                         T.C. Memo. 1997-139



                    UNITED STATES TAX COURT



        CHARLES McHAN AND MARTHA McHAN, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket No. 550-92.                 Filed March 18, 1997.



    Charles McHan, pro se.

    Eric B. Jorgensen, for respondent.



                         MEMORANDUM OPINION



    PANUTHOS, Chief Special Trial Judge:       This matter is

before the Court on petitioner Charles McHan's Motion for
                               - 2 -

Summary Judgment.1   As explained in greater detail below, we

shall deny petitioner's motion.

Background2

     On September 13, 1990, petitioner was charged in a 17-count

superseding bill of indictment with various drug trafficking

charges, filing false tax returns, engaging in a continuing

criminal enterprise, and criminal forfeiture, relating to his

involvement in an illegal scheme to distribute marijuana from

1984 to 1988.   Petitioner pleaded guilty in the U.S. District

Court for the Western District of North Carolina to a number of

the charges and was convicted with respect to the remaining

charges in July 1992 following a jury trial.




     1
        Although the petition in this case is a joint petition by
Charles McHan and his wife, Martha McHan, the latter did not join
in the filing of the motion that is the subject of this opinion.
Consequently, references to petitioner in the singular are to
Charles McHan. Because petitioner's motion does not address all
of the issues to be decided in this case, petitioner's motion is
more appropriately viewed as a motion for partial summary
judgment.

     Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
     2
        The following is a summary drawn from the entire record
of the relevant facts that do not appear to be in dispute. These
facts are stated solely for purposes of deciding the pending
motion. Fed. R. Civ. P. 52(a); Sundstrand Corp. v. Commissioner,
98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994).
Additional background discussion can be found in   McHan v.
Commissioner, T.C. Memo. 1996-12 (denying petitioner's motion for
summary judgment that the notice of deficiency is invalid). See
also United States v. McHan, 101 F.3d 1027 (4th Cir. 1996).
                              - 3 -

     In a Memorandum of Decision and Order entered December 10,

1993, the District Court also entered an order of criminal

forfeiture against petitioner in the amount of $395,670.    In

reaching its decision on the forfeiture count, the District Court

ruled that the Government bears the burden of proof with respect

to criminal forfeiture, that the degree of proof is beyond a

reasonable doubt, and that the amount subject to criminal

forfeiture is limited to the profits as opposed to the gross

proceeds from the criminal enterprise.3

     Petitioner appealed his various convictions and the

Government filed a cross-appeal with respect to the District

Court's holding limiting the amount of the criminal forfeiture to

petitioner's profits from the enterprise.   In United States v.

McHan, 101 F.3d 1027 (4th Cir. 1996), the U.S. Court of Appeals

for the Fourth Circuit affirmed petitioner's convictions but

reversed the District Court on the ground that the amount subject

to criminal forfeiture extends to the proceeds from a criminal

enterprise.

     Previously, on November 15, 1991, respondent issued a notice

of deficiency to petitioners determining deficiencies in and

additions to their taxes for 1985 and 1986 as follows:


     3
        The District Court found that the proceeds from
petitioner's criminal activities totaled $1,252,700, but that
petitioner's gross profits were only $395,670 after accounting
for the cost of goods sold and the share of the proceeds
distributed to petitioner's partner.
                                     - 4 -
                                                     Additions to Tax
                           Sec.           Sec.              Sec.             Sec.
Year       Deficiency   6653(b)(1)     6653(b)(2)      6653(b)(1)(A)    6653(b)(1)(B)

1985        $329,911     $164,956      50% of in-           ---                ---         $8
                                       terest due
                                       on $305,762

1986         $90,590        ---              ---           $52,226         50% of inter-   $1
                                                                           est due on
                                                                           $69,635

       The notice of deficiency includes an explanation of the adjustments

which states in pertinent part:

       1(A) It is determined that you received unreported income in the
       amounts of $1,311,670.00, $252,800.00 and $266,400.00, which was
       not reported on your income tax return for the years 1985, 1986,
       and 1987, respectively. Therefore, your taxable income is
       increased in the amounts of $1,311,670.00, $252,800.00 and
       $266,400.00 for the tax years ended December 31, 1985, December
       31, 1986, and December 31, 1987, respectively.

       1(B) It is determined that you are allowed the cost of sale of
       drugs in the amounts of $689,410.00, $159,525.00 and $65,490.00
       for the years 1985, 1986, and 1987, respectively. Therefore, your
       taxable income is decreased in the amounts of $689,410.00,
       $159,525.00 and $65,490.00 for the tax years ended December 31,
       1985, December 31, 1986, and December 31, 1987, respectively.

       1(C) It is determined that you are allowed a net operating loss
       carryback in the amount of $0.00 rather than $122,352.00 and
       $180,687.00 as reported on your tax return for the years 1985 and
       1986, respectively. Therefore, your taxable income is increased
       in the amounts of $122,352.00 and $180,687.00 for the tax years
       ended December 31, 1985 and December 31, 1986, respectively.

The notice of deficiency states that the 1987 year is included

in the notice for information purposes only.

       Petitioners invoked the Court's jurisdiction by filing a

timely imperfect petition for redetermination, followed by an

amended petition.4

       Petitioner now moves for summary judgment with respect to

the following issues:       (1) The addition to tax for substantial



       4
        At the time that the petition was filed, petitioner was
incarcerated in Estill, South Carolina.
                               - 5 -

understatement under section 6661 for 1985 is computed based upon

10 percent of the underpayment as opposed to the 25-percent rate

used in the notice of deficiency; (2) respondent is collaterally

estopped in this case from litigating a second time the issue

resolved by the District Court in petitioner's criminal case

concerning the amount of petitioner's profits from his illegal

activities; (3) petitioner is not required to substantiate the

amount of the net operating loss (NOL) reported in his 1987 tax

return and carried back to 1985 and 1986 on the ground that the

period of limitations with respect to 1987 has expired; (4) the

NOL that petitioner reported in his 1987 tax return accrued on

December 31, 1987; and (5) consistent with the holding of the

District Court in the criminal case, petitioner did not earn

profits from his criminal enterprise in 1986 and 1987.

     Respondent filed an objection to petitioner's motion.   In

particular, respondent contends that she properly computed the

addition to tax under section 6661 based upon 25 percent of the

underpayment (rather than 10 percent) because the 1986 amendment

to section 6661 increasing the rate from 10 percent to 25 percent

is effective with respect to assessments made after enactment of

the amendment.   In addition, respondent maintains that

petitioner's motion should be denied to the extent that

petitioner asserts that respondent is barred by the doctrine of

collateral estoppel from contesting the District Court's findings

in the criminal case inasmuch as the District Court's decision
                                - 6 -

was reversed.5   Respondent further contends that, because she

disallowed the NOL carrybacks that petitioner claimed for the

years in issue, petitioner is required to substantiate the NOL

reported in his 1987 tax return notwithstanding whether the

period of limitations for 1987 has expired.   Assuming that

petitioner can substantiate the NOL for 1987, respondent would

agree that the NOL accrued no later than December 31, 1987.

Discussion

     Summary judgment is intended to expedite litigation and

avoid unnecessary and expensive trials.    Florida Peach Corp. v.

Commissioner, 90 T.C. 678, 681 (1988).    Summary judgment may be

granted with respect to all or any part of the legal issues in

controversy "if the pleadings, answers to interrogatories,

depositions, admissions, and any other acceptable materials,

together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that a decision may be

rendered as a matter of law".   Rule 121(b); Sundstrand Corp. v.

Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th

Cir. 1994); Zaentz v. Commissioner, 90 T.C. 753, 754 (1988);

Naftel v. Commissioner, 85 T.C. 527, 529 (1985).    The moving

party bears the burden of proving that there is no genuine issue

     5
        Respondent also contends that petitioner failed to
properly plead collateral estoppel. See Rule 39. To the
contrary, petitioner was granted leave to, and filed an amendment
to the petition on Dec. 20, 1996, which includes allegations in
support of petitioner's contention that the doctrine of
collateral estoppel is applicable in this case.
                               - 7 -

of material fact, and factual inferences will be read in a manner

most favorable to the party opposing summary judgment.    Dahlstrom

v. Commissioner, 85 T.C. 812, 821 (1985); Jacklin v.

Commissioner, 79 T.C. 340, 344 (1982).

     1.   Computation of the Additions to Tax Under Section 6661

     Section 6661, originally added to the Code by section 323(a)

of the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L.

97-248, 96 Stat. 324, 613, provides for an addition to tax if

there is a substantial understatement of tax liability for any

taxable year.   Section 6661 was amended in the Omnibus Budget

Reconciliation Act of 1986 (OBRA), Pub. L. 99-509, sec. 8002(a),

100 Stat. 1874, 1951, by increasing the rate at which the

addition to tax is computed from 10 percent to 25 percent of the

amount of the underpayment.6   OBRA section 8002(b) provides that

the amendment to section 6661 is applicable to penalties assessed

after the date of enactment of the Act, i.e., October 21, 1986.

     Considering the effective date of the amendment to section

6661, petitioner's assertion that a 10-percent rate should be

applied to compute the additions to tax is incorrect.    The

additions to tax that respondent determined in the notice of

     6
        The Omnibus Budget Reconciliation Act of 1986, Pub. L.
99-509, sec. 8002(b), 100 Stat. 1951, included a repeal of an
amendment to sec. 6661 included in the Tax Reform Act of 1986,
Pub. L. 99-514, sec. 1504(a), 100 Stat. 2085, 2743, which amended
sec. 6661 to increase the rate on which the addition to tax is
computed from 10 percent of the underpayment to 20 percent of the
underpayment. See Pallottini v. Commissioner, 90 T.C. 498, 501-
503 (1988).
                                 - 8 -

deficiency have not been assessed, and may not be assessed until

the decision in this case is final.      Sec. 6213(a).   Because the

amendment to section 6661 set forth in OBRA is effective with

respect to assessments made after October 21, 1986, it follows

that the additions to tax at issue in this case will be computed

based upon 25 percent of the underpayment, if any.       See DiLeo v.

Commissioner, 96 T.C. 858, 878 (1991), affd. 959 F.2d 16 (2d Cir.

1992) (rejecting the taxpayers' contention that the OBRA

amendment to section 6661 violates the ex post facto clause of

the U.S. Constitution).   The question of petitioner's liability

for the additions to tax under section 6661 is a factual matter

that will be decided at trial.

     2.   Collateral Estoppel

     Under the doctrine of collateral estoppel, or issue

preclusion, a final judgment on the merits in a prior lawsuit

precludes, in a later lawsuit involving a separate cause of

action, litigation of issues actually litigated and necessary to

the outcome of the first action.    See United States v. Mendoza,

464 U.S. 154, 158 (1984); Parklane Hosiery Co. v. Shore, 439 U.S.

322, 326 (1979); Meier v. Commissioner, 91 T.C. 273, 283 (1988);

Amos v. Commissioner, 43 T.C. 50 (1964), affd. 360 F.2d 358 (4th

Cir. 1965).   In Meier v. Commissioner, supra at 283-286, we held

that collateral estoppel may be utilized in connection with

matters of law, matters of fact (whether ultimate facts or

evidentiary facts), and mixed matters of law and fact.      However,
                               - 9 -

it is well settled that the doctrine of collateral estoppel does

not apply where the degree of proof in the earlier proceeding is

higher than the degree of proof in the later proceeding.    See

Helvering v. Mitchell, 303 U.S. 391 (1938); Neaderland v.

Commissioner, 52 T.C. 532, 541-542 (1969) (acquittal on charge of

criminal tax fraud does not estop the Commissioner from later

attempting to prove the taxpayer's liability for civil tax

fraud), affd. 424 F.2d 639 (2d Cir. 1970).

     Consistent with the preceding discussion, it is evident that

petitioner's reliance on the doctrine of collateral estoppel is

misplaced.   The District Court's findings respecting the amounts

of petitioner's proceeds and profits from his illegal activities

do not work an estoppel in the present action because the

Government was required to prove its criminal forfeiture case

beyond a reasonable doubt, whereas petitioner bears the burden of

proving the amount of his taxable income for the years in issue

in this civil proceeding by a preponderance of the evidence.

     3. Substantiation of Net Operating Loss

     Petitioner contends that, because the period of limitations

has expired with respect to the 1987 taxable year, the Court

should find as a matter of law that petitioner is not required to

substantiate the NOL reported in his 1987 tax return and carried

back to the taxable years 1985 and 1986.   We disagree.

     Section 6214(b) provides in pertinent part:
                              - 10 -

          (b) Jurisdiction Over Other Years and Quarters.--
     The Tax Court in redetermining a deficiency of income
     tax for any taxable year * * * shall consider such
     facts with relation to the taxes for other years * * *
     as may be necessary correctly to redetermine the amount
     of such deficiency, but in so doing shall have no
     jurisdiction to determine whether or not the tax for
     any other year * * * has been overpaid or underpaid.

In sum, the Court may consider facts relating to taxes for years

that are not otherwise within the Court's jurisdiction where

necessary correctly to redetermine the amount of the tax

deficiency for any year properly before the Court.

     It is well settled that in redetermining the amount of a

deficiency for a taxable year before the Court, we may determine

the correct amount of a NOL carryover or carryback claimed with

respect to the year in issue, notwithstanding that the loss

arises in a year that is not within the Court's jurisdiction and

for which the period of limitations has expired.     Phoenix Coal

Co. v. Commissioner, 231 F.2d 420 (2d Cir. 1956), affg. T.C.

Memo. 1955-28; Calumet Indus., Inc. v. Commissioner, 95 T.C. 257,

274-275 (1990).   This is true even if it would involve

recomputing the tax liability in the other year to determine

whether a loss would be carried over or back.   See State Farming

Co. v. Commissioner, 40 T.C. 774, 782-783 (1963); see also Hill

v. Commissioner, 95 T.C. 437, 441-442 (1990), and cases cited

therein.

     The notice of deficiency in this case explains that

respondent disallowed the NOL carrybacks that petitioner reported
                               - 11 -

for 1985 and 1986.   Consistent with the principles discussed

above, it follows that petitioner is required to substantiate the

amount of the NOL that he reported in his 1987 return and then

carried back to 1985 and 1986.    See O'Connor v. Commissioner,

T.C. Memo. 1992-544.

     Respondent concedes that, if petitioner substantiates the

NOL reported in his 1987 return, the NOL accrued no later than

December 31, 1987.   In light of our holding that petitioner must

substantiate the NOL reported in 1987, we see no reason to

consider the matter further.

     In sum, we shall deny petitioner's Motion for Summary

Judgment.   To reflect the foregoing,

                                      An order will be issued

                                 denying petitioner's Motion

                                 for Summary Judgment.
