On Appeal from a Decision of the United States Tax Court -- Washington, D.C., Tax Court No. 2533-87.
Gibbons, Chief Judge, Hutchinson, Circuit Judge, and Wolin, District Judge*fn* .
The Commissioner of Internal Revenue appeals from a decision of the Tax Court determining that there was no deficiency in taxes of taxpayers Robert and Carole Zackim for the tax year 1979. The Commissioner's notice of deficiency for that year asserted that they owed deficiencies in income tax and additions to tax for that year due to fraud. A majority of the Tax Court held that the Commissioner was precluded from asserting a deficiency for 1979 based on fraud by the doctrine of res judicata, because an earlier decision in the Tax Court had been entered reflecting a settlement of an earlier notice of deficiency for that year. We will reverse.
On May 27, 1982 the Commissioner issued a notice of deficiency of $559 for the tax year 1979, in which he asserted that the Zackims failed to report $2,059 in interest income. The Zackims filed a timely petition to the Tax Court claiming that the interest income belonged not to them but to Mary Zackim. The 1982 notice of deficiency was subsequently referred to the Appeals Office of the Internal Revenue Service for settlement discussions. On October 23, 1985, as a result of a settlement, a decision was entered in the Tax Court upholding the Commissioner's determination that a deficiency of $559 was due for 1979.
Meanwhile, the Internal Revenue Service was investigating possible criminal charges against the Zackims for the tax years 1978, 1979, and 1980. The claimed deficiencies involved in that investigation arose out of unreported income other than the $2,059 in interest which was the subject of the May 27, 1982 notice of deficiency.*fn1 On November 19, 1984 the Zackims' counsel had a conference in New York City with Valerie Volesko of the Manhattan District Counsel Office, relating to a criminal referral made by the Internal Revenue Service Criminal Investigation Division for the Zackims' 1978, 1979, and 1980 tax years. On December 5, 1984 Ms. Volesko wrote to taxpayers' counsel, informing him that Mr. Zackim's case had been referred to the Department of Justice for prosecution. In September 1985 the Zackims' counsel informed the Appeals Office of Internal Revenue that Mr. Zackim was under investigation by the Criminal Investigation Division. The Appeals Office relayed this information to the district counsel attorney who was handling the Tax Court petition on the May 27, 1982 notice of deficiency. As noted above, that petition was disposed of by a Tax Court decision on October 23, 1985.
On November 27, 1985 a grand jury returned an indictment charging Mr. Zackim with one count of tax evasion, 26 U.S.C. § 7201 and one count of tax fraud, 26 U.S.C. § 7206(1) for each of the years 1978 through 1980. That indictment was disposed of when Mr. Zackim pled guilty, on February 10, 1986, to one count of violating section 7206(1) for each of the years 1978 through 1980.
Thereafter, in a statutory notice of deficiency issued November 14, 1986, the Commissioner determined deficiencies in the Zackims' federal income tax and additions to tax for fraud, 26 U.S.C. § 6653(b), as follows:
Year Deficiencies § 6653(b) addition