                          T.C. Memo. 1996-12



                      UNITED STATES TAX COURT



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



     Docket No. 550-92.                  Filed January 22, 1996.



     R. Walton Davis III, for petitioner Martha McHan.

     Charles McHan, pro se.

     Eric B. Jorgensen, for respondent.



                          MEMORANDUM OPINION

     PARR, Judge:   This case is presently before the Court on

petitioner Charles McHan's and petitioner Martha McHan's

(hereinafter sometimes referred to as Charles and Martha,

respectively) separately filed motions for summary judgment
                                     - 2 -

pursuant to Rule 121.1      Charles filed his motion on November 20,

1995, followed by the filing of a supplement to his motion on

December 1, 1995, and second supplement to his motion on December

29, 1995 (this motion and the first and second supplement will be

referred to hereinafter as Motion 1).          Martha filed her motion on

December 13, 1995 (this motion will be referred to hereinafter as

Motion 2).    Respondent has not filed an objection to the motions.

However, respondent has filed objections on five different

occasions in response to petitioners' prior motions for

dismissal.2    Those motions raised arguments similar to those

raised in the motions presently before the Court.            We do not deem

it necessary for respondent to file an objection.

       Respondent determined deficiencies in and additions to

petitioners' Federal income taxes as follows:



                                      Additions to Tax
                            Sec.            Sec.         Sec.
Year         Deficiency     6661         6653(b)(1)1 6653(b)(1)(A)1

1985         $329,911      $82,478           $164,956            --
1986           90,590       17,409               --          $52,226

1
      All Rule references are to the Tax Court Rules of Practice and
Procedure, and all section references are to the Internal Revenue Code in
effect for the taxable years in issue, unless otherwise indicated.
2
      Under Rule 121, when a Motion for Summary Judgment is made and supported
as provided in the Rule, an adverse party may not rest upon mere allegations
or denials in his pleadings, but his response by affidavits or as otherwise
provided in the Rule must set forth specific facts showing that there is a
genuine issue of fact for trial, and if he does not so respond, a decision, if
appropriate, may be entered against him. Rule 121(d). However, the opposing
party need not come forth with affidavits or other documentary evidence unless
the moving party makes a prima facie showing of the absence of a factual
issue. Shiosaki v. Commissioner, 61 T.C. 861 (1974). Here, we are not
satisfied that the moving party has made a prima facie case. (See discussion
infra.)
                                    - 3 -


     1
       Plus 50 percent of the interest due on the portion of the
underpayment attributable to fraud pursuant to secs. 6653(b)(2)
and 6653(b)(1)(B) for tax years 1985 and 1986, respectively.

Background

     Charles became involved in illegal conduct in the early part

of the year 1985.     On September 13, 1990, he was indicted on 17

counts for this illegal conduct.        Charles was charged with

various drug trafficking charges, filing of false tax returns,

continuing criminal enterprise, and criminal forfeiture.             At

trial, Charles pleaded guilty to counts 2 through 6 of the

indictment.    The trial proceeded on certain of the other counts,

resulting in a jury verdict on July 31, 1992.           The jury found

Charles guilty of all counts of the indictment that were

considered in the first phase of the trial:3          Conspiracy to

unlawfully possess with intent to distribute marijuana in

violation of 21 U.S.C. sec. 846; possession with intent to

distribute marijuana, aiding and abetting4 in violation of 21

U.S.C. sec. 841(a)(1) and 18 U.S.C. sec. 2; two counts of

distribution of marijuana, aiding and abetting in violation of 21

U.S.C. sec. 841(a)(1) and 18 U.S.C. sec. 2; three counts of

importation of marijuana, aiding and abetting in violation of 18

U.S.C. secs. 545 and 2; and continuing criminal enterprise in



3
      The court bifurcated Charles' jury trial, with the substantive criminal
charges presented first, to be followed by jury trial on count 17, the
forfeiture count.
4
      Charles was involved with others in the various drug trafficking
charges.
                                   - 4 -

violation of 21 U.S.C. sec. 848.       Charles was also charged and

found guilty on three counts for filing false tax returns for the

years 1985 and 1986 in violation of section 7206(1).

     Charles was subsequently convicted on the final count and

was ordered to forfeit his profits from the illicit activities to

the U.S. Government.     The District Court found that Charles and

the other persons involved in the illegal conduct made profits of

$398,430 and $33,240 in 1985 and 1986, respectively, and

sustained a loss of $36,000 in 1987.        United States v. McHan, No.

B-CR-90-41 (W.D.N.C. December 10, 1993).         Charles was sentenced

to prison, and he is currently still incarcerated.

     The deficiencies in question and additions to tax for fraud5

arise from respondent's determination that petitioners had

unreported income due to Charles' sales of illegal drugs,

principally marijuana.     In their petition, petitioners pleaded

that they had no illegal income for the years at issue, and that

the notice of deficiency is without merit.         Martha filed an

amendment to amended petition, in which she pleaded innocent

spouse relief under section 6013(e).

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


5
     The additions to tax for fraud were asserted against Charles.
                                - 5 -

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

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).       A motion for summary

judgment will not be granted if there is a genuine issue of

material fact.   Gulfstream Land & Dev. Corp. & Subs. v.

Commissioner, 71 T.C. 587 (1979).       The existence of any

reasonable doubt as to the facts will result in denial of the

motion for summary judgment.    Hoeme v. Commissioner, 63 T.C. 18,

20 (1974).

Motion 1

     In Motion 1, Charles argues that the notice of deficiency is

arbitrary and erroneous, and, therefore, not entitled to a

presumption of correctness.    Charles asserts that he was a mere

conduit or agent and did not have any ownership in the illegal

funds or profits.   Furthermore, Charles claims that respondent
                                - 6 -

has not produced any predicate evidence that supports her

determinations.   He asserts that respondent's reconstruction of

income is incorrect.    Specifically, Charles claims that in the

source and application of funds prepared by respondent, a source

was erroneously listed as an application.     Furthermore, he

asserts that the starting and ending bank balances were

incorrect.   Recognizing that his denials and assertions could be

considered merely self-serving statements, Charles refers to

certain documents, including financial statements, a net worth

calculation, and a statement of source and application of funds.

     The main thrust of Charles' motion is that respondent has

determined a tax liability against Charles which requires him to

come into Court and attempt to prove a negative; i.e., that he

did not receive unreported income.      Charles cites a line of cases

wherein the statutory notice was found to be arbitrary and

without a presumption of correctness.     E.g., Weimerskirch v.

Commissioner, 596 F.2d 358 (9th Cir. 1979), revg. 67 T.C. 672

(1977); see also Erickson v. Commissioner, 937 F.2d 1548 (10th

Cir. 1991), affg. T.C. Memo. 1989-522; Portillo v. Commissioner,

932 F.2d 1128 (5th Cir. 1991), affg. in part and revg. in part

T.C. Memo. 1990-68.    Charles' reliance is misplaced.   The cases

cited by him do not support the proposition that if a statutory

notice of deficiency is found to be arbitrary, then the taxpayer

is entitled to a decision as a matter of law.     Instead, as we

stated in Jackson v. Commissioner, 73 T.C. 394 (1979), what
                               - 7 -

occurs is that, as a procedural matter, the statutory notice of

deficiency is not entitled to the presumption of correctness and,

therefore, the burden of going forward with the evidence is on

the Commissioner.   See also Dellacroce v. Commissioner, T.C.

Memo. 1982-243 (if a statutory notice of deficiency is found to

be arbitrary, we will not enter a decision for the taxpayer

without weighing the evidence).

     Furthermore, the Court's summary judgment procedures are

adapted from rule 56(a) and (b) of the Federal Rules of Civil

Procedure.   Explanatory Note to Rule 121, Tax Court Rules of

Practice and Procedure, 60 T.C. 1057, 1127.   Rule 56 contemplates

a summary judgment for a part or all of the claim made in the

prayer for relief in the complaint; it does not contemplate a

summary judgment on evidentiary matters en route to that relief.

6 Moore, Moore's Federal Practice, par. 56.20 [3.-2], at 56-691

(1995-96).   Because Charles' motion for summary judgment contains

arguments pertaining to the shifting of the burden of going

forward, it seemingly falls within the ambit of the rule

prohibiting summary judgments on evidentiary matters.   Charles'

arguments relating to burden of proof and the burden of going

forward with the evidence are more appropriately raised in the

trial setting; they do not entitle him to summary judgment.

     The pleadings establish that there are issues of fact to be

decided; e.g., whether petitioners received the illegal profits

and, if so, whether Charles fraudulently intended to avoid
                                 - 8 -

payment of income tax on such money.      Cases in which an issue

turns on motivation or intent are generally inappropriate for

summary judgment, as are those in which the issues turn on the

credibility of the affiants.     Conrad v. Delta Airlines, Inc., 494

F.2d 914, 918 (7th Cir. 1974).    Whether petitioners received

unreported income from marijuana sales is a factual question

necessitating testimony of witnesses, including cross-

examination, and the examination of evidence regarding the source

and application of funds method of reconstructing income.

     Charles' liability for additions to tax for fraud also

presents a factual question to be determined by an examination of

the entire record.   Mensik v. Commissioner, 328 F.2d 147, 150

(7th Cir. 1964), affg. 37 T.C. 703 (1962).      To establish fraud,

it must be shown that the taxpayer acted with a specific intent

to evade a tax believed to be owing.       Kotmair v. Commissioner, 86

T.C. 1253, 1259-1260 (1986).

     Material facts remain in dispute regarding petitioners'

liability for the income tax deficiencies and additions to tax,

including the additions for fraud.       See Espinoza v. Commissioner,

78 T.C. 412 (1982); Hoeme v. Commissioner, 63 T.C. 18 (1974).

Accordingly, Charles' motion will be denied.

     Motion 2

     In Motion 2, Martha argues that she has stated under oath

many times that she knew nothing about Charles' involvement in

marijuana sales until he was arrested in 1988.      Moreover, Martha
                               - 9 -

asserts that her argument is supported by the District Court's

decision in a forfeiture action with respect to certain real

estate owned jointly by petitioners.     The District Court ordered

forfeiture as to Charles' interest in the land; however, Martha

was found to be an innocent party under Federal civil forfeiture

law and entitled to retain her interest in the land.      United

States v. 35 Acres in Cherokee County, N.C., No. B-C-88-173

(W.D.N.C. April 6, 1990), affd. 940 F.2d 654 (4th Cir. 1991).

     Martha argues that she had no reason to know of Charles'

illegal activities.   To this end, Martha makes a number of

statements as to petitioners' lifestyle, her education, and her

involvement in Charles' business.      Finally, Martha argues that it

would be inequitable to hold her liable.     Martha's arguments, as

were Charles', are set forth in an array of self-serving

statements and assertions.

     Section 6013(e) provides that a spouse is relieved from

liability for tax where a joint return has been made for a

taxable year and on that return there is a substantial

understatement of tax attributable to grossly erroneous items of

the other spouse, if:   (1) The would-be innocent spouse

establishes that she did not know, and had no reason to know,

that there was such a substantial understatement; and, (2) taking

into account all the facts and circumstances, it is inequitable

to hold that spouse liable for the deficiency in tax attributable

to the substantial understatement.     Martha has the burden of
                                - 10 -

proving that she qualifies as an innocent spouse.      See Lessinger

v. Commissioner, 85 T.C. 824, 838 (1985), revd. on other grounds

872 F.2d 519 (2d Cir. 1989).

     The standard in determining whether a taxpayer had "reason

to know" is "whether a reasonable person under the circumstances

of the taxpayer at the time of signing the return could be

expected to know of the omissions."       Shea v. Commissioner, 780

F.2d 561, 566 (6th Cir. 1986), affg. T.C. Memo. 1984-310.      The

primary ingredients of this test are (1) the circumstances which

face the taxpayer; and (2) whether a reasonable person in the

same position would have reason to know that omissions had been

made.   Id. at 565-566.   Whether an individual had reason to know

of a substantial understatement is generally regarded as a

question of fact.   Id.; Estate of Gryder v. Commissioner, 705

F.2d 336 (8th Cir. 1983), affg. T.C. Memo. 1981-466; Ratana v.

Commissioner, 662 F.2d 220, 224 (4th Cir. 1981), affg. in part

and revg. in part T.C. Memo. 1980-353; Sanders v. United States,

509 F.2d 162, 166 (5th Cir. 1975).       We believe that the facts and

circumstances relating to whether Martha knew or had reason to

know of the substantial understatement have not been adequately

developed such that this issue is proper for summary judgment.

     In addition, a genuine issue of material fact remains as to

whether it would be inequitable to hold Martha liable for that

substantial understatement.    In making a determination of whether

it would be inequitable to hold a taxpayer liable for the
                               - 11 -

substantial understatement, we must take into account all the

facts and circumstances.   Sec. 6013(e)(1)(D).   In addition,

Congress has expressed a clear intent that, in making this

determination, we consider whether a taxpayer benefited from the

erroneous items.   H. Rept. 98-432 (part 2), at 1501-1502 (1984).

Such a determination is factual in nature.   See Sanders v. United

States, supra at 170.

     Martha would have us decide this issue and grant summary

judgment relieving her of liability based on her unverified

assertions.   However, the issue of whether Martha is an innocent

spouse is not ripe for summary judgment.   We conclude that there

are genuine issues of material fact which should properly be

considered at trial.

     In her motion, Martha argues that the District Court's

decision with respect to the Federal forfeiture claim supports a

finding of innocent spouse in the present action.    We will

briefly discuss the applicability of the District Court action on

the current proceeding under the doctrine of collateral estoppel.

The District Court action was a Federal civil forfeiture

proceeding.   The proceeding was based on a cause of action

entirely different from that which is present in this case;

namely, Charles' liability for Federal income tax under the

provisions of the Internal Revenue Code.   However, the principles

of collateral estoppel may operate to bar the relitigation of a

fact which has actually been found in a prior case, even though
                                   - 12 -

the causes of action are different, where the parties are the

same or in privity, where the issue is the same, and when there

has been no change in the law intervening between the time of the

first case and the time of the second.         Montana v. United States,

440 U.S. 147 (1979); Commissioner v. Sunnen, 333 U.S. 591 (1948);

Meier v. Commissioner, 91 T.C. 273 (1988); Peck v. Commissioner,

90 T.C. 162 (1988), affd. 904 F.2d 525 (9th Cir. 1990).6

     The prior forfeiture case before the District Court for the

Western District of North Carolina concerned the forfeiture of

specific assets.     The District Court made no findings of fact

having any relevancy to the instant case in determining the

amount of petitioners' taxable income.         The issue of petitioners'

taxable income was not before the District Court.            However, the

District Court did hold that Martha was an innocent party under

21 U.S.C. sec. 881(a)(7) (1995) (hereinafter the Federal

forfeiture law).7     Nevertheless, such finding is not dispositive



6
      The Restatement defines collateral estoppel in the following manner:
when an issue of fact or law is actually litigated and determined by a valid
and final judgment, and the determination is essential to the judgment, the
determination is conclusive in a subsequent action between the parties,
whether on the same or a different claim. 1 Restatement, Judgments 2d, sec.
27 (1982); see also Meier v. Commissioner, 91 T.C. 273 (1988).
7
      21 U.S.C. sec. 881(a)(7) (1995) provides for the forfeiture to the
United States of the following:

      All real property, including any right, title, and interest
(including any leasehold interest) in the whole of any lot or tract of land
and any appurtenances or improvements,    which is used, or intended to be
used, in any manner or part, to commit, or to facilitate the commission of, a
      violation of this title punishable by more than one year's
imprisonment, except that no property shall be forfeited    under this
paragraph, to the extent of an interest of an   owner, by reason of any act or
omission established by that owner to have been committed or omitted without
the   knowledge or consent of that owner. [Emphasis added.]
                                 - 13 -

in the instant case because the factual predicate for an innocent

party under the Federal forfeiture law is not equivalent to that

for an innocent spouse under section 6013(e).

     Under the Federal forfeiture law, an owner's interest in

real property is exempt from forfeiture on account of any act

performed without the knowledge of that owner.    21 U.S.C. sec.

881(a)(7) (1995).    This section has been interpreted to employ a

subjective rather than an objective standard for assessing the

owner's knowledge.    United States v. One Parcel of Land Located

at 7326 Highway 45 North, 965 F.2d 311 (7th Cir. 1992).     21

U.S.C. section 881(a)(7) does not inquire whether the owner

should have known of illegal activities taking place on the

property.    Id. at 315.   Instead, 21 U.S.C. section 881(a)(7)

focuses on the owner's actual knowledge.     Id.; United States v.

Real Property & Improvements Located at 5000 Palmetto Drive, 928

F.2d 373, 375 (11th Cir. 1991); United States v. $10,694.00 U.S.

Currency, 828 F.2d 233, 234-235 (4th Cir. 1987); United States v.

Four Million Two Hundred Fifty-Five Thousand, 762 F.2d 895, 906

(11th Cir. 1985).

     Therefore, 21 U.S.C. section 881(a)(7) does not deal with

whether a person had reason to know of illegal activity, nor does

it deal with whether it is inequitable to hold such person liable

for tax.    Accordingly, a finding in a party's favor under the

Federal forfeiture law does not preclude a finding that such

party is not an innocent spouse under section 6013(e).
                              - 14 -

     For the reasons stated herein, Charles' and Martha's motions

for summary judgment are denied.

                                   Appropriate orders will be

                              issued.
