T.C. Memo. 1995-509
UNITED STATES TAX COURT
MICHAEL K. WOLFE AND ROSEMARIE E. WOLFE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16773-93. Filed October 25, 1995.
Michael K. Wolfe and Rosemarie E. Wolfe, pro sese.
Franklin R. Hise, for respondent.
MEMORANDUM OPINION
KÖRNER, Judge: Respondent determined deficiencies in and
additions to petitioners' Federal income taxes for the years and
in the amounts as follows:
Additions to Tax Under Section
Year Deficiency 6653(b)(1) 6653(b)(2) 6653(b)(1)(A) 6653(b)(1)(B) 6654
1984 $30,600 $15,300 * 0 -- $1,924
1985 221,060 112,980 * 0 -- 12,686
1986 65,392 0 -- $32,696 * 3,165
*50 percent of the interest payable on the portion of the
deficiency attributable to fraud.
2
All statutory references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, except as otherwise
noted.
During the taxable years 1984, 1985, and 1986 (the period
involved herein), and when the petition was filed, petitioners
Michael K. Wolfe and Rosemarie E. Wolfe were residents of Texas.
Petitioner Rosemarie E. Wolfe did not appear at the hearing of
this case, but was represented by her husband, petitioner Michael
K. Wolfe.
Petitioners' taxable years 1985, 1986, and 1987 were
investigated by the Internal Revenue Service during 1989 and
1990. After this examination, petitioners accepted adjustments
by respondent to their income tax liability for the years 1985
and 1986. Thereafter, respondent received information concerning
the possible receipt of additional and fraudulent income by
petitioners in the years 1984, 1985, and 1986, and the
examination of these years was reopened in 1992. As a result,
substantial additional deficiencies and additions to tax for
fraud were determined by respondent, and are contained in the
notice of deficiency that was issued herein, as detailed above.
Such deficiencies and additions to tax were computed, at
petitioners' request, on the basis of petitioners being married
and filing jointly.
3
Prior to the years in issue, petitioner Rosemarie Wolfe was
married to Jose Escalante, on two separate occasions, and they
have three children. During the years in issue here, however,
Jose Escalante was married to Susan Escalante (now Susan Myers).
During the years 1984, 1985, and 1986, Susan Escalante was
employed by the Spring Branch Savings & Loan Association in Texas
as a branch manager. She was not a loan officer. Nevertheless,
during that period she abstracted large amounts of money from the
savings and loan association (hereinafter Spring Branch), and
during the years in question caused the following amounts of
money to be transferred, with their complicity, to one or both of
petitioners, or to others who in turn remitted the money to one
or both of petitioners:
1984 1985 1986
$100,000 $512,000 $199,278
All the above proceeds were received by petitioners or
deposited in a bank account or bank accounts controlled by them.
Petitioners were also the sole owners of and controlled the
business known by the name of Deli, Etc., in Cypress, Texas, and
controlled bank accounts of that organization.
Susan Escalante later pled guilty to both criminal and civil
charges in connection with these abstractions, inter alia, from
Spring Branch. Upon audit, respondent's statutory notice
increased petitioners' income by the above amounts, after giving
4
credit to the amounts previously agreed to for 1985 and 1986 in
the case of each petitioner.
Petitioners were later charged criminally in Texas with
theft, or theft by receiving, in connection with the above
takings from Spring Branch. Petitioner Rosemarie Wolfe pled
guilty and was sentenced to prison; petitioner Michael Wolfe
likewise pled guilty, and was placed on probation for 10 years.
Petitioners were also sued civilly by Spring Branch as the
result of the above abstractions, and others, and they consented
in 1990 to the entry of judgment against them, jointly or
separately, of a total of some $1,300,000, with interest, costs
and attorney's fees.
With respect to the funds stolen or illegally received by
petitioners in the years in question, some were apparently used
by petitioners for their personal purposes, and some were
invested in the business that they operated as Deli, Etc.
In the original examination by respondent of petitioners'
taxable years 1985, 1986, and 1987, petitioners did not furnish
detailed information about their income or assets, and did not
disclose the illegal acquisition of funds for which they later
pled guilty and liable, both criminally and civilly. In the
later examinations by respondent, which for the first time
included the year 1984, petitioners attempted to conceal their
participation in the theft of these funds, as well as the
identity of at least eight bank accounts where they had stowed
5
funds in different places in Texas. They likewise attempted to
conceal the fact that petitioner Rosemarie Wolfe was the owner of
Deli, Etc., where some of the funds from Spring Branch went.
They did not disclose any taxable income for the years in
question, and they filed no income tax returns for those years.
Petitioners fraudulently failed to report any income or pay
the required tax thereon for 1984, 1985, and 1986. As to the
statutory notice of deficiency herein, petitioners contest only
the inclusion in their gross income of their illegally acquired
receipts from Spring Branch, as well as the additions to tax.
We consider first the correctness of the deficiencies in
tax.
In general, the burden of proof is on petitioners to prove
that respondent's determination, as set forth in the notice of
deficiency, is incorrect. Rule 142(a); Welch v. Helvering, 290
U.S. 111 (1933). Petitioners have admitted the receipt of the
income in question. Petitioners contend that the money received
from the Spring Branch checks was not embezzlement income, but
rather a loan. There is not a scrap of evidence in this record
to support that argument. Neither petitioner testified, nor did
any witness appear on their behalf. They pled guilty, both
criminally and civilly, to the receipt of the money that
respondent would tax to them here. Gross income includes income
from all sources, section 61(a). It is well established that
illegal gain can be taxable income, as in the case of other
6
accessions to wealth under the dominion and control of the
taxpayer. James v. United States, 366 U.S. 213 (1961); Rutkin v.
United States, 343 U.S. 130 (1952). Section 1 imposes a tax on
individuals for taxable income received. The liability for the
payment of the income tax is ordinarily on the individual
receiving the income. Edwards v. Commissioner, 39 T.C. 78
(1962), affd. in part and revd. in part 323 F.2d 751 (9th Cir.
1963).
The evidence submitted in this case clearly shows the
receipt of the income by petitioners, and in fact they admitted
it in the pleadings. Petitioners' argument of a "loan" is not
only unsupported by this record, it is clearly contrary to that
record, and we find that respondent's determination with respect
to unreported income must be sustained.
We next consider the correctness of the imposition of
additions to tax for fraud on petitioners by respondent. On this
matter, the burden of proof is on respondent, Rule 142(b). A
failure to file tax returns, without more, is not conclusive
proof of fraud, but may be considered in connection with other
facts. Stoltzfus v. United States, 398 F.2d 1002, 1004 (3d Cir.
1968); Kotmair v. Commissioner, 86 T.C. 1253, 1260 (1986).
Petitioners' entire course of conduct can be relied on to
establish a fraudulent intent. Otsuki v. Commissioner, 53 T.C.
96, 106 (1969).
7
Fraud, as used in section 6653(b), means actual intentional
wrongdoing. Mitchell v. Commissioner, 118 F.2d 308 (5th Cir.
1941), revg. 40 B.T.A. 424 (1939). The intent required is the
specific purpose to violate a known legal duty, in this case, to
evade a tax believed to be owing. Stoltzfus v. United States,
supra; Estate of Temple v. Commissioner, 67 T.C. 143, 159 (1976).
Where direct evidence of fraudulent intent is not available, its
existence may be determined from the conduct of the taxpayer and
the surrounding circumstances. Stone v. Commissioner, 56 T.C.
213 (1971). The Supreme Court has stated that an "affirmative
willful attempt may be inferred from * * * any conduct, the
likely effect of which would be to mislead or to conceal". Spies
v. United States, 317 U.S. 492, 499 (1943). Making false
statements to a revenue agent is evidence of fraud. United
States v. Beacon Brass Co., 344 U.S. 43 (1952); United States v.
Newman, 468 F.2d 791, 794 (5th Cir. 1972).
In the instant case, we need not rely on any presumption of
correctness as to the deficiency in order to conclude that fraud
has been committed by petitioners. They have admitted the
receipt of the unreported income, and it is clear from the facts
that an income tax was owing thereon, which has not been paid.
We are convinced that petitioners' failure to file returns or pay
the required tax was fraudulent on their part. The tax was
clearly owing, and petitioners, without any excuse, intentionally
did not file the returns and pay the tax. In addition, during
8
the investigation of their tax liability, petitioners withheld
information from the revenue agents as to the amount of their
income, and also concealed the fact of their prior convictions
for illegally obtaining such income.
We think respondent has satisfied the burden of proving
fraud in this case by the clear and convincing evidence required
by section 7454(a) and Rule 142(b). Cf. Green v. Commissioner,
T.C. Memo. 1993-152, affd. without published opinion 33 F.3d 1378
(5th Cir. 1994).
This leaves for discussion the imposition of additions to
tax by respondent under section 6654 for the failure by
petitioners to pay estimated tax. Respondent determined that the
addition to tax for failure to pay an estimated tax was
applicable for each of the years here in question, and
petitioners bear the burden of proving that respondent's
determination of the addition to tax is erroneous. Rule 142(a);
Grosshandler v. Commissioner, 75 T.C. 1 (1980). The statute is
specific, and unless the taxpayer can bring himself within one of
the four enumerated exceptions thereto, its application is
mandatory. Estate of Ruben v. Commissioner, 33 T.C. 1071 (1960);
Grosshandler v. Commissioner, supra. No such showing has been
made in this case, and we therefore sustain respondent on this
issue.
Decision will be entered
for respondent.