Lord v. C. I. R.
| Decision Date | 14 October 1975 |
| Docket Number | Nos. 74--1080,74--1120,s. 74--1080 |
| Citation | 525 F.2d 741 |
| Parties | 75-2 USTC P 9799 Robert P. LORD, Appellee-Cross-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellant-Cross-Appellee. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Before DUNIWAY and WALLACE, Circuit Judges, and MURPHY, * District Judge.
The Commissioner and the taxpayer appeal from a decision of the United States Tax Court (Lord v. Commissioner, 60 T.C. 199 (1973)). The Commissioner's appeal is from the Tax Court's refusal to uphold the 50% fraud penalty on a $63,366.82 deficiency in the taxpayer's income tax liability for the years 1961 through 1966. The taxpayer appeals from so much of the Tax Court's decision holding that taxpayer's income during five of those years was his separate property and not community property. On the Commissioner's appeal, we reverse. We affirm on the taxpayer's appeal, adopting the Tax Court's opinion on the community property issue.
Our jurisdiction is derived from 26 U.S.C. § 7482(a), which provides:
Accordingly, '(f)indings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge of the credibility of the witnesses.' (Fed.R.Civ.P. 52(a)). See Commissioner v. Duberstein, 363 U.S. 278, 291, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960).
After a thorough review of the entire record, we are satisfied that the Tax Court's finding that the Commissioner had failed to sustain his burden 1 of proving fraud is clearly erroneous, since we are left with the definite and firm conviction that a mistake has been committed. United States v. U.S. Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948); In re U.S.A. Motel Corp., 450 F.2d 499, 503--504 (9th Cir. 1971).
The trial before the Tax Court was completed in two hours. The taxpayer called no witnesses and the Commissioner called three--the taxpayer, taxpayer's former wife, and taxpayer's employer. The parties also filed an agreed statement of facts. There was no issue of credibility as to any witness, nor was there any conflicting evidence. There were but two issues, the community property issue and the issue: Whether the taxpayer's failure to pay his federal income taxes for the taxable years 1961 through 1966 was due to fraud? If fraudulent, he is liable for a 50% penalty as provided in 26 U.S.C. § 6653(b). 2 We will discuss only the fraud question.
The stipulated facts were that Lord, who prior to 1960 was employed as a security salesman and branch manager of an investment firm, abandoned his wife and six children in 1960, after 23 years of marriage, and moved to the State of Washington. In 1961 he began working as a real estate salesman for MacPherson's, Inc. at its branch office at Ocean Shores, Washington. In 1962 he was made sales manager for MacPherson's. His employment with MacPherson's Inc. continued through 1966. During the years involved he received commissions and bonuses from MacPherson's, Inc. as follows:
Total Total
commissions commissions
Year paid Year paid
1961 .. $16,488.29 1964 .. $40,298.15
1962 .. 46,316.60 1965 .. 36,227.88
1963 .. 30,274.91 1966 .. 17,827.08
Copies of IRS Forms 1099 reflecting such commissions, which were furnished to him by MacPherson's, Inc. at the end of each year, were attached to the Stipulation of Facts; and it was further stipulated that the Forms 1099 for the years 1961 and 1962 were no longer available. Lord failed to file a federal income tax return for each of the taxable years 1961 through 1966, and failed to pay any portion of the income tax liability due from him for any of said years. On March 27, 1969, an Information was filed against Lord in the United States District Court for the Western District of Washington charging him with willfully failing to file federal income tax returns for the years 1962 through 1966 in violation of 26 U.S.C. § 7203 (Internal Revenue Code of 1954). On September 29, 1969, Lord entered a plea of guilty to Count I of said Information, willful failure to file an income tax return for the year 1962. On December 19, 1969, the United States District Court for the Western District of Washington entered its judgment of conviction upon Lord's plea of guilty sentencing him to a fine in the amount of $2,500. and confinement in a jail-type institution for a period of three months. It also placed him on probation for a period of five years.
The Forms 1099 in evidence not only indicate the commissions paid but also the employer's name and address as well as Lord's. On no Form, however, did Lord's social security number appear. Lord admitted on direct examination that MacPherson's, Inc. tried several times to get him to provide his social security number, but he never complied.
MacPherson also wrote Lord a letter on October 1, 1962, explaining the need for Lord to start saving some money to pay his income taxes. The last two paragraphs of this letter are significant. They read:
'A married man, no children, would pay $8,000 on a $30,000 income on April 15. It takes the Government approximately 30 to 90 days to start garnisheeing and raising Holy Hell.
'After reading the last paragraph, I think you can see why I feel you would be better without the Eastvold house and and (sic) make a concerted effort to turn your Ocean Shores lots into cash to meet your taxes and extravagant living expenses.'
Lord admitted at trial that he was aware of his obligation to file federal income tax returns and pay federal income tax during the years in issue. Yet the Tax Court held: 'We have examined all the relevant facts in the instant case and have concluded that respondent has not sustained his burden of proving fraud by clear and convincing evidence.' In arriving at this conclusion the Tax Court misconstrued some of the testimony and, although cognizant of the correct legal principles involved, applied an erroneous standard.
The Tax Court premised part of its decision upon two findings of fact that are clearly erroneous. First, the Tax Court noted that taxpayer had an unstable or irregular pattern of employment. Second, the Tax Court found that taxpayer was an alcoholic.
However, except for the interval between March 24, 1960, when Lord abandoned his wife and family in Iowa, and some unidentified time in 1961 when he started his employment with MacPherson's in Washington, his work experience was exemplary. The only proof of Lord's job experience was (1) the Stipulation of Facts recited above, and (2) the taxpayer's own testimony relating both to the immediate period after he graduated from high school (probably 1932/33, since he was born on May 17, 1916) and to the period 1958 to 1960. We quote the latter testimony in the margin. 3
Even during this period, Lord had several jobs at used car lots. In sum, the only job instability that can be attributed to the taxpayer occurred during the hiatus when he abandoned his family and started with MacPherson's. And as to that period, all that the record shows is:
'* * * I spent a year or so not doing much, working various used car places for a few weeks * * *.' (Tr. p. 17)
How long this period was or how many jobs or car lots were involved cannot be determined from the record. Parenthetically, we take judicial notice that his 1961 tax return did not have to be filed until April 15, 1962. (26 U.S.C. § 6072).
More important than the unsubstantiated finding of job instability was the Tax Court's finding that the taxpayer was an alcoholic. The record discloses only five instances where the words 'drinking' or 'alcoholic problem' were mentioned or implied. That testimony is also quoted in the margin. 4 The most that such testimony reveals is that between March, 1960 and some time in 1961, when he started with MacPherson's, the taxpayer drank when he had the money, although he admitted that he had little or no income in 1960. Yet the Tax Court found that Lord was afflicted with alcoholism, 5 a well-known disease; and it reiterated this finding six times in its opinion.
Acknowledging that Lord had a drinking problem during the interval in question and also the fact that he worked only in a few car lots at that time, immediately thereafter he functioned extremely well and made a substantial success in the real estate business, earning $187,432.91, and establishing a new life with a new wife whom he had met in 1960. These facts are highly significant because they cover the period in question.
The sole issue is, as the Tax Court correctly noted: Whether the taxpayer's failure to pay his federal income taxes for the taxable years 1961 through 1966 was due to fraud. Accordingly, the period of time involved extends from April 15, 1962 through April 15, 1967, the dates when the returns were due for the years in question. This was the period covered by the Commissioner's proof.
The Commissioner proved that the taxpayer was an intelligent businessman who, over a period of six years, received substantial income. The Commissioner further proved that the taxpayer admitted that he intentionally disregarded his obligations to file returns and pay federal income taxes; that he kept no business records; that he refused, over a six-year period, to give his employer his social security identification number; that he was warned by his employer to pay his taxes and to cease his extravagant life...
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