Powell v. Granquist

             UNITED STATES COURT OF APPEALS NINTH CIRCUIT

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

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. Section 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 of the required intentional wrongdoing is stated to be the specific purpose to evade a tax believed (known) to be owing. Mitchell v. Commissioner, 5 Cir., 1941, 118 F.2d 308, 310; Wiseley v. Commissioner, 6 Cir., 1950, 185 F.2d 263, 266.

'Consistent, substantial understatements of income for several years, as was true here, is highly persuasive evidence of intent to defraud the government. Rogers v. Commissioner, 6 Cir., 1940, 111 F.2d 987; ( Kurnick v. Commissioner, 6 Cir., 1956, 232 F.2d 678.)' Cited in Baumgardner v. Commissioner, 9 Cir., 251 F.2d 311, 322.

As is true here, knowingly refusing to make any statement of income for nine years would seem to be at least of equal persuasiveness in evidencing an intent to defraud the government. There is nothing in the applicable statutes to the contrary, therefore it must be accepted that the Congress intended the ultimate conclusion of 'fraud' to be as ordinarily understood in the law. We agree that fraud in this type of case must be established by clear and convincing proof. Rogers v. Commissioner, supra. Jemison v. Commissioner, 5 Cir., 1930, 45 F.2d 4; the burden to establish by the required quantum of evidence such fraud is upon the government. Ohlinger v. United States, 9 Cir., 1955, 219 F.2d 310; and this required standard may be satisfied by circumstantial evidence. Owens v. United States, D.C.Ark.1951, 98 F.Supp. 621, affirmed 8 Cir., 1952, 197 F.2d 450.

We are of the opinion that the evidence abundantly sustains the finding of the District Court that Powell's deficiency is due to fraud with intent to evade tax, within the meaning of Section 293(b) of the Internal Revenue Code.

As was stated in DeFranco v. Commission, 9 TCM 1159, (CCH Dec. 18, 030(m) 1950), citing Abraham Wolf, 14 T.C. 751:

     'Where over a course of years an intelligent taxpayer and

     'Petitioner's action with regard to his income tax returns

We are not unmindful of the fact that under the present Code the counterparts of Section 291 and Section 293 are made mutually exclusive. See Section 6653(d), Internal Revenue Code 1954, 26 U.S.C.A. Section 6653 (d). Be that as it may, this was not the rule under the 1939 Code, as the following cases ⁵ attest, wherein fraud penalties were sustained in situations wherein the taxpayer had not filed any returns for the years in question.

Affirmed.

' Section 293(b) Fraud. If any part of any deficiency is due to fraud with intent to evade tax, then 50 per centum of the total amount of the deficiency (in addition to such deficiency) shall be so assessed, collected, and paid, in lieu of the 50 per centum addition to the tax provided in section 3612(d)(2).' 26 U.S.C.A. (I.R.C.1939) Section 293.

² 'During the years 1937 to 1945, taxpayer owned and operated a number of gasoline service stations, later leasing them to the two sons, Lee G. Powell and Vincent O. Powell, receiving from them rental incomes. Also taxpayer, at various times during that period, had 19 different properties that he rented, and also during that time, he made in excess of 30 real estate sales, farms and residences, and also had interest income on contracts and commissions from realty sales. In order to determine taxpayer's income, it was necessary that the Internal Revenue agent search public records of four counties, determine from the sons how much they leased the stations for, and contact real estate agents and other parties to the various transactions. This was necessary because taxpayer had indicated that he kept no records.'

³ See direct testimony of Lee G. Powell, Powell's son (R. 141):

     'Q. During those years in question, was the subject of taxes ever

     'Q. Did Mr. Powell ever state to you, at any time, any reason for

     'The cases that are cited to us here and relied on by the