Court Opinion

ID: 8593807
Source: CourtListenerOpinion
Date Created: 2022-11-23 15:58:44.9015+00
Date Added: 2024-06-11T14:09:35.372262
License: Public Domain

Per Curiam:
This case was referred to Trial Commissioner Mastín G. White with directions to make findings of fact and recommendation for conclusions of law under the order of reference and Pule 57(a). The commissioner has done so in an opinion and report filed on February 15,1967. Exceptions to the commissioner’s report were filed by plaintiffs and the case was submitted to the court on the briefs of the parties and oral argument of counsel. Since the court is in agreement with the opinion and recommendation of the commissioner, with modifications, it hereby adopts the same as modified as the basis for its judgment in this case as hereinafter set forth. Therefore, plaintiff in case No. 11-6,3, and the plaintiffs in case No. 12-63, are not entitled to recover and the petitions are dismissed.
Commissioner White’s opinion, as modified by the court, is as follows:
These two cases were jointly tried, since they involve common questions of fact and law.
Margaret Irolla is the widow, and the administratrix of the estate, of Lewis Irolla, deceased. She is seeking in these actions to recover civil fraud penalties, aggregating approximately $28,500, which were assessed by the Internal Revenue Service with respect to the period 1946-1954 because of an allegedly fraudulent intent on the part of Lewis Irolla to evade the payment of Federal income taxes for the several years during that period. The penalties in question were paid by Mr. Irolla on March 3, 1958. He later died on November 11,1958.
It is my opinion that no recovery is warranted.
In assessing and collecting the penalties previously mentioned, the Internal Revenue Service purported to act under the authority of Section 293 (b) of the Internal Revenue Code of 1939 (53 Stat. 88) with respect to the years 1946-1953, and under the authority of Section 6653(b) of the Internal Revenue Code of 1954 (68A Stat. 822) with respect to the year 1954.
*778Section 293(b) of the 1939 Code provided in part as follows:
If any part of any deficiency is due to fraud with intent to evade tax, then 50 per centum of the total amount of the deficiency (in addition to such deficiency) shall be so assessed, collected, and paid * * *.
Section 6653(b) of the 1954 Code provides in part as follows:
If any part of any underpayment * * * of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 50 percent of the underpayment. * * *
The record clearly shows that Lewis Irolla received a substantial amount of taxable income each year during the period 1946-1954, but that he did not file any Federal income tax returns or pay any Federal income taxes for the several years during that period, when the returns and payments for the respective years were due. Therefore, when the time prescribed for the filing of a return and the pay.ment of the tax due expired each year without any return being filed or any tax being paid, there was a “deficiency” for each year during the period 1946-1953, and an “underpayment” for the year 1954, in the total amount of the income tax due for the particular year. Cirillo v. Commissioner, 314 F. 2d 478, 484 (3rd Cir. 1963). The problem before the court, then, is to determine whether the evidence in the record is sufficient to establish that such deficiency or underpayment was “due to fraud” on the part of Lewis Irolla.
The term “fraud,” as used in the statutory provisions authorizing the assessment of civil fraud penalties against taxpayers, means intentional wrongdoing on the part of a taxpayer motivated by a specific purpose to evade a tax known or believed to be owing. Mitchell v. Commissioner, 118 F. 2d 308, 310 (5th Cir. 1941); Powell v. Grandquist, 252 F. 2d 56, 60 (9th Cir. 1958).
The question of fraud is one of fact (Mensik v. Commissioner, 328 F. 2d 147, 150 (7th Cir. 1964), cert. den. 379 U.S. 827 (1964)); and although a taxpayer suing for a tax refund generally has the affirmative burden of proving all the facts *779essential to establish bis right to recover, a taxpayer suing for the refund of a civil fraud penalty assessed against him and collected from him does not have the burden of establishing freedom from fraud (United States v. Thompson, 279 F. 2d 165, 167 (10th Cir. I960)). On the contrary, where the recovery of a civil fraud penalty is sought, the Government has the burden of proving fraud against the taxpayer, even though the Government is the defending party in the action. Armstrong v. United States, 173 Ct. Cl. 944, 948, 354 F. 2d 274, 277 (1965); Powell v. Grandquist, supra, 252 F. 2d at page 61; Mensik v. Commissioner, supra, 328 F. 2d at page 150.
The Government is required to sustain its burden of proof on the issue of fraud by means of clear and convincing evidence. Powell v. Grandquist, supra, 252 F. 2d at page 61; United States v. Thompson, supra, 279 F. 2d at page 167; Mensik v. Commissioner, supra, 328 F. 2d at page 150. This task is often a difficult one, since the state of the taxpayer’s mind, a subjective condition, is crucial in determining the existence or absence of the essential element of fraudulent intent. Armstrong v. United States, supra, 173 Ct. Cl. at pages 96L-965, 354 F. 2d at page 286.
The Government may, however, meet its burden of proof on the issue of fraud by means of circumstantial evidence. Powell v. Granquist, supra, 252 F. 2d at page 61. When all the circumstances that gave rise to the present litigation are considered, it appears that the existence of a fraudulent intent on the part of Lewis Irolla to evade the payment of income taxes during the period 1946-1954 has been established by clear and convincing evidence. The pertinent factors leading to this conclusion are indicated in the succeeding paragraphs of the opinion.
In the first place, it is pertinent that Mr. Irolla was a man of extensive business and financial experience. Powell v. Granquist, supra, 252 F. 2d at page 60. Beginning at least as early as June 1932 and continuing through the period that is involved in the present litigation, Mr. Irolla successfully operated a business as a bakery products jobber in New York City. Also, he was a close student of financial affairs, and he kept in touch with such developments by reading in*780vestment reports, the Wall Street Journal, and other material concerning the stock market. Furthermore, beginning in about 1943 and continuing through the period with which we are concerned, Mr. Irolla invested regularly in securities. By the time of his death in 1958, he owned stocks and bonds having a net value of approximately $435,000.
In the second place, it is pertinent that Mr. Irolla was familiar with the income tax system. Cf. First Trust & Savings Bank v. United States, 206 F. 2d 97, 98 (8th Cir. 1953). Before the period involved in the present litigation, Mr. Irolla had annually filed income tax returns for the years up to and including 1944, and he filed a declaration of estimated tax for 1945, although he did not file a return for that year. (No civil fraud penalty was assessed against Mr. Irolla for 1945.)
In the third place, it is pertinent that Mr. Irolla knew that he had taxable income in each of the years during the period 1946-1954. Bennett, 30 T.C. 114, 122 (1958). The evidence in the record indicates that Mr. Irolla’s annual income during the 9-year period ranged from a low of approximately $17,400 in 1949 to a high of approximately $33,200 in 1954. The income was derived from the profits on his business as a bakery products jobber, from dividends and interest on his investments in stocks and bonds, and from capital gains in connection with sales of securities. When the matter of Mr. Irolla’s failure to file income tax returns during the period 1946-1954 was under investigation by the Internal Bevenue Service, Mr. Irolla admitted to Revenue agents that he knew that the profits from his business as a bakery products jobber amounted to $5,000 per year, at least. (Actually, the profits from the business ranged from a low of $7,169.46 in 1949 to a high of $8,752.83 in 1953.) Mr. Irolla’s dividends and interest from his stocks and bonds ranged from a low of $6,061 in 1946 to a high of $19,728.98 in 1954; and his capital gains from sales of securities ranged from a low of $680.24 in 1949 to a high of $8,950.47 in 1948. Most of the dividend checks were received by Mr. Irolla at his home address. While some dividend payments were received for Mr. Irolla by the various stockbroker firms with which he did business and were credited *781to him on their customer account ledgers, these firms periodically sent Mr. Irolla statements reflecting the activity in his accounts, including dividend payments. The written material which the stockbroker firms sent to Mr. Irolla informed him that it was necessary under the income tax law for dividends to be reported on Federal income tax returns. Therefore, the evidence clearly shows that Mr. Irolla had knowledge of the receipt of taxable income during each of the years in the period 1946-1954.
In the fourth place, it is pertinent to the issue of fraud that Mr. Irolla failed to file any income tax returns over a long period of time, i.e., 9 years. Powell v. Granquist, supra, 252 F. 2d at pages 60-61; cf. First Trust & Savings Bank v. United States, supra, 206 F. 2d at pages 99-100.
In the fifth place, it is pertinent that Mr. Irolla’s own explanation to the agents of the Internal Bevenue Service concerning his failure to file income tax returns for the period in question was actually indicative of an intention to evade the payment of the taxes due. When asked by the agents why he did not file returns, Mr. Irolla said that the reason was “just negligence,” and he indicated that by “negligence” he meant “next year I’ll do it, tut next year never comes'1'1 (emphasis supplied).
Finally, it is pertinent that the “memorandum of conference” on the meeting had by Mr. Irolla with special agents of the Internal Bevenue Service, already referred to, includes the words “Has no stocks or bonds.” Agent Davis personally typed this document immediately after the conference, on the basis of notes he then destroyed. He and his partner signed it, but had at the trial no independent recollection of what had been said. Over objection our commissioner admitted it “as an official statement made by the revenue agent in the ordinary course of business.” Mr. Irolla was evidently never shown the memorandum or in any way called on to verify its accuracy. He never returned for another conference. The quoted statement followed others more accurately descriptive of Mr. Irolla’s assets: “Bought new truck 6 months ago. Has 1949 De Soto private car.” It therefore can be inferred that one of the agents asked Mr. Irolla whether he had any stocks or bonds and he replied he had *782none. At that preliminary stage of the investigation the agents would have had no source of information as to Mr. Irolla’s assets except Mr. Irolla himself. They had learned no more otherwise than the absence of tax returns in the Service’s files.
The likelihood that this inference could be mistaken is rebutted by the fact that Mr. Irolla at that conference further represented, by implication at least, that the “$5,000 a year easy” he admitted he derived from his business was all the taxable income he had. He claimed that in view of exemptions for [himself], wife, and two children under 18, [and nonbusiness deductions?], taxable income would be $1,500. He said he had made out returns before 1951 but he now balked at keeping needed records of every receipt and expenditure on his doughnut route. The whole thrust of his disclosures to the agents was that it would require an enormous effort to ascertain his taxable income and the revenue resulting would be insignificant. Concealment of his wealth in securities was necessary to put this across. True, he did not deceive anyone, but that was due, not to lack of artistic verisimilitude in the presentation, but to the fact that the audience consisted of special agents freed by their training of the gullibility that characterizes most of us.
Plaintiff’s counsel argues that it is “unreasonable” to give the statement in the memorandum the significance assigned it in finding 24 (d), i.e., that Mr. Irolla told the agents he did not have any stocks or bonds. We hold that finding is supported by evidence which is clear and convincing, even though essentially circumstantial in nature.
In Bennett, supra, at p. 122, the Tax Court, in a similar instance of failure to file returns, found evidence of fraudulent intent in the fact that, as it said, taxpayer, when asked about bank accounts by an agent, “withheld information about a personal account at the Bank of Douglas.” On the other hand, lacking similar indications of consciousness of guilt, the Eighth Circuit, in First Trust & Savings Bank v. United States, supra, held that failure to file returns over a period of several years did not, absent affirmative falsification, establish the existence of an intent to deceive, such as to justify imposition of the fraud penalty. Here, unlike *783Bennett, the taxpayer had died and the court could not pass judgment on the basis of his demeanor as a witness. Thus key importance attaches to circumstantial evidence that the requisite intent existed.
In the recent case of Stoltzfus v. United States, 264 F. Supp. 824 (E.D. Pa. 1967), judge Lord perceives a conflict between First Trust & Savings Bank, supra, (8th Cir.) on the one hand, against, on the other, Powell v. Grandquist, supra, (9th Cir. 1958); and Cirillo v. Commissioner, supra, (3rd Cir. 1963). He cites and follows the latter two as authority that long continued failure to file tax returns may, in given circumstances, establish the requisite intent for fraud penalty liability, without any affirmative step shown to furnish false information to the taxing authorities. The view of our majority as to the facts makes it unnecessary for us to take sides in this supposed controversy, but it will be seen that even if plaintiff’s counsel had knocked the “conference memorandum” out of the case, he would not have been assured of success.
When all the pertinent circumstances are considered and weighed, it appears that the evidence in the record is clear and convincing to the effect that Mr. Irolla fraudulently intended to evade the payment of income taxes for the several years during the period 1946-1954. It necessarily follows that the Internal [Revenue Service did not commit any error in assessing civil fraud penalties for those years.
Accordingly, no recovery of the civil fraud penalties is justified in the present actions, and the petitions should be dismissed.

 26 U.S.C. §§ 291, 293 (1952 ed.) ; see also 26 U.S.C. 8 6651 (1964 ed.).