Zell v. C.I.R.

• Decision Date: 24 May 1985
• Docket Number: No. 84-1935,84-1935
• Citation: 763 F.2d 1139
• Parties: -5128, 85-2 USTC P 9698 Lucian T. ZELL, II, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1139

763 F.2d 1139

56 A.F.T.R.2d 85-5128, 85-2 USTC P 9698

Lucian T. ZELL, II, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 84-1935.

United States Court of Appeals, Tenth Circuit.

May 24, 1985.

Lucian T. Zell, II, pro se.

Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Carleton D. Powell, and Murray S. Horwitz, Attys., Tax Div., Dept. of Justice, Washington, D.C., on briefs, for respondent-appellee.

Before BARRETT, SETH and McKAY, Circuit Judges.

McKAY, Circuit Judge.

This three-judge panel has determined unanimously that oral argument would not be of material assistance in the determination of this appeal. See Fed.R.App.P. 34(a); 10th Cir.R. 10(e). The cause is therefore ordered submitted without oral argument.

This is an appeal from a decision of the United States Tax Court upholding, for the most part, the Internal Revenue Service's determinations of deficiency and additions to tax for petitioner's tax years 1976, 1977, 1978, and 1979. Petitioner challenges both the deficiency assessment and the imposition of the civil fraud penalty under 26 U.S.C. Sec. 6653(b). ¹

Petitioner retired from the United States Air Force in 1963 and has received a military pension since that time. In 1976, petitioner submitted an employee's withholding allowance certificate (Form W-4) to the Department of the Air Force certifying that he was entitled to thirteen withholding allowances. Consequently, only $110.87 was withheld as income tax from petitioner's pension during 1976, and no amounts were withheld during 1977, 1978, or 1979. During the four years, petitioner continued receiving his military pension.

In the years 1976 and 1977, petitioner filed Forms 1040 from which he omitted information as to his social security number, exemptions, income, adjustments to income, deductions, and other information necessary to a determination of his tax liability. In place of such information, petitioner inserted the word "none" or asterisks which referred the reader to various constitutional objections.

Petitioner did not file any federal income tax returns for 1978 and 1979. On or about January 6, 1981, petitioner, aware that he was being investigated for those tax years, wrote to the IRS claiming that his wages were not taxable income and that he was not required to file a tax return.

The IRS determined deficiencies in petitioner's income taxes for the years 1976, 1977, 1978, and 1979, and further assessed civil fraud penalties under 26 U.S.C. Sec. 6653(b) and additions to tax for failure to pay estimated tax for each year in issue under 26 U.S.C. Sec. 6654. Petitioner timely sought redetermination in the tax court. The tax court sustained the deficiencies and the additions to tax for the most part but allowed petitioner additional deductions for interest expenses and taxes. Petitioner appeals.

The Deficiency Assessments

A statutory notice of deficiency is presumed correct, and the petitioner has the burden of establishing that the respondent's determination of income and deductions are incorrect. Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 9, 78 L.Ed. 212 (1933); Anson v. Commissioner, 328 F.2d 703, 706 (10th Cir.1964). Petitioner challenges the deficiency assessments on two grounds. First, he claims that he is entitled to deduct various expenses as trade or business expenses under 26 U.S.C. Sec. 162 (1982). Second, he claims that the tax court erred in disallowing capital loss-carryovers.

The tax court affirmed the disallowance of the claimed trade or business expenses on the grounds that petitioner had failed to prove that he was engaged in a trade or business during the years in question, that the activities in which he was engaged were accompanied by a profit motive, or that the payments for which deductions were claimed were not personal living expenses expressly made non-deductible by 26 U.S.C. Sec. 262 (1984). In addition, the court found that petitioner had failed to meet the substantiation requirements. See 26 U.S.C. Sec. 274(d) (1984).

The general test for whether a person is engaged in a "trade or business" under Sec. 162 is whether the taxpayer's primary purpose and intention in engaging in the activity is to make a profit. Snyder v. United States, 674 F.2d 1359, 1362 (10th Cir.1982). ² Testimony indicates that petitioner claimed trade or business deductions for expenses incurred in three activities during the tax years in question. First, petitioner claimed deduction for expenses incurred in 1976 and 1977 in connection with an organization called Taxpayers Anonymous, a group apparently designed to provide information about the tax protest movement. Second, he claimed deductions for the cost of attending a training program in Janesville, Wisconsin where he sought to learn "the trust business," and for expenses incurred in a subsequent "trust consulting" activity. Finally, petitioner was also involved in the distribution of a line of products known as Amzoil. Petitioner was uncertain as to when, during the four years, he participated in the Amzoil activity. Petitioner testified that he had a profit motive in engaging in these activities.

As petitioner argues, many taxpayers are in the business of helping people minimize their taxes, including accountants and lawyers. However, the evidence in the record concerning whether petitioner had "a good faith expectation of making a profit," Snyder, 674 F.2d at 1364, from his tax protest activities is scant. In addition, petitioner has failed to substantiate that the claimed deductions were expenses incurred in pursuit of his alleged trade or business activities, rather than non-deductible personal expenses. On the record before us, the case appears close. However, petitioner had the burden of proving that he is entitled to the deductions. New Colonial Ice Co. v. Helvering, 292 U.S. 435, 54 S.Ct. 788, 78 L.Ed. 1348 (1934). We cannot say, on this record, that the tax court erred in finding that petitioner had not met his burden of proof.

With regard to the purported capital loss carry-over, the tax court found that petitioner had not presented any evidence of how the loss was incurred or how much had been applied to his tax liability for prior years. The tax court noted that petitioner had presented a copy of a schedule and some early returns showing that he had claimed capital losses, but found that this failed to satisfy petitioner's burden of proof. Petitioner argues on appeal that the exhibits show the origin of the tax loss carry-over and subsequent additions to short- and long-term capital losses from 1958 through 1975. The tax court correctly observed that petitioner's failure to show how the loss had been incurred and how much of that loss had been applied to prior tax liabilities precluded a finding in his favor. See Davis v. Commissioner, 674 F.2d 553 (6th Cir.1982).

The Fraud Penalty

Petitioner also challenges the assessment of a 50 percent penalty for civil fraud under 26 U.S.C. Sec. 6653(b) (1984). ³ The government has the burden of proving fraud by clear and convincing evidence. 26 U.S.C. Sec. 7454(a); 10 Mertens, Law of Federal Income Taxation Sec. 55.10, p. 46 (1984). Fraud means "actual, intentional wrongdoing and the intent required is the specific purpose to evade a tax believed to be owing." Mitchell v. Commissioner, 118 F.2d 308, 310 (5th Cir.1941); Pavlic v. Commissioner, T.C. Memo 1984-182. Fraud will never be presumed or imputed. Goldberg v. Commissioner, 239 F.2d 316, 321 (5th Cir.1956). The required state of mind is one which, "if translated into action, is well calculated to cheat or deceive the government." 10 Mertens, Law of Federal Income Taxation Sec. 55.10, p. 46 (1984).

Petitioner argues that he is not liable for the fraud penalty because he sought only to present a good-faith challenge to the internal revenue laws. Thus, he argues that this case is indistinguishable from Raley v. Commissioner, 676 F.2d 980 (3rd Cir.1982), in which the Third Circuit held that wilful defiance of the tax laws did not constitute fraud where the taxpayer went "out of his way to inform every person involved in the collecting process that he [was] not going to pay any federal income taxes." Id. at 983.

The question of whether disclosed wilful defiance of the tax laws constitutes civil tax fraud is one of first impression in this circuit. Clearly, wilful failure to file a timely return does not in itself, without more, establish liability for the fraud penalties. Stoltzfus v. United States, 398 F.2d 1002, 1005 (3rd Cir.1968), cert. denied, 393 U.S. 1020, 89 S.Ct. 627, 21 L.Ed.2d 565 (1969); Cirillo v. Commissioner, 314 F.2d 478, 482 (3rd Cir.1963); Jones v. Commissioner, 259 F.2d 300 (5th Cir.1958); First Trust and Savings Bank v. United States, 206 F.2d 97 (8th Cir.1953). Such an approach has been explained as follows:

A man who files no return has made no misrepresentation. He has simply failed to do what the statute requires him to do. But the man who files a willfully false return has endeavored to mislead his government. He creates the appearance of having complied with the law, whereas his neighbor who has filed no return does no such thing.... There is also good common-law analogy for such a distinction both in the tort rules regarding liability for deceit and in criminal law rules regarding liability for obtaining money under false pretenses. The law has always distinguished between failing to disclose useful information and making a disclosure which is a lie.

United States v. Croessant, 178 F.2d 96, 97 (3rd Cir.1949) (discussing difference between failure to file and attempt to evade payment of taxes in criminal cases). See also Spies v. United States, 317 U.S. 492 (1943). Since wilful failure to file is insufficient ground for imposition of a fraud penalty, surely non-filing accompanied by notice of the nonfiling to the IRS, which clearly does not actively mislead the government...