Hypnosis
7203:
Willful Failure to File Return, Supply Information, or Pay Tax:
Evidence: Hypnosis
[Dec.
37,317] STANLEY GROSSHANDLER, PETITIONER v. COMMISSIONER OF INTERNAL
REVENUE, RESPONDENT
Docket No. 5260-76, 75 TC --, No. 1, 75 TC 1, Filed
October 2, 1980
[Appealable, barring stipulation to the contrary, to CA-7.--CCH]
[Code Secs.
6501(c)(3) , 6651
, 6653 , 6654 ]
[Income tax: Returns: Failure to file: Statute of Limitations: Fraud:
Additions to tax: Estimated payments: Admissibility of evidence:
Hypnosis.]--P, an attorney engaged in private law practice, admitted he
failed to file Federal income tax returns for the years 1966 through
1969, but contended that he did file returns for the years 1963, 1964
and 1965. His direct testimony at trial and memory regarding facts was
purportedly refreshed by use of hypnosis.Held, (1) P's testimony,
as purportedly refreshed through hypnosis, was too dubious to render it
admissible. But even if admissible, the Court gives no weight to it
under the particular circumstances. (2) P failed to file Federal income
tax returns for the years 1963, 1964 and 1965. (3) Assessment of the
taxes is not barred by the statute of limitations. (4) Respondent proved
the section 6653 (b) additions to tax for fraud by clear and convincing
evidence. (5) P is liable for the section
6654 additions to tax for failure to make timely estimated
tax payments.
Richard
M. Kates,
33 N. LaSalle St.
,
Chicago
, Il., for the petitioner. Francis J. Emmons, for the respondent.
DAWSON,
Judge:
Respondent
determined the following deficiencies in petitioner's Federal income
taxes and additions to tax:
Addition to Tax Addition to Tax
Year Deficiency Sec. 6653(b) Sec. 6654 1
1963 $ 4,203.84 $ 2,101.92 $ -0-
1964 17,464.89 8,732.45 443.69
1965 5,872.99 2,936.50 157.19
1966 9,862.97 4,931.48 264.81
1967 30,210.14 15,105.07 966.72
1968 3,148.89 1,574.45 98.55
1969 25,681.26 12,840.63 755.87
In the alternative the respondent has alleged that, if the Court should
decide that the petitioner is not liable for the section 6653(b)
additions to tax for fraud for any year at issue, the petitioner is
liable for the additions to tax for delinquency under section
6651(a) and for the additions to tax for negligence under
section 6653(a) with respect to each year.
The
parties have agreed as to the amounts of taxable income received by the
petitioner for all of the years before the Court. Oral concessions have
been made by the petitioner. The issues remaining for our decision are:
1.
Whether that portion of petitioner's direct testimony relating to his
memory, as allegedly refreshed by hypnosis, is admissible in the
circumstances present in this case and, if so, the weight that should be
given to such testimony.
2.
Whether the petitioner failed to file Federal income tax returns for the
years 1963, 1964 and 1965.
3.
Whether the assessment and collection of petitioner's Federal income
taxes for each of the taxable years 1963, 1964 and 1965 are barred by
the statute of limitations.
4.
Whether any part of the underpayment of income tax for each of the years
1963 through 1969 was due to petitioner's fraud with intent to evade
tax.
5.
Whether, alternatively, the petitioner is liable for the additions to
tax under sections 6651(a) and
6653(a), respectively, for the years 1963 through 1969.
6.
Whether the petitioner is liable for the additions to tax under section 6654 for failure to
make estimated tax payments for each of the years 1964 through 1969.
FINDINGS
OF FACT
Some
of the facts are stipulated. The stipulations of facts, together with
the exhibits attached thereto, are incorporated herein by this
reference.
Stanley
Grosshandler (petitioner) was a legal resident of
Highland Park
,
Illinois
, during the taxable years 1963 through 1969 and on June 14, 1976, when
he filed his petition in this case. The statutory notice of deficiency
herein was mailed to petitioner on March 15, 1976.
During
the years 1963 through 1969 the petitioner was an attorney who was
licensed to practice law by the State of
Illinois
. He maintained a law office at
4 South Genesee Street
,
Waukegan
,
Illinois
. Except for a short period of time during late 1969 when petitioner was
employed by the real estate development company of Kaufman & Broad
Homes, Inc., he was actively engaged in the practice of law as a sole
practitioner.
During
the taxable years 1963 through 1969, the petitioner's legal practice and
his employment at Kaufman & Broad Homes, Inc., generated the
following gross receipts:
Year Gross Receipts
1963 ....... $ 27,924.00
1964 ....... 62,185.50
1965 ....... 68,917.85
1966 ....... 60,368.12
1967 ....... 93,883.34
1968 ....... 41,630.99
1969 ....... 64,136.03
Total ...... $419,045.83
During
the taxable years 1963 through 1969, the petitioner incurred the
following business expenses in the operation of his law office:
Year Business Expenses
1963 ....... $ 10,870.44
1964 ....... 36,386.02
1965 ....... 48,368.88
1966 ....... 41,664.00
1967 ....... 72,544.49
1968 ....... 22,291.25
1969 ....... 29,383.64
Total ...... $261,508.72
During
the taxable years 1963 through 1968, the petitioner's distributive share
of losses generated by a real estate partnership were as follows:
Petitioner's Share of
Year Partnership Loss
1963 ....... $ 658.44
1964 ....... 292.89
1965 ....... 215.79
1966 ....... 287.19
1967 ....... 363.82
1968 ....... 186.53
Total ...... $2,004.66
For
the taxable years 1963 through 1969, the petitioner's adjusted gross
income was as follows:
Adjusted Gross
Year Income
1963 ....... $ 16,395.12
1964 ....... 25,506.59
1965 ....... 20,333.18
1966 ....... 18,416.93
1967 ....... 20,975.03
1968 ....... 19,153.21
1969 ....... 34,752.39
Total ...... $155,532.45
For
the taxable years 1963 through 1969, the petitioner had the following
amounts of allowable itemized deductions:
Allowable
Year Itemized Deductions
1963 ....... $ 3,183.54
1964 ....... 2,800.24
1965 ....... 2,923.56
1966 ....... 2,395.42
1967 ....... 3,727.51
1968 ....... 4,881.19
1969 ....... 3,299.66
Total ...... $23,211.12
During
the taxable year 1963 the petitioner was entitled to claim dependency
exemptions for himself, his wife, and three dependent children. During
the remaining years at issue he was entitled to claim dependency
exemptions for the same individuals plus one additional child.
Petitioner's
taxable income for the years 1963 through 1969 was as follows:
Year Taxable Income
1963 ....... $ 10,211.58
1964 ....... 19,106.35
1965 ....... 13,809.62
1966 ....... 12,421.51
1967 ....... 13,647.52
1968 ....... 10,672.02
1969 ....... 27,852.73
Total ...... $107,721.33
Petitioner
obtained his undergraduate degree from
Roosevelt
College
,
Chicago
,
Illinois
. He also did some of his undergraduate study at
Ohio
State
University
and the
University
of
Pittsburgh
. He obtained his law degree at Northwestern University School of Law in
1953.
After
graduation from law school the petitioner was employed by the City of
Highland Park, Illinois, as an assistant corporation counsel. During
this period of time he also maintained a small private law office in
Highland Park
,
Illinois
.
During
the years 1958 through 1962 the petitioner was involved in a law
partnership by the name of Grosshandler, Pauker and Shelly.
During
the years 1957 through 1969 the petitioner served as the chairman of the
Lake County, Illinois, Regional Planning Commission.
During
the years 1958 through 1968 the petitioner served as the city prosecutor
for the City of Highland Park, Illinois.
During
the years 1959 through 1964 the petitioner served as a special state's
attorney for the Lake County, Illinois, Forest Preserve District.
During
the years 1964 through 1969 the petitioner served as an attorney on
behalf of the City of Lake Forest, Illinois.
As
a part of his law practice the petitioner would, on occasion, prepare
individual Federal income tax returns for some of his clients.
Occasionally, he had communications with the Internal Revenue Service on
behalf of his clients. On one occasion he prepared an application for a
corporate client to be taxed under Subchapter S.
Joint
Federal income tax returns for the taxable years 1959 and 1962 were
filed in the names of the petitioner and his wife, Ann Grosshandler. The
joint 1959 income tax return was addited sometime during 1962 as a
result of which certain adjustments were made to reported taxable
income.
Petitioner
filed Employer Withholding Tax Returns (Forms 941) during the taxable
years 1963, 1964 and 1965.
Petitioner
filed a request for extension of time within which to file his Federal
income tax return for each of the taxable years 1966 through 1969. None
of the requests for extension oftime show petitioner's home address or
any social security number, but only his office address.
Petitioner
prepared and submitted loan applications during the years at issue which
indicated that his law office was being operated at a profit.
When
his Federal income tax returns for the years in issue were due,
petitioner was aware of the fact that there would be a tax liability
owed for each of these years.
Petitioner
did not file any estimated income tax returns during each of the taxable
years 1963 through 1969.
During
the taxable years 1963, 1964 and 1969 the following Federal income taxes
were withheld from salaries paid to the petitioner:
Federal Income
Year Employer Taxes Withheld
1963
Lake County
,
Illinois
.......... $1,319.40
1964
Lake County
,
Illinois
.......... 657.20
1969 Kaufman & Broad Homes, Inc. .... 723.00
Petitioner received Forms W-2 from the employers showing that taxes had
been withheld.
Except
for the taxes withheld from petitioner's salary from the abovenamed
employers, the petitioner has made no payments on his Federal income tax
liabilities for the taxable years 1963 through 1969.
During
the taxable years 1963 through 1969 the petitioner was aware of the fact
that he could file Federal income tax returns without full or partial
payment of the tax liabilities reported thereon.
Petitioner
failed to file individual income tax returns for each of the taxable
years 1966, 1967, 1968 and 1969.
Respondent's
records of assessments and payments show no receipt of a Federal income
tax return from petitioner for any of the taxable years 1963 through
1969. There is also no record oftax payments or refunds for those years.
In
March 1967, Revenue Agent Otto Stein was assigned to petitioner's
Federal income tax examination for the taxable years 1960 through 1965.
Prior to his assignment several other revenueagents had attempted to
contact petitioner concerning his income tax liabilities for the taxable
years subsequent to 1959.
From
March 1967 until Mr. Stein first met with petitioner on May 31, 1967,
Mr. Stein found it difficult to contact petitioner, a busy attorney, in
order to arrange a meeting to discuss his income tax liabilities.
On
May 31, 1967, petitioner told Mr. Stein that some of his books and
records of income and expense for the taxable years 1960 through 1965
had been destroyed.
On
May 31, 1967, Mr. Stein confronted petitioner with the fact that the
Internal Revenue Service had no record of his filing Federal income tax
returns for the taxable years 1963, 1964 and 1965. He also told Mr.
Stein that he had filed Federal income tax returns for each of the
taxable years 1963, 1964 and 1965, and provided Mr. Stein with notorized
statements to this effect.
On
May 31, 1967, petitioner told Revenue Agent Stein that, because of the
absence of adequate records, it would be necessary to reconstruct his
taxable income for the taxable years being audited. He also told Mr.
Stein that he would cooperate with him in reconstructing his taxable
income for such years but that he would not cooperate with a special
agent in doing so.
On
May 31, 1967, petitioner told Mr. Stein that he had received an income
tax refund for one of the years then under examination.
On
May 31, 1967, petitioner told Revenue Agent Stein that he doubted that
Mr. Stein would find any record of his 1963, 1964 and 1965 income tax
returns in Internal Revenue Service files.
After
his initial meeting with petitioner on May 31, 1967, Mr. Stein again
encountered difficulties in attempting to arrange a second meeting with
petitioner. The second meeting between Mr. Stein and petitioner occurred
on August 7, 1967. On that date the petitioner again told Mr. Stein that
he had filed Federal income tax returns for the taxable years 1963, 1964
and 1965. He also told Mr. Stein that he had given one of his returns
for the years then under investigation (1960 through 1965) to a
conductor on the Chicago and Northwestern Railroad so that it would be
postmarked in
Chicago
by the due date, and that the remaining returns were mailed from
Highland Park
,
Illinois
.
On
August 7, 1967, petitioner told Revenue Agent Stein that he had
requested two, and possibly three, extensions for filing returns during
the years then under examination, and he had requested extensions for
1966 and 1967.
On
August 7, 1967, petitioner initially told Mr. Stein that he had made at
least one payment toward his income tax liability for one of the years
then under examination by a check drawn on the Cosmopolitan National
Bank.
After
being told by Mr. Stein that copies of cancelled checks could be
obtained from bank microfilm, petitioner told him that he had made
payment toward tax liabilities by offsetting refunds shown on returns
with liabilities for other years. For example, a refund for a later year
was to be applied to his 1960 tax liability.
In
response to a question posed by Revenue Agent Stein on August 7, 1967,
petitioner stated that he was unable to say on what dates he filed his
Federal income tax returns for each of theyears then under
investigation.
On
September 13, 1967, petitioner was interviewed by Special Agent Robert
Trilling and Revenue Agent Stein, and he stated that he had filed his
Federal income tax returns for the taxable years then under
investigation.
On
October 18, 1967, petitioner was again interviewed by Special Agent
Trilling and Revenue Agent Stein, and he again told them that he had
filed his income tax returns for the taxable years 1960, 1961, 1963,
1964 and 1965.
After
the October 18, 1967, meeting, respondent's agents had no personal
contact with petitioner for approximately two or three years. sometime
during 1969 Special Agent James Houlihan was assigned to investigate
petitioner's 1965, 1966 and 1967 Federal income tax liabilities. Special
Agent Houlihan's first personal contact with petitioner occurred on
October 30, 1970, when he met petitioner at the Intelligence Division
(presently called Criminal Investigation Division) Office located in
Chicago
,
Illinois
. When asked by Special Agent Houlihan on October 30, 1970, if he had
filed Federal income tax returns for the taxable years 1965 through
1967, or for any prior or subsequent years, petitioner stated that he
would not answer that question without first referringto the memorandums
summarizing his previous statements.
Petitioner
stated in a sworn statement, submitted in connection with another
judicial proceeding, that he informed Special Agent Houlihan of his
problem in obtaining records of his income and expense from his former
landlord during the October 30, 1970, meeting.
At
no time prior to November 1970, did petitioner afford respondent's
agents access to any of his records of income and expenses.
At
no time during any of the investigations by respondent's agents did
petitioner provide them with any retained copies of his Federal income
tax returns.
At
no time during the October 30, 1970, meeting did petitioner inform
Special Agent Houlihan that he was having difficulty in gaining access
to his records or that these records were being held by petitioner's
former landlord.
Shortly
after the October 30, 1970, interview, Special Agent Houlihan learned
that records of petitioner's law practice had been seized by his former
landlord for nonpayment of rent and were being stored in the basement of
petitioner's former office building. Special Agent Houlihan then issued
a summons to petitioner's former landlord and obtained 46 boxes of
records concerning petitioner's law practice for the years then under
investigation by Mr. Houlihan (1965 through 1967), as well as prior and
subsequent years.
There
had been some misunderstanding in petitioner's mind as the years
"under investigation" by Special Agent Houlihan. He believed
that Special Agent Houlihan was investigating and questioning him
concerning 1963, 1964 and 1965, in which he claims he filed returns,
rather than 1965 plus two subsequent years (1966 and 1967) when he
admittedly did not file any returns.
Special
Agent Houlihan met with petitioner on June 21, 1971, in the
Waukegan
,
Illinois
, Office of the Internal Revenue Service. On that date the petitioner
told Mr. Houlihan that he had filed Federal income tax returns for each
of the years 1963 through 1968. He also told Mr. Houlihan that he had
made payment with one of his returns during the years 1963 through 1968,
but that the other returns were filed without payment of the taxes shown
to be due and owing.
On
June 24, 1971, petitioner told Special Agent Houlihan that he had
requested extensions of time for filing his Federal income tax returns
for 1965 and subsequent years.
On
June 28, 1971, petitioner met with Special Agent Houlihan and Mr.
Houlihan's supervisor, Group Manager Robert Fuesel, to discuss the
conclusion reached by Mr. Houlihan as a result of his investigation.
Petitioner was advised that he was to be prosecuted for failure to file
his 1965, 1966 and 1967 Federal income tax returns, and he was advised
of his gross income figures for each of those years.
On
June 28, 1971, petitioner told Messrs. Houlihan and Fuesel that he had
filed Federal income tax returns for each of the taxable years 1963
through 1968 by the end of the respective subsequent calendar years, and
that he had requested extensions of time for filing his Federal income
tax returns for such years.
On
June 28, 1971, petitioner told Messrs. Houlihan and Fuesel that he had
made payment with either his 1964 or 1965 Federal income tax return, but
that the other returns had been filed without payment.
In
1972, a judgment of conviction was entered against the petitioner for
willfully failing to file Federal income tax returns for 1966 and 1967,
in violation of section 7203 of the Code.
At
the conclusion of the criminal tax case against petitioner, the civil
tax case involving petitioner's Federal income tax liabilities for the
years 1963 through 1969 was returned to Revenue Agent Stein for
resolution of the civil liabilities. After the case had been returned to
Mr. Stein, petitioner was permitted to borrow certain files and
workpapers which Mr. Stein had prepared summarizing deposits made to
petitioner's bank accounts during the period under examination.
On
March 9, 1973, Mr. Stein wrote petitioner a letter requesting that he
return the files and workpapers which he had borrowed. Mr. Stein was
unable to secure the return of his files andworkpapers at that time.
Revenue
Agent Stein then issued a summons to petitioner for the return of his
files and workpapers. Petitioner returned the documents to Mr. Stein on
September 27, 1973, in response to the summons.
For
the taxable years 1963 through 1969, petitioner did not maintain any fee
ledger, general journal, or other books of original entry. His business
records consisted of a rolodex showing client's names, deposit slips
bearing some notations concerning the source of the deposit items,
cancelled checks, check duplicates or vouchers bearing some notations
concerning the purpose of the check or client on whose behalf it was
issued, and notations on some legal files. The records also included
some accounting sheets, a bookkeeping book and a petty cash book. Income
sources were disclosed by the petitioner to Mr. Stein.
A
review of the records obtained pursuant to the summons from petitioner's
landlord in November, 1970, led to the discovery of the front page of
what purported to be a 1965 joint Federal income tax return for
petitioner and his wife. The document was identical to a copy of a
purported 1965 return which petitioner was required to submit to Capital
Investments, Inc., on or about May 25, 1966, a copy of which had already
been obtained from the lender's assignee, Mercantile All-In-One Loans,
Inc., by respondent's agents.
The
purported copy of petitioner's 1965 Federal income tax return shows his
Schedule C net income to be exactly $24,000, his itemized deductions to
be exactly $5,500, and reflects purported 1965 estimated tax payments
totaling $2,000. The document contains no supporting schedules or
exhibits, is dated April 15, 1966, and was allegedly filed on April 16,
1966. However, the purported 1965 return was never received by the
Internal Revenue Service.
The
Internal Revenue Service's review of the records obtained from
petitioner's landlord in November, 1970, failed to disclose any
workpapers which might have been used by petitioner in preparing his
1963, 1964, or 1965 income tax returns.
Petitioner's
wife, Ann Grosshandler, was a housewife and mother during the taxable
years 1963 through 1969. During this period she was not employed and she
had no income of her own, except for a temporary job for two weeks
during 1966. She never earned more than $600 in any year, and she did
not file a separate Federal income tax return for any of those years.
She did not sign any joint Federal income tax returns with petitioner
for the taxable years 1963, 1964, and 1965.
At
no time during the years 1963 through 1969 did the petitioner and his
wife discuss petitioner's Federal income tax liabilities for those
years, nor did his wife have any knowledge of his working on Federal
income tax returns for such years or of him leaving their home to file
returns.
At
no time during the years 1963 through 1969 did petitioner tell his wife
that he had filed Federal income tax returns for any of the years.
During that period he did not discuss anything regarding taxes and
finances with Mrs. Grosshandler.
Special
Agent Houlihan made several attempts to obtain information from Internal
Revenue Service records which would corroborate petitioner's statements
that he had filed Federal income tax returns for the years 1963 through
1965, and that he had received an income tax refund for one of these
years, but Mr. Houlihan was unable to find any corroborating evidence.
Neither
petitioner nor his wife was ever contacted by the Collection Division of
the Internal Revenue Service concerning any unpaid tax liabilities for
the taxable years 1963 through 1969.
The
Social Security Administration has no record of the petitioner reporting
or paying self-employment taxes for the years 1963 through 1969, and
none were paid by the petitioner.
Petitioner
made false and misleading statements to agents of the Internal Revenue
Service that he had filed Federal income tax returns for the years 1963
through 1969.
Petitioner
did not cooperate fully with respondent's agents in their attempts to
determine his taxable income for the years 1963 through 1969.
Petitioner
failed to maintain adequate books and records of his income producing
activities for the years 1963 through 1969.
During
the week of December 2, 1979, the petitioner met at least three times
with Mr. Edwin L. Baron, an experienced professional hypnotist retained
by the Police Department for the City of
Chicago
. He met once with Mr. Baron on each of the two days immediately
preceding the trial of the case and once on December 6, 1979, during the
course of the trial. He was placed under hypnosis each time.
Petitioner's
first two meetings with Mr. Baron were not recorded and no notes were
kept as to what transpired. Mr. Baron's questions to petitioner, and
petitioner's responses thereto during the third meeting were recorded on
a tape cassette.
During
the first two meetings with Mr. Baron, the petitioner stated that he had
definitely filed a Federal income tax return for the taxable year 1969
and believed he filed returns for either 1965 or 1966 as well; that he
could not remember not filing a Federal income tax return for any of the
taxable years 1963 through 1969; and that he did not include payment
with any of his Federal income tax returns for the years 1963 through
1969 because he owed nothing on the returns.
During
the third meeting with Mr. Baron, petitioner stated that he typed his
1963 Federal income tax return in the kitchen of his home and mailed it
from Highland Park, Illinois; that he prepared his 1964 return in the
dining room of his home and gave it to a railroad conductor on the
Chicago & Northwestern Railroad for mailing in Chicago, Illinois;
and that the 1965 return was prepared in the kitchen of his home and
mailed from his law office in Waukegan, Illinois. Petitioner also stated
to Mr. Baron that he had signed each of the purported returns in his own
name and onbehalf of his wife; that he retained copies of each of the
purported returns; and that the 1963 and 1964 returns were filed on the
due date while the 1965 return was filed a day late.
ULTIMATE
FINDINGS OF FACT
1.
There are income taxes due and owing by the petitioner for each of the
years 1963 through 1969.
2.
Petitioner failed to file his Federal income tax returns for the taxable
years 1963 through 1969.
3.
The underpayments of income taxes which were required to be included in
the petitioner's Federal income tax returns for the taxable years 1963
through 1969 were due to fraud with intent to evade tax.
4.
The assessment and collection of petitioner's Federal income taxes for
the years 1963 through 1969 are not barred by the statute of
limitations.
5.
Petitioner failed to make estimated tax payments for each of the taxable
years 1964 through 1969.
OPINION
Issue 1. Admissibility and Weight to be Given Petitioner's Direct
Testimony As a Result of Memory Purportedly Refreshed by Hypnosis.
We
will first address an evidentiary question as to the admissibility of a
portion of the petitioner's direct testimony regarding facts purportedly
recollected as a result of having his memory refreshed by the use of
hypnosis. If admissible, we should decide what weight to give to the
testimony.
Respondent
concedes that in appropriate circumstances and with adequate safeguards,
there is no absolute prohibition against the use of hypnosis to refresh
the recollection of a witness.Cf. Fed. R. Evid. 401, 612. The propriety
of such procedure has been implicitly assumed in several decisions. See,
e.g., United States v. Miller, 296 F. Supp. 422 (D. Conn. 1968),
reversed on other grounds 411 F.2d 825 (2d Cir. 1969); United States
v. Adams, 581 F.2d 193, 198-199 (9th Cir. 1978); and People v.
Smrekar 68 Ill. App. 3d 379, 385 N.E.2d 848, 855 (1979). However, by
conceding that hypnosis may be used for this limited purpose, respondent
has not conceded that (1) hypnosis may be used in the courtroom, (2)
statements made by a petitioner outside of the courtroom may be
introduced as substantive evidence absent full compliance with the
appropriate rules of evidence; or (3) statements made as a result of
hypnosis are entitled to any greater credence than other testimony or
evidence. Cf.
United States
v. Awkard, 597 F.2d 667 (9th Cir. 1979); Wyller v. Fairchild
Hiller Corporation, 503 F.2d 506, 510, fn. 6 and 7 (9th Cir. 1974).
Respondent's
argument with respect to the testimony in question is twofold. First,
the procedures employed by petitioner in "refreshing his
recollection" through hypnosis fall far short of the safeguard
required by other courts for the admission of such testimony Second,
even if the testimony is admissible, no weight should be given to it.
In
United States
v.
Adams
, supra, at 199, fn. 12, the Ninth Circuit laid down standards for
the admission of testimony refreshed under hypnosis. It said:
We
think that, at a minimum, complete stenographic records of interviews of
hypnotized persons who later testify should be maintained. Only if the
judge, jury, and the opponent know who was present, questions that were
asked, and the witness's responses can the matter be dealt with
effectively. An audio or video recording of the interview would be
helpful [sic].
Absent
such a procedure, the Court of Appeals thought that the use of hypnosis
to refresh recollection carried with it the danger that the witness's
testimony in Court would be tainted byhypnotic suggestion. Similar
concerns have been expressed in other case where hypnosis was relied
upon to "refresh the recollection" of witnesses. See
United States
v. Narciso, 446 F.Supp. 252, 277-282 (E.D. Mich. 1977).
Here
the petitioner was hypnotized twice during the week immediately
preceding the trial and once during a lunch recess during the course of
the trial. At the first two sessions no records were kept of the
questions asked and there was no impartial or adverse party present to
determine the propriety of the methods employed. Consequently, we do not
know whether the prior sessionscontained the fatal degree of
suggestivensess prohibited by the Court decisions in which hypnotically
"refreshed" testimony has been admitted. For example, during
cross-examination the hypnotist, Edwin L. Baron, testified that the
petitioner had told him during the first two sessions that he had filed
a Federal income tax return for at least the year 1969 and that he
"owed nothing" on the returns that he did file. At no time did
petitioner admit that he had failed to file a timely return for any of
the years at issue in this case. Such testimony stands in sharp contrast
to the petitioner's own testimony and his concession at trial that he
failed to file Federal income tax returns for each of the years 1966
through 1969 and that taxes are owed for each of those years. Thus, it
is doubtful whether the petitioner's "memory" was actually
being refreshed through hypnosis. Indeed, it is not implausible, as
respondent has suggested, that the petitioner may havefaked hypnosis in
an attempt to bolster his credibility regarding the filing of returns
for all seven years or that he had "lived a lie for so long that he
no longer knew what the truth was."
The
final session of hypnosis was recorded, and a cassette tape 2 of the
questions asked and the petitioner's responses was [sic] received into
evidence for the limited purpose of determining whether Mr. Baron's
procedures were suggestive. During this final session the petitioner
stated that he had filed Federal income tax returns for each of the
taxable years 1963, 1964 and 1965, and provided details concerning his
purported preparation and filing of the returns. Our review and
consideration of the questions asked by Mr. Baron during this final
session "directing petitioner's attention" to the appropriate
time period reveals a defect in the use of hypnosis in these particular
circumstances. With respect to each year Mr. Baron attempted to focus
petitioner's attention by telling him that the time frame was when he
was "working on his income tax return" in the spring of the
next year. In essence, the procedure assumed the ultimate fact, and then
relied upon a willing subject to provide corroborating details
supporting what had been suggested. Moreover, Mr. Baron's questioning at
the final session appears to havebeen tainted by whatever had transpired
during the two unrecorded prior sessions.
In
short, we think the probative value of the petitioner's testimony, as
purportedly refreshed through hypnosis, is so dubious as to render it
inadmissible. The dangers in using hypnosisare not unlike those
attendant to such procedures as the polygraph test or the use of truth
serums, the results of which are almost universally deemed inadmissible
as evidence. See 22 Wright andGraham, Federal Practice and Procedure:
Evidence, Sec. 5169 (1978).
But,
even if we were to assume that such testimony is admissible, we would
give no weight to it because we regard it as inadequate and incredible
for several reasons. First, there are inconsistencies between the
stipulated facts coupled with the petitioner's testimony at the trial
and his prior statements while under hypnosis. These have already been
mentioned. Second, petitioner was unable to provide any evidence to
corroborate his account concerning his alleged preparation and filing of
returns. Surely his wife would have remembered that he worked "in
the kitchen,""in the dining room," or "at home"
on the tax returns. Certainly he would have recounted to his wife the
unusual details of handing one of his tax returns to a railroad
conductor at some time during the past few years. At least he should
have been able to produce some documentary evidence to support his claim
that returns were prepared and filed.
Third,
we think hypnosis provided the petitioner with a convenient means to
explain his false, conflicting, and misleading prior statements on the
question of whether returns were filed.Yet the use of hypnosis was
highly selective. No effort was made to determine his reported taxable
income or tax liabilities. No effort was made to locate the missing
"retained" copies of hisalleged returns.
Finally,
petitioner's other testimony at the trial and his previous statements to
respondent's agents bear upon the credibility of his testimony
purportedly "refreshed" through hypnosis. His claim that he
misunderstood the years under investigation is totally unfounded in
light of the testimony of Mr. Houlihan and Mr. Fuesel. His testimony and
prior sworn statement that he made books and records available to
respondent's agents prior to their discovery through third party
contacts is untenable when considered in the light of the testimony of
Mr. Stein and Mr. Houlihan.
Issue
2. Failure to File Federal Income Tax Returns
The
evidence in this record is persuasive that the petitioner failed to file
Federal income tax returns for each of the years 1963, 1964 and 1965. 3 The most
compelling evidence of petitioner's nonfiling of returns consists of
respondent's records of assessments and payments for the years in
question. Various documents of this type, some of which were obtained by
respondent's agents during the course of their civil or criminal
investigation of petitioner's Federal income tax liabilities, and the
last of which was obtained by respondent's counsel while preparing this
case for trial, were admitted into evidence. They uniformly show that as
early as November 27, 1967, and as late as November 30, 1979, the
respondent had no record of petitioner having filed returns for 1963,
1964 and 1965. The records also show nonfiling for 1966 through 1969. We
think these records are reliable and are entitled to great weight
because of their cumulative effect for so many years. If only one year
of nonfiling were involved, some possibility might exist that
respondent's records would be inaccurate. But here it is inconceivable
that such records could be inaccurate for three consecutive years.
Moreover, the accuracy of such records is corroborated by records of the
Social Security Administration which show no record of petitioner
reporting or making payments on his self-employment taxes for the years
covered by respondent's records.
Another
factor which adds to the credibility of respondent's records is that
they corroborate other evidence (including the testimony by petitioner)
showing that (1) petitioner filed returns for earlier years; (2) his
return for 1959 was audited with certain adjustments proposed and a
deficiency paid; (3) petitioner failed to file any estimated tax returns
or make any estimated tax payments for any of the years in issue; (4) he
made no other payments toward his tax liabilities for the years 1963
through 1969; (5) he failed to file a return for each of the years 1966
through 1969; and (6) he was never contacted by the Collection Division
of the Internal Revenue Service concerning the unpaid tax liabilities
allegedly reported on the returns purportedly filed for 1963, 1964 and
1965.
To
counter respondent's evidence of petitioner's nonfiling for 1963, 1964
and 1965, petitioner relies primarily on his own self-serving
statements. We think his testimony is not worthy of belief. No competent
documentary evidence was offered by petitioner and he obtained no
support from his wife's testimony--the one witness who was most likely
to have some knowledge concerning the circumstances of filing returns.
He did not even have retained copies of the returns claimed to have been
filed. His attempted use of hypnosis, his concessions that no returns
were filed for the years 1966 through 1969 and that no payments were
made during any of the years in controversy, represent an obvious
attempt to extricate himself from the web of false and conflicting
statementshe made to respondent's agents during the course of their
extensive investigations into his Federal income taxes. Cf. Block v.
Commissioner, 482 F.2d 1342 (6th Cir. 1973), affg. per curiamT.C.
Memo. 1972-130. Not only has the petitioner failed to prove that he
filed Federal income tax returns for the years 1963, 1964 and 1965, but
the respondent has affirmatively established that the petitioner did not
file any returns for those years.
Issue
3. Statute of Limitations
Since
the petitioner has conceded that he did not file Federal income tax
returns for the years 1966 through 1969, and we have concluded that he
failed to file returns for the years 1963,1964 and 1965, it follws that
the assessment and collection of petitioner's income taxes for all of
the years at issue are not barred by the statute of limitations. Section
6501(c)(3) of the Code.
Issue
4. Section 6653(b) Additions to Tax
Since
no returns were filed and the petitioner has stipulated that a tax
liability is owed for each of the years 1963 through 1969, a substantial
underpayment of tax with respect to each of the years has been
established. Thus, the next issue is whether respondent correctly
determined that the petitioner is liable for the addition to tax for
fraud for each of the years in question.
The
issue of fraud is one of fact to be determined upon a consideration of
the entire record. Stratton v. Commissioner [Dec.
29,958 ], 54 T.C. 255 (1970). The Commissioner bears the
burden of proving fraud. Section 7454(a) ; Rule
Procedure. Fraud is never presumed, Provedure. Fraud is never presumed,
but must be affirmatively established by clear and convincing evidence.Beaver
v. Commissioner [Dec.
30,380 ], 55 T.C. 85 (1970). Direct evidence of fraudulent
intent is seldom available and whether it exists must be determined from
the conduct of the taxpayer and the surrounding circumstances.
We
hold on this record that respondent has proved fraud by clear and
convincing evidence.
Failure
to file returns does not in itself establish fraud. However, such
failure may properly be considered in connection with other facts in
determining whether any deficiency or underpayment of tax is due to
fraud. Beaver v. Commissioner, supra; Cirillo v. Commissioner
[63-1 USCT ¶9311], 314 F.2d 478 (3d Cir. 1963); Bennett v.
Commissioner [Dec. 22,950 ], 30T.C. 114
(1958). An extended pattern of nonfiling plus some "convincing
affirmative indication" of the requisite specific intent to defraud
warrants imposition of the addition to tax for fraud. Stoltzfus v.
United States [68-2
USTC ¶9499 ], 398 F.2d 1002, 1004 (3d Cir. 1968).
There
are other indicia of fraud present in this case. First, the petitioner
was aware of his obligation to file returns and that taxes were due for
each of the years 1963 through 1969.He was an attorney and a
well-educated person. He had filed Federal income tax returns for
previous years. He earned substantial income which required him to file
returns. He had prepared income tax returns for some of his clients and
had communicated with the Internal Revenue Service on behalf of his
clients. Second, the petitioner attempted to avoid payment of his tax
liabilities for 1963 through 1969 by making false and inconsistent
statements to respondent's agents during the course of their
examinations. See Powell v. Guanquist [58-1
USTC ¶9223 ], 252 F.2d 56, 60 (9th Cir. 1958); Beaver v.
Commissioner, supra, at 93. Third, the petitioner did not cooperate
with respondent's agents during their investigations. Lord v.
Commissioner [75-2 USTC ¶9799 ],
525 F.2d 741 (9th Cir. 1975); Powell v. Granquist, supra.
A
fourth indicia of fraud here is that the petitioner failed to keep
complete and accurate records of his income. As a long-time
practitioner, he was well aware of the obligation to maintain adequate
records. Lollis v. Commissioner [79-1 USTC ¶9379 ]
595 F.2d 1189 (9th Cir. 1979); Estate of Mazzoni v. Commissioner
[71-2 USTC ¶9764 ],
451 F.2d 197 (3d Cir.1971); Otsuki v. Commissioner [Dec. 29,807 ] 53 T.C. 96
(1969).
Finally,
it is clear that the petitioner stopped filing income tax returns after
1962. He filed no returns until respondent's agents caught up with him.
At some point it must be concluded that he did not intend to file until
his nonfiling was discovered. Such conduct constitutes willful
concealment of income to evade payment of taxes. One obvious reason for
continued failure to file returns is to attempt to conceal defalcations
for prior years. Acker v. Commissioner [Dec. 21,679 ], 26 T.C 107
(1956).
Accordingly,
after examining and evaluating all the facts contained in this record,
we have found and hold that part of the underpayments of tax for each of
the years at issue was due to the petitioner's fraud. We therefore
sustain the additions to tax under section 6653(b).
Issue
5. Additions to Tax Under Section 6654 .
In
his notice of deficiency respondent determined that the petitioner is
liable for the additions to tax under section
6654 for the years 1964 through 1969 for failure to make
timely estimated tax payments.
Petitioner
testified that he never filed any estimated tax returns and that he did
not make any payment toward his admitted tax liabilities during the
years 1964 through 1969. Petitionerhas also conceded that he did not
file Federal income tax returns for the years 1966 through 1969, and we
have found that he failed to file such returns for the prior three
years.
The
section 6654 addition to
tax is mandatory unless the petitioner can place himself within one of
the computational exceptions provided for in subsection (d) thereof. As
this Court said in Estate of Ruben v. Commissioner [Dec. 24,109 ], 33 T.C.
1071, 1072 (1960): "This section has no provision relating to
reasonable cause and lack of willful neglect. It is mandatory
andextenuating circumstances are irrelevant."
Petitioner
has failed to show that he falls within one of the exceptions provided
for in section 6654(d) , and
because of his failure to file returns for the years in issue the
assessment and collection of the additions to tax is not barred by the
statute of limitations. Accordingly, we sustain the respondent's
determination, reduced to reflect agreed adjustments to the petitioner's
corrected taxable income for the years 1964 through 1969.
To
reflect the agreements of the parties and our conclusions with respect
to the disputed issues,
Decision
will be entered under Rule 155.
1
All section references are to the Internal Revenue Code of 1954, as
amended and in effect during the years in issue, unless otherwise
indicated.
2
The trial judge has listened to the tape three times in an effort to
consider the questions asked and the procedures used.
3
Petitioner has conceded that he did not file Federal income tax returns
for the years 1966 through 1969.