An individual who had been convicted of fraud in connection with a payment he received was collaterally estopped from disputing the fraudulent nature of the payment in subsequent proceedings. The taxpayer, a Canadian citizen and resident, was an officer of a Canadian company providing management services to a controlled U.S. corporation that owned several newspapers. The taxpayer had received payments in connection with sales of publications by the U.S. company to various purchasers; the payments were allegedly for entering into noncompete agreements.
Under Canadian law and the relevant U.S.-Canada treaty, payments for noncompete agreements are nontaxable. However, the taxpayer was charged with multiple criminal counts of fraud on the grounds that those payments were not compensation for noncompete agreements but, rather, were disguised kickbacks for his securing the sales agreements between his company and the purchasers. He was convicted on two counts that concerned two different payments. One conviction was affirmed and the other vacated on appeal.
The IRS argued that the two payments at issue were taxable under the treaty as income derived from fraud. The taxpayer claimed they were for noncompete agreements. The court found that the taxpayer was allowed to dispute the characterization of one payment as fraudulent because his conviction related to that payment had been vacated. Thus, there was no final judgment on the issue.
However, he could not dispute the finding from his criminal conviction with respect to the other payment that the payment was, in fact, fraudulent. Collateral estoppel applied because (1) the criminal case resulted in a final judgment; (2) the issue was identical in the two proceedings; (3) the parties were the same in the two proceedings; (4) the issue was actually litigated and essential to the prior decision; (5) the controlling facts and applicable principles remained unchanged; and (6) no special circumstances applied as an exception to application of collateral estoppel.
Because the IRS responded timely to the taxpayer’s petition, and because there remained a factual dispute as to the characterization of the remaining payment as fraudulent or not, the taxpayer’s motion for summary judgment was denied.
Related case at Dec. 59,151(M) , TC Memo. 2012-226.
J.A. Boultbee, TC Memo. 2012-227, Dec. 59,152(M)
Code Sec. 894
CCH Reference – 2012FED ¶26,865.01
CCH Reference – 2012FED ¶26,865.055
Tax Court Rule 121
CCH Reference – 2012FED ¶42,281.64
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