Powell v. Granquist

• Citation: 252 F.2d 56
• Decision Date: 13 January 1958
• Docket Number: No. 15447.,15447.
• Parties: Grace M. POWELL, Executrix of the Estate of O. E. Powell, Deceased, Appellant, v. Ralph C. GRANQUIST, District Director of Internal Revenue, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

252 F.2d 56 (1958)

Grace M. POWELL, Executrix of the Estate of O. E. Powell, Deceased, Appellant, v. Ralph C. GRANQUIST, District Director of Internal Revenue, Appellee.

No. 15447.

United States Court of Appeals Ninth Circuit.

January 13, 1958.

Arthur D. Jones, Humphries & Jones, Frederick A. Jahnke, Portland, Or., for appellant.

Charles K. Rice, Asst. Atty. Gen., Grant W. Wiprud, Davis W. Morton, Jr., Lee A. Jackson, Attys., Dept. of Justice, Washington, D. C., C. E. Luckey, U. S. Atty., Portland, Or., for appellee.

Before POPE and CHAMBERS, Circuit Judges, and EAST, District Judge.

EAST, District Judge.

Jurisdiction

The Appellant, Grace M. Powell, is the duly appointed, qualified and acting Executrix of the Estate of O. E. Powell (Powell), who died on July 16th, 1954.

Deficiencies of income tax for the years 1937 through 1945, all inclusive, were assessed by the Commissioner of Internal Revenue for the District of Oregon (Commissioner), the predecessor in interest to the Appellee above named. All of the amounts in dispute in these proceedings were paid to the Commissioner by Powell and/or the Appellant. Timely claims for refund of such payments were made, however, the Appellee timely and in due form and manner disallowed said claims. This action was timely commenced in the District Court below for the recovery of all amounts in controversy.

Jurisdiction was conferred on the District Court by Section 1340, Title 28 U. S.C. and on this Court by Section 1291 of said Title.

We are confronted with the question whether the District Court erred in concluding and holding that deficiencies in income taxes assessed by the Commissioner against Powell and collected by the Appellee herein for the years 1937 through 1945, inclusive, were due to fraud with intent to evade the tax within the meaning of Section 293(b). Internal Revenue Code of 1939,¹ and that the collection of $12,880.39 from Powell and/or the Appellant herein by the Appellee of the amount of the penalty imposed by Section 293(b), supra, for the said years was proper. The Appellant insists that the Appellee failed to sustain its burden of proving fraud by clear and convincing evidence.

Statement

The factual background of this case is aptly set out in the District Court's opinion and will not be fully reiterated here. Powell v. Granquist, 1956, 146 F.Supp. 308. Powell filed no federal income tax returns for the years 1937-1945 inclusive. Appellant concedes a deficiency in income tax for this period of $25,760.74.² She also concedes a 25% penalty under Section 291, Title 26 U.S.C.A. for willful failure to file returns and a 10% penalty under Section 294(d), Title 26 U.S.C.A. for failure to file declarations of estimated tax, but she contends that Powell was not subject to the 50% fraud penalty under Section 293(b), Title 26 U.S.C.A.

On the Merits

The record indicates three salient points in the evidence:

1. Powell had filed federal income tax returns for the years 1933, 1934 and 1936, and no claim is made that he was unaware of the existence of a revenue law or that he was unaware of the fact that he was earning taxable income during the years following (1937 to 1945).

2. The only reason advanced by Powell for his failure to file returns for the years in question was that he did not believe in the way the government was wasting money. Powell's son and an Oregon State Tax Commission agent both testified that they had informed Powell of his duty to file returns and to pay taxes on several occasions, and the only answer he gave for his failure to so do, was an explanation to his son that while he believed in taxation, he did not approve of the manner in which the money was spent by the government, that he considered the government wasteful.³

3. Powell made only a colorable attempt to cooperate with revenue accountants who were attempting to reconstruct his income for the years in question. Although Powell had kept no formal books as such, he had retained cancelled checks, bank statements and real estate contracts and deeds. Upon a request by revenue agents to produce his books and records he complied by producing his cancelled checks and bank statements only. Powell held a real estate broker's license from 1943 on, and revenue agents were able to uncover in excess of thirty real estate transactions made by Powell in his own right, by ferreting out the public records. In this regard an excerpt from the testimony of Revenue Agent Forsberg seems appropriate:

"Q. Aside from the cancelled checks and the bank statements, what documents and information, if any, was made available to you by Ora E. Powell? A. He made available to us specific contracts upon our specific request, after it became apparent that we had all the information regarding that particular sale.

"Q. Did you ever make any general request for contracts or information? A. Yes, sir, we certainly did.

"Q. And what was his response to that request? A. That he kept no such records and that he had no such records, and the general statement to the effect that he didn\'t see why he should, more or less, jeopardize himself in any way. As far as getting contracts and deeds and that, it became evident that he had them all the time but we were not given them until we specifically asked for each one as we discovered them."

Counsel for the Appellant makes much of the fact that none of the records which Powell eventually, albeit reticently, turned over to the Revenue Service had been altered, and that no attempt had been made by Powell to destroy or alter his cancelled checks or bank statements. There is of course no question but that destruction and alteration of records by a taxpayer is deemed a clear badge of fraud, however we cannot agree with counsel that lack of evidence of destruction or alteration makes impossible a finding of fraud. The record further indicates that Powell employed a Certified Public Accountant to peruse his records and papers for the purpose of determining his income for the years in question, this conduct, under some circumstances might be interpreted as evidence of good faith, however in this case it appears that Powell pursued such a course only in conjunction with his protest of the deficiency as originally determined by the Internal Revenue Service, and for the purpose of reducing the amount of the deficiency so found.

Counsel earnestly urges that the facts in the instant case are on all fours with the facts found in First Trust & Savings Bank of Davenport, Iowa v. United States, 8 Cir., 1953, 206 F.2d 97. In that case the Circuit Court reversed a finding of fraud under Section 293(b), supra, stating that there was no proof of any affirmative act or fraud on the part of the taxpayer (Kraftmeyer) to evade the taxes upon which he had filed no returns for the period 1937 to 1945 inclusive. Assuming without deciding that what was there said regarding the criminal penalties provided for in Section 145 of the Internal Revenue Code, 26 U.S.C.A. § 145 as interpreted by the Supreme Court in Spies v. United States, 1943, 317 U.S. 492, 63 S.Ct. 364, 87 L.Ed. 418 was a proper analogy to be applied to the civil penalties provided for in Sections 291 and 293 with which we are presently concerned, still we feel that the instant facts are sufficiently distinguishable from those in the First Trust & Savings case to allow an opposite conclusion herein. In that case as in this one, the taxpayer conceded the propriety of a 25% penalty under Section 291 for failure to file due to willful neglect and not due to reasonable cause. In that case, like this one, the taxpayer had earned a considerable amount of taxable income (a major portion of which was capital gain) during the years in question and had failed to keep a set of books or business records. But in that case, unlike this one, taxpayer had never filed an income tax return prior to 1937, and neither had he ever been told by anyone that he should have filed returns until the Revenue Service discovered his deficiency some time after the year 1945. Secondly, the taxpayer in that case genuinely thought that he was not earning taxable income, this feeling being based on taxpayer's own conception of taxable income. The divergence of opinion between the taxpayer and the Revenue Service as to what amounted to taxable income, of course, was of no mitigation as to the penalty under 291; however, the Court felt that no fraudulent intent to avoid taxes had been shown. Thirdly, upon being informed of the delinquency by the Revenue Service, taxpayer employed an attorney and cooperated with the Revenue Agents to produce a full showing of all his money transactions throughout the years in question.

We feel that these differences upon the facts are substantial and indicate a material distinction between the state of mind and attitude of Kraftmeyer, a man of little business experience and Powell, a man of wide and extensive financial experience and business acumen.

The Appellant herein urges that no taxpayer may be found to have fraudulently intended to avoid a tax within the meaning of Section 293(b) if no returns have been filed by the taxpayer and further, that for any such failure to file, the civil penalties under Section 291 are the government's exclusive remedies, and cites First Trust & Savings Bank, supra.⁴

If the foregoing proposition and authority means that one who files no return at all cannot be found guilty of a fraudulent intention to evade a tax then to such a proposition we cannot agree. For a taxpayer to be ill-advised, neglectful, stubborn or a passive resistant in his duty to file a return is one thing, but for a taxpayer to be knowingly and wilfully defiant, withholding and dedicated to a plan of nonpayment of taxes for which he knows he is liable is quite "a horse of another color."

"Fraud implies bad faith, intentional wrongdoing and a sinister motive." Davis v. Commissioner, 10 Cir., 1950, 184 F.2d 86, 87.

The intent...