Opinion
453-17
10-21-2021
Gregory J. Podlucky & Karla S. Podlucky, Petitioners v. Commissioner of Internal Revenue, Respondent
ORDER
Albert G. Lauber Judge.
This case was tried on October 5 and 7 during the Court's October 4, 2021, Los Angeles, California, trial session. The parties and witnesses appeared remotely via Zoomgov.
In 2016 the Internal Revenue Service (IRS or respondent) issued petitioners a notice of deficiency determining deficiencies totaling $4,781,702, plus civil fraud penalties (against Mr. Podlucky only) totaling $3,586,277. These determinations were made with respect to petitioners' 2003-2006 tax years. Petitioners timely petitioned this Court in January 2017. Mrs. Podlucky has also sought relief from joint and several liability under section 6015.
All statutory references are to the Internal Revenue Code in effect at all relevant times. Unless otherwise noted, all Rule references are to the Tax Court Rules of Practice and Procedure.
On September 22, 2021, respondent filed a Motion in Limine seeking admission into evidence of the former testimony of Brent Nestor. In 2011 Mrs. Pod-lucky was indicted on counts of money laundering and conspiracy to commit money laundering. The Government alleged that petitioners used funds extracted from Le-Nature's, Inc., a corporation of which petitioner husband had majority control, to purchase (and later sell) jewelry from various jewelers, including Van Cleef & Arpels (VCA).
The Government called Mr. Nestor to testify as a witness in Mrs. Podlucky's criminal trial. At that time Mr. Nestor served as Senior Vice President of Sales for VCA, and he worked in the company's New York office. Mr. Nestor testified about petitioners' jewelry purchases from VCA. Specifically, he testified that petitioners ordered jewelry that was custom-made for Mrs. Podlucky. To enable these orders to be fulfilled Mr. Nestor traveled to petitioners' home to take Mrs. Pod-lucky's measurements so that rings, bracelets, and necklaces could be sized to fit her exactly. Mrs. Podlucky's defense attorney cross-examined Mr. Nestor during the criminal trial. Her attorney questioned Mr. Nestor about various matters, including whether he had met her in person, whether Mrs. Podlucky herself had placed orders, and whether he had ever seen Mrs. Podlucky wearing the jewelry.
In her request for innocent spouse relief Mrs. Podlucky alleged (among other things) that the jewelry purchases were made without her knowledge. She also asserted her belief that her husband had purchased the jewelry, not for her personally, but as an investment asset for Le-Nature's, Inc. Respondent seeks to use Mr. Nestor's testimony as evidence that Mrs. Podlucky knew about, and benefited from, the jewelry purchases.
Proceedings in the Tax Court are conducted in accordance with the Federal Rules of Evidence (FRE). See sec. 7453; Rule 143, Tax Court Rules of Practice and Procedure. FRE 801(c) defines hearsay as an out-of-court statement that "the party offers in evidence to prove the truth of the matter asserted." FRE 802 provides that hearsay is generally inadmissible.
Respondent agrees that Mr. Nestor's prior testimony constitutes hearsay. However, respondent contends that Mr. Nestor's testimony is admissible under FRE 804(b)(1), which provides an exception when (1) the declarant is unavailable, (2) the testimony was given "at a trial * * * whether given during the current proceeding or a different one," and (3) the testimony is "now offered against a party who had * * * an opportunity and similar motive to develop it by direct, cross-, or redirect examination." FRE 804(b)(1).
Petitioners do not dispute that Mr. Nestor is "unavailable" as a witness. Indeed, he now resides in Switzerland and is beyond the Tax Court's subpoena power. See sec. 7456(a)(1). Under Swiss law, the U.S. Government is generally prohibited from eliciting live testimony from an individual residing in Switzerland. Because Swiss authorities do not recognize tax cases as "civil" or "commercial" matters, the Hague Evidence Convention does not permit respondent to serve a subpoena on Mr. Nestor. And Mr. Nestor's attorney has informed respondent's counsel that Mr. Nestor will not travel to the United States, or otherwise outside Switzerland, to enable his testimony to be taken in this case.
Petitioners do not dispute (and could not possibly dispute) that Mr. Nestor's prior testimony was given "at a trial." The third and final element is the "similar motive" requirement. The similar motive requirement ensures "that the earlier treatment of the witness is the rough equivalent of what the party against whom the statement is offered would do at trial if the witness were available to be examined by that party." Kirk v. Raymark Indus., Inc., 61 F.3d 147, 166 (3d Cir. 1995) (quoting United States v. Salerno, 937 F.2d 797, 806 (2d Cir. 1991)). "The way to determine whether or not motives are similar is to look at the similarity of the issues and the context in which the opportunity for examination previously arose." Ibid. (quoting 2 Steven A. Saltzburg & Michael M. Martin, Federal Rules of Evidence Manual 400 (5th ed. 1990)).
In Mrs. Podlucky's criminal trial Mr. Nestor testified that petitioners purchased custom-made jewelry for Mrs. Podlucky and that the jewelry was sized specifically for her. The Government used Mr. Nestor's trial testimony as evidence that Mrs. Podlucky received unlawful benefits. In this case respondent seeks to admit Mr. Nestor's testimony for a nearly identical proposition--that Mrs. Pod-lucky knew about, and benefited from, the jewelry purchases. Respondent seeks to use this testimony to dispute Mrs. Podlucky's claim that she is entitled to innocent spouse relief.
By cross-examining Mr. Nestor during the criminal trial, Mrs. Podlucky's counsel had a "similar motive" to develop Mr. Nestor's testimony in an effort to show that Mrs. Podlucky had no knowledge of (and derived no benefit from) the jewelry arrangements. We accordingly conclude that Mr. Nestor's prior testimony is admissible under FRE 804(b)(1). See United States v. Conner, 811 Fed.Appx. 787, 794-795 (3d Cir. 2020) (finding that defendant had a "similar motive" to develop prior disciplinary hearing testimony in a case involving "the same subject matter covered" in the subsequent criminal case); United States v. Geiger, 263 F.3d 1034, 1039 (9th Cir. 2001) (finding that defendant had a "similar motive" to develop prior testimony in a case involving similar issues); Foster v. Commissioner, 80 T.C. 34, 126-127 (1983) (finding that taxpayer had a "similar motive" to develop prior deposition testimony in a case involving the same tax matters as the Tax Court proceeding), aff'd in part and vacated in part on other grounds, 756 F.2d 1430 (9th Cir. 1985).
In their responses to the Motion in Limine petitioners do not address the hearsay rule or the requirements of FRE 804(b)(1). Nor do they dispute that Mr. Nestor is currently an "unavailable" witness. Rather, petitioners contest granular details of his prior testimony and assert that his testimony is not relevant. Mr. Nestor's testimony is clearly relevant because Mrs. Podlucky, by requesting innocent spouse relief, has placed her knowledge of the jewelry purchases at issue in this case. And to the extent petitioners believe Mr. Nestor's testimony to be incorrect, they were free to testify to that effect at trial.
In consideration of the foregoing, it is
ORDERED that respondent's Motion in Limine, filed September 22, 2021, at docket entry #231, is granted.