APPEAL FROM THE UNITED STATES TAX COURT T.C. No. 8383-79
Before Aldisert, Hunter and Sloviter, Circuit Judges.
The Internal Revenue Service (the "IRS") assessed deficiencies in federal income taxes against appellant John C. Raley (the "taxpayer") for the tax years 1972 through 1976. In addition, the IRS assessed Raley a penalty for his failure to pay an estimated tax pursuant to the Internal Revenue Code ("I.R.C.") § 6654 and added a penalty in the amount of fifty percent of the deficiency for civil fraud pursuant to I.R.C. § 6653(b). The taxpayer contested the two penalty assessments in the United States Tax Court.*fn1
The tax court ruled that the assessments resulting from Raley's failure to pay an estimated tax were proper and that Raley had failed to carry his burden of proof to the contrary. As to the civil fraud penalties, the tax court found that Raley's actions evidenced an intent to defraud the government by evading taxes which he knew or believed to be owed to the IRS, and therefore upheld the civil fraud assessments.
The only issue before us in this appeal is whether the appellant is liable for civil fraud penalties imposed pursuant to I.R.C. § 6653(b).*fn2 We hold that he is not and therefore reverse that much of the decision of the tax court that holds to the contrary.*fn3
The taxpayer is (and was for the years in question) a resident of Elizabeth, Pennsylvania. For the years 1972 through 1976, the taxpayer failed to file timely federal income tax returns. Prior to those years, the taxpayer had filed income tax returns jointly with his wife, Janet R. Raley.*fn4
John Raley worked for United States Steel Corporation for each of the years in question. In 1973, and for each year thereafter, Raley supplied Form W-4E, Exemption from Withholding, to his employer. On each form Raley claimed that he had not incurred any federal income tax liability during the immediately prior year and that he did not anticipate any such liability for the then-current year. United States Steel stopped withholding federal income tax from Raley's income for the years 1973 through 1976.
Throughout this period (and for the following two years), Raley sent numerous letters concerning his refusal to pay the federal income tax to the Internal Revenue Service, the Secretary of the Treasury, various other high ranking federal officials, and to his employer. These letters included the following statements:
As I told you last year and the year before, I am no longer going to contribute voluntarily to your boss Mr. Rockefeller's establishment of a New World Order. Toward that end, I have filed form W4E of the unconstitutional Internal Revenue Service with my employer, stopping the unconstitutional confiscation of my property to be turned over to you and your fellow conspirators.
Letter to Treasury Secretary William E. Simon, March 5, 1976; Govt. Ex. H.
After all, my refusal to file the form 1040 only clouds the real issue, which is my refusal to pay 25 percent (or any percent) of my income to the International ...