## Facts

- Kevin J. Morse worked part-time as a movie-theater manager and operated a farming business generating substantial income.
- For tax years 1991–1994, he filed federal income tax returns that omitted significant farm income that he did not disclose to his tax preparer.
- The parties later stipulated unreported income of $75,799 (1991), $39,900 (1992), $24,481 (1993), and $68,713 (1994).
- Morse was criminally prosecuted and convicted on four counts of willfully filing false returns under 26 U.S.C. § 7206(1) for 1991–1994.
- The criminal judgment included imprisonment, a fine, costs, and restitution to the IRS of $61,700, which Morse paid in full.
- The IRS issued a notice of deficiency determining income-tax deficiencies and asserting civil fraud penalties under I.R.C. § 6663 for 1991–1994.
- In the Tax Court case, Morse conceded the deficiencies but contested the civil fraud penalties and argued that the criminal case and restitution barred further civil liability.

## Issues

1. Whether the IRS proved by clear and convincing evidence that Morse’s underpayments for 1991–1994 were attributable to fraud, warranting the I.R.C. § 6663 civil fraud penalty.
2. Whether Morse’s criminal conviction and restitution payment for the same years barred the IRS from determining civil deficiencies and imposing civil fraud penalties under res judicata, collateral estoppel, or double jeopardy.

## Decision

- The Tax Court sustained the deficiencies for 1991–1994 (as conceded by Morse).
- The Tax Court held Morse liable for the I.R.C. § 6663 civil fraud penalty for each year.
- The Tax Court rejected arguments that the criminal conviction and restitution precluded additional civil deficiencies or civil fraud penalties.
- The court held that res judicata and collateral estoppel did not apply because the criminal case did not finally adjudicate Morse’s civil tax liability or civil fraud penalties.
- The court held that imposing the civil fraud penalty after the criminal case did not violate the Double Jeopardy Clause because the fraud penalty is a civil sanction.

## Legal Principles

- The I.R.C. § 6663 civil fraud penalty applies when the IRS proves, by clear and convincing evidence, that an underpayment is attributable to fraud.
- Fraud may be established through circumstantial evidence, including repeated and substantial understatements of income and willful filing of materially false returns.
- A criminal restitution order does not fix or limit a taxpayer’s civil tax liability and does not restrict the IRS from determining deficiencies and asserting civil penalties for the same years.
- Res judicata requires the same claim and a final judgment on the merits; collateral estoppel requires that an identical issue was actually litigated and essential to the prior judgment.
- Civil tax fraud penalties are treated as civil, remedial measures; their imposition after a criminal conviction does not constitute multiple criminal punishments for double-jeopardy purposes.

## Conclusion

The Tax Court found clear and convincing evidence that Morse fraudulently underpaid taxes by omitting substantial farm income over multiple years and held him liable for I.R.C. § 6663 civil fraud penalties, further ruling that his prior criminal conviction and restitution payment did not bar the IRS from pursuing civil deficiencies and penalties.


Morse v. Comm’r, T.C. Memo. 2003-332 (2003)