                        T.C. Memo. 2008-262



                      UNITED STATES TAX COURT



                  JOSEPH CARIONE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 23559-06.            Filed November 24, 2008.



     James O. Druker, for petitioner.

     Theresa G. McQueeney, for respondent.



                        MEMORANDUM OPINION

     SWIFT, Judge:   Respondent determined a deficiency of $88,914

in petitioner’s 2000 Federal income tax.
                               -2-

     The primary issue for decision is whether $388,301 in

capital gain income received relating to a 1998 court-ordered

criminal forfeiture sale of the assets of petitioner’s S

corporation is taxable to petitioner and if so whether it is

taxable to petitioner in the year 2000.

     Unless otherwise indicated, references to sections are to

the Internal Revenue Code applicable to 2000, and references to

Rules are to the Tax Court Rules of Practice and Procedure.


                           Background

     The facts have been stipulated and are so found.   This case

has been submitted under Rule 122.   At the time of filing his

petition, petitioner resided in New York.

     During the 1990s petitioner was president, chief operating

officer, and sole shareholder of Grand Carting, Inc. (Grand

Carting), a New York S corporation which operated a commercial

trash-hauling business on Long Island, New York.

     In 1996 the United States indicted petitioner, Grand

Carting, and other individuals in the Federal District Court for

the Eastern District of New York (District Court) on charges of

money laundering, conspiracy, and other crimes under the

Racketeer Influenced and Corrupt Organizations Act (RICO),

18 U.S.C. secs. 1961-1968 (2006).

     The indictment also asked for “RICO forfeiture” to the

United States of assets which petitioner and the other named
                                -3-

defendants acquired or maintained in violation of RICO.   See 18

U.S.C. sec. 1963(a).

     On September 10, 1996, the District Court issued a

restraining order which, among other things, restrained

petitioner, without approval of the court, from in any way

alienating or selling the property and assets of Grand Carting

other than in the ordinary course of business and appointed the

U.S. Marshals Service to monitor Grand Carting and to ensure that

its assets were not sold or wasted during the pendency of the

restraining order.

     During the pendency of the criminal charges, Grand Carting

lost customers and revenue.   Accordingly, petitioner sought to

sell the assets of Grand Carting, and petitioner negotiated for

the sale of Grand Carting’s assets to Waste Management of NY,

Inc. (WMI), for $548,309.

     On May 5, 1998, after obtaining permission from the District

Court and pursuant to an order of the District Court, the sale of

Grand Carting’s assets to WMI occurred, and the $548,309 proceeds

were deposited into an escrow account with the District Court to

be withdrawn only upon further order of the court.

     Considering only its tax bases in the assets sold, on the

sale to WMI Grand Carting realized a net long-term capital gain

of $388,301.
                                -4-

     On February 12, 1999, as part of the plea agreements which

were entered into in the criminal case, the District Court issued

a Consent Order of Forfeiture signed by all of the defendants in

the criminal case including Grand Carting and petitioner.   As

part of the Consent Order of Forfeiture the defendants in the

criminal case, including Grand Carting and petitioner, agreed

that they were jointly and severally liable to the United States

for a forfeiture judgment of $6,900,721.

     The February 12, 1999, Consent Order of Forfeiture provided

that the $6.9 million forfeiture judgment was to be fully paid by

the defendants by July 1, 2000, and that initially payments on

the judgment were to be made by various lead defendants in the

criminal case other than Grand Carting and petitioner.   However,

the forfeiture judgment also provided that Grand Carting’s assets

that had been placed in escrow were subject to forfeiture to pay

for any balance due on the forfeiture judgment as of the July 1,

2000, payment deadline.   The language of the Consent Order of

Forfeiture reads as follows:


     In the event that the Forfeiture Judgment is not fully
     paid by July 1, 2000, the government may in its sole
     discretion sell, and/or forfeit and sell, all property
     restrained in this matter, including the proceeds of
     the sale of Grand Carting, which shall be held in
     escrow until the Forfeiture is satisfied, or until July
     1, 2000, whichever is earlier. The funds realized by
     the sale of these properties, after payment of all
     reasonable costs, expenses associated with the sale,
     shall be forfeited to the government to the extent that
     the Forfeiture Judgment remains unsatisfied, and the
                               -5-

     funds shall be deposited into the Asset Forfeiture Fund
     and credited towards the Forfeiture Judgment.


     On July 1, 2000, the balance unpaid on the forfeiture

judgment was over $2 million, and on August 9, 2000, the District

Court ordered that the $548,309 proceeds from the sale of Grand

Carting’s assets which were in the escrow account be transferred

into the Asset Forfeiture Fund and be applied as further payment

on the forfeiture judgment.

     On August 9, 2000, the District Court issued an order which

referenced the July 1, 2000, payment deadline and which ordered

that the proceeds be released from escrow, be paid into the Asset

Forfeiture Fund, and be applied to the forfeiture judgment.

     On January 16, 2001, $560,689 in the escrow account, plus

accrued interest of $63,292, was actually disbursed from the

escrow account and transferred into the Asset Forfeiture Fund.


Tax Returns

     The $388,301 net long-term capital gain realized on the sale

of Grand Carting’s assets was reported on its 1998 Federal

corporate income tax return and on an attached Schedule K-1,

Shareholder’s Share of Income, Credits, Deductions, etc.,

indicating petitioner as the sole shareholder.

     In October 1999 petitioner, a cash basis taxpayer, filed his

1998 individual Federal income tax return and reported thereon
                                  -6-

the $388,301 net long-term capital gain realized on the sale of

Grand Carting’s assets as passthrough income to petitioner.

     On September 18, 2000, petitioner paid to respondent the

$49,400 in Federal income taxes attributable to the $388,301

reported capital gain on the sale of Grand Carting’s assets.

     On November 2, 2000, petitioner filed with respondent an

amended 1998 Federal income tax return on which petitioner

claimed that the assets of Grand Carting were not sold in 1998

and that the proceeds relating to the sale of the assets should

be taxed to him, if ever, in 2000.

     On or about September 6, 2002, petitioner filed a second

amended 1998 Federal income tax return on which petitioner

claimed further that the $388,301 proceeds should not be taxable

to him in 1998 because the proceeds were directly forfeited to

the U.S. Government and he never had dominion and control over

them.   Petitioner’s two amended tax returns include the following

statement:   “Taxpayer’s accountant incorrectly included a capital

gain from the sale of [Grand Carting], whereas in fact, this

corporation was not sold in 1998.       The taxable event, if any,

should occur in the year 2000.”

     For 2000, Grand Carting did not file a Federal corporate

income tax return.

     On October 15, 2001, petitioner filed his 2000 Federal

income tax return and reported thereon total income of $44,165,
                                -7-

which did not include any portion of the $388,301 long-term

capital gain relating to the sale of Grand Carting’s assets.

     No disclosure was made on petitioner’s 2000 Federal income

tax return relating to the sale of Grand Carting’s assets or the

$388,301 proceeds.

     On their 1998, 1999, 2000, and 2001 Federal income tax

returns, neither petitioner nor Grand Carting reported the

$63,292 in interest income that accrued over the course of those

years on the funds being held in escrow, which interest in

January of 2001 was transferred to the Asset Forfeiture Fund.


District Court Refund Suit

     On the basis of respondent’s failure to allow petitioner

the refund that was claimed in petitioner’s two amended 1998

Federal income tax returns, petitioner timely filed in the

District Court for the Eastern District of New York a suit for

refund alleging overpayment of his 1998 Federal income taxes.

See Carione v. United States, 368 F. Supp. 2d 186 (E.D.N.Y.

2005), motion for reconsideration denied, 368 F. Supp. 2d 196

(E.D.N.Y. 2005), appeal dismissed per unreported stipulation (2d

Cir. Sept. 19, 2005).

     In the District Court litigation, petitioner argued that

because the proceeds were subject to the forfeiture order and

were placed directly in escrow, he neither received nor had

control over the proceeds.   Accordingly, petitioner claimed that
                               -8-

he should not be taxed thereon--not in 1998 when Grand Carting’s

assets were sold and not in 2000 when the proceeds were ordered

by the District Court to be withdrawn from escrow and paid on the

forfeiture judgment.

     In the District Court litigation, the Government argued that

the proceeds should be taxed to petitioner in 1998 because

petitioner in 1998 negotiated the sale of Grand Carting’s assets,

because the sale of the assets actually occurred in 1998, and

because petitioner knew that the proceeds of the sale would be

placed in escrow and eventually likely used to satisfy the

forfeiture judgment.

     On March 17, 2005, the District Court in Carione ruled in

petitioner’s favor and held that the proceeds were not taxable to

petitioner in 1998; rather, the District Court explained, the

proceeds should be taxed to petitioner in August 2000 when the

proceeds were ordered to be released from the bona fide and

arm’s-length escrow over which the District Court, not

petitioner, had control and in the year in which the proceeds

effectively were used to satisfy petitioner’s forfeiture

judgment.

     An appeal from the District Court’s opinion was dismissed

pursuant to the parties’ stipulation, and on September 19, 2005,

the District Court’s judgment in Carione became final.
                                -9-

     On September 7, 2006, respondent mailed to petitioner a

notice of deficiency for 2000 charging petitioner in that year

with the $388,301 additional long-term capital gain income

relating to the sale and use of the $388,301 Grand Carting

proceeds to pay petitioner’s obligation on the forfeiture

judgment.

     One day before the scheduled trial herein, respondent filed

a motion for leave to file a second amended answer seeking to

charge petitioner with $63,291 in interest income that had

accrued on the $388,301 Grand Carting proceeds while the proceeds

were held in the escrow account.


                            Discussion

     Under section 61, all income from whatever source derived is

included in gross income.   Under section 61(a)(2) and (3), gains

derived from business and from dealings in property are

specifically included in gross income.

     Under section 1366, because petitioner was the sole

shareholder the gains and losses of Grand Carting pass through to

petitioner, and the possibility that the assets of Grand Carting

may have been earned through illegal activities does not alter

the taxability of gains relating thereto.   See James v. United

States, 366 U.S. 213, 218 (1961).
                              -10-

     It is clear that the proceeds realized on the sale of Grand

Carting’s assets generally would be taxable to petitioner as the

100-percent owner of the stock of Grand Carting.

     Petitioner, however, argues that the $388,301 Grand Carting

proceeds should not be charged to him as income even in 2000

because the proceeds were placed directly into escrow and were

always subject to the District Court’s control, not petitioner’s.

     Petitioner further emphasizes that from the beginning of the

forfeiture proceeding his liability under the $6.9 million

forfeiture judgment was not personal, was to be paid solely from,

and was limited or capped by the amount of, the proceeds realized

on a sale of the Grand Carting assets.

     We note that if the proceeds are taxable to petitioner in

2000, there clearly was an omission of more than 25 percent of

gross income on petitioner’s 2000 Federal income tax return, the

6-year period of limitations would apply, and respondent’s notice

of deficiency to petitioner for 2000 would be timely.1

     The District Court in Carione v. United States, supra at

194, explained with regard to the taxability of the proceeds to

petitioner as follows:


     1
        Respondent argues in the alternative that if the
assessment period of limitations with regard to petitioner’s
Federal income taxes for 2000 is not open under sec.
6501(e)(1)(A), then the assessment period of limitations for 2000
would be open under the mitigation provisions of secs. 1311 to
1314.
                              -11-


     Courts should construe “income” liberally, “in
     recognition of the intention of Congress to tax all
     gains except those specifically exempted. * * *
     [James v. United States, 366 U.S. 213, 219 (1961).] A
     further general principle of taxation is that “an
     individual should be taxed on any economic benefit
     conferred upon him, to the extent that the benefit has
     an ascertainable fair market value.” The above quotes
     suggest, and the various cases demonstrate, that a
     taxpayer does not gain income only through his dominion
     and control over something; a taxpayer also realizes
     taxable income where he “obtains the fruition of the
     economic gain which has already accrued to him.”
     Comm’r v. Fender Sales, Inc., 338 F.2d 924, 928 (9th
     Cir. 1964).

          In conformity with these principles, the Supreme
     Court has long held that “discharge by a third person
     of an obligation to [the taxpayer] is equivalent to
     receipt by the person taxed.” Old Colony Trust Co. v.
     Comm’r, 279 U.S. 716, 729 * * * (1929) (employer’s
     payment of employee’s taxes constitutes taxable
     income). “Income is not any the less taxable income of
     the taxpayer because by his command it is paid directly
     to another in performance of the taxpayer’s obligation
     to that other.” [United States v.]Joliet & C.R. Co.,
     315 U.S. * * * [44, 49 (1942)] (quoting Raybestos-
     Manhattan, Inc. v. U.S., 296 U.S. 60, 64 * * * (1935)).
     Where a taxpayer’s property interest, even one that was
     never in his control or possession, is used to satisfy
     his outstanding obligation to the Government, the
     corresponding reduction in the amount of that
     obligation constitutes an “economic benefit,” and is
     taxable as income. See Koehn v. Comer, No. 97 Civ.
     76328, 2003 WL 1735496, at *1 (E.D. Mich. Feb. 19,
     2003).


     With regard to whether the capital gain should be included

in petitioner’s income in 1998, however, the District Court went

on to explain as follows:
                                -12-

          Where a taxpayer’s would-be income is deposited in
     an escrow account beyond that taxpayer’s reach, it
     generally should not be included in his taxable income.
     See, e.g., C.I.R. v. Indianapolis Power & Light Co.,
     493 U.S. 203, 211 n.7 * * * (1990) (acknowledging
     Commissioner’s concession that security deposits held
     by power company “would not be taxable if they were
     placed in escrow”); Ware v. C.I.R, 906 F.2d 62, 65 n.2
     (2d Cir. 1990) (fee not actually or constructively
     received by firm for tax purposes so long as held in
     escrow beyond firm’s control); and Reed v. Comm’r, 723
     F.2d 138, 149 (1st Cir. 1983) (taxpayer not required to
     report income held in bona fide escrow for payment in
     later tax period and from which no other present
     beneficial interest is derived). [Carione v. United
     States, 368 F. Supp. 2d at 192-193.]


And the District Court concluded that--


     (1) the sale of Grand Carting’s assets produced taxable
     income to Grand Carting, (2) and thus to Carione, but
     (3) only in August 2000, when such proceeds were
     released from escrow and used to satisfy * * *
     [petitioner’s] prior forfeiture judgment. [Id.]


     We generally agree with the analysis of the District Court

as to the applicable tax law.   We also agree with the District

Court’s dicta that petitioner has taxable income for 2000 from

the proceeds of the sale of Grand Carting’s assets.2

     For Federal income tax purposes, a gain is treated as

realized when the taxpayer receives the benefit of the gain,

which may occur even if the proceeds representing the gain are

not paid directly to the taxpayer.     Helvering v. Horst, 311 U.S.

     2
        Respondent acknowledges that the doctrine of collateral
estoppel does not apply to the resolution of this issue.
                               -13-

112, 115 (1940).   The proceeds from the sale of Grand Carting’s

assets were not paid to petitioner in 1998, and because they were

escrowed petitioner did not receive the benefit of the proceeds

until 2000 when they were ordered to be released from escrow and

used to discharge petitioner’s debt under the forfeiture

judgment.

     When the defendants in the criminal case (including

petitioner) failed to satisfy the July 1, 2000, forfeiture

payment deadline and the escrowed proceeds were ordered released

by the District Court to be applied to the forfeiture fund (i.e.,

in August 2000), petitioner received the economic benefit of the

1998 $388,301 net capital gain and of the $63,292 interest

income.   The August 9, 2000, District Court order memorialized

the release of the funds from escrow and resulted in a discharge

of petitioner’s forfeiture obligation.

     As sole shareholder of the S corporation, petitioner is

charged with the income thereof and is to be taxed thereon on

August 9, 2000, when he received the economic benefit of the

proceeds upon entry of the order directing application thereof to

his obligation under the criminal forfeiture.

     We note that although the escrowed funds were physically

transferred out of the escrow in January 2001, the benefit of the

escrowed funds shifted to or was realized by petitioner on August

9, 2000, the date of the District Court’s order.   As of that date
                                 -14-

petitioner’s liability under the forfeiture judgment was

satisfied and the various parties’ entitlement to the funds was

settled and no longer in dispute.

     Because the unreported $388,301 long-term capital gain

taxable to petitioner in 2000 is in excess of 25 percent of the

reported 2000 gross income of $44,165, the 6-year period of

limitations under section 6501(e)(1)(A) applies and respondent’s

September 7, 2006, notice of deficiency is timely.

     On the basis of well-established tax law we conclude that

the $388,301 proceeds are taxable to petitioner in 2000.    As the

Supreme Court has held, the “discharge by a third person of an

obligation to * * * [the taxpayer] is equivalent to receipt by

the person taxed.”     Old Colony Trust Co. v. Commissioner, 279

U.S. 716, 729 (1929) (employer’s payment of employee’s taxes

constitutes taxable income to the employee).

     Respondent also argues that under the doctrine of judicial

estoppel petitioner should be barred from challenging the

taxability to him in 2000 of the forfeiture funds.    Judicial

estoppel is an equitable doctrine that prevents a party in a

subsequent judicial proceeding from asserting a position

contradictory to a position that the party asserted and that a

court adopted in a prior judicial proceeding.

     We have explained the proper application of judicial

estoppel as follows:
                               -15-


          We hold that the doctrine of judicial estoppel is
     available in the Tax Court to be used in appropriate
     cases, such as the one before us, to prevent parties
     from taking positions that are inconsistent with those
     previously asserted by the parties and accepted by
     courts and that would result in inappropriate and
     prejudicial consequences to the courts. [Huddleston v.
     Commissioner, 100 T.C. 17, 28-29 (1993).]


     In view of petitioner’s affirmative contention in the prior

refund suit that the forfeiture proceeds should be taxable to

petitioner, if at all, in 2000, and the District Court’s

agreement therewith, and in view of our holding that petitioner

is taxable on the proceeds, petitioner is judicially estopped

from denying the taxability thereof in 2000.

     We conclude that the doctrine of judicial estoppel also

applies here to bar petitioner from arguing that he is not

taxable on the $388,301 proceeds in 2000.

     Petitioner argues that in his District Court refund suit the

Government should have filed a counterclaim raising an

alternative issue as to the taxability to petitioner of the

forfeiture proceeds in 2000.   Having failed to do so, petitioner

argues respondent now is precluded from asking this Court to tax

him in 2000 on the proceeds.   Petitioner states that respondent

is engaged in “serial litigation” (i.e., “trying to tax the same

item of income in different years, particularly where the issue

was squarely raised in the first lawsuit.”).
                               -16-

     We disagree.   Each taxable year stands on its own.

Respondent’s position that petitioner should be taxed on the

forfeiture proceeds in 2000 was not a required counterclaim in

petitioner’s tax refund suit for 1998.   See Fed. R. Civ. P. 13(a)

and (b); Flora v. United States, 362 U.S. 145, 166 (1960);

Hemmings v. Commissioner, 104 T.C. 221, 234-235 (1995).

     Petitioner argues that under the duty-of-consistency

doctrine respondent should not be allowed to take a position in

this case inconsistent with the position respondent took in the

District Court litigation.   To the contrary, petitioner never

relied on respondent’s adjustment that the forfeiture funds

should be taxed to petitioner in 1998, and petitioner’s own

amended 1998 Federal income tax return stated that the funds

should be taxed in 2000, if at all.   Further, the District Court

rejected respondent’s position as to the year 1998.   See Cluck v.

Commissioner, 105 T.C. 324, 332 (1995), for an explanation of the

proper application of the duty-of-consistency doctrine.

     Lastly, citing Dept. of Revenue of Mont. v. Kurth Ranch, 511

U.S. 767 (1994), and United States v. Bajakajian, 524 U.S. 321

(1998), petitioner argues that taxing him on the $388,301

proceeds would violate the double jeopardy clause of the

Constitution.

     In Kurth Ranch, a tax imposed upon the possession and

storage of illegal substances constituted an additional penalty
                                 -17-

on those convicted of selling the substances and violated the

defendant’s rights under the Fifth Amendment’s Double Jeopardy

Clause.   Here, petitioner claims that because the forfeiture of

the proceeds occurred after the guilty pleas were entered, the

forfeiture constituted an impermissible additional punishment of

petitioner and unconstitutional double jeopardy.

     Among other reasons for rejecting petitioner’s double

jeopardy argument, we note that petitioner’s forfeiture

obligation was established not after but simultaneously with the

guilty pleas that were entered and was imposed as part of the

criminal sentencing relating to the guilty pleas.

     We have considered and we reject all other arguments made by

petitioner as to the nontaxability of the $388,301 proceeds.

     Petitioner objects to respondent’s attempt by motion filed

just before the scheduled trial herein to raise an issue as to

the taxability to him of the $63,291 in interest income which had

accrued on the $388,301 Grand Carting proceeds while the proceeds

were in the escrow account.   Petitioner notes that respondent was

fully aware of this interest income during discovery that

occurred in the District Court refund suit and that respondent’s

failure herein to raise the taxability thereof by motion and on a

timely basis should be denied.    We agree.   See Rule 41(a).

     Respondent has provided no adequate explanation as to why

the taxability of the interest income was not raised earlier than
                              -18-

the eve of the scheduled trial herein.   We will deny respondent’s

untimely motion to amend his answer to charge petitioner with an

additional $63,291 in interest income.


                                     An appropriate order and

                              decision will be entered.
