Opinion ID: 1118224
Heading Depth: 1
Heading Rank: 8

Heading: Fraud Penalty [3]

Text: The Jensens argue that the Commission erred in assessing the 100% penalty for fraud with intent to evade taxes because there was no evidence of their dishonest intent to evade. We affirm the penalty as to Mr. Jensen. Our holding that the Commission erred in assessing the deficiency against Mrs. Jensen makes it unnecessary for us to address whether she was guilty of fraud since the penalty for fraud with intent to evade is based on a percentage of the tax deficiency. In assessing the 100% penalty, the Commission relied on Utah Code Ann. § 59-1-401 (1987), which provides: The penalty for underpayment of tax is as follows: (a) If any underpayment of tax is due to negligence the penalty is 10% of the underpayment. (b) If any underpayment of tax is due to intentional disregard of law or rule, the penalty is 15% of the underpayment. (c) For intent to evade the tax, the penalty is the greater of $500 per period or 50% of the tax due. (d) If the underpayment is due to fraud with intent to evade the tax, the penalty is the greater of $500 per period or 100% of the underpayment. Subparagraph (c) fixes a penalty for intent to evade taxes, and subparagraph (d) fixes a higher penalty for fraud with intent to evade taxes. The Commission found that the Jensens had intended to evade taxes and that they had committed fraud by intentionally failing to file valid returns and maintain proper records. In 1978, the Code imposed a 50% civil penalty [i]f any of the deficiency in tax... is due to fraud. Utah Code Ann. § 59-14A-89(c) (1974). In 1987, this statute was renumbered § 59-10-539(3) and amended to refer to § 59-1-401 for the appropriate penalty. 1987 Utah Laws ch. 2, § 247. Under § 59-1-401(3)(d), the civil penalty for fraud with intent to evade is 100% of the deficiency. Because § 59-1-401(3)(d) provides only the amount of a penalty without regard to a particular type of tax, it cannot provide the substantive basis for penalizing the evasion of income taxes. The Commission's ruling that the Jensens committed fraud with intent to evade, therefore, cannot rely on this general provision, but rather must find some basis in the income tax chapter. We believe § 59-14A-89(c) (pre-1987) and § 59-10-539(3) (post-1987), which penalize a deficiency due to fraud, provide that basis. [4] In the income tax arena, fraud is an actual intentional wrongdoing with the specific intent to evade tax believed to be owing. Fahy v. Commissioner, 43 T.C.M. (CCH) 387, 394 (1982). Tax fraud is a question of fact to be resolved by consideration of the entire record. [5] Kotmair v. Commissioner, 86 T.C. 1253, 1259 (1986); Famularo v. Commissioner, 47 T.C.M. (CCH) 948, 952 (1984); Fahy, 43 T.C.M. (CCH) at 394. Where fraud is asserted for several years, the Commission's burden must be met separately for each of those years. Fahy, 43 T.C.M. (CCH) at 393. Because direct evidence of a taxpayer's intent is often nonexistent, specific intent must be drawn from the surrounding facts, considering reasonable inferences drawn therefrom. The mere failure to file an income tax return is not sufficient to prove fraud. Kotmair, 86 T.C. at 1260-61. However, the failure to file a return while aware of the obligation, combined with other factors such as the concealing of assets and records or the failure to maintain proper records to indicate income, may support a finding of fraud. Famularo, 47 T.C.M. (CCH) at 953; Fahy, 43 T.C.M. (CCH) at 394-95; Cummings v. Commissioner, 27 T.C.M. (CCH) 273, 279 (1968). The United States Supreme Court has stated with respect to the federal crime of willful intent to evade income tax: By way of illustration, and not by way of limitation, we would think affirmative willful attempt may be inferred from conduct such as keeping a double set of books, making false entries or alterations, or false invoices or documents, destruction of books or records, concealment of assets or covering up sources of income, handling of one's affairs to avoid making the records usual in transactions of the kind, and any conduct, the likely effect of which would be to mislead or to conceal. Spies v. United States, 317 U.S. 492, 499, 63 S.Ct. 364, 368, 87 L.Ed. 418 (1943). Although the acts referred to in the quotation evidence the crime of fraud, they may also evidence the conduct that is subject to civil fraud. The Tax Court has found similar conduct subject to civil penalties for income tax fraud. See, e.g., Famularo, 47 T.C.M. (CCH) at 953-54 (failure to file returns, combined with noncredible excuses for failing to file, failing to produce business records without an acceptable excuse, and misleading tax agents in interviews); Fahy, 43 T.C.M. (CCH) at 394-95 (failure to file tax returns while aware of the obligation, combined with customers' agreement not to withhold income tax for petitioner, attempts to conceal assets and records and failure to keep records, and noncredible explanation for receipt of federal reserve notes as not constituting receipt of income); Cummings, 27 T.C.M. (CCH) at 279 (failure to file returns without reasonable explanation, combined with failure to maintain proper records of income and refusal to cooperate with tax agents). We now turn to the instant case. Mr. Jensen failed to file tax returns, although aware of the obligation to do so. This is evidenced by the Jensens' filing in 1977, the Commission's notifying them of the particular statute codifying the obligation, and the undisputed testimony that Mr. Jensen realized income from Sound Concepts. The Jensens' argument that because the federal government has not assessed federal income taxes against them they could not owe state income tax is unpersuasive and unreasonable. Moreover, judging from the nature and quality of documents and letters submitted by Mr. Jensen to the Commission and this Court, it appears that he is a sophisticated businessman and well aware of the income tax provisions of the Code and of his obligation to file returns. The form that Mr. Jensen filed in 1978 is not a return as a matter of law. The information sought on income tax returns does not fall within the fifth amendment privilege against self-incrimination. First Federal Savings & Loan Assoc. v. Schamanek, 684 P.2d 1257, 1265 (Utah 1984); United States v. Sullivan, 274 U.S. 259, 263-64, 47 S.Ct. 607, 607, 71 L.Ed. 1037 (1927); United States v. Stillhammer, 706 F.2d 1072, 1076 (10th Cir.1983); United States v. Brown, 600 F.2d 248, 252 (10th Cir.1979); United States v. Carlson, 617 F.2d 518, 522-23 (9th Cir.1980); State v. Poncelet, 187 Mont. 528, 610 P.2d 698, 707 (1980). In addition to his intentional failure to file returns while aware of the obligation, Mr. Jensen failed to keep any business or income records from Sound Concepts and continuously attempted to impede the Commission and its investigation with evasive letters and frivolous arguments. In sum, we hold that the Commission's finding of fraud against Mr. Jensen for the years in question is adequately supported by the evidence. The Commission's ruling on the penalty is not entirely correct, however. The Commission affirmed the 100% fraud penalty for all years in question, 1978 to 1988. But, as noted above, the Code in effect between 1978 and 1986 provided that the civil penalty for a tax deficiency due to fraud was 50% of the deficiency. Utah Code Ann. § 59-14A-89(c) (1974, Supp. 1983, & Supp.1986). It was not until 1987 that the 100% penalty for fraud with intent to evade was codified. Utah Code Ann. § 59-10-539(3) (1987) (referencing § 59-1-401). The Legislature intended the 1987 penalty to be retroactive only to January 1, 1987. See 1987 Utah Laws ch. 2, § 331. This plain error renders the Commission's ruling unlawful as to the years 1978 to 1986. On remand, the Commission is to apply the appropriate penalty for these years of the assessment.