In a notice of deficiency dated March 12, 1981, respondent determined deficiencies and additions to tax as follows:
Additions to tax Year Deficiency sec. 6653(b)
11977 ............. $1,589 $794.50 1978 ............. 980 490.00 1979 ............. 509 254.00
Petitioner resided in Fulton, N.Y., at the time he submitted his petition herein. Petitioner completed high school and, although he did not graduate from college, attended a total of 3 or 4 years of college classes at Wesley College, Oswego State College, Lester College, Syracuse University, and the University of Maryland. Beginning in the early 1970's, petitioner belonged to a philosophy study class, which studied philosophy, economics, the Bible, different religions, and the Constitution. In about 1975, the class studied law cases and the Constitution. Petitioner proclaims that he has knowledge of "the laws."
Petitioner and his wife timely filed a joint 1975 income tax return. On that return, petitioner reported wages, dividend, interest, and rental income. Petitioner also itemized his deductions, claiming deductions for medical expenses, taxes, interest, and charitable contributions. He reported a long-term capital loss from the sale of shares of two mutual funds, and claimed depreciation and other expenses attributable to rental property, employee business expense deductions related to the use of his automobile for business purposes, and a home office expense deduction.
During 1977 and 1978, petitioner worked with Oswego Warehousing, Inc. (Oswego Warehousing), in Oswego, N.Y., and received compensation of $10,345.92 and $7,830.01, respectively. Petitioner exchanged his labor for the checks or cash he
During 1979, petitioner worked with W. T. Anderson Ford, Inc. (Anderson Ford), in Fulton, N.Y., and received $5,854.25. Petitioner exchanged his labor for checks or cash received from Anderson Ford during that year. On or about June 18, 1979, petitioner submitted a W-4 form to Anderson Ford on which he claimed 10 exemptions. No Federal tax other than social security was withheld by Anderson Ford from payments made to petitioner during 1979. The only reason that petitioner initially claimed 10 exemptions on the W-4 form submitted to Anderson Ford was that he was informed by that company that he would be fired if he claimed more than 10 exemptions or that he was exempt from tax. On or about May 11, 1980, petitioner submitted a W-4 form to Anderson Ford on which he claimed that he was exempt from tax; petitioner was shortly thereafter fired by Anderson Ford.
Oswego Warehousing and Anderson Ford sent to petitioner copies of W-2 forms reporting payments made to petitioner during the years in issue. Petitioner did not file any Federal income tax returns for the calendar years 1977, 1978, or 1979. Petitioner claims that he was not required to file returns because he is a "natural unfranchised individual and freeman"; that the 16th Amendment to the Constitution only permits a tax on income rather than on the source of income; that the tax laws set forth in the Internal Revenue Code are unconstitutional because they tax the source rather than the income; that gain is a prerequisite to income; and that he received no gain or profit because his labor was capital and the compensation received for his services was equal to the value of his labor.
After respondent began an investigation of petitioner's failure to file income tax returns for the years in issue, petitioner became very vocal in espousing his political beliefs, particularly his disagreement with the income tax laws. Petitioner was unsuccessful in attempts to cause various officials of the Internal Revenue Service to discuss his legal
Petitioner has attached to his brief hundreds of pages of books on various subjects, including a totally unapt comparison of the United States to Nazi Germany. The credibility and persuasiveness of petitioner's arguments are adversely affected by his penchant for hyperbole. We address only those points dealing with petitioner's liability for income tax and additions to tax and ignore the balance of his political statements. Before dealing with substantive issues, however, it is appropriate to dispose of certain procedural contentions of petitioner.
First, petitioner contends that the Tax Court is unconstitutional because it is not created under article III of the Constitution. The constitutionality of the Tax Court has been repeatedly upheld on the basis of congressional authority to create specialized courts under article I of the Constitution. See, e.g., Raetzsch v. United States, 575 F.2d 549 (5th 1978); Stix Freidman & Co. v. Coyle, 467 F.2d 474 (8th Cir. 1972); Nash Miami Motors, Inc. v. Commissioner, 358 F.2d 636 (5th Cir. 1966), cert. denied 385 U.S. 918 (1966); Martin v. Commissioner, 358 F.2d 63 (7th Cir. 1966), cert. denied 385 U.S. 920 (1966); Jennemann v. Commissioner, 67 T.C. 906 (1977). Petitioner's reliance on Northern Pipeline Construction Co. v. Marathon Pipe Line, Co., 458 U.S. ___ (1982), is misplaced. The Supreme Court, there, held unconstitutional the broad grant of jurisdiction to bankruptcy courts over, inter alia, State law contract claims by the Bankruptcy Act of 1978. The Supreme Court noted that the act did not constitute bankruptcy courts legislative courts under article I. (458 U.S. at ___ n. 13.) Compare sec. 7441. The Court further noted that legislative courts had been upheld where created to resolve public rights, i.e., cases between the Government and its citizens, but that the Bankruptcy Act unconstitutionally gave bankruptcy
Second, petitioner claims that he has been wrongfully denied a jury trial. The Seventh Amendment does not apply to suits against the United States, because there was no common law action against the sovereign. McElrath v. United States, 102 U.S. 426, 440 (1880). Thus, it has repeatedly been held that there is no constitutional right to a jury trial in the Tax Court. Phillips v. Commissioner, 283 U.S. 589, 599 n. 9 (1931); McCoy v. Commissioner, 696 F.2d 1234 (9th Cir. 1983), affg. 76 T.C. 1027 (1981); Lonsdale v. Commissioner, 661 F.2d 71, 72 (5th Cir. 1981), affg. a Memorandum Opinion of this Court; Dorl v. Commissioner, 507 F.2d 406 (2d Cir. 1974), affg. 57 T.C. 720 (1972).
Third, petitioner claims that he was wrongfully denied discovery and a continuance of the trial for purposes of discovery. Petitioner served on respondent a set of 218 purported interrogatories, which were in essence rhetorical questions ranging from whether or not the Government acknowledges the Constitution and various Supreme Court cases through contentions concerning monopoly; George Orwell's novel 1984; and the Law Merchant. The interrogatories were not reasonably calculated to lead to the discovery of admissible evidence. See Rule 70(b). They served no useful purpose, and continuance of the case would merely have prolonged the dilatory course of conduct engaged in by petitioner. See Mid-Continent Supply Co. v. Commissioner, 571 F.2d 1371, 1376 (5th Cir. 1978), affg. 67 T.C. 37 (1976).
Fourth, petitioner complains of an order that certain matters be deemed stipulated pursuant to Rule 91(f). The order was made after petitioner refused to stipulate to the amount of
Fifth, petitioner complains that he was not confronted by his "accuser," whom he deems to be the District Director of Internal Revenue for the Buffalo District, whose signature appears on the notice of deficiency. This proceeding, of course, is a civil proceeding instituted by petitioner seeking redetermination of a deficiency pursuant to section 6213(a). The determination of an addition to tax for fraud does not change this into a criminal proceeding, and protections applicable to criminal sanctions, such as the right of confrontation, do not apply. Helvering v. Mitchell, 303 U.S. 391, 402-404 (1938); Black Forge, Inc. v. Commissioner, 78 T.C. 1004, 1013 (1982). As indicated above, all of the factual findings in this case are based upon petitioner's testimony. He was therefore not prejudiced by the failure of respondent to appear in Court other than through attorneys or the refusal of the Court to allow him to cross-examine under oath the attorneys for respondent.
Sixth, petitioner complains of allegedly prejudicial remarks made by the Court during a conference in chambers prior to trial and other alleged indicia of bias. In denying the continuance for discovery purposes stated above, the Court did
Seventh, petitioner complains of the Court's refusal to admit into evidence an "affidavit" from a purported "teacher of English, Latin and related subjects (1946-1980) Retired," dated 2 days before the trial, and a copy of a letter from a New York State senator to Chief Counsel of the Internal Revenue Service dated March 19, 1981. The English teacher's affidavit analyzes the structure of the 16th Amendment to the end of concluding that "source is not to be equated with income as these terms are used in the above quoted sentence." The State senator's letter states, inter alia, that:
Any argument which concludes that wages exceed the value of services must be rejected out of hand. Therefore, unless the Congress specifically authorizes
The items were inadmissible hearsay, and admitting them as evidence would have been unfair to respondent inasmuch as the authors were not available for cross-examination. The opinions contained in the writings do not relate to any genuine issue of fact, and the writers had not been qualified as experts; therefore there was no foundation for admission of the opinions under rules 701, 702, and 704, Federal Rules of Evidence. The writings were dated long after petitioner failed to file income tax returns for the years in question, and the statements of other persons agreeing with petitioner are not relevant to the only genuine issue of fact in controversy, to wit, the question of whether petitioner had a fraudulent intent when he failed to file his income tax returns. Finally, the theories expressed in the writings are not relevant because neither writing has "any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence." Rule 401, Fed. R. Evid. See discussion of substantive issues infra.
Eighth, petitioner has filed a motion after trial to correct the trial transcript. Some of the items are harmless typographical errors or misspellings. In other instances, petitioner seeks to complete sentences that were interrupted during the trial. None of the proposed "corrections" affect any issue. Nonetheless, so that petitioner may be given the benefit of every doubt, the motion will be granted and the transcripts may be deemed to read as petitioner contends solely for purposes of this case.
A future complaint may be anticipated by reason of the Court's denial of petitioner's last minute motion for a 60-day extension of time to reply to respondent's brief. In granting a third request by petitioner for additional time to file his opening brief, the Court warned that no further extension would be granted to him. Petitioner has had approximately 6 months after trial to present his position. He should have
Payments Received for Labor
In Pollock v. Farmers' Loan & Trust Co., 158 U.S. 601 (1895), the U.S. Supreme Court held unconstitutional a tax on incomes derived from property. It conceded at that same time, however, that taxes on income from "professions, trades, employments or vocations" were valid. The entire statute was voided on the ground that Congress did not intend to permit the entire "burden of the tax to be borne by professions, trades, employments, or vocations." 158 U.S. at 637.
In 1913, the 16th Amendment to the Constitution was adopted. It provides as follows:
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
In 1916, the Supreme Court held the 1913 income tax law to be constitutional. Brushaber v. Union Pacific Railroad Co., 240 U.S. 1 (1916). The propriety of taxing incomes from professions, trades, employments, or vocations was reaffirmed, the Court stating that in the Pollock case "its validity was recognized; indeed, it was expressly declared that no dispute was made upon that subject and attention was called to the fact that taxes on such income had been sustained as excise taxes in the past." 240 U.S. at 17.
In Eisner v. Macomber, 252 U.S. 189 (1920), the Supreme Court was concerned with the taxability of stock dividends. By way of dicta, the Court referred to income as "gain derived from capital, from labor, or from both combined." 252 U.S. at 207.
Section 61(a) of the Internal Revenue Code of 1954, as amended, states that "gross income means all income from whatever source derived, including (but not limited to) * * * compensation for services." Petitioner has admitted that he
Petitioner's position has been repeatedly rejected by this and other courts. See, e.g., Reading v. Commissioner, 70 T.C. 730 (1978), affd. 614 F.2d 159 (8th Cir. 1980), in which the Court said:
It is difficult, if not impossible, to respond to arguments such as petitioners have put forth without becoming embroiled in a game of semantics. The logical force requiring rejection of their arguments — apart from their assertions of personal political philosophy which do not provide a basis for us, a Court sitting to interpret the law, to decide the questions dispositive of this case — is essentially a matter of the definition of terms. * * *
Nevertheless, accepting the conclusion that some kind of "gain" must be realized for there to be income, the flaw in petitioners' analogy of what they call the "cost of doing labor" to the "cost of goods sold" concept — essentially its failure to acknowledge the difference between people and property — may be shown. The "cost of goods sold" concept embraces expenditures necessary to acquire, construct or extract a physical product which is to be sold; the seller can have no gain until he recovers the economic investment that he has made directly in the actual item sold. Labor, on the other hand, is, in the current context, behavior performed by human beings in exchange for compensation. * * * [70 T.C. at 733. Citations omitted.]
Thus, the Court held that the taxpayer could not deduct his living expenses as the "cost" of producing his labor.
The Supreme Court early established the principle that the word "income", as it is used in the Sixteenth Amendment, is to be construed according to its common, everyday meaning. In Lynch v. Hornby, 247 U.S. 339, 344 (1918), the Court stated, "* * * Congress was at liberty under the [Sixteenth] Amendment to tax as income, without apportionment, everything that became income, in the ordinary sense of the word * * *." Under this principle, the ordinary, and perhaps most common, meaning of "income" has been wages. Thus, when a coal company argued before the Supreme Court that the proceeds from its sale of ore, which it had dug from its properties, were the return of depleted capital, not income, the Court dismissed the argument, observing, "the same is true of the earnings of the human brain and hand when unaided by capital, yet such earnings are commonly dealt with in legislation as income." Stratton's Independence v. Howbert, * * * [231 U.S. 399, 415 (1913)]. This quote illustrates that whether or not wages can be characterized as the product of an exchange, they are still income within the Constitutional embrace.
Mr. Rice misconstrues the oft-cited phrase that income is "gain derived from capital, from labor, or from both combined" to mean that wages are not income. Wages are "derived" from labor or services in the sense that they cannot be gained without such labor. Although the wages received by Mr. Rice may represent no more than the time-value of his work, they are nonetheless the fruit of his labor, and therefore represent gain derived from labor which may be taxed as income.
Even if we were to agree with Mr. Rice's contention that wages are, in effect, an exchange of equal value for value, he would still be taxable upon the wages he and Mrs. Rice received in 1978. The general doctrine that
[Fn. refs. omitted.]
In granting an injunction against a return preparer who had fraudulently misled taxpayers into violating the Internal Revenue Code by filing so-called "Eisner v. Macomber" returns (i.e., asserting that wages are not income because of the absence of "gain"), a U.S. District Court has said that:
it is clear that wages, salaries, and any other things of value received in exchange for work performed are income within the meaning of the Sixteenth Amendment to the United States Constitution, and the Internal Revenue Code. The etymology of the word "income" reveals that it is a compound word meaning "that which comes in." Whether or not something is income does not depend on whether what comes in is received in exchange for something else. [United States v. May, 555 F.Supp. 1008, 1009 (E.D. Mich. 1983). Fn. ref. omitted.]
Based upon his argument that his wages are not taxable income, petitioner asserts that withholding of tax from his wages violates his Fifth Amendment right not to be deprived of property without due process of law. This contention also lacks merit. Brushaber v. Union Pacific Railroad Co., supra; Charles C. Steward Machine Co. v. Davis, 301 U.S. 548 (1937); Abney v. Campbell, 206 F.2d 836 (5th Cir. 1953), cert. denied 346 U.S. 924 (1953); United States v. Smith, 484 F.2d 8 (10th Cir. 1973), cert. denied 415 U.S. 978 (1974); Campbell v. Amax Coal Co., 610 F.2d 701 (10th Cir. 1979). The provision in section 3402 requiring employees to file W-4 statements with their employers does not violate petitioner's Fifth Amendment right against self-incrimination. United States v. Smith, supra. Petitioner has not made any effort to show any relationship between the information required on the W-4 form and a real and appreciable danger of criminal prosecution at the time he
Additions to Tax for Fraud
The 50-percent addition to tax in the case of fraud is a civil sanction provided primarily as a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from the taxpayer's fraud. Helvering v. Mitchell, 303 U.S. 391, 401 (1938). Respondent has the burden of proving, by clear and convincing evidence, that some part of the underpayment for each year was due to fraud. Sec. 7454(a); Rule 142(b). This burden is met if it is shown that the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of such taxes. Stoltzfus v. United States, 398 F.2d 1002, 1004 (3d Cir. 1968); Webb v. Commissioner, 394 F.2d 366 (5th Cir. 1968), affg. a Memorandum Opinion of this Court.
The existence of fraud is a question of fact to be resolved upon consideration of the entire record. Gajewski v. Commissioner, 67 T.C. 181, 199 (1976), affd. without published opinion 578 F.2d 1383 (8th Cir. 1978). Fraud will never be presumed. Beaver v. Commissioner, 55 T.C. 85, 92 (1970). Fraud may, however, be proved by circumstantial evidence because direct proof of the taxpayer's intent is rarely available. The taxpayer's entire course of conduct may establish the requisite fraudulent intent. Stone v. Commissioner, 56 T.C. 213, 223-224 (1971); Otsuki v. Commissioner, 53 T.C. 96, 105-106 (1969).
Failure to file tax returns, without more, is not proof of fraud; such omission may be consistent with a state of mind other than the intention and expectation of defeating the payment of taxes. Stolzfus v. United States, supra; Cirillo v.
Petitioner contends that he could not have intended to conceal his conduct because of his attempts to confront various agents of respondent. But those attempts, and the publication of petitioner's letter to the Secretary of the Treasury, occurred long after the time for filing his returns had passed. Contrast Raley v. Commissioner, 676 F.2d 980 (3d Cir. 1982), revg. T.C. Memo. 1980-571;
Although petitioner complains that respondent did not cooperate with him by attempting to deal with all of the attacks petitioner was making on the income tax system, petitioner admits that he never provided any financial information to respondent's agents. His refusal to cooperate in the attempt to determine his correct liability is, in the context of this record, further indicia of fraud. See Powell v. Granquist, 252 F.2d 56, 60 (9th Cir. 1958); Grosshandler v. Commissioner, 75 T.C. 1, 20 (1980); Gajewski v. Commissioner, supra at 200.
In summary, petitioner's filing of his tax return for 1975 established his knowledge of his obligation to file and to report payments received for his services and to pay tax thereon. His belatedly proclaimed belief that he was exempt from tax is unpersuasive in view of the total lack of merit to that claim
Decision will be entered for the respondent.
"During `trial' respondent's attorney further accused petitioner of willful failure to obey tax regulations and of being an illegal tax-protestor. No one from the IRS (respondent) would be sworn in at the `trial' so that petitioner could cross examine his accusers. At this point an impartial court would have rendered a default judgement in favor of petitioner, a layman, acting on his own without benefit of a trial lawyer.
"Impartiality is an impossibility with the tax court, it is clearly the hand maiden of the Internal Revenue Service."
It would indeed be ironic if following well-established legal rules and applying the law were indicia of bias. Obviously it is not. See United States v. Conforte, 624 F.2d 869, 882 (9th Cir. 1980); United States v. Carroll, 567 F.2d 955, 958 (10th Cir. 1977); United States v. Schwartz, 535 F.2d 160, 165 (2d Cir. 1976); United States v. Ming, 466 F.2d 1000, 1002-1004 (7th Cir. 1972); United States v. Anderson, 433 F.2d 856, 860 (8th Cir. 1970).
"As our second ground for rejecting petitioners' arguments, we rely upon the doctrine of common interpretation. As was stated by Judge Learned Hand, "[the] meaning [of income] is * * * to be gathered from the implicit assumptions of its use in common speech." United States v. Oregon-Washington R. & Nav. Co., 251 F. 211, 212 (2d Cir. 1918). Thus, the meaning of income is not to be construed as an economist might, but as a layperson might. Petitioners received many more dollars for the buildings than they had paid for them. The extra dollars they received are well within the common perception of income, even though each 1976 dollar received represents less purchasing power than each 1964 dollar paid. Petitioners' nominal gain may or may not equal their real gain in an economic sense. Nonetheless, neither the Constitution nor tax laws `embody perfect economic theory.' See Weiss v. Wiener, 279 U.S. 333, 335 (1929). [77 T.C. at 1366.]"
It is also worth repeating the words of Justice Holmes: "A constitution is not intended to embody a particular economic theory. * * * It is made for people of fundamentally differing views." Lochner v. New York, 198 U.S. 45, 75-76 (1905).
"We conclude that petitioner knew what he was doing — i.e., that petitioner was evading the payment of his Federal income tax liability (United States v. Pomponio, 429 U.S. 10, 12 (1976)); that he was taking steps to reduce the likelihood that he would be caught; and that he was taking steps to reduce the likelihood that, if he were caught, he would have to pay the taxes he owed."