Schiff v. United States, 1989 WL 119410 (D.Conn.)
 

United States District Court, D. Connecticut.

Irwin A. SCHIFF

v.

UNITED STATES of America.

CIV. No. N-86-354 (WWE).

Sept. 6, 1989.

RULING ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

EGINTON, District Judge:

Plaintiff Irwin A. Schiff is no stranger to the federal courts, having litigated both the criminal and civil side of his liabilities for failure to pay income taxes, and having challenged the collection of liabilities assessed against him.   In the present action against defendant United States of America (the "Government"), plaintiff seeks a refund of monies collected and applied in satisfaction of the liabilities assessed against him for the taxable years 1976-1978.   Schiff challenges (1) the procedures followed by the Internal Revenue Service ("IRS") in determining that deficiencies existed and the subsequent assessment of those deficiencies;  (2) the validity of the notice of the assessment and demand for payment;  (3) the constitutionality of the income tax;  (4) the seizure of his property after his failure to pay the assessment;  and, (5) the determination that he fraudulently underpaid his income taxes with respect to the years 1976-78.   Plaintiff has now moved for summary judgment.  Defendant has responded to plaintiff's motion and has filed a cross-motion for summary judgment.   For the following reasons, plaintiff's motion for summary judgment will be denied and defendant's motion for summary judgment will be granted.

Factual Summary

On or about April 15, 1977, plaintiff filed a form 1040 with the IRS.   Rather than providing any information concerning income received or deductions claimed, plaintiff either stated "NONE" or referred to a statement typed onto the form 1041 which said, "I do not understand this return or the laws that may apply to me.   This means I take specific objection under the 4th or 5th Amendments to the U.S. Constitution to the specific question."   In addition, he referred the reader to certain attachments to the return.

After plaintiff filed neither a return nor a form 1040 for the taxable years 1977 and 1978, the IRS determined that a deficiency existed with respect to plaintiff's taxable years 1976-1978.   A notice of this deficiency was sent to plaintiff by certified mail on December 2, 1982.   Plaintiff did not thereafter file a petition with the Tax Court challenging the Commissioner's determination.   Thus, after the expiration of the statutory period, the IRS assessed the amount of deficiency for each of the years 1976-1978.   In addition to the deficiencies in income taxes, the IRS assessed statutory interest, a failure to pay estimated tax penalty and a fraud penalty.

Thereafter, the IRS proceeded to administratively collect the unpaid assessed liabilities.   The IRS levied upon plaintiff's royalties from his book How Anyone Can Stop Paying Income Taxes.   Plaintiff not only attempted to enjoin the collection of these liabilities, but also brought suit against Simon and Shuster for complying with the levy.   Both actions were subsequently dismissed.

Discussion

To grant a motion for summary judgment, the court must determine that there are no genuine issues of material fact in dispute and that the moving party is entitled to judgment as a matter of law.  Fed.R.Civ.P. 56(c).   A "material fact" is one whose resolution will affect the ultimate determination of the case.  Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).   A factual dispute is "genuine" when "the evidence is such that a reasonable jury could return a verdict for the nonmoving party."  Id.  The party opposing summary judgment must provide a factual basis for its allegations and may not rely on mere speculation or conjecture as to the true nature of the facts.   Matsushita Electronics Ind. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).   That both sides have filed motions for summary judgment does not require that the court grant judgment as a matter of law for one side or the other. United States Brewers Ass'n v. Healy, 669 F.Supp. 543, 548 (D.Conn.1987).

The Calculation of the Deficiency

In his motion for summary judgment, plaintiff first challenges the procedures used by the IRS in determining the existence of a deficiency.

Under the American system of "self-assessment," an individual is required to file an individual income tax return, disclosing to the IRS Commissioner his correct tax liability and the basis for arriving at that determination. Commissioner v. Lane-Wells Co. [44-1 USTC 9195], 321 U.S. 219, 223 (1944).   Refusal to furnish the required information on the tax return "is the functional and legal equivalent of a self-assessment of 'zero' ".  Fuller v. United States [86-1 USTC 9332], 786 F.2d 1437, 1439 (9th Cir.1986).

When an individual's tax liability is greater than the liability reported on the return, a deficiency exists.  Laing v. United States [76-1 USTC 9164], 423 U.S. 161, 173-74 (1976).   The determination of a deficiency triggers certain procedural rights on behalf of the taxpayer, including the requirement that a notice of deficiency issue, allowing the taxpayer 90 days in which to petition the Tax Court for a review of the determination.   See Internal Revenue Code of 1954 ("Code"), 26 U.S.C. 6212-13.

Plaintiff claims that since he did not file a return and the definition of a deficiency in 26 U.S.C. 6212 contemplates the filing of a return, a deficiency could not be determined or assessed as it was in this case--as the difference between the tax shown by the taxpayer on the return and any greater liability later determined by the IRS.

The court finds plaintiff's argument misplaced.   A taxpayer's failure to file a return does not bar the determination of a deficiency.   When "a taxpayer files no return, the deficiency can be determined as if a return was made showing the amount of tax to be zero."  Hartman v. Commissioner [CCH Dec. 33,543], 65 T.C. 542, 546 (1975).

In order to reflect the amount of taxes owed by an individual as a deficiency, the IRS prepares a "dummy return," showing the taxpayer's name, address and social security number, and then recording "the amount shown as the tax by the taxpayer upon his return" as zero.  26 U.S.C. 6211.   This "dummy return" does not relieve the taxpayer of the obligation to file a proper return, but provides the administrative accounting procedure necessary to show the taxpayer's failure to file a return amounted to a self-assessment of zero. Thus, any tax found owing is in the nature of a deficiency.  Fuller, 786 F.2d at 1439.   By proceeding in this manner, the IRS grants all taxpayers the same procedural rights, even those taxpayers who fail or refuse to file returns.

In the instant case, the Government has submitted proof that the Examination Division of the IRS prepared "dummy returns" on or around November 9, 1982, for plaintiff's 1976-78 taxable years, which included his name, address and social security number.   See Defendant's Exhibit 2 attached to defendant's statement of material facts ("Defendant's Exhibit 2").   The court notes here that plaintiff's argument that such returns must not only be prepared, but also subscribed by the Secretary pursuant to 26 U.S.C. 6020(b) must be rejected.   See United States v. Harrison, 1972-2 USTC 9573, aff'd. 486 F.2d 1397 (2d Cir.1972).

In light of the foregoing, plaintiff's argument that the IRS erred in determining a deficiency by preparing a "dummy return," and then issuing a statutory notice of deficiency must fail as a matter of law.   The Notice of Deficiency submitted by defendant, see Defendant's Exhibit 3, sets forth in full the explanation and calculation of the deficiency, and its issuance gave plaintiff the right to petition the Tax Court and contest the Commissioner's determination prior to the payment of any taxes.   Thus, plaintiff received the same procedural rights as those accorded to taxpayers who file proper returns and attempt to inform the IRS of their correct tax liability.

The Assessment of the Deficiency

Plaintiff next argues that the deficiency assessments were not properly proven to him pursuant to 26 U.S.C. 6201-6203.

An assessment is the "ascertainment of the amount due and the formal entry of the amount on the books by the Secretary."  United States v. Dixieline Financial Co. [79-1 USTC 9330], 594 F.2d 1311, 1312 (9th Cir.1979).   An assessment is made when an assessment officer signs the summary record of assessment.   This summary record, known as form 23C, along with any supporting information, shall "provide identification of the taxpayer, the character of the liability assessed, the taxable period, if applicable, and the amount of the assessment."   Treas.Reg. 301.6203-1.   Upon request of the taxpayer, he shall be furnished a copy of the record of assessment.  26 U.S.C. 6203. In the case of a deficiency, "[i]f the taxpayer does not file a petition with the Tax Court within ... [90 days from the date of issuance of the Notice of Deficiency], the deficiency ... shall be assessed, and shall be paid upon notice and demand from the Secretary."  26 U.S.C. 6213(c).

Once an assessment has been made, the Government is entitled to pursue certain remedies, similar to those of a judgment creditor, in seeking satisfaction of the amount due.  Bull v. United States [35-1 USTC 9346], 295 U.S. 247, 260 (1935) [The Court held that "[t]he assessment is given the force of a judgment and if the amount assessed is not paid when due, administrative officials may seize the debtors property to satisfy the debt"].

In the instant case, plaintiff did not avail himself of the option of petitioning the Tax Court for a redetermination of the Commissioner's decision that a deficiency existed with respect to the taxable years 1976-78.   Thus, when more than 90 days expired from the date of the issuance of the Notice of Deficiency, the Government assessed the amount of deficiency in accordance with 26 U.S.C. 6201 and 6213(c), as reflected on the Certificates of Assessments and Payments.   See Defendant's Exhibits 4-6.

A Certificate of Assessments and Payments is presumptive proof of the validity of the assessment.  United States v. Dixon, 849 F.2d 1478 (11th Cir.1988). In addition to proving the assessment, the Certificate satisfies the requirements of 26 U.S.C. 6203, that the taxpayer be provided upon request with proof of the assessment.   Accordingly, the court finds that the assessment of deficiencies with respect to plaintiff's 1976-78 taxable years were made in accordance with all statutory and regulatory requirements.

The Correctness of the Assessment

Plaintiff next argues that the tax assessments are incorrect.

A tax assessment is presumptively correct.  United States v. Janis [76-2 USTC 16,229], 428 U.S. 433, 440 (1976).   Once a Certificate of Assessment has been established, the taxpayer has the burden or going forward and the ultimate burden of persuasion.  United States v. Lease [65-2 USTC 9478], 346 F.2d 696 (2d Cir.1965).   This burden is not changed, as plaintiff contends, when an assessment is levied against a taxpayer who has failed to file a return.

In this case, plaintiff has failed to produce any evidence that the assessments made against him are incorrect.   Plaintiff's conclusory denials and bald assertions that he could produce evidence at trial that the assessments are incorrect are insufficient, without more, to withstand the granting of defendant's summary judgment motion.   Mere conclusory denials do not satisfy the dual burdens of proof and persuasion, and should be pierced upon a summary judgment motion.  United States v. Prince [65-2 USTC 9552], 348 F.2d 746, 748 (2d Cir.1965).

In order to prevail, plaintiff must show not only that the Commissioner's determination was erroneous, but also his correct tax liability Lewis v. Reynolds [3 USTC 856], 284 U.S. 281, 283 (1932).   Plaintiff has done neither in this case.

Plaintiff's argument that the assessment made against him for the year 1976 is barred by the statute of limitations must fail as a matter of law.   Had plaintiff filed a proper tax return for 1976, then absent fraud, the statute of limitations for making an assessment is three years.  26 U.S.C. 6501. However, since plaintiff did not file a proper return, the statute of limitations did not begin to run until the assessment was made in April 1983.

The Constitutionality of the Income Tax

The court now turns to plaintiff's contention that the imposition of an income tax on plaintiff is unconstitutional.

The authority given Congress to lay and collect tax, see U.S. Const., Art. 1 8, Cl. 1, as modified by the 16th Amendment, allows the imposition of an income tax without limitation.   The 16th Amendment removed the limitation on Congress' authority to impose a direct tax only if proportioned among the States, stating that "Congress shall have the 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."   Courts have repeatedly upheld the constitutionality of the 16th Amendment.   See, e.g., Brushaber v. Union Pacific Railroad [1 USTC 4], 240 U.S. 1, 17-19 (1916) [The Court upheld the validity of the 16th Amendment, finding that it eliminated the requirement that direct taxes, such as the income tax, on all income from whatever source derived, need no longer be apportioned].

As set forth in the pages attached to the statutory Notice of Deficiency, see Defendant's Exhibit 3, during each of the years from 1976-78, plaintiff received income in the amount of $52,200, $51,2268 and $121,219, respectively. Based on the foregoing, plaintiff's contention that this income cannot constitutionally be taxed must be rejected.

The Collection of the Assessment

Having determined that the assessments were proper and the imposition of an income tax on plaintiff was not unconstitutional as a matter of law, the court now turns to plaintiff's assertion that the assessment was improperly collected.

The Government has shown that plaintiff was sent notice of assessment and demand for payment through form 3552 Prompt Assessment Billing Assembly-- Statement of Tax Due on Federal Tax Return, as well as a subsequent Final Notice demanding payment.   See Defendant's Exhibits 7-9.   While plaintiff does not deny receiving these notices, he claims that the IRS should have used a different form to send the notice, either form 17 or 17A Statement of Tax Due.

The court finds that the form used by the IRS in the instant case provided plaintiff with all the information required for notice and demand by 26 U.S.C. 6303 and Treas.Regs. 301.6303.   Accordingly, plaintiff's argument that the assessment was improper must fail as a matter of law.

The Imposition of Fraud Penalties

The court finally turns to plaintiff's argument that he is entitled to summary judgment on the issue of fraudulent underpayment of taxes.

26 U.S.C. 6653(b), as in effect during 1976-78, imposes an addition to tax equal to 50 percent of the underpayment if any part of the underpayment is due to fraud.   See O'Connor v. Commissioner [69-2 USTC 9453], 412 F.2d 304, 310 (2d Cir.1969).   The purpose of this fraud penalty "is to protect the revenue and reimburse the Government for the public funds which must be expended in the investigation and uncovering of tax evasion activities."   Kahr v. Commissioner [69-2 USTC 9594], 414 F.2d 621, 626 (2d Cir.1969).

The Government bears the burden of proving fraud by clear and convincing evidence. Prince v. United States, 348 F.2d at 748.   However, since "[t]ax evaders seldom leave tracks," Webb v. Commissioner [68-1 USTC 9341], 394 F.2d 366, 380 (5th Cir.1968), "fraud need not be established by direct evidence, but can be shown by surveying the taxpayer's entire course of conduct and drawing reasonable inferences therefrom." Korecky v. Commissioner [86-1 USTC 9232], 781 F.2d 1566, 1568 (11th Cir.1986).

In determining what constitutes fraud under 26 U.S.C. 6653(b), courts have relied on several factors, including (1), the failure to file tax returns;  (2) the failure to report income over a period of time;  (3) failure to furnish the Government with access to his records;  (4) failure to keep adequate books and records;  and (5) the taxpayer's experience and knowledge. Solomson v. C.I.R. [84-1 USTC 9450], 732 F.2d 1459, 1461-62 (6th Cir.1984).   While any one factor may not be conclusive on the fraud issue, the combination of several factors is persuasive evidence of fraud.  Schiff v. Commissioner [CCH Dec. 41,174(M) ], T.C. Memo. 1984-223, aff'd. [85-1 USTC 9108], 751 F.2d 116 (2d Cir.1984).

In the instant case, the court finds that there is persuasive evidence that plaintiff committed fraud.   It is undisputed that absent enforced collection, plaintiff paid no taxes for the years 1976-1978, and failed to file returns disclosing either his income or tax liability.   In addition, the evidence establishes that plaintiff is an intelligent person with a broad knowledge of tax law, as plaintiff has written books on the subject of income taxes and has appeared on television discussing the same.

The court finds plaintiff's attempts to exculpate himself from the fraud penalty based on the sincerity of his belief that he need not pay income taxes to be without merit.   While a failure to pay because of a "misunderstanding of law" may not sustain the imposition of the fraud penalty, "disagreement with the law" provides no defense.  United States v. Schiff [86-2 USTC 9684], 801 F.2d 108, 112 (2d Cir.1986).   As the Court of Appeals for the Second Circuit noted, "[t]he distinction [between a misunderstanding and a disagreement] is necessary to the functioning of our tax system.   Without it, any taxpayer could evade tax obligations simply by stubbornly refusing to admit error despite the receipt of any number of authoritative statements of the law."  Id.

In a prior action involving plaintiff's liability for tax evasion and fraudulent underpayment of taxes, the Tax Court, after reviewing the evidence and considering plaintiff's arguments, concluded:

Petitioner is free to argue his theories to Congress but he cannot disregard the laws passed by Congress and upheld by the courts, fail to perform an affirmative duty imposed on him by those laws, and then expect to avoid the consequences of his avowedly freely exercised disobedience.

Schiff [CCH Dec. 41,174(M) ], T.C. Memo. 1984-223.

For the same reasons stated by the Tax Court, and based on the evidence of fraud presented by the Government in the instant case, the court will uphold the imposition of the fraud penalty on plaintiff with respect to the taxable years 1976-78.

Conclusion

For the foregoing reasons, the court finds that there are no genuine issues of material fact in dispute and that summary judgment should enter for defendant as a matter of law.   Accordingly, defendant's motion for summary judgment is GRANTED and plaintiff's motion for summary judgment is DENIED.   The clerk is directed to enter judgment in favor of defendant United States of America against plaintiff Irwin A. Schiff and to close this case.   The parties cross- motions for sanctions are DENIED.

SO ORDERED.