Plunkett v. CIR

• Decision Date: 10 July 1972
• Docket Number: No. 71-1084.,71-1084.
• Citation: 465 F.2d 299
• Parties: Haldane M. PLUNKETT, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

465 F.2d 299 (1972)

Haldane M. PLUNKETT, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 71-1084.

United States Court of Appeals, Seventh Circuit.

July 10, 1972.

Argued December 3, 1971.

Decided July 10, 1972.

Raymond J. Smith, Chicago, Ill., for petitioner-appellant; Arthur N. Nasser, Chicago, Ill., of counsel.

Fred B. Ugast, Acting Asst. Atty. Gen., Bruce I. Kogan, Gilbert E. Andrews, Elmer J. Kelsey, Attys., Tax Division, Dept. of Justice, Washington, D. C., for respondent-appellee.

Before KERNER^*, PELL, and SPRECHER, Circuit Judges.

PELL, Circuit Judge.

In 1968, taxpayer Haldane M. Plunkett filed two petitions in the Tax Court challenging the Commissioner's determinations regarding deficiencies in income tax, additions to tax, and alleged overpayments. The two petitions, one involving the years 1957 through 1959 and the other 1960 through 1963, were consolidated for trial and decision.¹ On October 2, 1970, the Tax Court entered its decisions sustaining a deficiency of $9,504.96 for the taxable year 1957 and additions to tax under 26 U.S.C. § 6653(b)² of $35,141.10 for the years 1957 through 1963.³ After the Tax Court denied his petition for reconsideration, Plunkett appealed to this court.

During the years in question, the taxpayer ran a food catering business with the assistance of Mrs. Plunkett. Both Plunkett, who has had little formal education, and his wife are allegedly untutored in the intricacies of bookkeeping and accounting. The taxpayer did not maintain any formal records for his business nor did he retain a bookkeeper or accountant to do so for him. He did, however, keep a customer order book which reflected each catering event and, in most instances, the amount charged therefor. He also separated paid bills from unpaid bills and retained them in different drawers.

Plunkett timely filed original individual income tax returns for the years 1957 through 1959 and original joint returns for the years 1960 through 1963. The original returns for 1957, 1958 and 1959 were prepared by others on the basis of information supplied by Plunkett. To compute the net income shown on those returns, the taxpayer had estimated his total expenses and deducted that amount from his estimated gross receipts or else he had deducted the total estimated expenses from the amount that he had deposited in his bank account.

During this period, Plunkett engaged in transactions in the stock market and in the commodity futures market. He subscribed to a security advisory service and maintained a margin account with a brokerage house, which periodically sent him information concerning his account and periodically credited cash dividends to the account.

Although Plunkett knew that dividends were taxable income, he failed to report such income for the taxable years 1957, 1958 and 1959. In his testimony in the Tax Court, he attributed this omission to his claimed belief at the time that dividends credited to an account need be reported only if they are withdrawn from the account. Plunkett did not withdrawn any dividends during 1957, 1958 or 1959.

In about December 1963, the taxpayer became concerned with the manner in which he was handling his tax matters, and in early 1964, he consulted an alderman who helped him find an attorney to advise him. Shortly after Plunkett began working with the attorney, a revenue officer conferred with Plunkett, his wife, and one of his employees about the employee's tax affairs. At this time, late June 1964, the IRS had not assigned an agent to examine Plunkett's income tax returns.

On the advice of his attorney, Plunkett decided to file amended returns for the years 1958 through 1963. (Counsel recommended that no amended return be prepared for 1957.) With the help of a CPA, Plunkett completed this task by the end of July. The returns were based on information that had been available to the taxpayer when he had filed originally. On August 6, 1964, Plunkett filed the amended returns and paid the additional taxes shown on them, plus interest. The Commissioner generally accepted the new returns as reflecting accurately Plunkett's income, expenses and deductions for 1958 through 1963.⁴

Subsequent to August 11, 1964, IRS agents conducted a criminal investigation of Plunkett's original and amended returns. On the basis that the amended returns "spoke for themselves," Plunkett and his represenatives declined any cooperation during the course of the criminal investigation. In December 1966, a four-count indictment was returned against Plunkett and his wife for violating 26 U.S.C. § 7201 with respect to their joint income tax returns for the years 1960 through 1963. The defendants entered pleas of not guilty. Plunkett later changed his pleas to nolo contendere upon his counsel's understanding that the Government would then move to dismiss the indictment as to Mrs. Plunkett. However, the Government objected to the tendered pleas and stated that it would not move to dismiss. Plunkett, by his attorney, thereupon withdrew his tender of the nolo contendere pleas and pleaded guilty. Following a colloquy between Plunkett and the district court, the court entered the guilty pleas and granted the Government's motion to dismiss Mrs. Plunkett.

Plunkett was sentenced to three years' probation on each count of the indictment, the sentences to run concurrently on the condition that he serve 90 days of the probation in a "jail type" institution. He was also fined $20,000. Before the commencement of the jail term, Plunkett, then aged 73, suffered a stroke, and the court vacated the imposition of the 90 days' imprisonment. Plunkett has never appealed from the conviction or sentence in the criminal case.

In the civil suit in the Tax Court below, the Commissioner introduced evidence as to the years 1957, 1958 and 1959 to meet his burden of proving fraud on the part of the taxpayer. However, to sustain the fraud penalties for the years 1960 through 1963 he relied entirely on the original and amended returns and the doctrine of collateral estoppel, based on Plunkett's criminal conviction.

Plunkett's first contention is that the Tax Court erred in finding that a part of his underpayments of income tax for the years 1957, 1958 and 1959 was due to fraud with intent to evade tax within the meaning of 26 U.S.C. § 6653(b) so as to render the petitioner liable for the "fraud penalty" addition to tax. More particularly, Plunkett argues that the court improperly ignored his defense of voluntary disclosure and that the Commissioner failed to satisfy the "clear and convincing evidence" standard.

Contrary to the Commissioner's assertion, we think that the record supports Plunkett's claim that his disclosure of the inaccuracies in his original returns was voluntary. He had filed amended returns for the years 1958 through 1963 before the criminal investigation of his tax affairs was initiated. The conferences between the Plunketts and Internal Revenue Service agents prior to the time the amended returns were filed concerned the tax returns of one of Plunkett's employees; that is, the petitioner was involved only as the employer of a person being investigated.

We cannot therefore conclude, however, that the United States Attorney was foreclosed from prosecuting Plunkett or that the Commissioner of Internal Revenue was precluded from pursuing civil remedies, including the imposition of fraud penalties, against a taxpayer whom he believed evidence showed to have filed false and fraudulent original returns. The IRS may have an informal policy of sometimes not seeking full sanctions against an errant taxpayer who voluntarily and prior to the initiation of an IRS investigation files amended returns and pays the additional taxes due, but it is not required to follow that policy of leniency. Cf. United States v. Shotwell Mfg. Co., 225 F.2d 394, 397-398 (7th Cir. 1955), cert. denied on the cross petition, 352 U.S. 998, 77 S.Ct. 552, 1 L.Ed.2d 544, and the decision vacated on other grounds, 355 U.S. 233, 78 S.Ct. 245, 2 L.Ed.2d 234 (1957).

Although we find that such admissions create no legal bar, we appreciate the irony that—as Plunkett points out—a taxpayer may thereby become the unintended victim of his own defensive maneuvers. An objective observer might well come to the conclusion that the combination of criminal and civil penalties visited upon Plunkett was unduly harsh under the circumstances here involved. Nevertheless, it is apparent that one of the calculated risks of tax evasion, as well as of the violation of any criminal law, is that the full measure of the law's retribution may be asserted by way of demonstrating its irrefragability.

We turn then to the second prong of the petitioner's challenge.

It is well established that whether an underpayment of income is due to fraud is a question of fact. "Although . . . this is a fact which the Commissioner is required to prove by clear and convincing evidence, it, like other findings of fact, will not be upset unless clearly erroneous. . . ." Archer v. Commissioner of Internal Revenue, 227 F.2d 270, 274 (5th Cir. 1955). See also Commissioner of Internal Revenue v. Duberstein, 363 U.S. 278, 291, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960). To meet his burden of proof, the Commissioner need not prove the precise amount of the underpayment resulting from fraud, but only that "any part" of the underpayment is attributable to fraud. See Estate of W. Y. Brame v. Commissioner of Internal Revenue, 25 T.C. 824 (1956), aff'd per curiam, 256 F.2d 343 (5th Cir. 1958). We are also mindful that fraud may be established by circumstantial evidence and that the taxpayer's background and the context of the events in question may be considered, e. g., Gano v. Commissioner, 19 B.T.A. 518, 532 (1930).

Applying these principles to the present case, we hold that the Tax Court's finding was not clearly erroneous. The court had a sufficient basis for sustaining the...