BAILEY v. COMMISSIONER OF INTERNAL REVENUE
T.C. Memo. 2012-96
United States Tax Court.
Filed April 2, 2012.
From the Credit Suisse advance account, Mr. Bailey made Duboc-related expenditures8 that totaled $931,698 in 1994 and $302,454 in 1995; and he made transfers of Biochem Pharma stock sale and loan proceeds to the Barnett account totaling $688,2709 in 1994 and $2,750,249 in 1995 (totaling $3,475,327), of which the sale proceeds constituted $175,037 in 1994 and $250,019 in 1995 (totaling $425,056) and loan proceeds constituted the remainder of $3,013,463.10 Mr. Bailey also transferred from the Credit Suisse account to the Barnett account the $730,000 in proceeds from the sales of the Obayashi and Pasco stock.
From the Barnett account, Mr. Bailey paid $730,000 in 1995 to the U.S. Marshals, for the Obayashi and Pasco stock. (The record shows no complaint at that time from the U.S. Marshals that this $730,000 payment was made from the Barnett account rather than directly from the Credit Suisse advance account, and we find that his use of this account did not result in any appropriation by Mr. Bailey.) Mr. Bailey also made transfers from the Barnett account to his personal checking account totaling $2,863,000 in 1995 (including the $425,056 that constituted Biochem Pharma sale proceeds, rather than loan proceeds). From the Barnett account Mr. Bailey also made substantial personal expenditures, both in 1994 and 1995, but they were evidently made from his non-Duboc-related personal funds in the account, which were adequate to cover those expenditures. The record does not show that Mr. Bailey regarded the funds in the Barnett account as subject to any restrictions on their use resulting from his agreement with the Federal Government.
From the personal checking account (which had received $2,863,000 of Duboc-derived funds from the Barnett account in 1995 (including the $425,056 in sales proceeds)), Mr. Bailey made $35,705 in Duboc-related expenditures, apparently in 1995. He spent the remainder of the Duboc-derived funds (more than $2.8 million) on non-Duboc-related matters. When the money was in that personal checking account, Mr. Bailey treated it (and spent it) as his own.
Accounting for and return of stock
In late 1995 or early 1996, Mr. Duboc replaced Mr. Bailey with another lawyer. For the prior year and a half, the Government had not inquired about the Biochem Pharma stock. However, Mr. Duboc's retention of new counsel focused attention on the situation at a time when the stock had more than quadrupled in value (from under $10 per share in the spring of 1994 to about $44 in February 1996). The 400,000 unsold shares had thus increased in value by about $34 per share, so that appreciation of $13.6 million was at stake. At the Government's request, the District Court ordered Mr. Bailey to transfer the 400,000 unsold Biochem Pharma shares to the Federal Government. At that time, however, Mr. Bailey owed $2,332,743 for loans that had been made against 236,000 of the remaining 400,000 unsold shares (and he had spent the proceeds); and Credit Suisse would not make any transfer of the shares until the loans were repaid. Mr. Bailey therefore did not immediately comply with the District Court's order, and the court found him in contempt in March 1996 and ordered him incarcerated.
Mr. Bailey had induced Credit Suisse to transfer 164,000 of the unsold shares to the Federal Government in February 1996. However, because the remaining 236,000 of those unsold shares served as collateral for the loans of about $2.3 million, Mr. Bailey had to repay those loans before Credit Suisse would transfer those shares to the Government. He did repay the Credit Suisse loans (from funds he borrowed from others); but the difficulty of borrowing such amounts from third parties (accomplished while Mr. Bailey was incarcerated for contempt) accounted for his delay in complying with the District Court's order. After Mr. Bailey repaid the Credit Suisse loans, Credit Suisse transferred the remaining 236,000 shares to the Government in April 1996. See Bailey I, 175 F.3d at 968.
Repayment of unapproved expenditures and personal loans