T.C. Memo. 1997-419
UNITED STATES TAX COURT
CHARLES M. WORTHLEY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2612-94. Filed September 22, 1997.
Charles M. Worthley, pro se.
Gary S. Gross, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
FOLEY, Judge: Respondent determined the following
deficiency and additions to tax relating to petitioner's Federal
income taxes:
Additions to Tax
Year Deficiency Sec. 6653(b) Sec. 6654
1979 -- $20,605 --
1980 $38,636 108,414 $2,277
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As an alternative position, respondent in his answer asserted
that petitioner is liable for additions to tax pursuant to
sections 6651(a) and 6653(a). Unless otherwise stated, all
section 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.
On April 10, 1995, respondent, pursuant to Rule 91(f),
submitted a Motion to Show Cause Why Proposed Facts In Evidence
Should Not Be Accepted As Established. Respondent attached a
stipulation of facts and related exhibits to the motion. This
Court: (1) On April 12, 1995, granted respondent's motion and
issued an order requiring petitioner to show cause why the facts
set forth in respondent's motion should not be deemed admitted;
(2) on April 21, 1995, filed petitioner's response to this
Court's order to show cause; and (3) on April 26, 1995, ordered
that certain facts contained in respondent's Stipulation of Facts
be deemed stipulated.
On February 13, 1996, respondent served requests for
admissions on petitioner. Petitioner did not respond to the
requests and, as a result, the facts contained therein were
deemed admitted. Rule 90(c); Freedson v. Commissioner, 65 T.C.
333, 334-336 (1975), affd. 565 F.2d 954 (5th Cir. 1978).
This case was called from the calendar of this Court's May
13, 1996, trial session in Boston, Massachusetts, and petitioner
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failed to appear in person or through counsel. Respondent filed
a motion asking this Court to find petitioner in default and
enter a decision against him. By order dated November 5, 1996,
this Court granted respondent's motion in part and held
petitioner liable for the underlying deficiency and the section
6654(a) addition to tax. This Court denied respondent's motion
with respect to the section 6653(b) additions to tax and restored
the case to the general docket for trial.
This case was subsequently called from the calendar of this
Court's April 28, 1997, trial session in Boston, Massachusetts.
Petitioner failed to appear in person or through counsel, and
respondent rested on the facts previously established pursuant to
Rules 91(f) and 90(c).
Respondent, on brief, conceded that petitioner is not liable
for the section 6653(b) addition to tax relating to petitioner's
1979 tax year. As a result, the issues we must decide are as
follows:
1. Whether petitioner, pursuant to section 6653(b), is
liable for an addition to tax for fraud relating to his 1980 tax
year. We hold that he is liable.
2. Whether petitioner, pursuant to section 6651(a), is
liable for an addition to tax for failing to file his 1979
Federal income tax return in a timely manner. We hold that he is
liable.
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3. Whether petitioner, pursuant to section 6653(a), is
liable for an addition to tax for negligence relating to his 1979
tax year. We hold that he is liable.
FINDINGS OF FACT
Petitioner resided in Gerona, Spain, at the time his
petition was filed. During the years in issue, he was employed
by Measurex Corp. (Measurex), a California corporation, and by
Saab-Totem, Inc. (Saab-Totem), a Washington corporation.
In 1980, petitioner received a $5,845 vacation allowance
from Measurex and realized a $328,455.37 long-term capital gain
attributable to the sale of 12,500 shares of Measurex stock.
During that year, he also submitted to Measurex and Saab-Totem
Forms W-4E. On these forms petitioner stated, under penalties of
perjury, that he incurred no income tax liability for 1979 and
that he anticipated no income tax liability for 1980.
Petitioner submitted to respondent two tax forms relating to
1979 and three tax forms relating to 1980. On April 18, 1980,
and April 17, 1981, respondent received Forms 1040 relating,
respectively, to petitioner's 1979 and 1980 tax years.
Petitioner, on these forms, provided objections, based on the
Fifth Amendment privilege against self-incrimination, to the tax
return filing requirement. After receiving these forms, the
Internal Revenue Service (IRS) began investigating petitioner's
1979 and 1980 tax liability. On August 13, 1981, petitioner
wrote a letter to Don Waite, an employee of Measurex, suggesting
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the following methods by which Measurex could delay the IRS
investigation of petitioner: "One way to 'delay' would be to
write Regan asking him for a schedule of payment fees for the
documents. A second way would be to submit copies of only the
front of the checks in the first submission."
On February 11 and 12, 1982, respondent received revised
Forms 1040 relating, respectively, to petitioner's 1979 and 1980
tax years. Petitioner, on the 1979 form, reported gross income
of $83,082 and a tax liability of $41,210. Petitioner, on the
1980 form, reported wages of $182,352. Petitioner crossed out
the declarations that these forms were being submitted under
penalties of perjury.
On January 21, 1983, respondent received a Form 1040X
relating to petitioner's 1980 tax year. Petitioner reported a
tax liability of $178,191 and signed the form under penalties of
perjury, but he failed to report the $5,845 vacation allowance
and the $328,455.37 long-term capital gain.
On April 9, 1986, a criminal information was filed in the
U.S. District Court for the Western District of Washington
charging petitioner, pursuant to section 7203, with willful
failure to file 1979 and 1980 Federal income tax returns.
Thereafter, petitioner left the country. On July 22, 1987, a
U.S. Magistrate issued a bench warrant for petitioner's arrest.
On April 8, 1991, officers from the U.S. Customs Service arrested
petitioner at Logan International Airport in Boston,
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Massachusetts. On April 26, 1991, before the U.S. District Court
for the District of Massachusetts, petitioner pled guilty to
willfully failing to file, in violation of section 7203, his 1980
Federal income tax return. The charge relating to his 1979
return was dismissed. On June 24, 1991, petitioner was
convicted, sentenced to 6 months' imprisonment, and fined $5,000.
OPINION
I. Addition to Tax for Fraud
Respondent determined that petitioner, pursuant to section
6653(b), is liable for an addition to tax for fraud relating to
his 1980 tax year. Section 6653(b) provides that if any part of
an 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.
Fraud is defined as an intentional wrongdoing designed to
evade tax. Powell v. Granquist, 252 F.2d 56, 60 (9th Cir. 1958);
Miller v. Commissioner, 94 T.C. 316, 332 (1990). Respondent
bears the burden of proving fraud by clear and convincing
evidence. Sec. 7454(a); Rule 142(b). To carry the burden of
proof, respondent must show for each year in issue that an
underpayment of tax exists and that some portion of the
underpayment is due to fraud. Petzoldt v. Commissioner, 92 T.C.
661, 699 (1989).
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A. Underpayment
Where a taxpayer does not file a return, the underpayment
equals the correct tax due. See sec. 6653(c)(1). Respondent
contends that petitioner underpaid his taxes by $216,827 (i.e.,
the amount that respondent contends is the correct tax due). In
1983, petitioner reported and paid $178,191 of his 1980 tax
liability. Respondent contends that the remaining portion of the
underpayment, $38,636, was attributable to petitioner's failure
to report as income: (1) The $5,845 vacation allowance; (2) the
$328,455.37 long-term capital gain (resulting in a $79,024
increase in net capital gain income); and (3) $3,468 that
Measurex paid the IRS in satisfaction of petitioner's Federal
income tax liability. Respondent has established by clear and
convincing evidence that there is an underpayment of petitioner's
tax for 1980.
B. Fraudulent Intent
To prove fraud, respondent must establish that petitioner
intended to evade taxes through conduct designed to conceal,
mislead, or otherwise prevent the collection of taxes. Rowlee v.
Commissioner, 80 T.C. 1111, 1123 (1983). Fraudulent intent is
not to be imputed or presumed but may be established by
circumstantial evidence and reasonable inferences drawn from the
facts. Spies v. United States, 317 U.S. 492, 499 (1943);
Petzoldt v. Commissioner, supra; Stephenson v. Commissioner, 79
T.C. 995, 1006 (1982), affd. 748 F.2d 331 (6th Cir. 1984). The
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taxpayer's entire course of conduct may establish the requisite
fraudulent intent. Stone v. Commissioner, 56 T.C. 213, 223-224
(1971).
Petitioner, pursuant to section 7203, was convicted of
willfully failing to file his 1980 Federal income tax return.
While a taxpayer's failure to file a tax return does not,
standing alone, establish fraud, an inference of fraud is
justified when the failure to file is coupled with other badges
of fraud (i.e., circumstances that establish an intent to conceal
or mislead). Recklitis v. Commissioner, 91 T.C. 874, 910-911
(1988). These badges include filing false Forms W-4 and failing
to cooperate with tax authorities. Id. at 911-912; Rowlee v.
Commissioner, supra at 1124-1125.
In 1980, petitioner submitted Forms W-4E to his employers.
On these forms petitioner stated, under penalties of perjury,
that he incurred no income tax liability for 1979 and anticipated
no income tax liability for 1980. Petitioner incurred a 1979 tax
liability of $41,210 and during 1980 received wages of $182,352.
We find that petitioner knowingly submitted false Forms W-4E to
his employers. In addition, he encouraged Measurex to delay
respondent's investigation of his 1980 tax liability. These
facts, coupled with petitioner's willful failure to file his 1980
tax return, establish the requisite fraudulent intent.
Accordingly, we hold that petitioner is liable for the section
6653(b) addition to tax.
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II. Addition to Tax for Failing To File a Return in a Timely
Manner
Respondent contends that petitioner, pursuant to section
6651(a), is liable for an addition to tax for failing to file his
1979 Federal income tax return in a timely manner. Respondent
bears the burden of proof relating to this issue because this
contention was made for the first time in the answer. Rule
142(a).
In 1979, petitioner had gross income of $83,082. Thus, his
gross income exceeded the sum of the applicable standard
deduction and personal exemption, and he was required to file a
Federal income tax return. See sec. 6012. Neither of the Forms
1040 petitioner provided respondent for 1979 were returns because
they either did not contain sufficient information to compute
petitioner's tax liability or were not signed under penalties of
perjury. See sec. 6065; Cupp v. Commissioner, 65 T.C. 68, 78-79
(1975), affd. without published opinion 559 F.2d 1207 (3d Cir.
1977). Therefore, petitioner failed to file his 1979 tax return
in a timely manner, and we hold that he is liable for the section
6651(a) addition to tax.
III. Addition to Tax for Negligence
Respondent contends that petitioner, pursuant to section
6653(a), is liable for an addition to tax for negligence relating
to his 1979 tax year. Respondent bears the burden of proof
relating to this issue because this contention was made for the
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first time in the answer. Rule 142(a). Section 6653(a) provides
that if any part of an underpayment of tax required to be shown
on a return is due to negligence or intentional disregard of
rules and regulations, there shall be added to the tax an amount
equal to 5 percent of the underpayment.
Petitioner's 1979 tax liability was $41,210, but he failed
to file a return. Therefore, petitioner had an underpayment of
$41,210. See secs. 6211, 6653(c)(1). In addition, petitioner
intentionally disregarded applicable rules and regulations
requiring the filing of a return and the reporting of income.
Accordingly, we hold that he is liable for the section 6653(a)
addition to tax.
All other arguments made by the parties are either
irrelevant or without merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.