DocketNumber: Docket No. 19225-80.
Citation Numbers: 51 T.C.M. 17, 1985 Tax Ct. Memo LEXIS 48, 1985 T.C. Memo. 586
Filed Date: 12/2/1985
Status: Non-Precedential
Modified Date: 11/21/2020
MEMORANDUM FINDINGS OF FACT AND OPINION
WILBUR,
Additions to tax | |||
Year | Deficiency | Sec. 6653(b) 1 | Sec. 6654(a) |
1972 | $4,346.58 | $2,173.29 | $140.05 |
1973 | 6,556.06 | 3,278.03 | 211.24 |
1974 | 12,878.25 | 6,439.12 | 414.94 |
1975 | 3,228.84 | 1,614.42 | 139.79 |
The issues for decision are (1) whether petitioner is liable for the self-employment tax on his net earnings for the taxable years in issue; (2) whether petitioner is liable for an addition to tax pursuant to
FINDINGS OF FACT
Pursuant to
Taxpayer failed to file Federal income tax returns for the taxable years 1972 through 1975. Petitioner (Mr. Paddock) resided in Kaneohe, Hawaii, at the time he filed his petition.
During the years 1945*51 to 1947, petitioner served in the United States Army Air Corps as a photographer. Following his discharge from the Air Corps, petitioner enrolled in several courses, including a bookkeeping course offered by the Standard Oil Company of California. After graduating from high school in 1949, petitioner enrolled in automotive courses at San Jose State College.
During the years 1950 to 1976, petitioner was a self-employed Chevron service station operator. From 1950 to 1962, petitioner operated a service station in San Francisco, and in 1962 he moved to San Jose where he remained until 1970. In 1970 Mr. Paddock and his family moved to Hawaii where petitioner operated a Chevron service station in Waipahu. Petitioner continued to operate the Waipahu service station until February of 1976 when it was closed by Chevron, U.S.A., Inc. He leased another service station in Maili, Hawaii, until September of 1976 when the lease was terminated by Chevron.
Petitioner was the sole proprietor of the Waipahu service station during the years in issue and, as such, was responsible for all record keeping, deposits of cash and receipts, finances, operations and compilation of records for tax return*52 purposes. Taxpayer submitted the records he maintained to his certified public accountant, Alex Chu, who used this information to prepare a Schedule C "Profit or (Loss) from Business or Profession" for each of the years in issue. Alex Chu provided petitioner with the Schedules C in time for Mr. Paddock to file timely Federal and state income tax returns. The specific items of income, deductions and not profit as shown on the Schedules C are summarized below.
1972 | 1973 | 1974 | 1975 | |
Gross re- | $164,538.53 | $173,619.88 | $197,977.89 | $210,857.40 |
ceipts | ||||
Cost of | (102,219.40) | (106,741.24) | (126,312.50) | (147,723.20) |
goods sold | ||||
Deductions | (39,020.64) | (40,710.79) | (32,743.80) | (43,441.82) |
Net profit | $ 23,298.49 | $ 26,167.85 | $ 38,921.59 | $ 19,487.61 |
Petitioner did not file an income tax return for any of the years in issue although he knew that the Schedules C indicated taxable income for each year in issue. Mr. Paddock considered the data prepared by his accountant to be completely accurate. In fact, by petitioner's own account the Schedules C were prepared on the basis of daily records supplied by petitioner.
Petitioner received*53 taxable income for the years in issue consisting of the items and amounts described below:
1972 | 1973 | 1974 | 1975 | |
Business | $23,298.45 | $26,167.85 | $38,921.59 | $19,487.61 |
income | ||||
Less: | ||||
Moving | (625.50) | |||
expenses | ||||
Adj. gross | $22,672.95 | $26,167.85 | $38,921.59 | $19,487.61 |
income | ||||
Less: | ||||
Itemized | ||||
deductions: | ||||
Contri- | (403.00) | (557.00) | ||
butions | ||||
Interest | (3,821.33) | (2,872.61) | (2,859.35) | (3,117.70) |
Taxes | (1,535.56) | (1,130.88) | (1,365.93) | (1,472.14) |
Less: | ||||
Personal | (3,000.00) | (3,000.00) | (3,000.00) | (3,000.00) |
exemptions | ||||
Taxable | $14,316.00 | $19,164.36 | $31,293.31 | $11,340.77 |
income |
On February 16, 1979, an information was filed in the United States District Court for the District of Hawaii charging petitioner with willful failure to file Federal income tax returns pursuant to
Petitioner sold property in San Jose, California, which generated enough income for he and his family to live on for 4 years after moving to Hawaii. In addition, petitioner's service station business generated sufficient income to support his family during the period in question. Mr. Paddock borrowed money from his life insurance policy in order to purchase a second residence in Maili, Hawaii in 1976.
Prior to 1972, petitioner had been a successful businessman who had diligently complied with his responsibility to satisfy his Federal income tax obligations on a timely basis. After moving to Hawaii, however, he began having an extra-marital affair and began to drink heavily. The problems that Mr. Paddock was having in his private life soon began to disrupt his business life and ultimately his employment contract was terminated by his employer.
Petitioner failed to file Federal income tax returns or pay any portion of the income tax liabilities owing for the taxable years at issue. He also failed to make any estimated income tax payments during this period. For the two decades prior to the time petitioner*55 moved to Hawaii, he fully complied with his duty to file accurate and timely Federal and state income tax returns. In addition, Mr. Paddock filed gross excise tax returns with the State of Hawaii for 3 of the years in question. Mr. Paddock never set aside a fund that could have been used for the eventual payment of his outstanding tax obligations.
OPINION
The first issue for decision is whether petitioner is liable for the deficiencies in Federal income tax determined by the Commissioner. The Commissioner's determinations are presumed to be correct and petitioner bears the burden of proving them to be erroneous.
The amounts of net profit petitioner earned as well as his tax liability for the years in issue, have been established pursuant to
We deal next with whether petitioner is liable for the self-employment tax for the years in issue. An individual who engages in a trade or business as a sole proprietor or as a partner must pay a tax on the "net earnings" 3 from all self-employment activities.
We deal now with the issue of whether petitioner*57 is liable for the addition to tax under
*58 The next issue for our consideration is whether petitioner is liable for the addition to tax under
Taxpayer failed to file an income tax return for the taxable years 1972 to 1975, inclusive. 7 For 3 of the 4 years in issue, taxpayer entered a plea of guilty to a criminal charge of failing to file a Federal income tax return in violation of
*61 There is some question as to what respondent must show, in addition-to a taxpayer's failure to file, in order to prove the requisite intent to defraud. In the landmark case of
A second less restrictive test has been adopted by the Third Circuit requiring, in addition to petitioner's failure to file, merely an "affirmative indication" of taxpayer's intent to evade the tax.
*64 We do not need to decide which of the two approaches described above is appropriate in the instant case because respondent failed to sustain his burden of proof under either the
*65 We further believe that respondent failed to prove fraud by clear and convincing evidence under the more liberal "affirmative-indication" test. Although the Third Circuit found fraud in
In
In the instant case, although Mr. Paddock's failure to file a tax return can create an inference of fraud when coupled with his knowledge that he owed tax during the years in issue, that inference is made weaker by virtue of the shorter non-filing period and the other mitigating facts and*67 circumstances. Petitioner was a forthright and credible witness and although his actions were clearly dilatory and remiss, they do not rise to the level of deception and guile necessary for a finding of fraud. Mr. Paddock had been a successful businessman for nearly a quarter of a century. After moving from California to Hawaii in 1971, however, petitioner's business and personal affairs began to deteriorate rapidly. The evidence indicates that towards the end of the period in question, petitioner became involved in an extra-marital affair and drinking heavily. Ultimately, both his marriage and his career as a service station operator came to an unhappy conclusion.
Petitioner's personal problems during the years in issue were manifested in his unfortunate tendency to over-extend himself financially. His service station was ultimately closed by Standard Oil Company in 1976 because he used gas receipts for personal expenditures. We believe from Mr. Paddock's testimony and from the relatively short non-filing period that he would eventually have made efforts to satisfy his outstanding obligations to respondent as his business and personal affairs improved. This Court has recognized*68 that an intent to avoid the payment of tax can be distinguished from an intent merely to postpone the payment of tax.
Petitioner was exceptionally diligent in maintaining complete and accurate records of his gross income and expenditures during the years in issue. Mr. Paddock furnished these records to the investigating agents and they were ultimately incorporated into respondent's statutory notice. The maintenance of detailed financial records during the period in question and the prompt surrender of those records is certainly not indicative of an intent to defraud. 11
*69 The taxpayer in the instant case diligently complied with his tax obligations for all but 4 of his 25 years of professional life. Mr. Paddock's failure to file tax returns for the years in issue, rather than being indicative of an intent to defraud, is merely reflective of the chaos that was occurring in his life during the period in question. As we later hold, petitioner's conduct was negligent, but negligence is not fraud and respondent's attempt to impose fraud under these circumstances is draconian.
We hold that, taking all of the circumstances into account, respondent has not satisfied his burden of proving, by clear and convincing evidence, that some part of the underpayment for each year was due to fraud.
Respondent argues, in the alternative, that petitioner is liable for the additions to tax under
*71
*72 To reflect the foregoing,
1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect for the years in issue.↩
2. Unless otherwise indicated, all rule references are to the Tax Court Rules of Practice and Procedure.↩
3. The phrase "net earnings from self-employment" is defined in
4. The "underpayment" as defined in
5. We note that there is no language in
6.
(b) Fraud.--If any part of any underpayment * * * of tax * * * is due to fraud, there shall be added to the tax an amount equal to 50 percent of the underpayment. In the case of income taxes and gift taxes, this amount shall be in lieu of any amount determined under subsection (a) * * * [relating to negligence or intentional disregard of the rules and regulations regarding the payment of income or gift taxes.]↩
7. Although it was deemed admitted that petitioner failed to file a Federal income tax return in 1971, that taxable year is not before this Court. Furthermore, Mr. Paddock provided testimony at trial, which we believed, that he did in fact file a tax return in 1971.↩
8. The Court of Appeals for the Ninth Circuit, the circuit to which an appeal in the instant case would lie, has specifically declined to decide whether the
In
1) The taxpayer was informed of his duty to file income tax returns, and the only answer given for his failure to file was that he did not approve of the manner in which the tax revenues were being spent by the Federal Government.
2) The taxpayer maintained no formal books, and upon a request by revenue agents to produce his records he complied by producing only his cancelled checks and bank statements.
3) The taxpayer failed to cooperate with the Internal Revenue Service by refusing to turn over the records he had relative to certain transactions that he was involved with as a real estate broker. The taxpayer lied by telling revenue agents that he had no such records and only finally complied with their specific requests after it was apparent that the revenue agents had discovered the existence of these transactions through other means. Because the
In a later case, the Ninth Circuit again found fraud in a case involving the willful failure to file tax returns.
9. Respondent argues on brief that a number of minor misstatements made by petitioner at trial amount to significant misrepresentations. These misstatements had to do with the accuracy of the Schedules C prepared by Mr. Paddock's accountant, a wristwatch purchased by petitioner and given to a female acquaintance, and the source of the funds used by petitioner to purchase a house in Maili, Hawaii.
We believe that the effect of these misstatements on respondent's investigation was negligible and that they lend little weight to respondent's contention that petitioner's failure to file returns and pay tax was motivated by a specific intent to defraud the Government.↩
10. See also
11. Respondent argues on brief that petitioner refused to cooperate during the investigation because he was unwilling to stipulate to known facts. We note that Mr. Paddock represented himself in these proceedings. Because of petitioner's lack of sophistication and because of his willingness to cooperate by surrendering to respondent his books and records for the years in issue, we are unwilling to view Mr. Paddock's failure to stipulate as indicative of fraud.↩
12. The doctrine of collateral estoppel is intended to avoid repetitious litigation by precluding the relitigation of any issue of fact or law that was actually litigated and that culminated in a valid and final judgment.
13. An "underpayment" is generally defined in the same manner as a "deficiency" (essentially the correct tax minus the reported tax) except that the amount reported on a late return does not reduce the amount of the underpayment.
Lucian T. Zell, II v. Commissioner of Internal Revenue , 763 F.2d 1139 ( 1985 )
joseph-a-cirillo-and-martha-r-cirillo-v-commissioner-of-internal , 314 F.2d 478 ( 1963 )
A. Raymond Jones and Mary Lou Jones, Husband and Wife v. ... , 259 F.2d 300 ( 1958 )
Robert P. Lord, Appellee-Cross-Appellant v. Commissioner of ... , 525 F.2d 741 ( 1975 )
Chris D. Stoltzfus and Irma H. Stoltzfus v. United States , 398 F.2d 1002 ( 1968 )
Grace M. Powell, of the Estate of O. E. Powell, Deceased v. ... , 252 F.2d 56 ( 1958 )
Helvering v. Mitchell , 58 S. Ct. 630 ( 1938 )
Spies v. United States , 63 S. Ct. 364 ( 1943 )
Welch v. Helvering , 54 S. Ct. 8 ( 1933 )
Montana v. United States , 99 S. Ct. 970 ( 1979 )