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Wednesday, December 4, 2013
6663 case to be considered by the U.S. Supreme Court
This is a "badges of fraud" case that the Supreme Court will consider.
It is especially interesting because it also deals with the failure to file a tax return
Internal Revenue, Respondent-Appellee., U.S. Court
of Appeals, Fourth Circuit, 2013-2 U.S.T.C. ¶50,409, (Jun. 27, 2013)
Michael Craig Worsham, Petitioner-Appellant v.
Commissioner of Internal Revenue, Respondent-Appellee.
U.S. Court of Appeals, Fourth Circuit; 13-1074, June
Unpublished opinion affirming, per curiam, the Tax
Court, 104 TCM 129, Dec. 59,143(M), TC Memo. 2012-219.
[ Code Secs. 6651 and 6654]
Penalties, civil: Fraudulent failure to file return:
Failure to pay tax: Failure to make estimated tax payment: Frivolous
An attorney who failed to file his tax return was
liable for deficiencies and increased penalties. His arguments that Congress
lacked authority to tax his income, that the income tax infringed on his
fundamental rights, and that his earnings as an attorney were not taxable
because they included the "basis value" of his labor were frivolous.
He was also liable for the penalty for fraudulent failure to file a return.
Several badges of fraud were present, including the fact that he had filed his
returns for previous years when his income was lower, he was a highly educated
attorney who raised arguments that he should have recognized as frivolous, and
he appeared to be more concerned with concealing his income than with raising
good-faith arguments regarding his tax liability. Absent evidence to the
contrary, he was also liable for the penalties for failure to pay the tax shown
on the substitute return prepared by the IRS and for failing to pay his
estimated tax. Back references: ¶3100.11, ¶3100.22, ¶39,475.23, ¶39,475.298,
¶39,475.88 and ¶39,560.34.
Michael C. Worsham, for Appellant. Kathryn Keneally,
Assistant Attorney General, Robert W. Metzler, Steven K. Uejio, Department of
Justice, for Appellee.
Before: Traxler, Chief Judge, and Niemeyer and Motz,
The court has designated this opinion as NOT FOR
Consult the Rules of the Court before citing this
Per curiam: After a trial, the tax court found that
Michael Worsham failed to report taxable income of $193,026 for 2006 and that
he was liable for increased penalties because his failure to file was
fraudulent. We affirm.
Worsham does not dispute that he failed to pay taxes
on the income he earned in 2006, or the Commissioner's calculations as to the
amount of the deficiency. However, he argues that Congress lacks authority to
tax his income. This argument clearly fails. See U.S. Const. art. I, §8, cl. 1
(“The Congress shall have Power To lay and collect Taxes, Duties, Imposts and
Excises … .”); U.S. Const. amend. XVI (“The Congress shall have power to lay
and collect taxes on incomes, from whatever source derived, without
apportionment among the several States, and without regard to any census or
enumeration.”). We find similarly unpersuasive Worsham's argument that the
federal income tax infringes his fundamental rights.
Worsham also argues that his earnings as an attorney
are not taxable income because they include the “basis value” of his labor. We
agree with the numerous other courts to have addressed this argument that it is
meritless. See, e.g., Boggs v. Comm'r [ 2009-1 ustc ¶50,446], 569 F.3d 235, 238
(6th Cir. 2009); Olson v. United States, 760 F.2d 1003, 1005 (9th Cir. 1985).
Finally, Worsham contends that the tax court erred
in imposing a penalty under 26 U.S.C. §6651(f) for fraudulent failure to file a
tax return. “A finding of fraud requires that the Commissioner prove
affirmatively by clear and convincing evidence actual and intentional
wrongdoing on the part of the [taxpayer] with a specific intent to evade the
tax.” Grossman v. Comm'r [ 99-2 ustc ¶50,631], 182 F.3d 275, 277 (4th Cir.
1999) (internal quotation marks omitted). However, “[i]ntent to defraud … may
be proven by circumstantial evidence.” Id. We review the tax court's finding of
fraud for clear error. Romm v. Comm'r [ 57-2 ustc ¶9757], 245 F.2d 730, 734
(4th Cir. 1957).
Worsham does not dispute that he failed to file a
return. The tax court found several indicia of fraud present, including: 1)
Worsham had filed tax returns in years preceding 2006, demonstrating his
awareness of the filing requirement; 2) Worsham's tax liability increased in
2006 because his law practice became more profitable; 3) Worsham raised
numerous frivolous arguments; and 4) Worsham is highly educated and has a law
degree and thus should have been able to identify frivolous arguments. Worsham
v. Comm'r [ CCH Dec. 59,143(M)], T.C. Memo 2012-219, at 17-21 (2012). The court
found it particularly significant that Worsham previously moved to dismiss his
case after learning that the Commissioner had subpoenaed his bank accounts; the
court concluded that Worsham was more concerned with concealing the true amount
of his income than with presenting good-faith arguments regarding his tax
liability. Given these considerations, we cannot conclude that the tax court's
finding of fraud was clearly erroneous.
In addition to the 26 U.S.C. §6651(f) penalty, the
tax court imposed penalties under 26 U.S.C. §§6651(a)(2) and 6654 for failure
to pay the tax shown on a substitute for return and failure to pay estimated
taxes. Worsham does not challenge those penalties beyond arguing that he never
owed any income tax to begin with. We have rejected that argument and thus need
not consider the issue further. *
Accordingly, we affirm the judgment of the tax
court. We dispense with oral argument because the facts and legal contentions
are adequately presented in the materials before the court and argument would
not aid the decisional process.
The Commissioner has filed a motion seeking
sanctions against Worsham, acting pro se, for noting a frivolous appeal.
See 28 U.S.C. §1912; Fed. R. App. P. 38. We deny that motion.