Christopher E. Huminski v. Commissioner, TC Memo 2012-302 ,
Code Sec(s) 6651; 6673; 7454.
CHRISTOPHER E. HUMINSKI, Petitioner v. COMMISSIONER OF
INTERNAL REVENUE, Respondent .
Case Information:
Code Sec(s):
6651; 6673; 7454
Docket: Docket
No. 2396-10.
Date Issued:
10/31/2012
Judge: Opinion by
Wells, Gerber
HEADNOTE
XX.
Reference(s): Code Sec. 6651; Code Sec. 6673; Code Sec. 7454
Syllabus
Official Tax Court Syllabus
Counsel
Alexander C. Socia, for petitioner.
Michael J. Gabor, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MORRISON, Judge: The respondent IRS determined deficiencies
in the petitioner's 2005, 2006, 2007, and 2008 federal income tax in the
respective amounts of $50,360, $27,018, $28,159, and $23,838, plus additions to
tax under [*2] sections 6651(a)(2),
6651(f), and 6654. Unless otherwise indicated, all section references are to
the Internal Revenue Code.
Before trial the Court issued a partial summary judgment
order stating that Huminski earned unreported income during the years at issue
in the same amounts as those underlying the deficiencies determined in the
notice of deficiency. Although Huminski had previously opposed this judgment,
he does not in his posttrial brief make any further challenges to the
deficiency determinations. Therefore, we sustain the deficiency determinations.
Similarly, he does not in his posttrial brief contest the IRS's determinations
that he is liable for the additions to tax under section 6651(a)(2) or the
additions to tax under section 6654. Therefore, we sustain these determinations
as well. The only issues remaining for decision are: (1) whether Huminski is
liable for fraudulent-failure-to-file additions to tax under section 6651(f)
for the years at issue; and (2) whether the Court should impose a penalty on
Huminski under section 6673(a)(1) (at trial the IRS made an oral motion to
impose this penalty). We hold that Huminski is liable for the additions to tax
under section 6651(f), although we decline to impose a penalty under section
6673(a)(1). 1 [*3] FINDINGS OF FACT
Some facts have been deemed stipulated under Tax Court Rule
of Practice & Procedure 91(f) and are so found. Huminski resided in Florida
at the time the petition was filed.
Huminski earned a bachelor of science degree and a two-year
degree in mechanical design. He took an additional year of education courses to
be a certified secondary-education teacher, but he was never certified.
From 1990 to 1995 Huminski received compensation from
various companies for making technical drawings of machinery. During these
years he filed federal income-tax returns in which he reported the compensation
he received for his services. He paid the tax he reported.
From 1996 until 2005, Huminski testified, he was unemployed.
2
We do not find as a matter of fact whether this testimony
was truthful as it does not affect our conclusions. [*4] Beginning in 2005
Huminski began making technical drawings for Mid-State Machine &
Fabricating Corp. This company will be referred to as Mid-State Machine.
For tax years 2005, 2006, 2007, and 2008, Huminski filed
Forms 1040, U.S. Individual Income Tax Return. These purported returns were
“zero” returns in that on each return he listed zero as the amount of his
wages, total income, adjusted gross income, taxable income, and total tax. 3 To
each of his purported returns he attached a self-created form, labeled
“Corrected Form 1099-MISC”, on which he claimed that he received no income from
Mid-State Machine.
However, during 2005, 2006, 2007, and 2008, Huminski received
$160,043.93, $87,175, $90,796.85, and $79,550, respectively, for services
performed for Mid-State Machine. For each year Mid-State Machine issued a Form
1099-MISC, Miscellaneous Income, to Huminski reflecting the correct amount it
paid him. For each year Huminski received the correct Form 1099-MISC from
Mid-State Machine before he submitted to the IRS the form he labeled “Corrected
Form 1099-MISC”. [*5] The IRS did not treat Huminski's purported returns as
valid returns. Rather, pursuant to section 6020(b), the IRS prepared
substitutes for returns for 2005, 2006, 2007, and 2008.
On November 3, 2009, the IRS mailed a notice of deficiency
to Huminski regarding his 2005, 2006, 2007, and 2008 tax years. Huminski filed
a timely petition with the Court.
OPINION
1. Additions to Tax Under Section 6651(f)
The IRS determined that Huminski is liable for additions to
tax under section 6651(f) for fraudulently failing to file his 2005, 2006,
2007, and 2008 tax returns. Although Huminski mailed the IRS what purported to
be tax returns, he filled in zeros for all lines where he should have reported
income, and the IRS treated the Forms 1040 as invalid returns. The majority of
Courts of Appeals, as well as this Court, have held that, generally, a return
that contains only zeros is not a valid return. See United States v. Mosel, 738
F.2d 157 [54 AFTR 2d 84-5481] (6th Cir. 1984); United States v. Grabinski, 727
F.2d 681 [53 AFTR 2d 84-710] (8th Cir. 1984); United States v. Rickman, 638
F.2d 182 [47 AFTR 2d 81-379] (10th Cir. 1980); United States v. Moore, 627 F.2d
830 [47 AFTR 2d 81-515] (7th Cir. 1980); United States v. Smith, 618 F.2d 280
[46 AFTR 2d 80-5071] (5th Cir. 1980); United States v. Edelson, [*6] 604 F.2d 232 [44 AFTR 2d 79-5515] (3d Cir.
1979); Cabirac v. Commissioner, 120 T.C. 163, 169 (2003). For example, in
Moore, 627 F.2d at 835, the Court of Appeals for the Seventh Circuit noted that
a tax might conceivably be calculated on the basis of the zero entries;
however, “it is not enough for a form to contain some income information; there
must also be an honest and reasonable intent to supply the information required
by the tax code.” See also Mosel, 738 F.2d at 158. Accordingly, we conclude
that the returns Huminski filed were invalid and tantamount to failing to file
returns. We must therefore consider whether Huminski's failure to file returns
was fraudulent.
In deciding whether a failure to file is fraudulent under
section 6651(f), we consider the same elements that are considered in imposing
the addition to tax for fraud under former section 6653(b) and present section
6663. Clayton v. Commissioner, 102 T.C. 632, 651-653 (1994). The IRS must
establish, by clear and convincing evidence, that Huminki's failure to file was
fraudulent.See sec. 7454(a); Clayton v. Commissioner, 102 T.C. at 646, 651-653.
The instant case involves many indicators of fraud. For
example, Huminski failed to file valid returns for the years at issue. Huminski
failed to make any payments for those years. As he was an independent contractor,
Huminski was supposed to prepay his tax in quarterly installments. [*7] On
brief Huminski argues that his conduct was not fraudulent because he genuinely
believed that if someone files an income-tax return that is based on personal
knowledge, then the correctness of the return cannot be questioned by the IRS
or the courts. Although he testified that this was his belief, we find his
testimony incredible. Huminski did not have a good-faith misunderstanding of
the law. Huminski knew of his legal duty to file tax returns and pay tax and
sought to avoid it. Huminski has no defense to the fraudulent-failure-to-file
additions to tax. See Niedringhaus v. Commissioner 99 T.C. 202, 217-218 (1992).
, We find that the IRS has established fraud by clear and convincing evidence.
Thus, Huminski is liable for the additions to tax under section 6651(f) for
2005, 2006, 2007, and 2008. 2. Section-6673 Penalty The IRS moved that the
Court impose a penalty against Huminski pursuant to section 6673(a)(1). Section
6673(a)(1) authorizes the Court to require a taxpayer to pay a penalty to the
United States in an amount not to exceed $25,000 whenever it appears to the
Court that the taxpayer instituted or maintained the proceeding primarily for
delay or that the taxpayer's position in the proceeding is frivolous or
groundless. [*8] Huminski's posttrial brief, signed by a lawyer that he had
retained after trial, is free of frivolous arguments. We decline to impose the
penalty against Huminski, although we warn him that making such arguments
before this Court in the future will likely result in the imposition of the
penalty against him. 3. Conclusion Huminski is liable for the deficiencies, the
additions to tax under section 6651(a)(2), the additions to tax under under
section 6651(f), and the additions to tax under section 6654 that the IRS
determined.
To reflect the foregoing,
An appropriate order and decision will be entered.
1
We need not address
the IRS's alternative contentions, which were asserted in its amended answer,
(1) that if the additions to tax under sec. 6651(f) do not apply because the
Court determines that Huminski filed valid returns, then Huminski should be
held liable for additions to tax under sec. 6663, and (2) that if the Court
determines that the additions to tax under sec. 6651(f) do not apply because
the Court determines that Huminski filed valid returns, and that additions to
tax under sec. 6663 do not apply because fraud is not present, then Huminski
should be held liable for accuracy-related penalties under sec. 6662.
2
3
The one exception is
that on his purported return for 2007, Huminski wrote the words “Not
Applicable” in the line for wages.
NIEDRINGHAUS
v. COMMISSIONER, 99 TC 202, Code Sec(s) 6653.
Paul E. Niedringhaus and Gladys F. Niedringhaus,
Petitioners v. Commissioner of Internal Revenue, Respondent
Case Information:
|
Code
Sec(s):
|
6653
|
|
Docket:
|
Docket
No. 27032-89.
|
|
Date
Issued:
|
08/11/1992
|
|
Judge:
|
Opinion
by GERBER, J.
|
|
Tax
Year(s):
|
Years
1979, 1980, 1981, 1982, 1983, 1984, 1985.
|
|
Disposition:
|
Decision
for Govt.
|
HEADNOTE
1. Failure to pay taxes—burden of proving
fraud. Penalty imposed on
taxpayer as a result of his fraudulent intent to evade taxes. After becoming
involved with tax protester groups, taxpayer ceased to file returns or make
estimated tax payments, and only filed delinquent returns for seven tax years
after learning of criminal investigation. This together with his allegedly
deceptive actions relating to business checking account, showed a deliberate
intent to prevent collection of taxes. Taxpayer's reliance on Cheek v. U.S. (1991), 67 AFTR2d 91-344,
111 S.Ct 604, was misplaced. That case held
that if taxpayer subjectively believes in good faith that tax laws don't apply
to him, whether objectively reasonable or not, he cannot be convicted of a
willful act. Evidence here showed that taxpayer did not have a good-faith
belief that he didn't have to file returns or pay taxes. His misunderstanding,
if any, was to constitutionality of law. Other penalties also imposed.
Syllabus
Official
Tax Court Syllabus
R determined that P's failure to file returns,
pay estimated tax, and other related activities were fraudulent within the
meaning of sec. 6653(b)(1) and (2), I.R.C. P, relying on the recent Supreme
Court opinion inCheek v. United States, 498 U.S. 192 (1991), contends that there is no
fraud "because of his good faith, although erroneous, understanding of the
tax laws due to his having accepted a false premise into his thinking process
about the question of tax liability." P had filed returns for many years
before becoming involved with tax [pg. 203]protesters.Held, P did not have a good-faith belief that he was
not required to file a return, report his taxes, or pay his tax. The holding ofCheek v. United States, supra (involving the interpretation of willfulness
in a criminal case), analyzed in connection with the use of the term
"willful" in civil fraud additions to tax.
OPINION
The parties agree as to the amount of
petitioners' income tax liability for each year in issue. At issue is whether
petitioners are liable for various additions to tax.
Section
6653(b) Addition to Tax
Respondent determined that all of the
underpayments of tax are due to fraud under section 6653(b)(1) and (2) 5 for 1982, 1983, 1984, and 1985.
Section 6653(b)(1) provides that if any part
of the underpayment is due to fraud, there will be an addition to tax equal to
50 percent of the entire underpayment. The addition to tax under section
6653(b)(2), however, applies only to that portion of the underpayment
attributable to[pg. 210] fraud. Fraud is
defined as an intentional wrongdoing designed to evade tax believed to be
owing. Powell v. Granquist, 252 F.2d 56 (9th Cir. 1958); Miller v. Commissioner, 94 T.C. 316, 332 (1990).
Respondent has the burden of proving by clear
and convincing evidence that an underpayment exists for the years in issue and
that some portion of the underpayment is due to fraud. Sec. 7454(a); Rule
142(b). To meet this burden, respondent must show that petitioners intended to
evade taxes known to be owing by conduct intended to conceal, mislead, or
otherwise prevent the collection of taxes. Stoltzfus v. United States, 398 F.2d 1002 (3d Cir. 1968); Webb v. Commissioner, 394 F.2d 366 (5th Cir. 1968), affg. T.C. Memo. 1966-81; Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983). Respondent need not
prove the precise amount of the underpayment resulting from fraud, but only
that some part of the underpayment of tax for each year in issue is
attributable to fraud.Lee v. United States, 466 F.2d 11, 16-17 (5th Cir. 1972); Plunkett v. Commissioner,
465 F.2d 299, 303 (7th
Cir. 1972), affg. T.C. Memo. 1970-274.
Petitioners concede that there is an underpayment for each of the years in
issue; respondent, therefore, has met her burden of proof as to the
underpayment of tax for each year.
The existence of fraud is a question of fact
to be resolved upon consideration of the entire record. Gajewski v. Commissioner, 67 T.C. 181, 199
(1976), affd. without published opinion 578 F.2d 1383 (8th Cir. 1978);Estate of Pittard v. Commissioner, 69 T.C. 391 (1977).
Fraud is not to be imputed or presumed, but rather must be established by some
independent evidence of fraudulent intent. Beaver v. Commissioner, 55 T.C. 85, 92 (1970);Otsuki v. Commissioner, 53 T.C. 96 (1969).
Fraud may not be found under "circumstances which at the most create only
suspicion." Davis v. Commissioner, 184 F.2d 86, 87 (10th
Cir. 1950); Petzoldt v. Commissioner, 92 T.C. 661, 700
(1989). However, fraud may be proved by circumstantial evidence and reasonable
inferences drawn from the facts because direct proof of the taxpayer's intent
is rarely available. Spies v. United States, 317 U.S. 492 (1943); Rowlee v. Commissioner, supra; Stephenson v.
Commissioner, 79 T.C. 995 (1982),
affd. 748 F.2d 331 (6th Cir.
1984). The taxpayer's entire course of conduct may establish the requisite
fraudulent intent. Stone v. [pg. 211]Commissioner, 56 T.C. 213, 223-224
(1971); Otsuki v. Commissioner, supra at 105-106. The intent to conceal or mislead may
be inferred from a pattern of conduct.See Spies v. United States,
supra at 499.
Courts have relied on several indicia of fraud
in considering the section 6653(b) addition to tax cases. Although no single
factor may necessarily be sufficient to establish fraud, the existence of
several indicia may be persuasive circumstantial evidence of fraud. Solomon v. Commissioner, 732 F.2d 1459, 1461
(6th Cir. 1984), affg. per curiam T.C. Memo. 1982-603; Beaver v. Commissioner, supra at 93.
Circumstantial evidence which may give rise to
a finding of fraudulent intent includes: (1) Understatement of income; (2)
inadequate records; (3) failure to file tax returns; (4) implausible or
inconsistent explanations of behavior; (5) concealment of assets; (6) failure
to cooperate with tax authorities; (7) filing false Forms W-4; (8) failure to
make estimated tax payments; (9) dealing in cash; (10) engaging in illegal
activity; and (11) attempting to conceal illegal activity. Bradford v. Commissioner, 796 F.2d 303, 307 (9th
Cir. 1986), affg. T.C. Memo. 1984-601.
See Douge v. Commissioner, 899 F.2d 164, 168 (2d
Cir. 1990), affg. in part and revg. in part and remanding an oral opinion of
this Court dated July 1, 1988. These "badges of fraud" are
nonexclusive.Miller v. Commissioner, supra at 334. The taxpayer's background and the
context of the events in question may be considered as circumstantial evidence
of fraud. United States v. Murdock, 290 U.S. 389, 395
(1933); Spies v. United States, supra at 497;Plunkett v. Commissioner, supra at 303.
The record before us provides a basis for
finding the underpayment of tax for 1982, 1983, 1984, and 1985 is due to fraud
on the part of petitioner. Petitioner is well-educated and an experienced
businessman. He filed tax returns from at least 1960 through 1978. He was aware
of his obligation to file Federal income tax returns. Even though he believed
his business generally was expanding, petitioner did not prepare or file
returns for 1979 through 1985 until respondent commenced a criminal
investigation. Petitioner consistently and substantially understated his income
for 1979, 1980, 1981, 1982, 1983, 1984, and 1985.
Petitioner claims that he filed delinquent tax
returns before he learned of respondent's investigation. Petitioners, [pg. 212]however,
received a copy of the summons notifying them of the criminal investigation on
July 11, 1986, approximately 1 month before the delinquent returns were filed.
Petitioners stipulated this fact, but contend that the stipulation may have
been made in error and ask to be relieved from their stipulation.
Parties are bound by their stipulations
without a showing that evidence contrary to the stipulation is substantial or
the stipulation is clearly contrary to facts disclosed by the record and
justice requires that the stipulation be qualified, changed, or contradicted in
whole or in part. Rule 91(e); Loftin & Woodard, Inc. v.
United States, 577 F.2d 1206, 1232
(5th Cir. 1978); Jasionowski v. Commissioner, 66 T.C. 312, 317-318
(1976). No such showing has been made here. The Court is not required to accept
petitioner's self-serving testimony. 6 Geiger v. Commissioner, 440 F.2d 688, 689-690
(9th Cir. 1971), affg. per curiam T.C. Memo. 1969-159;Sharwell v. Commissioner, 419 F.2d 1057, 1060
(6th Cir. 1969), vacating and remanding on other issues T.C. Memo. 1968-89; Tokarski v. Commissioner, 87 T.C. 74, 77 (1986); Surloff v. Commissioner, 81 T.C. 210, 239
(1983). Respondent has introduced credible evidence establishing that
petitioners filed the delinquent returns approximately 1 month after they were
notified of respondent's investigation. Additionally, petitioner testified that
he received notification of the criminal investigation on July 11, 1986.
Consequently petitioners will not be relieved from their stipulation that they
received notification of the criminal investigation on July 11, 1986, a date
prior to their filing delinquent returns for the years in issue.
Petitioner, though "knowledgeable about
*** [his] taxpaying responsibilities, consciously decided to unilaterally opt
out of our system of taxation." Miller v. Commissioner, 94 T.C. 316, 335
(1990). While the mere failure to file tax returns may not be fraudulent,Kotmair v. Commissioner, 86 [pg. 213] T.C. 1253 (1986), it
can be evidence of the intent to evade tax. Bradford v. Commissioner, supra at 307. Petitioner also ceased filing estimated tax payments for
the years in issue even though he knew that his business was expanding.
Petitioner continued his deceptive behavior until he learned of respondent's
criminal investigation. "This malfeasance weighs heavily against
petitioners, particularly when we consider that petitioners knew of their
filing requirements and had a prior history of filing timely tax returns."Miller v. Commissioner, supra at 336.
The facts show that petitioner did not intend
to voluntarily pay his tax. Most telling is petitioner's failure to make
estimated tax payments or to file returns until respondent began the
investigation. It is well settled that later repentant behavior does not
absolve a taxpayer of his antecedent fraud. Badaracco v. Commissioner, 464 U.S. 386, 394
(1984); Plunkett v. Commissioner, 465 F.2d 299, 303 (7th
Cir. 1972), affg. T.C. Memo. 1970-274; Miller v. Commissioner, supra.
We find that petitioner's failure to file
returns, combined with his failure to make estimated tax payments, was a
deliberate attempt to conceal his correct tax liability and to frustrate its
collection. Miller v. Commissioner, supra at 337.
Respondent has also relied upon collateral
estoppel and several actions of petitioner in support of her determination of
an addition to tax under section 6653(b).
Collateral
Estoppel
Respondent contends that petitioner is
collaterally estopped by his criminal conviction under section 7203 for 1982
through 1984 from denying his failure to file returns for those years was
willful. The doctrine of collateral estoppel, or estoppel by judgment, is
intended to avoid repetitious litigation by precluding a second litigation of
any issue of fact or law that was actually litigated and that culminated in a
valid and final judgment. Kotmair v. Commissioner, supra at 1262. Under the doctrine of collateral
estoppel, a judgment in a prior action precludes litigation, in a second cause
of action, of issues actually litigated and necessary to the outcome of the first
action. Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n.5 (1979). Collateral
estoppel applies to issues of fact or law previously litigated. Meier v. Commissioner, 91 [pg. 214]T.C. 273, 283-286 (1988). Collateral estoppel
has been employed concerning failure to file situations. SeeCastillo v. Commissioner, 84 T.C. 405, 409-410
(1985).
Collateral estoppel, however, is an
affirmative defense which must be raised in a party's pleading. Rule 39. An
affirmative defense not pleaded is deemed waived. Gustafson v. Commissioner, 97 T.C. 85, 90 (1991);Jefferson v. Commissioner, 50 T.C. 963, 966-967
(1968). In the answer, respondent pled collateral estoppel in support of the
alternative determination that petitioners are liable for additions to tax
under sections 6651(a) and 6653(a). However, collateral estoppel is not
available in support of her determination of additions to tax under section
6653(b) for 1982, 1983, 1984, and 1985 because respondent did not raise it with
respect to these additions. Accordingly, respondent has waived the affirmative
defense of collateral estoppel with respect to the section 6653(b) addition to
tax.
Other
Actions in Support of Fraud
Respondent contends that petitioners' actions
surrounding the deposit of a $14,527 check into a MACBA bank account are
evidence of fraud. Respondent posits, on the basis of the description of MACBA
in United States v. Jungles, 903 F.2d 468, 472 (7th
Cir. 1990), as "a clearinghouse for tax protesters and persons who wished
to avoid detection by the IRS", that the check was deposited into a MACBA
bank account in order to avoid detection by the IRS.
Petitioners, however, claim in effect that the
MACBA transaction was not undertaken to avoid tax. According to petitioner, he
forwarded the check to Ryche of MACBA, at a time when petitioner did not need
the funds for his business, to be converted into silver as a hedge against
inflation. Additionally, petitioner states that within a few months he had
MACBA return the money when it was needed in his business and because
fluctuations in the silver market caused him to worry about the wisdom of
investing in silver. 7
Petitioner has provided an explanation for the
MACBA transaction which respondent has failed to rebut. Although [pg. 215]the
circumstances relating to this $14,527 check raise a suspicion as to the purpose
for the actions petitioner undertook, respondent cannot rest on suspicion alone
to carry the burden of proof as to fraud. Davis v. Commissioner, 184 F.2d 86, 87 (10th
Cir. 1950); Petzoldt v. Commissioner, 92 T.C. 661, 700
(1989).
Respondent also contends that petitioners' use
of their personal bank account to deposit business income after opening a
separate business account, and petitioners' use of their business bank account
to deposit business income after changing the name of that account, were deliberate
attempts to prevent the collection of tax and are evidence of fraud.
Petitioners used the Northfield account for
personal and business purposes until December 1983 when they opened the
Glenview account for the business, retaining the Northfield account generally
for personal transactions. They used the Glenview account for business purposes
until July 1984. Between July 1984 and October 1985, petitioners did not use
the Glenview account but again used the Northfield account for personal and
business purposes. In November 1985, petitioner changed the name of the
Glenview account to "Penco Precision Supplier Escrow Account" and
resumed using it for business purposes. According to petitioner, he changed the
name of the Glenview account at the time "the tax situation was coming to
the forefront", because he was advised that "if there should be some
adverse ruling against my interpretation of the tax, maybe they would seize my
funds and that if I put it in a supplier escrow account, that would show that ***
[those] funds had to be used to pay my suppliers." Respondent would have
us infer that petitioner was attempting to secrete his assets to avoid paying
his tax liabilities. Penco, however, is an unincorporated business and
petitioner's personal assets were available to satisfy business-related tax
liabilities. Other than the MACBA transaction, there is nothing in the record
to suggest that petitioner attempted to specifically secrete his personal
assets from respondent.
Although none of petitioner's "additional
actions" individually would suffice to carry respondent's burden of
clearly and convincingly proving fraud, taken together they present additional
support for respondent's determination.[pg. 216]
Petitioners, relying on Cheek v. United States, 498 U.S. 192 (1991),
contend that there was no fraud intended "because of *** [petitioner's]
good faith, although erroneous, understanding of the tax laws due to his having
accepted a false premise into his thinking process about the question of tax liability."
According to petitioner, he was under an "induced dementia" and as a
result "did not believe that the tax applied to him".
The Supreme Court has defined willfulness, as
used in the criminal tax statutes, as the voluntary, intentional violation of a
known legal duty.Cheek v. United States, 498 U.S. at 201. InCheek, the Supreme Court reversed a tax evasion
conviction where the District Court had instructed the jury that a defendant's
good-faith misunderstanding must be "objectively reasonable." The
Court held that the Government cannot carry its burden of demonstrating that
the defendant willfully failed to file a tax return unless the Government has
negated "a defendant's claim of ignorance of the law or a claim that
because of a misunderstanding of the law, *** [defendant] had a good-faith
belief that *** [defendant] was not violating any of the provisions of the tax
laws." Cheek v. United States, 498 U.S. at 202. The inquiry properly should
focus on whether the defendant actually believed that he or she did not have to
file the return. The reasonableness or unreasonableness of a defendant's belief
is relevant only for purposes of assessing the credibility of the defendant's
claim. Cheek v. United States, 498 U.S. at 202; United States v. Lussier, 929 F.2d 25, 31 (1st
Cir. 1991).
The premise of Cheek is that a person
cannot be convicted of willful failure to file a tax return if he subjectively
believes in good faith that the tax laws do not apply to him. 8 As the Supreme Court explained: "In the
end, the issue is whether, based on all the evidence, the Government has proved
that the defendant was aware of the duty at issue, which cannot be true if the
jury credits a good-faith misunderstanding and belief submission, whether or
not the claimed belief or misunderstanding [pg. 217]is objectively reasonable." Cheek v. United States, 498 U.S. at 202.
The term "willfully", as used in
sections 7201, 7202, 7203, 7204, 7205, 7206, and 7207, has been interpreted to
require a specific intent to violate the law. United States v. Pomponio, 429 U.S. 10, 12
(1976); United States v. Bishop, 412 U.S. 346, 361
(1973); Kotmair v. Commissioner, 86 T.C. 1253, 1273
(1986). We have held that the term "willfully" as used in section
7201 encompasses all the elements of fraud which are envisioned in section
6653(b). Amos v. Commissioner, 43 T.C. 50, 55 (1964),
affd. 360 F.2d 358 (4th Cir.
1965). We have interpreted the "due to fraud" language of section
6653(b) to require proof of specific intent to evade a tax believed to be
owing. Wright v. Commissioner, 84 T.C. 636, 639
(1985). It follows that a good-faith misunderstanding of the tax laws could
negate fraud under section 6653(b). See Granado v. Commissioner, 792 F.2d 91, 93 (7th
Cir. 1986), affg. per curiam T.C. Memo. 1985-237
(fraud under section 6653 "'is intentional wrongdoing on the part of the
taxpayer *** to avoid a tax known to be owing'") (quoting Akland v. Commissioner, 767 F.2d 618, 621 (9th
Cir. 1985), affg. T.C. Memo. 1983-249);
see alsoKlaphake v. Commissioner, T.C. Memo. 1990-375; Clark v. Commissioner, T.C. Memo. 1986-586.
There is a difference, however, between a
good-faith misunderstanding of the law and a good-faith belief that the law is
invalid or a good-faith disagreement with the law. United States v. Burton, 737 F.2d 439, 442-443
(5th Cir. 1984); United States v. Ware, 608 F.2d 400, 405
(10th Cir. 1979). As the Supreme Court has stated:
Claims that some of the provisions of the tax
code are unconstitutional are submissions of a different order. They do not
arise from innocent mistakes caused by the complexity of the Internal Revenue
Code. Rather, they reveal full knowledge of the provisions at issue and a
studied conclusion, however wrong, that those provisions are invalid and
unenforceable. Thus in this case, Cheek paid his taxes for years, but after attending
various seminars and based on his own study, he concluded that the income tax
laws could not constitutionally require him to pay a tax.
We do not believe that Congress contemplated
that such a taxpayer, without risking criminal prosecution, could ignore the
duties imposed upon him by the Internal Revenue Code and refuse to utilize the
mechanisms provided by Congress to present his claims of invalidity to the
courts and to abide by their decisions. *** As we see it, he is in no position
to claim [pg. 218]that
his good-faith belief about the validity of the Internal Revenue Code negates
willfulness or provides a defense to criminal prosecution under §§7201 and
7203. Of course, Cheek was free in this very case to present his claims of
invalidity and have them adjudicated, but like defendants in criminal cases in
other contexts, who "willfully" refuse to comply with the duties
placed upon them by the law, he must take the risk of being wrong.
[Cheek v. United States, 498 U.S. at 205-206; fn. ref. omitted.]
As was explained recently by the Court of
Appeals for the Tenth Circuit:
"Willfulness" is defined as the
"voluntary, intentional violation of a known legal duty." Cheek v. United States, 111 S. Ct. at 610 (emphasis added). To be a
relevant defense to willfulness, then, Willie, because of his belief or
misunderstanding, must not have known he had a legal duty. Id. at 611 (defendant must be "ignorant of his duty").
Thus, his belief must be descriptive—he must believe that the lawdoes not apply to him. A normative belief that the lawshould not apply to him leaves Willie fully aware of his legal obligations
and simply amounts to a disagreement with his known legal duty and a
"studied conclusion ... that [the law is] invalid and unenforceable." Id. at 612-13. *** [United States v. Willie, 941 F.2d 1384, 1392
(10th Cir. 1991).]
We find that petitioner did not have a
good-faith belief that he was not required to file tax returns, report his
income, or pay tax for 1982 through 1985. The record shows that petitioner
merely thought he could elude prosecution. Moreover, reviewing the record in
the best light for petitioner, it shows that he considered the tax laws to be
unconstitutional. Petitioner's testimony demonstrates that his
misunderstanding, if any, went to the constitutionality of law. For example, in
response to an inquiry as to why petitioner filed the delinquent returns when
he did, he stated:
Well, I was in communication with my legal
advisor, Mr. Stift, and he had been trying to convince me that my interpretation
of the tax law was wrong.
And I also saw that some of these people who I
had put my trust in were having their own legal problems. And, therefore, Ichanged my mind and decided that I would have to comply with the
law. [Emphasis added.]
Petitioner's reliance on advisers would not
preclude a finding of fraud in this case. The testimony establishes that
petitioner's reliance did not go to whether he was required by law to file;
rather, petitioner's reliance related to the question [pg. 219]of
whether he could continue failing to file the tax returns without detection.
Mrs. Niedringhaus' testimony regarding their
failure to file returns for 1979 through 1985 also shows that petitioner did
not honestly misunderstand his obligation to file the tax returns but merely
disagreed with the tax laws:
[Respondent] And then for 1979 through 1985,
you didn't file returns; is that correct?
[Mrs. Niedringhaus] Paul got very interested,
as he has testified in this, I think you call it a tax protestor thing.
And as Paul has testified—or as you have
brought out—that an individual out in California, over many years, had
convincing information regarding taxes and the passage of the—
[Respondent] Okay.
[Mrs. Niedringhaus]—16th Amendment. The fact
that one outspoken individual in California was never investigated—
[Respondent] Okay.
[Mrs. Niedringhaus]—despite the fact that he
had gone on record for five years, invited the press, and had it in the press—
[Respondent] Yes.
[Mrs. Niedringhaus]—the government have tacit
approval to that individual's actions. And I think—
[Respondent] Mrs. Niedringhaus, could—
[Mrs. Niedringhaus]—that that was convincing
to Paul.
[Respondent] Okay. I just asked the question,
you didn't file returns between 1979 and 1985; is that correct?
[Mrs. Niedringhaus] Paul has testified so.
[Respondent] Okay.
[Mrs. Niedringhaus] I, at the time, that Paul
said that he was not going to—that he was believing what all of these
individuals were saying, I said to him—and we were down in the office at the
time—I don't agree with this. I don't agree that you should not file.
You should work it some other way. You should,
you know, write to your Senator and say, you know, I've heard that the 16th
Amendment was never ratified. And work at it through the legal processes, even
though they are very slow. And I did say to Paul, I don't think you should do
it.
At best this testimony shows that petitioner
believed that he should not have to file returns since the provisions of the
tax code requiring same were unconstitutional. A belief that the tax laws are
unconstitutional and should not apply, however, is not a sufficient defense to
fraud. Cheek v. United States, supra;
United States v. Willie, supra at 1392. We cannot accept petitioner's self-serving testimony,
especially where it contradicts credible testimony. Geiger v. Commissioner, 440 F.2d 688, 689-690
(9th Cir. 1971), affg. per [pg. 220]curiam T.C. Memo. 1969-159;Sharwell v. Commissioner, 419 F.2d 1057, 1060
(6th Cir. 1969), vacating and remanding on other issues T.C. Memo. 1968-89;Tokarski v. Commissioner, 87 T.C. 74, 77 (1986);Surloff v. Commissioner, 81 T.C. 210, 239
(1983). Petitioner's testimony that he did not file returns because he did not
believe the tax laws applied to him is not credible.
The evidence clearly and convincingly
establishes that petitioner is liable for the additions to tax under section
6653(b)(1) and (2) for 1982 through 1985. Because the additions to tax under
section 6653(b) apply, we need not consider respondent's alternative argument
under sections 6651(a)(1) and 6653(a) for 1982 through 1985.
Fraud—Mrs.
Niedringhaus
There is no basis in the record to find that
any part of the underpayment in any of the years in issue is due to fraud on
Mrs. Niedringhaus' part. She had no separate income for the years in issue and
urged petitioner to file returns for those years. There is no evidence showing
that the delinquent returns (to which she was a party) are fraudulent.
Therefore, we hold that the fraud additions determined by respondent do not
apply to her. SeeCirillo v. Commissioner, 314 F.2d 478, 484 (3d
Cir. 1963), affg. in part and revg. in part T.C. Memo. 1961-192.
Because of our holding that Mr. Niedringhaus' acts were fraudulent for these
taxable years, respondent's alternative determinations concerning sections
6651(a)(1) and 6653(a) are moot.
Section
6651(a)(1) Addition to Tax
Respondent determined additions to tax under
section 6651(a)(1) for the late filing of petitioners' 1979, 1980, and 1981
returns. Petitioners filed these returns on August 13, 1986, after they
discovered that petitioner was under investigation by respondent.
Section 6651(a)(1) imposes an addition to tax
of 5 percent of the amount of the tax due for each month a return is
delinquent, up to a maximum of 25 percent. The addition to tax is not
applicable if the lateness is due to reasonable cause and not to willful
neglect. Sec. 6651(a)(1);United States v. Boyle, 469 U.S. 241, 245
(1985). Petitioners have [pg. 221]the
burden of proving that the failure to file is due to reasonable cause and not
willful neglect. Davis v. Commissioner, 81 T.C. 806, 820
(1983), affd. without published opinion 767 F.2d 931 (9th Cir. 1985). Whether
the late filing of an income tax return is due to reasonable cause or willful
neglect is a question of fact.Commissioner v. Walker, 326 F.2d 261, 264 (9th
Cir. 1964), affg. on this issue 37 T.C. 962 (1962).
Reasonable cause for the failure to timely
file a return exists if the taxpayer exercised ordinary business care and
prudence but, nevertheless, was unable to file the return within the time
prescribed by law. Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.; Estate of La Meres v. Commissioner, 98 T.C. 294, 325
(1992). In order to disprove "willful neglect", a taxpayer must prove
that the late filing did not result from a "conscious, intentional failure
or reckless indifference." United States v. Boyle, supra at 245-246. A taxpayer's belief that no return
is required in itself is not sufficient to show that the failure to file was
due to reasonable cause. Lawrence Block Co. v.
Commissioner, 12 T.C. 366 (1949); P. Dougherty Co. v. Commissioner, 5 T.C. 791, 800
(1945), affd. 159 F.2d 269 (4th Cir.
1946).
Petitioners have failed to show that their
failure to file returns for 1979, 1980, and 1981 was due to reasonable cause
and not willful neglect. Petitioners were fully aware of their duty to timely
file tax returns but they elected not to file the returns until notified of the
IRS criminal investigation. Therefore, we hold that petitioners are liable for
the additions to tax under section 6651(a)(1) for 1979, 1980, and 1981.
Section
6653(a) Additions
Respondent determined that all of the
underpayment of tax for 1979, 1980, and 1981, is due to negligence or the
intentional disregard of rules and regulations.
Section 6653(a) 9 provides an addition to tax if any part of an
underpayment is due to negligence or intentional disregard of rules. Negligence
is the lack of due care or failure to do what a reasonable and ordinarily
prudent person would do in a similar situation. Neely v. Commissioner, 85 T.C. 934, 947
(1985). Petitioners have the burden of proving that the[pg. 222] additions to tax under
section 6653(a) do not apply for 1979, 1980, and 1981. Rule 142(a); Luman v. Commissioner, 79 T.C. 846, 860-861
(1982). As a general rule, taxpayers are charged with knowledge of the law. Harrington v. Commissioner, 93 T.C. 297, 314
(1989). While a showing of good faith by the taxpayer may preclude the
existence of fraud, good faith does not always negate negligence. Wesley Heat Treating Co. v. Commissioner, 30 T.C. 10, 26 (1958),
affd. 267 F.2d 853 (7th Cir.
1959); Richlands Medical Association
v. Commissioner, T.C. Memo. 1990-660,
affd. without published opinion 953 F.2d 639 (4th Cir. 1992). Although
taxpayers are not subject to the addition to tax for negligence where they make
honest mistakes in complex matters, they are required to take reasonable steps
to determine the law and to comply with it. See Adams v. Commissioner, T.C. Memo. 1982-223,
affd. without published opinion 732 F.2d 159 (7th Cir. 1984). Additionally,
petitioners' failure to file has some bearing on negligence. See Emmons v. Commissioner, 92 T.C. 342 (1989),
affd. 898 F.2d 50 (5th Cir.
1990).
Petitioners have not shown that their actions
were reasonable or prudent, or that they exercised due care. Petitioner made no
effort to consult an attorney or tax return preparer outside the tax protester
movement regarding his obligation to file tax returns. Petitioners were advised
of and knew of their obligation to file tax returns for 1979, 1980, and 1981,
but they intentionally failed to file the returns. Therefore, petitioners are
liable for the section 6653(a) additions to tax for 1979 and 1980 and the
section 6653(a)(1) and (2) additions to tax for 1981.
Section
6654 Addition to Tax
Respondent also determined that petitioners
are liable for additions to tax under section 6654(a) for failure to pay
estimated income tax. Imposition of the addition to tax under section 6654(a)
applies where prepayments of tax, either through withholding or by making
estimated quarterly tax payments during the course of the year, do not equal
the percentage of total liability required under the statute, unless
petitioners show that one of the several statutory exemptions applies. Sec.
6654(a); Grosshandler v. Commissioner, 75 T.C. 1, 20-21
(1980). Petitioners have made no [pg. 223]such showing. For the years in issue
petitioners filed no timely returns and made no estimated tax payments. They
had substantial taxable income for the years in issue; therefore, we hold that
they are liable for the additions to tax under section 6654(a) for those years.
To reflect the foregoing,
Decision will be entered under Rule 155.
It appears that this organization
is the same Belanco Religious Order, founded by Paul Bell, which is mentioned
in the following cases:United States v. Witvoet, 767 F.2d 338 (7th Cir.
1985); United States v. Streich,759 F.2d 579 (7th Cir. 1985); In re Grand Jury Witness, 695 F.2d 359 (9th Cir. 1982); United States v. House, 617 F. Supp. 240 (W.D.
Mich. 1985); Gromnicki v. Commissioner, T.C. Memo. 1988-358.
The record regarding MACBA's activities
is very sparse. The Court of Appeals for the Seventh Circuit has described
MACBA as "a clearinghouse for tax protestors and persons who wished to
avoid detection by the IRS."United States v. Jungles, 903 F.2d 468, 472 (7th
Cir. 1990).
Neither party introduced evidence
to show what MACBA actually did with the funds between the time of deposit and
their return to petitioner.
The record does not contain a copy
of the bill of information for the criminal charges nor does it contain any
information regarding the sentence imposed pursuant to petitioner's plea of
guilty for the 1982, 1983, and 1984 years.
The addition to tax for fraud is
now contained in sec. 6663 of the
Internal Revenue Code of 1986.
Petitioners rely on the unsworn
declaration of Robert G. Stift (Stift) to corroborate petitioner's testimony.
The declaration was an exhibit to their reply to respondent's answer. Outside
of the obvious hearsay problems with the declaration, it was never offered at
the trial or admitted into the record; hence, it cannot be considered as
evidence. Petitioners did not call Stift as a witness at the trial. We are left
with the conclusion that had Stift been called to testify, his testimony would
have been unfavorable to petitioners. Mckay v. Commissioner, 89 T.C. 1063, 1069
(1987), affd. 886 F.2d 1237 (9th
Cir. 1989); Pollack v. Commissioner, 47 T.C. 92, 108
(1966), affd. 392 F.2d 409 (5th Cir.
1968);Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165
(1946), affd. 162 F.2d 513 (10th
Cir. 1947).
In his posttrial filings, which we
have treated as his briefs, petitioner attempts to add additional or clarifying
information to the testimony adduced at the trial on the MACBA transaction or
other matters. Statements in briefs, however, do not constitute evidence and
cannot be used as such to supplement the record. Rule 143(b).
In a recently issued memorandum
opinion, this Court cited Cheek v. United States, 498 U.S. 192 (1991),
but did not address its application to civil cases. SeeCoulter v. Commissioner, T.C. Memo. 1992-224.
InCoulter, the taxpayer argued that he was not subject to additions to tax
for fraud because he was "taken in" by a tax-protest promoter and did
not believe that he was subject to tax. We rejected taxpayer's argument because
the Internal Revenue Service had notified him that returns must be filed.
Sec. 6653(a)(1) and (2) for 1981.
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