United States v. Diehl, Civ. A. No. 73-H-1017.

• Decision Date: 06 August 1978
• Docket Number: Civ. A. No. 73-H-1017.
• Citation: 460 F. Supp. 1282
• Parties: UNITED STATES v. Beth Koehler DIEHL.
• Court: U.S. District Court — Southern District of Texas

460 F. Supp. 1282

UNITED STATES v. Beth Koehler DIEHL.

Civ. A. No. 73-H-1017.

United States District Court, S. D. Texas, Houston Division.

August 6, 1978.

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J. A. "Tony" Canales, U. S. Atty., Houston, Tex., Paul D. Barker, Tax Div., Dept. of Justice, Washington, D. C., for plaintiff.

Dougal C. Pope, Pope & Waits, Houston, Tex., for defendant.

MEMORANDUM AND OPINION

CARL O. BUE, Jr., District Judge.

I. INTRODUCTION

This action was commenced pursuant to the provisions of the Int.Rev.Code of 1954, § 7401,¹ to reduce to judgment an assessment of income tax liability. The defendant taxpayer in this case, Beth Koehler Diehl (hereinafter defendant), and Kent B. Diehl (hereinafter Mr. Diehl), now deceased, were married during the entire calendar year 1957, and they filed a joint income tax return for that year in July of 1958. The government's assessment, which was made on July 21, 1967, concerned four different transactions. The taxpayer concedes that one of the transactions resulted in income which should have been reported. She maintains, however, that the remaining three transactions did not result in taxable income. The facts of these three more complicated transactions are set out in detail under the Findings of Fact. For purposes of introduction, each of the four transactions are briefly described as follows:

a. During the calendar year 1957, Mr. Diehl received a check from one Kennedy Van Sauns in the amount of $9,000.00. This amount was paid to Mr. Diehl for services rendered. On their joint income tax return for 1957 defendant and Mr. Diehl reported the receipt of only $4,500.00 from Kennedy Van Sauns. Defendant concedes that the entire $9,000.00 should have been reported.

b. In January of 1957, the board of directors of the Texas Portland Cement Company (hereinafter Texas Portland) voted to issue 110,491 fully paid shares of capital stock to Mr. Diehl for services he rendered to the company in his capacity as engineer and president. Mr. Diehl received those shares in March of 1957. On the same day that Mr. Diehl took possession of the certificate representing these 110,491 shares, Mr. Diehl pledged the shares as collateral for a $200,000.00 line of credit to be made directly to Texas Portland. The parties dispute whether the circumstances surrounding the issuance of the 110,491 shares render the receipt of these shares taxable income under § 61.

c. In February of 1957 Mr. Diehl entered into a contract with A. N. Morgan and others wherein Mr. Diehl pledged 50,005 shares of Mississippi Portland Cement Company (hereinafter MVPC) capital stock in return for a loan of $35,000.00. The contract provided that the loan was to be repaid within three months, and further, that the lender was granted an option to purchase 25,000 shares for $25,000.00 any time within that three-month period. Repayment was not timely made, and the lender never exercised his option. However, on June 14, 1957, while the loan was in default, Mr. Diehl exchanged 25,000 shares for the forgiveness of $25,000.00 of his debt. The parties do not dispute that this constituted a sale of the stock and should have been reported. The dispute centers on whether the transaction resulted in an unreported interest deduction which offsets any income generated by the transaction.

d. On June 14, 1957, Mr. Diehl entered into a contract with Bankers Life and Casualty Company (hereinafter Bankers Life). Mr. Diehl transferred title to the 25,005 shares of MVPC stock in exchange for $40,000.00. The contract required Mr. Diehl to repurchase 23,672 of the shares for $75,015.00 within one year. Again, the parties do not dispute that this resulted in a taxable sale which the Diehls should have reported. Again, the dispute centers on whether any unreported income is offset by unreported interest deductions.

This case was tried before Senior Judge Ben C. Connally, in November of 1975, and the parties agreed that the case should be submitted to the jury solely on the issue of fraud, reserving all questions of law for the Court's determination. The Court submitted the case to the jury in four interrogatories on the issue of fraud as to each transaction, and the jury found that the failure to report the $4,500.00 commissions received, as well as the receipt of the 110,491 shares of Texas Portland capital stock constituted fraud. After trial and prior to determining these legal questions, Judge Connally died, and this cause was transferred to the docket of Judge Carl O. Bue, Jr. Shortly after this transfer, the parties filed a joint stipulation agreeing to submit all issues of fact not submitted to the jury as well as all issues of law to this Court for determination based on the record. Pursuant to Rule 63, F.R.Civ.P., this Court therefore had authority to determine all unresolved questions of fact and law, and entertain any motions related thereto. See Miller v. Pennsylvania R. Co., 161 F.Supp. 633 (D.C.D.C.1958).

The Court concluded, however, that the complications of this lawsuit required a hearing by this Court, notwithstanding the duplication of efforts which would be necessitated by a de novo determination of the questions of fraud. Accordingly, this action was retried by this Court beginning on June 1, 1976, and lasting three days.

The Court has concluded that all of the aforementioned transactions resulted in taxable income not reported in the Diehls' 1957 joint income tax return. The Court has also concluded that the evidence presented at this second hearing was sufficient to establish clearly and convincingly that the income generated by (a) the receipt of the $9,000.00 commissions, and (b) the issuance to Mr. Diehl of the 110,491 shares of Texas Portland stock was fraudulently omitted from the joint income tax return filed by Mr. and Mrs. Diehl for tax year 1957.

II. THE "PROOF OF FRAUD" REQUIREMENT

To avoid the three year statute of limitations imposed by § 6501(a), it was the government's burden to prove by clear and convincing evidence that the failure to report income generated by at least one of the four transactions discussed above constituted fraud. Proof of fraud as to any one of the alleged deficiencies permits a general reaudit of the return in its entirety, and the statute of limitations is tolled as to all deficiencies. Lowy v. Commissioner of Internal Revenue, 288 F.2d 517 (2d Cir. 1961) (L. Hand, J.), cert. denied, 368 U.S. 984, 82 S.Ct. 596, 7 L.Ed.2d 523 (1961). See also Bahoric v. Commissioner of Internal Revenue, 363 F.2d 151, 153 (9th Cir. 1966); Worcester v. Commissioner of Internal Revenue, 370 F.2d 713, 717 (1st Cir. 1966).

It is important to note that the government's purpose in seeking to prove fraud in this case is limited solely to avoidance of the three year statute of limitations. Although the fifty percent fraud penalty assessed in this case constitutes some part of the government's total assessment, under the provisions of § 6653(b), it cannot be collected from Mrs. Diehl because the evidence in the record is insufficient to establish her participation in any of the four transactions found by this Court to be fraudulent. However, the Court has concluded that the evidence of fraud on the part of Mr. Diehl is amply supported by the record, and Mrs. Diehl is jointly and severally liable for any tax liability due to omissions from the Diehl's joint return. E. g., Hicks Co. v. Commissioner, 56 T.C. 982, 1030 (1971), aff'd, 470 F.2d 87 (1st Cir. 1972).

III. INAPPLICABILITY OF THE "INNOCENT SPOUSE" PROVISION: SECTION 6013(e)

There is insufficient evidence in the record to establish that defendant is entitled to be relieved from all tax deficiencies here at issue as an "innocent spouse" under § 6013(e). In the first trial of this cause before Judge Connally defendant made no attempt to assert this provision. Due to the peculiar nature of this action this Court considered it appropriate to direct counsel in a minute entry to brief the possible applicability of this provision. To qualify under § 6013(e) as an innocent spouse, a party has the burden of proving, among other things, that "in signing the return he or she did not know of, and had no reason to know of, such omission . . ." 26 U.S.C. § 6013(e)(1)(B). See Allen v. Commissioner of Internal Revenue, 514 F.2d 908, 912 (5th Cir. 1975).

In the second trial before this Court, defendant again made no effort to assume her burden of establishing the applicability of § 6013(e). Accordingly, the Court has concluded that statutory relief for defendant due to her nonparticipating role in the fraudulent transactions must be limited to relief under § 6653(b) from that part of the total assessment attributable to fraud penalties.

IV. LEGAL SUFFICIENCY OF AMOUNT FRAUDULENTLY EVADED

With respect to the unreported $4,500.00, defendant has cited four criminal tax fraud cases for the proposition that the government must prove that the income fraudulently omitted was a "substantial" amount. In all four cases cited the court affirmed the conviction of a taxpayer in a criminal tax fraud case who argued that the government had not proved the amount alleged in the indictment. In each case the court ruled that the government in a criminal tax fraud case need only show that a "substantial" amount of tax liability alleged was willfully evaded. See United States v. Beasley, 519 F.2d 233, 245 (5th Cir. 1975); Harris v. United States, 356 F.2d 582, 585 (5th Cir. 1966); United States v. Burdick, 221 F.2d 932, 934 (3d Cir. 1955), cert. denied, 350 U.S. 831, 76 S.Ct. 65, 100 L.Ed. 742 (1955); Sasser v. United States, 208 F.2d 535, 539 (5th Cir. 1953). The Court is of the opinion that the taxes attributable to the $4,500.00 omitted from defendant's return are sufficiently substantial to support the Court's finding of fraud with respect to this term of income. It should be noted that the omitted $4,500.00 is only...