, the Commissioner issued a notice of deficiency to the company in which he determined that the company had omitted $2,406,202.22 from its gross income for 1980 and that the underpayment of tax was due to fraud within the meaning of section 6653(b). In its petition, the petitioner disputed the entire deficiency and its liability for the fraud addition. It alleged that the statute of limitations had run before the issuance of the notice of deficiency. It also alleged that the first GM sale had been reported and that the second GM sale was not reportable for 1980. It alleged that during the latter part of March 1980, the price of silver was fluctuating drastically, that the petitioner and GM agreed that the price of such silver should be computed by ‘using a ten day average of silver prices both before and after the actual date of transfer of title,‘ and that the price was not determined until after March 31, 1980. In his answer, the Commissioner alleged that the proceeds of the first and second GM sales were not reported, that deposits in the RAD account at the Garland Bank and Trust were not reported, and that sales to Handy and Harman in the amount of $120,167.10, to Rio Grande Jewelers in the amount of $113,095.45, and of telescope scales in the amount of $2,226.50 were not reported. In its reply, the petitioner admitted that deposits were made in the RAD account and that the sales to Handy and Harman and to Rio Grande Jewelers were not reported; it denied for lack of information the allegation concerning the telescope scales.

On June 18, 1985, there was a hearing by an agent of the Appeals Division at which Mr. Weinberger appeared and produced the originals of the general ledger and sales journals for all of fiscal 1980. At that conference, Mr. Weinberger did not explain that the company reclassified sales for purposes of the financial statements. However, the Appeals officer did not question the validity of the general ledger shown to him, and the explanation of the reclassification would not have altered his conclusion; he accepted the petitioner's return since it reflected the income shown in the general ledger and the proper amount of tax.

The Appeals officer also requested whether the company would agree to a further examination of its records, and Mr. Weinberger agreed. A revenue agent came to Mr. Weinberger's office on November 25, 1985, and examined the company's records, including the general ledger, for approximately 2 hours.

The case was set for trial at a session of the Court commencing on March 3, 1986. On January 30, 1986, the counsel for the Commissioner advised Mr. Weinberger that he would concede the case, but on February 18, 1986, he reported to Mr. Weinberger that the Regional Counsel had overruled him and that the case would be tried.

At the trial, the general ledger of the company was admitted in evidence and showed that the first GM sale had been recorded. The proceeds of such sale were included in the income of the company for 1980. In connection with the second GM sale, the purchase order stated in part: ‘Invoice will be average Handy & Harmon of next five market days following quantity release less 1%‘ and ‘Invoice will be average Handy & Harmon of preceding five market days prior to shipment less 1%.‘ The silver was delivered to the GM subsidiary on March 31, 1980. The invoice had a typed price of $838,665.37; but that price was crossed out, and a price of $809,470.06 was written in. The change was initialed by an employee of the company, who remembered delivering the silver, remembered that there was some dispute over the price, and remembered that after consulting with Mr. Casey, he initialed the changed price. However, he did not remember whether the new price was inserted on March 31, 1980, or thereafter.

Special Agent Shelton testified and admitted that Michael Furlow, who was the comptroller and financial vice president of the company from July of 1980 until October 1981, told him that the first GM sale had been reclassified, although Mr. Furlow did not know why that was done. Mr. Shelton also admitted that his conclusion that the second GM sale was reportable in 1980 was based solely upon the purchase order and invoice; although the accountants for the company told him that there was some question about when the price was agreed upon and when the sale was completed, Mr. Shelton never interviewed William W. Parmenter, the buyer for the GM subsidiary and the person most familiar with the circumstances surrounding the purchase by such subsidiary, nor did Mr. Shelton interview any employees of the company regarding the circumstances surrounding such sale.

Mr. Furlow, who left the company because he was fired, was called by the Commissioner as his witness. He prepared the workpapers from which the company's 1980 return was prepared, and the proceeds of the first GM sale were included in income and reclassified by him. However, he believed that Mr. Casey withheld the records concerning some bank accounts and that the return did not report all receipts of the company.

Another former employee of the company testified that some sales of silver were made for cash and that he understood that the proceeds of some sales were not recorded in the books of the company. He also testified that on occasion, Mr. Casey commented with respect to the payment of taxes that ‘he needed it more than the government‘ and ‘it was maybe doing him better than the government.‘ Another former comptroller of the company, who was also dismissed, testified that Mr. Casey altered assay records in order to reduce what the company paid for silver. He also said that Mr. Casey ordered that invoices not be written for all cash sales and that all cash sales should not be recorded; according to that employee, Mr. Casey said ‘that there was no sense paying taxes on everything that was recorded, or everything that came in.‘

WELLS, J., did not participate in the consideration of this case.