Opinion ID: 545523
Heading Depth: 1
Heading Rank: 5

Heading: Fraud Penalties

Text: 59 The Internal Revenue Code, 26 U.S.C. Sec. 6653(b), imposes a penalty on any taxpayer whose underpayment of a tax is due to fraud. 8 The United States bears the burden of proving fraud by clear and convincing evidence. Traficant, 884 F.2d at 264; cf. 26 U.S.C. Sec. 7454(a) (the Secretary bears the burden of proving fraud in the Tax Court). We will set aside a finding of fraud under section 6653(b) only if it is clearly erroneous. Fed.R.Civ.P. 52(a); Traficant, 884 F.2d at 264; Solomon v. Commissioner, 732 F.2d 1459, 1461 (6th Cir.1984). 60 To support a finding of tax fraud, the government must show that the taxpayer has engaged in conduct with the intent to evade taxes that he knew or believed to be owing. Traficant, 884 F.2d at 264. Because fraudulent intent is never, or at least rarely, admitted, Biggs v. Commissioner, 440 F.2d 1, 5 (6th Cir.1971), the courts must generally rely on circumstantial evidence. Traficant, 884 F.2d at 264. Accordingly, fraud may be inferred from any conduct, the likely effect of which would be to mislead or conceal. Spies v. United States, 317 U.S. 492, 499, 63 S.Ct. 364, 368, 87 L.Ed. 418 (1943). The courts have relied on numerous indicia of fraud in deciding cases under section 6653(b). Of particular weight is a taxpayer's failure to file a tax return. As we noted in Solomon, 732 F.2d at 1461, [w]hile failure to file is not in itself sufficient to prove fraud, it is persuasive circumstantial evidence of fraud when coupled with other indicia or 'badges' of fraud. (citations omitted). Many of these other indicia were also set out in Solomon: 61 A second factor is a taxpayer's failure to report income over an extended period of time. A taxpayer's failure to furnish the Government with access to his records is also a factor. Another consideration is a taxpayer's failure to keep adequate books and records. Further evidence is taxpayer's experience and knowledge, especially knowledge of tax laws. A taxpayer's concealment of bank accounts from Internal Revenue agents is yet another sign indicating fraudulent intent. 62 732 F.2d at 1461-62 (citations omitted). In addition, the courts have considered implausible explanations of conduct given at trial to be a strong indication of fraud. See, e.g., Bahoric v. Commissioner, 363 F.2d 151, 153-54 (9th Cir.1966). 63 The district court found that Walton acted fraudulently based on the fact that he had (1) failed to timely file tax returns for himself or BIRA, (2) failed to maintain adequate personal or corporate business records, (3) commingled his personal assets with those of BIRA in an attempt to avoid tax liability, and (4) refused to cooperate with the IRS in its investigation. The defendants have failed to show clear error in any of these findings. 64 Walton filed no personal federal income tax returns for the 1976 and 1977 tax years. Pursuant to the IRS investigation, Agent Backaitis visited BIRA several times, asking to speak with Walton. Backaitis was told on each occasion that Walton was not there, by a man who he later discovered was Walton himself. When Backaitis subsequently confronted him, Walton denied having received any income during the years at issue and failed to provide any records to aid in the computation of his tax liabilities. He told the IRS agent that he owned no assets and had no income. He also told the agent that his accountant was preparing his tax returns, and that they would be filed shortly. As of the date of the trial, however, these returns had not been filed. 65 At trial, Walton testified that he had mailed tax returns for BIRA for its 1976 through 1979 tax years to the IRS in 1980. The IRS, however, received no such returns until 1987. When Walton eventually did provide records of his own personal dealings and those of BIRA, they were uniformly inaccurate. 9 As was shown in our consideration of the house on Strathcona Drive, the Grumman aircraft, and the bicycle rental concession on Belle Isle, there was extensive commingling of assets between Walton and the Academy. 66 At the conclusion of the trial, the court stated: 67 Mr. Walton's story is the most incredible, the most nonsensical, child-like story that I ever heard in almost five years on the bench. It's an insult to this court to bring in that kind of discussion. I don't think anybody could possibly believe it. It's unbelievable under any stretch of the imagination. 68 We must agree. Walton has a college education and has operated several businesses. It is evident that his unusual business practices were not the result of ignorance, but were undertaken with the intent to avoid paying taxes that he knew were owed. See Solomon, 732 F.2d at 1461-62. The court correctly found that the government had met its burden of proving fraud.