Petition for Writ of Certiorari — Sanford v. United States

LIBRARY ee ik Te

REME COURT. th & 690 OCT 25 1999

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FID, ann JOHH F. BAWIS, CLERK

In THE

Suprecsne Court of the United States

Octoser Term, 1968 :

Curis D. Stroitzrus and Irma H. Sro.irzrus, Petitioners, i

v.

Unrrep States or America, Respondent.

PETITION FOR A WRIT OF CERTIORARI :

TO THE UNITED STATES COURT OF :

APPEALS FOR THE THIRD CIRCUIT ‘

Converse MurpocH

Ricnarp E. Poois :

Counsel for Petitioners

350 Delaware Trust Building ;

Wilmington, Delaware 19801 :

{

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INDEX

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SESE Se NEE OR OEE

Question presented Na ERD a I

a on seca cats ves our wies coca a toriceccee scm | Pa

i RE TOE ANCES I OTT RON a ea 2

Reasons for granting the writ ...§. CS

SE I Tac Se ao eg ON teat ee cee CT RON 8

Apoenan Be 9

B—Opinions and judgment below _...___. 11

CITATIONS

Page

CasEs:

Cave v. United States,

159 F.2d 464 (8th Cir. 1947) . NT SANA nls 6, 7

Edwards v. United States,

375 F.2d 862 (9th Cir. 1967) _ Reh ee eee

First Trust & Savings Bank v. U nited Biases,

206 F.2d 97 (8th Cir. 1953) _. ea ee

Trolla v. United States,

oe ae eee 0 ee ew

Jones v. C.1.R.,

ee ee ee ee ee: ce

Melinder v. United States,

281 F. Supp. 45 (W.D. Okla. 1968)... :

Moore v. United States,

Bee 28 Gee (ee Cre. 8)... 8

Powell v. Granquist,

ee ee ee ee ee ee eee

Spies v. United Staies,

Fe 2 | ene: Ss

SratTutEs:

Internal Revenue Code of 1954,

68A Stat. 821-822:

Sec. 6651 (26 U.S.C. §6651) __... 2, 3, 9

Sec. 6653(b) (26 U.S.C. §6653(b) )_..------------ 2, 3, 9

ii

In THE

Supreme Cut of the United States

Ocrosex TERM, 1968 :

NO.

Curis D. Stottzrus and Irma H. Sroutrzrus, Petitioners,

v.

Untrep States or America, Respondent.

TALES x "i

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF :

APPEALS FOR THE THIRD CIRCUIT ;

Fr era

Chris D. Stoltzfus and Irma H. Stoltzfus pray that a writ

of certiorari issue to review the judgment of the United

States Court of Appeals for the Third Circuit, entered in

the ahove-entitled case on July 31, 1968.

sg

CITATIONS TO OPINIONS BELOW

The opinion of the District Court with respect to findings

of fact ard conclusions of law, printed in Appendix B hereto,

infra, p. 11, is reported in 264 F. Supp. 824 (E.D. Pa. :

1967); 67-1 U.S. Tax Cas. 19287; 19 AFTR 2d 854. The

memorandum opinion of the District Court with respect

to plaintiffs’ motion for a new trial is unreported and is:

2

printed in Appendix B hereto, infra, p. 18. The opinion of

the Court of Appeals for the Third Circuit, printed in Ap-

pendix B hereto, infra, p. 21, is not yet officiaily reported

but is unofficially reported in 68-2 U.S. Tax Cas. 19499; 22

AFTR 2d 5066.

JURISDICTION

The judgment of the Court of Appeals for the Third Cir-

cuit was entered on July 31, 1968. Rehearing was denied on

September 26, 1968. The jurisdiction of this Court is in-

voked under 28 U.S.C. §1254(1).

QUESTION PRESENTED

Whether the rejection of Spies v. United States, 317 US.

. 492 (1943) by the Third Circuit, in admitted conflict with

the Eighth Cireuit, makes it desirable for the Court to

grant certiorari in this case in order both to settle generally

the resulting confusion in the law relating to civil tax pen-

alties and to review specifically the trial, post-trial, and

appellate procedures which here resulted in deniai of tax-

payer’s refund claim?

STATUTES INVOLVED

The statutory provisions involved are Sections 6651 and

6653(b) of the Internal Revenue Code of 1954, 68A Stat.

821-822, 26 U.S.C. §§6651 and 6653(b). They are printed in

Appendix A, infra, p. 9.

STATEMENT

This suit arises out of plaintiffs’ claim for refund of 50%

tax fraud penalties assessed for the year 1954 pursuant to

26 U.S.C. §6653(b).* The United States District Court had

jurisdiction of this case by virtue of 28 U.S.C. §§1340 and

1346(a). An appeal was taken to the United States Court of

* Mrs. Stoltzfus is involved as a party only because joint returns were

filed.

3

Appeals pursuant te 28 U.S.C. §1291.

The factual background of this case can be stated briefly.

After filing returns and paying taxes for 1941 and 1942 and

aiter paying the first installment on his 1943 estimated tax,

taxpayer suffered an uninsured fire loss of his business and

did not send in his second installment. During the next eight

years taxpayer was plagued by financial adversity as re-

flected in his total income tax liability of $221.04 for the

entire period. He was also hampered by an irrational but

real fear that drastic consequences in the form of summary

actions by government agents would result from his omis-

sions. During this period, as always, taxpayer openly kept

complete records of his financial affairs.

In the early 1950’s taxpayer made a modest start toward

recovery and for 1954, the year in issue in this case, he had

a tax liability of $596.50. Thereafter he made efforts to

resolve his tax problems and in 1959 he consulted a lawyer.

Complete returns and full payment of all tax liabilities soon

followed. The taxpayer, his attorneys, and his accountants

fully cooperated with the revenve agents who were assigned

to the case.

Taxpayer’s counsel readily recognized that taxpayer was

liable for the 25% failure to file penalties provided for in

Section 6651 of the Internal Revenue Code of 1954. How-

ever, the government insisted upon the 50% fraud penalty

under Section 6653(b). Sitting without a jury the trial

judge heard the government’s case, and one witness and

taxpayer testified in defense. The trial judge then cut short

the trial without permitting redirect examination of tax-

payer or the testimony of further witnesses on taxpayer’s

behalf. Instead, the trial judge informally announced to

counsel that the government had failed to meet its burden

of proving fraud. Before this decision could be reduced to

judgment the trial judge died. Taxpayer thereafter agreed

to have the case assigned to another judge for decision on

the record without prejudice to the later assertion of post-

trial motions.

CFT SPE Ie OR

4

The assigned judge agreed that under the circumstances

all of the evidence should be construed most favorably to

taxpayer. Nevertheless, in spite of a trial record which con-

tained evidence that taxpayer had always intended to pay

his taxes, had maintained excellent records, had lived mod-

estly, had made efforts to resolve his tax difficulties, and had

engaged in no attempts to conceal income or assets, the

assigned District Court judge somehow concluded that tax-

payer was nevertheless liable for a 50 percent fraud

penalty.

On the law the assigned District Court ruled in its opinion

as follows (264 F. Supp. 824, 827 (E.D. Pa. 1967)):

‘*... I casnot agree that there should be engrafted

upon civil fraud proceedings the criminal fraud re-

quirement of ‘affirmative action’ consisting of actively

deceptive conduct by the taxpayer. See Spies v. United

States, 317 U.S. 492, 498-499, 63 S. Ct. 364, 87 L.ED.

418 (1943), a criminal case, and First Trust & Savings

Bank of Davenport, Iowa v. United States, 206 F. 2d

97, 100 (C.A. 8, 1953), a civil case, and compare the civil

ease of Powell v. Granquist, 252 F. 2d 56 (C.A. 9, 1958).

While this Circuit does not appear to have ruled defini-

tively on the question, I think it would not follow the

8th Cireuit.”’

On appeal to the Third Circuit the assigned District

Court judge was affirmed, one judge dissenting. The Court

agreed that all the evidence should be construed most favor-

ably to taxpayer but it found that taxpayer did not file

returns in order to conceal prior years’ defalcations. There

is no explanation in the majority’s opinion as to how such a

finding can be reconciled with the facts that 1) taxpayer’s

problem first arose when he sustained a severe financial loss

after previous full compliance with the tax laws, 2) for

eight years thereafter he hed nothing at al! to gain and

much to lose by not filing returns, and 3) during the entire

period he conducted himself openly with a view to making a

full accounting and not with any intent to escape his tax

liabilities.

5D

REASONS FOR GRANTING THE WRIT

On the law the majority of the Court of Appeals for the

Third Circuit based its affirmance on the proposition that

taxpayer’s knowledge that he owed taxes was an affirmative

indication of fraud. But unlike many other taxpayers in

similar situations, here taxpayer never denied that he was

aware of his obligations. Indeed, he testified that he always

fully intended to meet them. And the Third Circuit’s exclu-

sive reliance on the knowledge factor would seem to place

it in direct conflict with the Fifth Circuit as well as with

the Eighth Circuit:

‘¢... [T]he argument is utterly lacking in force that a

citizen can be convicted of intentional wrongdoing with

specific intent to evade his taxes because he elects to

use his money .. . in preference to turning it over to

the Government even though he knows he owes taxes.’’

(Emphasis supplied). Jones v. C.I.R., 259 F. 2d 300

(5th Cir. 1958).

Like the assigned District Court the majority in the Third

Circuit Court of Appeals refused to adopt the criminal law

standard that the government must prove some affirmative

act. Such rejection of the criminal law test in this area of

civil tax penalties runs directly counter to the previous

practice as summarized by the Fourth Circuit in Moore v.

United States, 360 F. 2d 353, 356 (4th Cir. 1966) :

‘¢. .. [T]he case-by-case process of construction of

the civil and criminal tax provisions has demonstrated

that their constituent elements are identical.’’

To date two cases have cited the Stoltzfus case: Melinder

v. United States, 281 F. Supp. 45 (W.D. Okla. 1968) and Irolla

v. United States, 390 F. 2d 951 (Ct. Cls. 1968). In Melinder

and in the majority opinion in /rolla the conflict created by

Stoltzfus was noted without elaboration. But the dissent in

the Irolla case demonstrates that the resolution of this con-

flict is of crucial importance both to taxpayers and to the

government in the administration of the income tax laws.

And the same dissent fully indicates the error of the

6

Stoltzfus result in terms of disregard of legislative intent

and unfairness to taxpayers (at 963-4) :

‘‘[The government] cites the case of Stoltzfus v.

United States, 264 F. Supp. 824 (E.D. Pa. 1967), in

which notice of appeal has been given, as controlling in

this case, although it appears to be in conflict with the

decision of the Supreme Court in Spies v. United

States, 317 U.S. 492, 63 S. Ct. 364, 87 L.Ed. 418 (1943),

and other cases as Cave v. United States, 159 F. 2d 464

(8th Cir. 1947) cert. denied, 331 U.S. 847, 67 S.Ct. 1732,

91 L.Ed. 1856; First Trust & Savings Bank v. United

States, supra, and other cases cited herein. Defendant

argues that the Stoltzfus case is correct in holding

that in a civil fraud case all the government has to

do to prove fraud is to show what it chooses to call an

‘affirmative indication’ on the part of the taxpayer of

the specific fraudulent intent, instead of the ‘affirma-

tive action’ required by the Spies case and the other

cases. This appears to be an exercise in semantics, and

is much like trying to distinguish between ‘Tweedledee’

and ‘Tweedledum’. There cannot be an ‘affirmative in-

dication’ without ‘affirmative action’. The government

would have us believe that by using this illusory for-

mula of ‘affirmative indication’ a person’s fraudulent

intent can be determined as easily as his predilection

and characteristics can be shown by reading the signs

of the zodiac. This places the proof of fraud on a rather

nebulous basis, which falls far short of the clear and

convincing evidence required by law. An affirmative

indication of fraud is a descriptive term which is based

on and results from an affirmatve act of fraud. It can-

not exist otherwise. The government cannot by such

argument reduce its burden of having to prove by

clear and convincing evidence an affirmative act of

fraud on the part of the taxpuyer that shows a specific

intent to evade tax.

‘‘The Stoltzfus case does not appear to be correctly

decided for another reason. The court there held that

when a taxpayer knows of his concrete liability to pay

taxes and does not file his return and pay them, he

intentionally, willfully, and fraudulently evades taxes,

in the absence of a valid justification for his conduct.

Such a ruling changes the burden of proof from the

RI UN 4 TS

7

government to the taxpayer. No principle is better

established in civil fraud cases than that which requires

the government to prove by clear and convincing evi-

dence that the taxpayer has a fraudulent intent to

evade tax. The Stoltzfus case would shift this burden

and require the taxpayer in a civil fraud case to prove

he did not have a fraudulent intent to evade tax. This

is not the law as I understand it.

‘‘Before a taxpayer can be liable for a civil fraud

penalty, there must be an affirmative commission of an

act of fraud by him. A willful omission to file a return

is not enough. The cases distinguished between ‘com-

mission’ and ‘omission’. See Spies v. United States,

supra; Cave v. United States, and First Trust & Sav-

ings Bank v. United States, supra. In the last cited

case, the court correctly stated the law as follows:

‘* * * But Congress makes the difference on the

civil side as it does on the criminal side, between the

taxpayer whose deficiencies of tax are due te (or

caused by) his affirmative commission of fraud and

tke one whose deficiencies of tax are due to willful

omission to make return. [sic] That omission justifies

the addition of 5 per cent up to 25 per cent of the

deficiencies found against the taxpayer but does not

afford any basis for the addition of 50 per cent to his

deficiencies. Only the commission of acts of fraud

with intent to evade tax to which ‘‘the deficiencies

are due’’ (or which bring about the deficiencies)

affords a basis for the 50 per cent addition to tax.

Id., 206 F’. 2d at 100-101. [Emphasis supplied.]’ ”’

The validity of this reasoning is easily recognized. The

majority in Jrolla did not repudiate it. Rather the majority

there disagreed with the dissent on the facts of that case.

The /rolla majority found affirmative acts of fraud consist-

ing of incomplete records, non-disclosure of assets, and an

apparent admission by taxpayer that he was never going

to file returns. No such affirmative acts are present here.

Instead, this case is best summarized by the language of

Edwards v. United States, 375 F. 2d 862, 867 (9th Cir.

1967):

‘‘Kvasion and defeat ... contemplate an escape from

8

tax and not merely a postponement of disclosure or

payment.’’

**[footnote 6] . . . But here, by tardy filing of a

proper return, the tax for the taxable period has not

been evaded; its payment has merely been postponed.”’

CONCLUSION

It is of great importance to tax administration that there

be a resolution of the conflict which the Third Circuit in this

case admittedly created with the Eighth Circuit and appar-

ently also with the Fourth, Fifth, and Ninth Circuits. Un-

less action is taken now the Stoltzfus case may well destroy

the hitherto orderly and parallel development of the law of

criminal and civil tax penalties. Furthermore, the creation

of this conflict lias arisen in the context of questionable

procedural circumstances which provide a shaky founda-

tion for such a departure. For these reasons this petition

for a writ of certiorari should be granted.

Respectfully submitted,

ConvEeRSE MurpocH

RicHarp EK. Pooie

Wilmington, Delaware

Counsel of Petitioners

October 1968

a te li a me cane eee

9

APPENDIX A

Statutes Involved

Internal Revenue Code of 1954:

§ 6651. Failure to Cle tax return

(a) Addition to the tax.—In case of failure to file any

return required under authority of subchapter A of chapter

61 (other than part III thereof), of subchapter A of chapter

51 (relating to distilled spirits, wines, and beer), or of sub-

chapter A of chapter 52 (relating to tobacco, cigars, ciga-

rettes, and cigarette papers and tubes), or of subchapter A

of chapter 53 (relating to machine guns and certain other

firearms), on the date prescribed therefor (determined with

regard to any extension of time for filing), unless it is

shown that such failure is due to reasonable cause and not

due to willful neglect, there shall be added to the amount

required to be shown as tax on such return 5 percent of the

amount of such tax if the failure is for not more than 1

month, with an additional 5 percent for each additional

month or fraction thereof during which such failure con-

tinues, not exceeding 25 percent in the aggregate.

(b) Penalty imposed on net amount due.—For purposes

of subsection (a), the amount of tax required to be shown

on the return shall be reduced by the amount of any part of

the tax which is paid on or before the date prescribed for

payment of the tax and by the amount of any credit against

the tax which may be claimed upon the return.

(c) Exception for declarations of estimated tax.—This

section shall not apply to any failure to file a declaration of

estimated tax required by section 6015 or section 6016. Aug.

16, 1954, ec. 736, 68A Stat. 821.

§ 6653. Failure to pay tax

(b) Fraud.—If any part of any underpayment (as de-

fined in subsection (c)) of tax required to be shown on a

10

return is due to fraud, there shall be added to the tax an

amount equal to 50 percent of the underpayment. In the

case of income taxes and gift taxes, this amount shall be in

lien of any amount determined under subsection (a).

11

Opinion and Judgment (3/7/67)

APPENDIX B

Opinions and Judgment Below

DISTRICT COURT’S OPINION AND JUDGMENT

FOR DEFENDANT

CHRIS D. STOLTZFUS AND

IRMA H. STOLTZFUS

v.

UNITED STATES.

Orv. A. No. 34343.

March 7, 1967.

264 F’. Supp. 824 (E. D. Pa. 1967).

FINDINGS OF FACT AND CONCLUSIONS

OF LAW AND ORDER

JosEpPH S. Lorn, III, District Judge.

Plaintiff (hereinafter ‘‘taxpayer’’?) sues for the refund

of civil fraud penalties imposed for the taxable year 1954

pursuant to Section 6653(b) of the Internal Revenue Code.’

The case was tried by my late brother Judge Grim (sitting

as finder of fact) who died before handing down a decision.

“Taxpayer” refers to Chris Stoltzfus. There is no suggestion in the

record that Mrs. Stoltzfus was liable for or that she vaid any part of the

deficiency assessments. She appears in this case only because joint returns

were eventually filed. She alone cannot, of course, recover if her husband

acted fraudulently.

*“Fraud.—If any part of any underpayment * * * of tax required to be

shown on a return is due to fraud, there shall be added to the tax an

amount equal to 50 percent of the underpayment. * * *”

SPN OR TO RNIN Rn cuee—e

ORE TRRING Ha NOR UIR CHET EO AL RE Ye

AT NOTTS LMEI BENIN

12

Opinion and Judgment (3, 7/67)

After his death, the matter was assigned to me, and the

parties have stipulated that I may draw the necessary find-

ings of fact and conclusions of law from the present record,

without prejudice to the later assertion by either party of

post-trial motions.

The parties have also eure’ that the burden of proof,

specifically the burden of proving fraud, is on the govern-

ment. See Cirillo v. C.LR., 314 F. 2d 478, 482 (C.A. 3, 1963).

I have determined that the government has sustained this

b.cden by ‘‘clear and convincing’’ evidence, id., and that

judgment must be entered for the defendant. In making

these findings, I have construed all of the evidence most

favorably to the plaintiff. This approach seemed peculiarly

well-suited to the adjudication of this case because, although

I presided at the criminal trial of Mr. Stoltzfus for willful

failure to file tax returns, 26 U.S.C. §7203; Crim. No.

20938 (E. D. Pa. 1962), I have had no fresh opportunity to

assess his demeanor credibility or that of any other witness

who testified in the present proceedings.

FINDINGS OF FACT

Taxpayer freely concedes that he filed no tax return in

1954. Indeed, he does not dispute the fact that he filed no

tax returns for the years 1943 to 1958, although he knew all

along that he had an obligation to do so.* The record also

compels the conclusion that Stoltzfus knew that he was

earning taxable income on which taxes should in fact be

paid as required by law. Since he was a self-employed

entrepreneur, no taxes were ever withheld from his earn-

ings; the taxpayer knew from his own experience in filing

returns before his lapses beginning in 1943 that the only

way the government got any income tax money from him

was when he filed a return and paid the indicated tax. In

*I note, and properly so {see Cirillo v. C. I. R., supra, at 482), that the

taxpayer has been convicted of willful failure to file returns.

13

Opinion and Judgment (3/7/67)

other words, he knew that his failure to file returns re-

dounded to his personal gain while it deprived the govern-

ment of tax funds lawfully owing to it.

The taxpayer attempts to justify his conduct by explain-

ing that in 1943, his place of business burned down and,

burdened with the ensuing loss, ke knowingly refrained

from submitting the second installment of his estimated

tax. After that, he became obsessed with the fear of sun-

mary criminal prosecution for his omission. Thrs, instead

of seeking advice from an attorney, or indeed, from the

Internal Revenue Service itself, he simply stopped filing

returns, believing that the government would be impeded

from the immediate discovery of what he himself supposed

to be criminal tax fraad. The taxpayer contends that this

evidence establishes that his purpose was not to avoid the

payment of taxes, but merely to avuid contemplated crim-

inal penalties for neglecting to pay.

In support of his position, Stoltzfus maintains that he

made no attempt to conceal sources of income, and although

there is some conflict in the testimony, I will assume that

the records kept by the taxpayer, while by no means equiva-

lent to formal ‘‘books’’ which readily established net in-

come, were by and large adequate enough to establish that

he did not intentionally falsify financial statements or de-

stroy relevant portions thereof. Finally, although there is

again evidence to the contrary,’ I will assume that after he

had been cornered by the Revenue agents, the taxpayer

cooperated reasonably well.

DISCUSSION AND CONCLUSIONS OF LAW.

As one leading commentator has noted: ‘‘It is not easy

to generalize about what constitutes fraud so as to justify

the 5 per cent penalty imposed by § 6653(b).’’ Bittker,

“Agent Richman stated that Stoltzfus claimed never to have had more

thar. $1,900 on hana at any time. The facts are otherwise.

14

Opinion dnd Judgment (3/7/67)

Federal Income Estate and Gift Taxation (3d ed. 1964) p.

958. In this Circuit, the general rule in non-filing cases is

that the ultimate burden of proof is on the government to

show by ‘‘clear and convincing”’ evidence that ‘‘the circum-

stances surrounding the failure to file returns * * * strongly

and unequivocally indicate an intention to avoid the pay-

ment of taxes. Powell v. Granquist, 9th Cir., 1958, 252 F.

2d 56; cf. Bender v. Commissioner [of Internal Revenue],

7th Cir., 1958, 256 F. 2d 771.’’ Cirille v. C.I.R. supra, 314

F. 2d at p. 482. While willful failure to file is relevant evi-

dence of fradulent evasion, the burden of proving fraud is

not met solely by proof of such failure. ‘‘The record must

contain some convincing affirmative indication of the re-

quired specific intent.’’ Id.

However, I cannot agree that there should be engrafted

upon civil fraud proceedings the criminal fraud requirement

of ‘‘affirmative action’’ consisting of actively deceptive con-

duct by the taxpayer. See Spies v. United States, 317 U. S.

492, 498-499, 63 S. Ct. 364, 87 L. Ed. 418 (1943), a criminal

ease, and First Trust & Savings Bank of Davenport, Iowa

v. United States, 206 F. 2d 97, 100 (C. A. 8, 1953), a civil

case, and compare the civil case of Powell v. Granquist,

252 F. 2d 56 (C. A. 9, 1958). While this Circuit does not

appear to have ruled definitively on the question, I think it

would not follow the 8th Circuit. The Tax Court in Ciriilo,

T. C. Memo. 1951-192 explicitly rejected the contention that

the Spies interpretation of § 7201, a strictly construed crim-

inal statute,® affects civil cases which are governed by the

vague reference to ‘‘fraud’’ in § 6653(b). The Tax Court

referred to the specific ‘‘terminology of attempt’’ embodied

in the criminal statute, a factor which was the fulcrum of

the Supreme Court’s decision in Spies. It held that no

‘¢affirmative action”’ or ‘‘willful commission in addition to

the willful omissions’’ (Spies v. United States, supra, 317

*“Any person who willfully attempts * * *” to evade taxes.

15

Opinion and Judgment (3/7/67)

U.S. at 499, 63 S. Ct. at 368) need by shown in civil suits.

This reasoning appears to me to be sound.

Furthermore, when Cirillo came before the Court of

Appeals, ieither party cited Spies. However, we must as-

sume that Judge Hastie, who wrote the opinion for the

Court, considered the Tax Court’s memorandum. Neverthe-

less, although both Spies ard Cirillo were non-filing cases,

and although there was no evidence of ‘‘affirmative action’’

in Cirillo, Judge Hastie did not deem it appropriate to re-

fer to Spies. The test then, under Cirillo, is ‘‘affirmative

indication,’’ and not ‘‘affirmative action.”’’

As applied to the facts of this case, there is no question

that Cirillo requires a judgment for the government. In-

deed, the taxpayer in Cirillo had a much more appealing

excuse for nonpayment than Stoltzfus: the bulk of his in-

come for many years was subject to withholding taxes and

he asserted that although he knew he should have filed re-

turns, he honestly did not believe any additional taxes were

owing. In those years where this belief failed to conform to

the fact of liability, the Court of Appeals, on a record no

more persuasive to the government’s case than that before

me, had no difficulty in sustaining the Tax Court’s finding

of fraud, even absent the slightest indication that the tax-

payer had actively concealed sources of income or falsely

fabricated contemplated deductions. Referring to Cirillo’s

avowedly innocent attitude toward the extent of his tax

liability, the Court concluded:

‘<* * * His disingenuous avoidance of accurate know!-

edge when the need for such knowledge must have been

apparent was in itself a substantial indication of fraud-

ulent intent. * * *’’ 314 F. 2d at p. 483.

Stoltzfus, like Cirillo, knew of his duty to file returns and

of his general obligation to pay taxes. Unlike Cirillo, he con-

cededly realized that he had a tax liability which was neither

aneecnlative nor insubstantial. Under the circumstances, bis

16

Opinion and Judgment (3/7/67)

belief that by becoming as inconspicuous as possible he

could escape governmental detection cannot be interposed

as a defense. Indeed, it serves to augment the proof of

evil motive which the taxpayer protests is lacking. The

intentional avoidance of taxes to conceal conduct which the

taxpayer believed to be criminal by no stretch of the imagi-

nation reflects an innocent purpose. If Stoltzfus’ arguments

were to prevail, a hunted fugitive from justice could safely

refuse to pay his taxes on the ground that the government

would then be able to capture him by tracing his returns.

The non-filing taxpayer who knows of his concrete liabil-

ity to pay taxes (and not merely his obligation to file returns

or his general duty to pay such taxes as those returns might

indicate are owing) intentionally, willfully, and fraud-

ulently evades taxes, within the meaning of Section 6653(b),

in the absence of a valid justification for his conduct. In

this case, the justification suggested—fear of criminal re-

prisals—must be rejected as a matter of law for it is not

even colorably valid. The taxpayer would have this court

believe that because the ultimate ‘‘purpose’’ of the tax

evasion was not to materially benefit him, but to preclude

his conviction on self-conceived criminal charges, the spe-

cific intent to defraud is absent. There are two reasons why

this contention lacks merit.

First, the statutory reference to fraud does not require

a motive of self-enrichment.® It requires only a purpose to

evade taxes. One who in knowing violation of the law makes

no attempt to pay admitted tax liabilities and asserts no

“If such were the case, a modern day Robin Hood who gave his intended

tax monies to poorer countries he thought could better employ them could

not be considered liable for tax evasion. See Powell v. Granquist, 252 F.

2d 56 (C. A. 9, 1958), where the taxpayer’s sole justification for failing to

file returns and pay taxes was his objection to “the way the government

was wasting money.” The court dismissed this frivolous contention with

the observation that “for a taxpayer to be knowingly and willfully defiant,

withholding and dedicated to a plan of nonpayment of taxes for which he

knows he is liable * * *” constitutes fraud. 252 F. 2d at vp. 60.

17

Opinion and Judgment (3/7/67)

colorably valid excuse can fairly be said to have no other

purpose than that of evasion.

Secondly, acceptance in any manner of the taxpayer’s

avowed primary ‘‘purpose”’ in failing to file or pay, avoid-

ance of criminal prosecution for tax evasion, would thwart

the operation of the revenue laws, which depend in large

measure upon voluntary compliance. A taxpayer is ex-

pected to police his own records, to report promptly and

in full his taxable income, and to pay the assessments which

he himself has initially determined to be owning. Stoltzfus

cannot justify his tax evasion by claiming that to have paid

would have invited criminal prosecution for the very acts

of willful defiance in which he was engaged. Such an inter-

pretation would vitiate the deterrent effectiveness of all

sanctions for tax evasion by making concealment of that

evasion a justification for the evasion itself, exonerating

the taxpayer from civil and criminal penalties.

I am satisfied that ‘‘the circumstances surrounding the

failure to file returns * * * strongly and unequivocally indi-

cate an intention to avoid the payment of taxes.’’ Cirillo v.

C.1.R., supra, 314 F. 2d at p. 482.

Judgment will be entered for the defendant. It is so

ordered.

18

Opinion and Order (1/10/68)

DISTRICT COURT'S OPINION AND ORDER

DENYING NEW TRIAL

MEMORANDUM.

JosePH S. Lorp, III, J. January 10, 1968.

This suit for refund of civil fraud penalties! was de-

cided by me adversely to the plaintiff? on the record made

before my late brother, Judge Allan K. Grim. Stoltzfus v.

United States, 264 F. Supp. 824 (EK. D. Pa. 1967). The

stipulation that I might decide the case on Judge Grim’s

record was ‘‘without prejudice to the later assertion by

either party of post-trial motions.’’ 264 F. Supp. at p. 826.

Plaintiff now moves for a new trial alleging as error that

the trial judge (1) refused to premit re-direct examination

of plaintiff; and (2) refused to permit plaintiff to call addi-

tional witnesses. The motion will be denied for these

reasons:

1. There is not the slightest indication on the record,

either by offer of proof at the trial or by affidavit filed there-

after, of what the re-direct examination would have covered

or what the testimeny of the witnesses would have been.

‘‘There was no offer of proof and what would have been

* * * [the] testimony is left to the realm of conjecture and

cannot serve as a basis for setting aside the verdict * * *

and granting a new trial.’’ Tweith v. Duluth, M. & I. R.

Ry. Co., 66 F. Supp. 427, 431 (Minn. 1946).

2. Plaintiff asserts in his brief (a) that he was preju-

diced because on re-direct he would have explained his in-

ability to identify his wife’s handwriting and (b) that

‘<[n]Jo one was permitted to verify taxpayer’s intentions to

pay his taxes, nor to emphasize the extent of his cooperation

once his situation was made known to the government.”’

*Imposed under 26 U.S. C. A. (I. R. C. 1954) § 6653(b).

“Plaintiff” herein refers only to the husband-plaintiff.

19

Opinion and Order (1/10/68)

Of course, statements in counsel’s brief are not part of the

record. In the Matter of H. Ernest Strubbe, 347 F. 2d

217, 218 (C. A. 3, 1965) ; United States v. Beard, 381 F. 2d

329, 331 (C. A. 6, 1967). However, even if these assertions

were true, plaintiff would not be entitled to a new trial.

As to (a), plaintiff’s argument is at best fatuous and

at worst disingenuous. It completely ignores the fact that

this question arose pointedly during the direct examination:

‘‘THE Court: Let me ask this again: How long have

you been married?

‘‘Tae Witness: She wouldn’t like this, your Honor—

‘‘THE Court: No. I want to know because it seems

inconceivable to me a man married as you would not

know your wife’s handwriting.”’

The fullest opportunity to explain what counsel now

seems to regard as an apparently curious aberration on

plaintiff’s part was sharply presented at that very moment

of the trial. This was the time for an explanation, if one

existed and was thought necessary. Surely, having squarely

raised the question without answer, the trial judge can

scarcely be faulted for refusing re-direct, at least. without

an offer of proof.

In any event, the only possible prejudice of which

counsel can conceive is that this lack of explanation may

have affected the court’s appraisal of plaintiff’s credibility.

However, not only did I attach no weight whatsoever to

this, but | ‘‘construed all of the evidence most favorably

to the plaintiff.’’ 264 F. Supp. at p. 826. The findings com-

pletely accepted plaintiff’s direct testimony and any evi-

dence to the contrary was rejected. See 264 F. Supp. at

p. 826, n. 4.

As to (b), such testimony would avail plaintiff nothing.

No returns were filed for the years 1943 through 1958. The

fraud here involved was for the year 1954. Certainly, some

vague intention to pay sometime in the unidentified future

ed ARNE 3“

20

Opinion and Order (1/10/68)

which took form only after plaintiff’s sixteen years of dere-

liction would not undo the fraud that had already attached

in connection with the 1954 taxes. Cf. Cirillo v. C.1.R.,

314 F. 2d 478 (C. A. 3, 1963). And I have already explicitly

assumed in my adjudication that, after discovery, ‘‘the tax-

payer cooperated reasonably well.’’

Thus, even accepting the belated and unsworn state-

ments in plaintiff’s brief, it is plain that if there was any

error by the trial judge, it was in no way prejudicial to

plaintiff and does not warrant a new trial. F. R. Civ. P. 61.

Plaintiffs’ motion for a new trial will be Deniep. It is so

ORDERED.

By THE COURT:

JosePH S. Lorp, Iil, J.

Me ATI he a 16 at OLY K LAGE tie x

21

OPINION AND JUDGMENT OF AFFIRMANCE

UNITED STATES COURT OF APPEALS

For tHe Tuirp Circuit

Nos. 16774 and 17124

CHRIS D. STOLTZFUS ann IRMA H. STOLTZFUS,

Appellants,

v.

UNITED STATES OF AMERICA

AppEALs From THE Unrrep States District Court FoR THE

Eastern District oF PENNSYLVANIA

Argued June 7, 1968

Before McLaucuuin, Sta.ey and Seirz, Circwt Judges.

OPINION OF THE COURT

(Filed July 31, 1968)

Seitz, Circuit Judge.

This is an appeal from a judgment of the district court

denying appellant’s (“‘taxpayer’’)' request for a refund of

civil fraud penalties imposed for the taxable year 1954 pur-

suant to Section 6653(b) of the Internal Revenue Code of

1954, 26 U. S. C. A. §$6653(b). The district court, sitting

without a jury, determined that the government had sus-

tained its burden of proving fraud and denied taxpayers

the relief requested.? 264 F. Supp. 824 (E.D. Pa. 1967).*

We briefly narrate pertinent portions of the evidence

as stipulated by the parties or adduced by the government

‘The real party to this suit is Mr. Stoltzfus. Mrs. Stoltzfus is named as

a party solely because a joint return was filed.

* This case was tried before a judge who died before entering judgment.

The parties stipulated that subject to objections contained in the record,

the case should be decided by an assigned judge on the record earlier

made. Such judge construed all the evidence most favorably to the plain-

tiff because he had not observed the witnesses. In our review of the

record, we adopt the same approach.

* Plaintiff also appeals the judgment denying a new trial.

22

in its case and not challenged by the taxpayer in his testi-

mony.

Taxpayer was educated through the eighth grade. As

a teenager he worked on his father’s farm and later held

odd jobs in automobile garage and repair shops until he

went into business for himself. From 1944 through 1954

taxpayer was self-employed in a business consisting of crop

spraying and dusting by airplane. In the furtherance of

such business taxpayer directly engaged in negotiations

with various federal and local governmental agencies con-

cerning the purchase of airplanes. He also bid on and

negotiated contracts for crop spraying and dusting. In 1954

taxpayer entered the airplane parts business.

The taxpayer filed income tax returns for the taxable

years 1941 and 1942 and paid a small amount of tax. For

the taxable year 1943, he filed an estimated tax return and

paid the first installment due thereon. From 1943 through

1958 the taxpayer, although admittedly receiving income

from various sources, filed no tax returns. Late returns for

these years were ultimately filed in 1959 and 1960.4 The

‘They show, inter alia, the following: Total

Gross Tax Due

Year Gross Receipts From Business Income Per Return

1943 Net worth method used........ $ 2,177.17 $ 56.04

1944 Net worth method used... ... 1,842.85 35.00

1945 Net worth method used ........ 3,155.60 142.00

1946 Net worth method used........ (2,559.88) —I—

1947 Net worth method used ........ 2,553.98 —0—

1948 Net worth method used ........ 3,922.23 88.00

1949 Net worth method used ........ 1,273.18 —0-—

1950 Net worth method used ........ 1,374.20 —0—.

1951 Net worth method used ........ 8,097.42 752.28

1952 Net worth method used ........ 12,232.96 1,781.70

1953 Net worth method used ........ 11,119.80 1,354.36

1954 3, ane Re 6,925.83 596.50

2,596.49—Farm

1955 EE Fatt Ste aera 48,336.08 16,697.73

1,602.79—F arm

1956 I ee ee oe os 101,842.56 50,838.59

—0— —Farm

1957 EE et nde .. 19,609.82 3,477.95

—0— —Farm

1958 Ree ... (83,544.60) —0—

—0— —Farm

23

state of the record does not permit a finding as to why

taxpayer finally filed returns. The taxes due were subse-

quently paid with penalties and interest. Taxpayer then

filed a timely claim for refund of the fraud penalty paid for

the taxable year 1954. The District Director of Internal

Revenue disallowed the claim in full. This action in the dis-

trict court followed.®

We first note certain pertinent legal principles.

‘‘¥raud,’’ as that term is used in the statutory provisions

authorizing the imposition of penalties upon a taxpayer

when ‘‘* * * any part of an underpayment of tax required

to be shown on a return is due to fraud, * * *’’? means in-

tentional wrongdoing on the part of a tax payer motivated

by a specific purpose to evade a tax known or believed to be

owing. Powell v. Granquist, 252 F. 2d 56 (9th Cir. 1958).

Even though a timely return has not been filed, a taxpayer

may be found to have fraudulently intended to avoid taxes.

Powell v. Granquist, above. The burden of proving fraud

when the taxpayer, as in this case, is suing for a rofund,

rests upon the government. Armstrong v. United States,

354 F. 2d 274 (Ct. Cl. 1965). To sustain this burden the

government must produce ‘‘* * * some convincing affirma-

tive indication of the required specific intent.’’ Cirillo v.

C. I. R., 314 F. 2d 478, 482 (3rd Cir. 1963). This burden

may be met by circumstantial evidence. Powell v. Gran-

quist, above. Although the proven failure of a taxpayer to

file returns for an extended period of time is not enough,

in and of itself, to justify the imposition of the fraud pen-

alty, it is persuasive evidence of an intent to defraud the

government. Cirillo v. C.I.R., above; Powell v. Granquist,

above.

We turn to an evaluation of the undisputed evidence

5In 1961 an Information was filed by the United States charging tax-

payer with the misdemeanor of willful failure to file income tax returns

for 1955, 196 and 1957. A jury rendered a verdict of guilty on all three

years. Although no income tax returns had been filed for previous years

beginning with 1943, the statute of limitations prevented prosecution

relative thereto.

Me ett

24

in light of these legal principles. The evidence concerning

the entire period of default (1943-1958) was relevant to

taxpayer’s right to recover the fraud penalties imposed and

paid for in 1954. The government’s uncontroverted evi-

dence may be summarized as follows:

Taxpayer, although limited in formal education, had ex-

tensive business experience. His business activities caused

him to be directly engaged in substantial negotiations with

federal and local governments leading to contracts for crop

dusting and spraying. These contracts were entered into

by the taxpayer without employing an attorney. They in-

volved large sums of money and warrant an inference that

a keen awareness of business and financial matters was de-

manded. Further, taxpayer was aware of his obligation to

file returns, report his income and pay taxes. For 1942 and

1942 he timely filed his returns, and he also filed a 1943

estimated tax return on which he paid one installment.

From 1943-1958 he failed to file returns. His total gross

income, as ultimately reported on returns filed for this

period, dictates not only an inference that taxpayer knew

at the time that he was obligated to file a return for 1954,

but also that he knew he owed taxes for that year. Certainly

the fact finder was entitled to so conclude. The material con-

tained in his tax return, as ultimately filed for 1954, when

considered with the other uncontroverted matter in the rec-

ord, fully discharged the government’s quantitative and

qualitative burden of creating an issue of fact as to whether

the taxpayer was chargeable with such fraud under the

statute for the year 1954. The ‘‘convincing affirmative indi-

cation’’ is found in the government’s showing that the tax-

payer had no contemporaneous reasonable basis for believ-

ing that taxes were not owed.°

We look now to the taxpayer’s evidence to determine

whether it so diluted the government’s case that the matter

*Cf. Cirillo v. C. I. R., 314 F.2d 478,483 (3rd Cir. 1963). We do not

understand that the citation of First Trust & Savings Bank v. U. S. 206

F.2d 97 (8th Cir. 1953), in Cirillo was intended to be an adoption of the

criminal law standaid that the government must prove an affirmative “act.”

25

was no longer proper for decision on a-factual basis.

To justify his failure to fie for the many years in-

volved, the taxpayer testified that his failure to pay the

second instaliment on his 1943 estimated tax was precipi-

tated by financial adversity, and his continued failure to

file was prolonged by ignorance and fear of what he called

‘summary criminal prosecution.’? Taxpayer argues that

these factors, plus the adequacy of his records and his ulti-

mate cooperation with revenue authorities, as found by the

district court, fully verify his own statement that he in-

tended to eventually file tax returns for the years in ques-

tion. We disagree. His statement that one of the reasons

for his continued failure to file returns was fear of criminal

prosecution was in itself an admission that he did not file in

order to conceal his prior years defaleations. See Fred N.

Acker, 26 T. C. 107 (1956). By not filing a return in each

year subsequent to 1943, taxpayer attempted to conceal his

failure to file for the prior years. We fail to see how such

conduct indicates an innocent state of mind. Quite to the

contrary, we find such conduct is some evidence of an intent

to fraudulently avoid paying taxes knowingly due. In these

premises, the taxpayer’s testimony, presumably accepted,

that throughout the entire period he intended to file returns

did aot dilute the convincing proof of fraud adduced by the

government.

We are satisfied that the required evidentiary showing

of the government was reinforced rather than weakened

by the taxpayer’s own evidence. The district court, as the

fact finder, was therefore fully warranted in concluding

that the government sustained its burden of proving fraud.

And this is so even if we put aside the ‘‘clearly erroneous’’

review standard because the fact finder here did not see and

hear the witnesses.

Taxpayer argues further that the district court erred

in refusing to grant his motion for a new trial. This motion

alleyed as error the trial judge’s refusal to permit re-direct

examination of the taxpayer and his refusal to permit the

eo ae cate

26

taxpayer to call additional witnesses. The record shows that

the taxpayer was offered more than a full opportunity to

adduce testimony and present evidence. Even so, if we were

convinced that the court’s closing of the case might have

worked any material prejudice to the taxpayer we would

reverse. However, the approach taken by the judge who

decided this case below indicates that the taxpayer got the

‘*benefit’’ of all relevant disputed matters. There is no sug-

gestion that further evidence would have challenged any

of the undisputed facts relied upon by the district court and

by us in deciding this case. We think a new trial was there-

fore correctly denied.

The judgments of the district court will be affirmed.

Judge McLaughlin dissents and thinks that the. case

should be remanded to the District Court for a new trial

on the merits.