Tax Court In Brief | Sestak V. Commissioner | Badges Of Fraud, Bribery, And Violation Of Sharply Defined Public Policy

• Published date: 02 May 2022
• Subject Matter: Tax, Criminal Law, Income Tax, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Freeman Law
• Author: Freeman Law

The Tax Court in Brief - April 25th- April 29th, 2022

Freeman Law's "The Tax Court in Brief" covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

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Tax Litigation: The Week of April 25th, 2022, through April 29th, 2022

• Valentine v. Comm'r, TC Memo. 2022-42| April 28 2022 | Gustafson, J. | Dkt. No. 6724-19

Sestak v. Comm'r, TC Memo. 2022-41| April 25, 2022 | Weiler, J. | Dkt. No. 17285-18

Opinion

Short Summary: In 2012, Michael Sestak was employed as a consular officer by the State Department at the U.S. Consulate in Ho Chi Minh City, Vietnam. Sestak was responsible for reviewing U.S. visa applications and issuing U.S. visas to applicants. Sestak devised a scheme whereby he would receive compensation in exchange for facilitating approval of nonimmigrant visas to the U.S. through his position as a consular officer. From February to September 2012, Sestak approved 410 visa applications directed to him, and Sestak received payments'that were ultimately wired to his bank accounts'totaling $3,227,501. In an attempt to hide his bribery proceeds, Sestak acquired real property in Thailand for a total of approximately $3.2 million.

In 2013 Sestak timely filed his 2012 Form 1040, U.S. Individual Income Tax Return, reporting therein wages of $122,029 as an employee of the State Department. He did not report the $3,227,501 in bribery proceeds he received.

The State Department uncovered the fraudulent scheme, and ultimately, Sestak pleaded guilty to conspiracy to commit offenses against the U.S. and to defraud the U.S., bribery of a public official, and conspiracy to engage in a monetary transaction in property derived from specified unlawful activity. In a plea deal, Sestak executed a preliminary consent order of forfeiture imposing a forfeiture money judgment of $6,021,441 in favor of the U.S., which included forfeiture of his real estate holdings in Thailand, all of which represented bribery proceeds traceable to the fraudulent visa scheme and were subject to forfeiture pursuant to 18 U.S.C. ' 981(a)(1)(C), 18 U.S.C. ' 982(a)(1) and (6), 21 U.S.C. ' 853(p), and 28 U.S.C. ' 2461.

Sestak was permitted'under U.S. supervision and approval'to sell the real estate holdings in Thailand, with portions of the proceeds to be used to pay any of Sestak's federal income tax due for tax years 2012 and 2013. Ultimately, Sestak sold his real estate holdings at a loss, but the U.S. received $1,551,134. The IRS then audited Sestak's 2012 return, and through IRS Letter 950, along with Form 4549-A, Income Tax Examination Changes, the IRS asserted the civil fraud penalty against Sestak. A Revenue Agent made an initial determination to assert the civil fraud penalty under section 6663, and prior written supervisory approval was obtained to assert the civil fraud penalty pursuant to section 6663. Then, those decisions were formally communicated to Sestak.

Key Issues:

• Whether petitioner is entitled to a tax deduction for the financial loss...