                         T.C. Memo. 2001-124



                       UNITED STATES TAX COURT



                  ARTHUR C. BRINCAT, Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent

                   EDGAR J. BRINCAT, Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 14637-97, 18178-98.             Filed May 25, 2001.



     Arthur C. Brincat, pro se in docket No. 14637-97.

     Donald Del Grande, for petitioner in docket No. 18178-98.

     Daniel J. Parent, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION

     GERBER, Judge:    Respondent determined a deficiency in income

tax for each petitioner in these consolidated1 cases as follows:


     1
         These cases have been consolidated for purposes of trial,
                                                     (continued...)
                               - 2 -

Arthur C. Brincat--1989 income tax deficiency of $37,366 and

additions to tax of $9,341.50 and $2,527.02 under sections

6651(a)(1)2 and 6654, respectively; Edgar J. Brincat--1989 income

tax deficiency of $31,470 and a $6,294 penalty under section

6662(a).   The deficiencies stem from the common issue of whether

the proceeds from the sale of a building that was owned by a

charitable entity, but which were ultimately received by

petitioners, were taxable to petitioners.   We also consider

whether the period for assessment had expired at the time that

respondent mailed the notice of deficiency to Edgar J. Brincat.

With respect to Edgar J. Brincat, we consider whether he is

entitled to deduct $20,000 in attorney’s fees in connection with

the settlement of his father’s estate.   Finally, we consider

whether petitioners are liable for the additions to tax or

penalty determined by respondent.

                         FINDINGS OF FACT

     Petitioners Arthur C. Brincat (Arthur) and Edgar J. Brincat

(Edgar) resided in the State of California at the times that

their petitions were filed in their respective cases.   Arthur did

not file a Federal income tax return for the 1989 taxable year.



     1
      (...continued)
briefing, and opinion.
     2
       Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the taxable year under
consideration.
                                - 3 -

Sometime in 1973 or 1974, petitioners’ father, Victor Brincat

(Victor), founded Magna Carta University (Magna Carta), which was

intended to operate as a nonprofit educational institution,

consisting of a college of law, undergraduate colleges, and other

education programs.    From Magna Carta’s founding until Victor’s

death in October 1988, Victor was president of Magna Carta.

Initially, Magna Carta was a section 501(c)(3) tax-exempt

organization, but respondent, during 1991, revoked Magna Carta’s

tax exemption retroactive to January 1, 1982.    Around 1973,

Victor donated to Magna Carta a building located at 301 Linden

Avenue, South San Francisco, California (the building), which he

had purchased for $65,000.

     About 2 weeks before his death, Victor established and

transferred all of his property to the Victor Victory Trust (the

trust).    Victor and petitioners were the beneficiaries of the

trust.    Victor named Arthur and Edgar as co-trustees of the

trust.    Edgar was summoned to his father’s deathbed after many

years of alienation and was advised by his father of the

arrangement.    After Victor’s death, Arthur became president of

Magna Carta and negotiated the sale of the building for $980,000

to a California partnership.    An initial deposit of $60,000 for

escrow was received with $350,000 due before closing, along with

an executed note in the amount of $568,064 payable to Magna Carta

and secured by a deed of trust.
                               - 4 -

     On October 26, 1988, Arthur, as president of Magna Carta,

transferred $49,000 of the $60,000 initial deposit to the trust.

On January 26, 1989, Magna Carta received $350,000 from the sale

of the building, and Arthur transferred $272,100 of the proceeds

to the trust.   On that same date, $135,550 was transferred from

the trust to Edgar.   From January 26 through February 2, 1989,

Arthur was transferred $136,550 from the trust.   Arthur, as

president of Magna Carta, assigned the $568,064 note to the

trust.   Edgar’s involvement with the trust and Magna Carta was

nominal and without knowledge of the legal nuances.

     Before Victor’s death, the State of California brought an

action against Victor in which the State court held that Victor

used Magna Carta’s assets for his own benefit and that Magna

Carta was his alter ego.   After Victor’s death and the sale of

the building, the California attorney general’s office filed a

complaint seeking a dissolution of Magna Carta and the

appointment of a receiver.   Arthur and Edgar were named in the

complaint as defendants, both individually and as co-trustees of

the trust.   On November 30, 1989, the Colusa County Superior

Court (the court) granted a summary adjudication, holding that

the transfer of at least the $272,100 by Arthur to the trust was

a nullity as a matter of law and that all transfers of money from

the sale of the building were property of Magna Carta.   It was

argued that Victor had lent money to Magna Carta and that the
                               - 5 -

transfer of the building was in repayment of the loan.    In that

regard, the court held that Magna Carta was the alter ego of

Victor and that transactions between Victor and Magna Carta were

a nullity as a matter of law and could not be relied upon by

Arthur or Edgar.   It was also held that the $568,064 note

assigned to the trust should be returned to Magna Carta.

     On April 9, 1990, the court ordered Arthur and Edgar to turn

over $330,000 they had received to the receiver for Magna Carta.

Arthur and Edgar appealed, and on August 30, 1993, the California

appellate court affirmed the lower court.   The appellate court

found that Arthur and Edgar were in privity with Victor and that

they were collaterally estopped from relitigating the prior

holdings piercing the corporate veil and thereby nullifying

alleged loan obligations owed by Magna Carta to Victor.

     Neither Arthur nor Edgar has returned the $136,550 or

$135,550 he received from the sale of the building.   They have

continually contended that the amounts received were inheritances

from their father.   Edgar, who was a disabled fireman, had no

relationship or involvement with Magna Carta before the time that

he became a trustee of the trust.   Edgar had been summoned to his

father’s deathbed and was told that the trust was being created

to transfer ownership of his father’s assets to him and his

brother, Arthur.   For 10 years before that time, Edgar and his

father were alienated and had no communications.   Edgar, at the
                               - 6 -

time of his tax return preparation, inquired of his return

preparer about whether an inheritance from his father was

taxable.   Edgar was not knowledgeable about the legal proceedings

brought by the State.   He believed that because he had already

received the money from his father’s trust, it was his

inheritance.   The return preparer, a certified public accountant

who specialized in taxation and who had prepared Edgar’s returns

since 1969, after hearing the facts of which Edgar was aware,

advised that it was not taxable.

     On Edgar’s 1989 Federal income tax return, he reported three

items of income as follows:   $3,122 interest, $1,419 gross

business receipts, and $7,405 as a nontaxable pension.   Edgar’s

1989 Federal income tax return was timely filed on October 15,

1990, pursuant to extensions to file granted by respondent.    On

September 5 and 6, 1996, the Internal Revenue Service and Edgar

signed an agreement consenting to extension of the period for

assessment of his 1989 tax year to December 31, 1997.    On May 20

and 29, 1997, a similar consent was executed to extend the period

to December 31, 1998.   The notice of deficiency for the 1989 tax

year was mailed to Edgar on August 27, 1998.

     A 1989 return was not filed for Victor, the trust, or Magna

Carta.   Victor’s estate was not probated, and an estate tax

return was not filed for Victor’s estate.   Magna Carta paid an
                               - 7 -

attorney $40,000 to represent it in the above-described

proceedings.

                              OPINION

Are Petitioners Required To Include in Gross Income the Amounts
Received From the Sale of the Building?

     Respondent contends that petitioners diverted $272,100

($136,550 and $135,550) from Magna Carta through the trust to

themselves and that those amounts are taxable to them.

Respondent sees this as nothing more or less than the “income

from whatever source” referenced in section 61(a).   See also

North American Oil Consol. v. Burnet, 286 U.S. 417 (1932).

Conversely, petitioners contend that these amounts are simply

inheritances from their father’s estate planning trust and are

excluded from gross income in accord with section 102(a).

Petitioners base their contention on the premise that Victor had

lent money to Magna Carta and the proceeds of the sale of the

building were merely repayment of amounts owed Victor.

Respondent argues that petitioners are collaterally estopped from

asserting that Magna Carta owed Victor any portion of the

proceeds of the sale of the building or that they are entitled to

any portion of the $272,100 from the estate of Victor, the trust,

or Magna Carta.   We agree with respondent.

     Once a factual finding or holding is “actually and

necessarily determined by a court of competent jurisdiction, that

determination is conclusive in subsequent suits based on a
                                 - 8 -

different cause of action involving a party to the prior

litigation.”    Montana v. United States, 440 U.S. 147, 153 (citing

Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n.5 (1979)).     In

Peck v. Commissioner, 90 T.C. 162, 166 (1988), affd. 904 F.2d 525

(9th Cir. 1990), we set forth the following prerequisites for

application of collateral estoppel involving a factual dispute:

           (1) The issue in the second suit must be identical
     in all respects with the one decided in the first suit.
     * * *

          (2) There must be a final judgment rendered by a
     court of competent jurisdiction. * * *

          (3) Collateral estoppel may be invoked against
     parties and their privies to the prior judgment. * * *

          (4) The parties must actually have litigated the
     issues and the resolution of these issues must have
     been essential to the prior decision. * * *

          (5) The controlling facts and applicable legal
     rules must remain unchanged from those in the prior
     litigation. * * *

          [Citations omitted.]

A State court holding may form the basis for collateral estoppel

in this Court if the use of collateral estoppel is allowed in the

State’s courts.    See Bertoli v. Commissioner, 103 T.C. 501, 507-

508 (1994).    The offensive use of collateral estoppel is

permitted in California.    See Imen v. Glassford, 247 Cal. Rptr.

514 (1988).

     We consider here two California proceedings involving

petitioners’ family, Magna Carta, and the trust.    The first,
                               - 9 -

Department of Educ. v. Magna Carta Univ., No. 287846 (Cal. Super.

Ct. Aug. 14, 1986), involved Victor and his relationship to Magna

Carta.   In that proceeding, it was held that Victor “used the

* * * assets of Magna Carta for the personal benefit of himself

and his family” and accordingly that Magna Carta was Victor’s

alter ego.   The second proceeding, Van De Kamp v. Magna Carta

Univ., No. 17526 (Cal. Super. Ct. Apr. 9, 1990), addressed the

very question we consider in this proceeding:    Who was entitled

to the proceeds from the sale of the building?   In the second

case, the superior court again held that Magna Carta was the

alter ego of Victor and that the transactions (loans) between

Victor and Magna Carta were “a nullity as a matter of law, and

that those transactions cannot be relied upon by * * * [Arthur

and Edgar]”.   The court further held that “all money transferred

by Arthur C. Brincat to the Victor Victory Trust from the down

payment of $410,000 is the property of Magna Carta University”.

The California Court of Appeals for the Third District affirmed

the holdings in the second case and also held that Arthur and

Edgar were in privity with Victor in connection with Victor’s

earlier proceedings and were collaterally estopped from

relitigating issues in the earlier cases.

     The effect of these holdings negates even the possibility

that petitioners’ funds were inheritances received from the

trust.   The requisites for collateral estoppel have been met in
                                - 10 -

that:     The issue as to ownership of the funds is identical, the

holding of the California courts are final, petitioners were

parties in one proceeding and found to be in privity with Victor

in the earlier proceeding, the issues here were necessarily

litigated by petitioners in the State court proceeding(s), and

there has been no change in the facts or law.

     We note that petitioners were ordered by the California

courts to return the $272,100 but they have not done so, and they

do not argue here that they are compelled to do so.     Accordingly,

we hold that, for 1989, Arthur’s and Edgar’s receipt of $136,550

and $135,550, respectively, is income to them and does not

constitute nontaxable inheritances from their father.

Did the Period for Assessment Expire Before Respondent’s Issuance
of the Notice of Deficiency to Edgar?

        Edgar contends that the period for assessment had expired

before respondent’s August 27, 1998, mailing of the notice of

deficiency for Edgar’s 1989 taxable year.     Edgar executed

consents beginning on September 5, 1996, and again on May 20,

1997, which, if effective, would have extended the period for

assessment to December 31, 1998.     The normal 3-year period for

assessment under section 6501(a), however, would have expired on

October 15, 1993, before the execution of the first consent to

extend the statutory period.

        Respondent contends that the 3-year assessment period is not

applicable because Edgar omitted more than 25 percent of gross
                              - 11 -

income by his failure to include or report the $135,550 on his

1989 income tax return.   See sec. 6501(e).   On this point, Edgar

argues that in order for the 6-year period of section 6501(e) to

apply, respondent must prove that the $135,550 is taxable.    In

accord with our above holding, the 6-year assessment period was

applicable at the time Edgar first consented to extend the

assessment period for his 1989 tax year, and accordingly the

assessment period had not expired at the time respondent mailed

the notice of deficiency for Edgar’s 1989 taxable year.

Whether Edgar Is Entitled to a $20,000 Deduction for Attorney’s
Fees

     Edgar claims that he is entitled to a $20,000 deduction for

attorney’s fees that he alleges were paid in connection with the

settlement of his father’s financial affairs and/or estate.

Respondent counters that Edgar has not substantiated that he paid

an attorney $20,000.   There is evidence that Magna Carta paid the

attorney $40,000 during 1989 but no showing by Edgar that one-

half of that payment was for his direct benefit or on his behalf.

If it was, there would be some question of whether Edgar would

also have an additional $20,000 of income that has not been

reported.   In addition, Edgar has not provided the Court with a

legal theory under which the amount would be deductible in

arriving at adjusted gross income or taxable income.   On this

record, we find that Edgar has failed to substantiate his

entitlement to a deduction under section 162 or 212.
                                - 12 -

Whether Edgar Is Liable for the Accuracy-Related Penalty Under
Section 6662(a)

     Respondent determined that a 20-percent penalty was

applicable to Edgar because of negligence, disregard of rules or

regulations, and substantial understatement of income tax.    An

understatement is “substantial” if it exceeds the greater of 10

percent of the tax required to be shown on the return or $5,000.

Sec. 6662(d)(1).    Edgar’s understatement for 1989 exceeds the

threshold for application of section 6662.

     An accuracy-related penalty is imposed on a taxpayer if any

portion of an underpayment of tax is attributable to either

negligence or disregard of rules or regulations or to any

substantial understatement of income tax.    See sec. 6662(a) and

(b)(1) and (2).    The term “negligence” includes any failure to

make a reasonable attempt to comply with the provisions of the

Internal Revenue Code, and the term “disregard” includes any

careless, reckless, or intentional disregard.    Sec. 6662(c).    The

accuracy-related penalty is not to be imposed if it is shown that

there was reasonable cause for the underpayment and that the

taxpayer acted in good faith.    See sec. 6664(c)(1).   Petitioners

have the burden of showing that they are not liable for the

accuracy-related penalty.    See Welch v. Helvering, 290 U.S. 111

(1933).

     In support of his determination, respondent contends that

Edgar failed to report the $135,550 he received in connection
                              - 13 -

with Magna Carta, the trust, and his father’s death.    Respondent

argues that Edgar was aware at the time of filing his 1989 return

that the court had held that the $135,550 belonged to Magna Carta

and that it should be returned.   Edgar, who was alienated from

his father and family, was not aware of his father’s holdings or

prior litigation.   He believed that the amount received by him

was a nontaxable inheritance from his father.    That belief was

based on his father’s deathbed representations and the fact that

Edgar had received the $135,550 from the trust.    At the time of

the filing of Edgar’s return, the court’s holding was being

appealed on the theory that the moneys received were

inheritances.   Edgar was not involved in pursuing the litigation,

and he was generally unaware of the court’s holdings.

     Edgar had no working knowledge of Magna Carta and believed

that the trust was based on his father’s deathbed intent to

permit Edgar to inherit from his father.   In addition, Edgar, a

disabled fireman who had no background in these matters, inquired

of his return preparer about whether an inheritance from his

father was taxable.   Edgar provided his preparer with information

about the $135,550 based on his understanding.    The return

preparer, who was a certified public accountant specializing in

tax and who had prepared Edgar’s returns since 1969, advised that

it was not taxable.
                                - 14 -

     Whether Edgar acted with reasonable cause and in good faith

is a factual determination.     See sec. 1.6664-4(b)(1), Income Tax

Regs.     On the basis of Edgar’s experience, knowledge, and

education, we find that his actions were reasonable and that his

reliance on his longtime preparer was also reasonable.      See,

e.g., Remy v. Commissioner, T.C. Memo. 1997-72.      It is relevant

that Edgar made an effort to assess his tax responsibility by

seeking the advice of his accountant of long standing.      See

Drummond v. Commissioner, T.C. Memo. 1997-71.      Accordingly, we

hold that Edgar is not liable for an accuracy-related penalty

under section 6662(a) for 1989.

Whether Arthur Is Liable for a Delinquency Addition Under Section
6651(a)(1) and/or a Failure To Pay an Estimated Tax Addition
Under Section 6654

        Section 6651 provides for an addition to tax of 5 percent

per month, not to exceed 25 percent of the amount of tax required

to be shown on a return, for failure to file.      Unlike Edgar,

Arthur failed to file a return.     Arthur’s failure to file went

beyond the period in 1993 when the State of California’s

appellate court affirmed the court’s holding that the money

should be returned because it belonged to Magna Carta.      In this

regard, as of the time of trial, Arthur continued to hold the

money from the sale of the building.      Also unlike Edgar, Arthur

did not rely on a tax professional.      Accordingly, Arthur has

failed to show that his failure to file was, under his
                             - 15 -

circumstances, reasonable, and he is liable for the section

6651(a)(1) addition to tax for 1989.

     Section 6654 provides for an addition to tax in the case of

any underpayment of estimated tax, and this addition has been

held to apply unless a taxpayer shows that there is some

exception to application of the addition.    See Grosshandler v.

Commissioner, 75 T.C. 1, 20-21 (1980).    Arthur has not shown that

any of the so-called safe harbors apply to his case.    See Swonder

v. Commissioner, T.C. Memo. 1994-430.    Accordingly, Arthur is

liable for the section 6654(a) addition to tax for 1989.

     To reflect the foregoing,

                                 Decision will be entered for

                         respondent in docket No. 14637-97, and

                         for petitioner as to the penalty and

                         respondent as to the deficiency in

                         docket No. 18178-98.
