tcmemo_1998_346 united_states tax_court michael london petitioner v commissioner of internal revenue respondent patricia london petitioner v commissioner of internal revenue respondent docket nos filed date henry d katz for petitioner michael london eugene f sullivan jr and francis j dimento for petitioner patricia london christine colley and ronald f hood for respondent memorandum findings_of_fact and opinion whalen judge respondent determined the following deficiencies in and additions to petitioners' federal_income_tax additions to tax_year deficiency sec_6653 sec_6653 sec_6661 dollar_figure dollar_figure dollar_figure of the interest due on dollar_figure big_number big_number of the interest due on dollar_figure big_number all section references are to the internal_revenue_code as in effect during the years in issue after concessions the issues for decision are whether mr london's deposition in a prior proceeding is admissible in evidence on the ground that he is unavailable as a witness within the meaning of rule a of the federal rules of evidence due to his refusal to answer any of the questions put to him on fifth_amendment grounds whether the tapes and transcripts from the electronic surveillance conducted at mr london's business and the evidence derived therefrom are admissible in evidence whether petitioners failed to report income in and as determined by respondent using the net_worth_method of reconstructing income whether petitioners are liable for additions to tax for fraud under sec_6653 and for and whether petitioners are liable for additions to tax for substantial_understatement of liability under sec_6661 for and whether mrs london intended to file a joint_return for and whether mrs london qualifies as a so-called innocent spouse findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts supplemental stipulation of facts and attached exhibits are incorporated herein by this reference petitioners are husband and wife they filed a joint federal_income_tax return for each of the years in issue respondent issued a separate notice_of_deficiency to each petitioner and each petitioner filed a petition for redetermination in this court the two cases were consolidated pursuant to rule a tax_court rules_of_practice and procedure in this opinion all rule references are to the tax_court rules_of_practice and procedure at the time they filed their petitions mr london resided in lewisburg pennsylvania and mrs london resided in weston massachusetts in this opinion we sometimes refer to mr london as petitioner mr london graduated from high school in from to he attended bordentown military academy the university of maryland and boston university but he did not graduate from any of those institutions mrs london received a bachelor of arts degree from emmanuel college where she majored in biology she also received a teaching certificate from salem state college after graduating from college mrs london worked for massachusetts institute of technology as a laboratory assistant she was later employed by the new england baptist hospital where she taught biological studies to nursing students she left her employment at the hospital in date petitioners were married on date in chelsea massachusetts after they were married they rented an apartment in an area known as glovers landing in marblehead massachusetts where they resided for approximately years before moving to an apartment on blueberry hill road in marblehead massachusetts petitioners lived in that apartment until date when they purchased a house pincite black oak road weston massachusetts petitioners had four children roanna terrence hellene and shauna roanna attended colgate university from through terrence attended the university of michigan from through hellene attended the university of vermont from through and shauna was a first year student at georgetown university at the time of trial terrence received a partial athletic scholarship during college petitioners paid the tuition for each child's college education london's cafe inc from through mr london was a stockholder in london's cafe inc a corporation which operated a bar in chelsea massachusetts prior to the bar was owned and managed by mr london's parents who also held the bar's liquor license according to records filed with the secretary of state of the commonwealth of massachusetts in petitioner's mother mrs ida london was president and treasurer of the predecessor of london's cafe inc and petitioner's father mr isadore london was an officer of the corporation gradually petitioners took over more of the ownership of the corporation london's cafe inc and mr london took more responsibility for operation of the bar in an application filed with the liquor licensing authority in the commonwealth of massachusetts on date mrs london is identified as the owner of of the outstanding shares of stock and as a director of the corporation petitioner's mother is identified as the owner of shares and as president of the corporation mr london is identified as clerk shortly thereafter in date mrs london applied for and was granted the liquor license to operate london's cafe inc d b a heller's cafe mrs london is identified in the application as manager and director the parties have stipulated that mrs london was the liquor licensee of london's cafe inc d b a heller's cafe from through at least date in this opinion we refer to the corporation as london's cafe inc and to the bar as heller's cafe check-cashing business from through mr london also conducted a check-cashing business as a sole_proprietorship m l associates from an enclosed area in heller's cafe m l associates charged its customers a fee for cashing checks the fee ranged from to percent of the total amount of the check mr london also lent money to customers and charged various rates of interest ranging from to percent per week mr london used two bank accounts for the check- cashing business essex bank account no and shawmut county bank account no during the years through the aggregate deposits made to these accounts are as follows year amount dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure total dollar_figure m l associates issued forms w-2 wage and tax statement to petitioners' children roanna and terrence for and the forms w-2 report that each child was paid dollar_figure dollar_figure and dollar_figure for and respectively petitioner's criminal activity on date the police raided heller's cafe they arrested mr isadore london for allowing his premises to be used for gaming and they arrested petitioner for setting up and promoting a lottery in date the u s district_court for the district of massachusetts found petitioner and his father guilty of those offenses mr london and his father were arrested a second time in on date they were indicted and on date they pleaded guilty to unlawfully knowingly and willfully conducting an illegal gambling business in violation of title u s c sections and they were each sentenced to years in prison the sentences were suspended and they were placed on probation for years mr london was fined dollar_figure and his father was fined dollar_figure from through officials from the criminal_investigation_division of the internal_revenue_service the drug enforcement administration the federal bureau of investigation fbi and the massachusetts state police investigated heller's cafe for possible violation of the laws prohibiting gambling loan-sharking drug trafficking money laundering and for possible failure to submit currency transaction reports ctr's on date in response to an application and affidavit submitted by federal agents the u s district_court for the district of massachusetts issued two orders authorizing federal agents to conduct electronic surveillance at heller's cafe for a 30-day period one order authorized the agents to intercept communications in and adjacent to the enclosed area where mr london conducted the business of m l associates the second order authorized federal agents to monitor and record telephone communications on two telephones at heller's cafe a pay phone located on the premises and a private phone line belonging to m l associates the district_court extended the orders for an additional days on date federal agents terminated electronic surveillance of heller's cafe before the end of date on date pursuant to a search warrant a task force of fbi agents and massachusetts state police officers conducted a search of heller's cafe the search warrant authorized the task force to search for evidence of unlawful gambling loan-sharking distribution of narcotics money laundering and failure_to_file ctr's during the course of the search the agents seized drugs weapons records of m l associates records of bookmaking activities and money in the aggregate amount of dollar_figure consisting of a dollar_figure cashier's check and currency of dollar_figure found in a safe in the enclosed area mr london was present when federal agents searched heller's cafe on date mr london was indicted by a federal grand jury for two counts of income_tax evasion in violation of sec_7201 the grand jury returned superseding indictments on date and on date the second superseding indictment charged mr london with the following violations of the law count no title and sec nature of offense u s c u s c c and rico--conspiracy rico--substantive u s c and u s c b u s c u s c and u s c u s c and sec_7201 sec_7201 money laundering failure_to_file ctr's conspiring to commit extortion aiding_and_abetting extortion loan-sharking operating a gambling business tax_evasion for tax_evasion for by the start of mr london's trial on date the counts of the second superseding indictment had been reduced to counts several counts including the count charging mr london with gambling were dismissed by the government and several other counts were dismissed by the district_court the two counts of tax_evasion count sec_50 and sec_51 were among the counts that were not tried but the record of these cases does not explain why on date a jury returned guilty verdicts with respect to counts involving rico money laundering failure_to_file ctr's and extortion the jury acquitted mr london on one count of money laundering during the jury trial the contents of the communications intercepted during the electronic surveillance of heller's cafe were introduced into evidence on date mr london pleaded guilty to willful evasion of his federal_income_tax under sec_7201 on date the district_court gave mr london the following sentence for all of the offenses on which he was convicted the defendant is hereby committed to the custody of the united_states bureau of prisons to be imprisoned for a term of months on count sec_1 to be served concurrently with each other months on counts to be served concurrently with each other and with count sec_1 months on count to be served concurrently with count sec_1 the defendant is remanded to the custody of the united_states marshal the district_court fined him dollar_figure on count sec_5 through for money laundering on the same day the district_court also entered an order of forfeiture under which it gave the united_states title to an additional dollar_figure which mr london had agreed to forfeit the district_court entered judgment against mr london for his criminal offenses on date this judgment was affirmed by the u s court_of_appeals for the first circuit 66_f3d_1227 1st cir heller's cafe liquor license on date the board_of excise of the city of chelsea issued a decision revoking the liquor license of heller's cafe effective date the decision states in relevant part the board finds that the licensee london's cafe inc permitted a violation of a condition of its license or of the laws of the commonwealth of massachusetts by permitting mr london to use the licensed premises for a racketeering enterprise loan sharking extortion money laundering and currency violations in its decision the board_of excise also found the following all of the issued and outstanding_stock of london's cafe inc d b a heller's cafe heller's is and was at all times relevant hereto owned of record by patricia london mrs london was and is the licensed manager at all times relevant hereto on date the alcoholic beverages control commission of the commonwealth of massachusetts approved the board's decision and that action was affirmed on date by the superior court of the commonwealth of massachusetts suffolk county the memorandum of decision and order issued by the superior court on date states that patricia london was the record_owner and manager of heller's from to december wrongful_levy suit in the commissioner levied on stock brokerage accounts at paine webber and kidder peabody which petitioners owned jointly mrs london challenged the levy in a civil suit brought against the commissioner in the u s district_court of the district of massachusetts the government took mr london's deposition while the suit was pending in the parties to the suit agreed to a settlement under which mrs london received dollar_figure of assets in the paine webber account and she was permitted to keep her individual_retirement_account at paine webber amounting to dollar_figure as of date under the settlement mrs london also retained one-half of the kidder peabody account or approximately dollar_figure bank accounts during the years through petitioners either individually jointly or with mr london's parents maintained the following bank accounts bank accounts account no date opened broadway natl bank broadway natl bank broadway natl bank broadway natl bank broadway natl bank heller's cafe carmel credit_union carmel credit_union essex bank m l associates provident inst for sav shawmut county bank roanna shawmut county bank m l associates shawmut county bank before before before during mrs london wrote checks on the three accounts which she held jointly with her husband broadway national bank account no broadway national bank account no and shawmut county bank account no in addition to the above accounts petitioners reported on the schedules b interest and dividend income filed as part of their federal_income_tax returns for through that they had received interest_income from accounts at five banks atlantic savings bank commonwealth bank marblehead savings bank metropolitan credit_union and grand national bank the interest reported from those accounts is set out in the following schedule atlantic sav metro credit_union metro credit_union metro credit_union commonwealth bank commonwealth bank commonwealth bank commonwealth bank natl grand bank natl grand bank natl grand bank marblehead sav dollar_figure -- -- -- dollar_figure -- -- dollar_figure -- -- -- -- -- -- -- -- dollar_figure -- -- -- -- -- -- -- -- -- -- -- dollar_figure -- -- -- -- -- -- -- -- -- -- dollar_figure -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- they also reported receiving a small amount of interest_income during each of the years through from an account at boston five cents savings stocks petitioners purchased the following stocks and securities during the period through name no of units date purchased at t general motors corp boston edison john hancock big_number big piney oil gas big_number mass st go jj big_number mass st go jj big_number utah power light xerox corp big_number santa fe s pac big_number florida fed sav big_number san diego gas elec big_number western co of n am isomedix inc haber inc silver tech big_number big_number pension ins group am arkla inc big_number big_number mass st go fa zenith natl ins corp big_number zenith natl ins corp big_number mass st go ms so calif edison co so calif edison co big_number big_number mass med ctr j mass med ctr j big_number kidder peabody acct fund big_number pre-1977 pre-1977 pre-1977 pre-1977 1an agreement to purchase the shares was signed by petitioners on 2value as of petitioners reported on the schedules b interest and dividend income filed as part of their returns for and that the general motors boston edison john hancock and at t stocks were jointly owned on the schedule b filed as part of their return for petitioners also reported that they had received dividend income from southwestern bell ameritech u s west bell atlantic nynex bell south and pacific telesis real_estate on date petitioners paid dollar_figure to purchase the building pincite chestnut street chelsea massachu- setts the site of heller's cafe title to the building was taken in mrs london's name d b a london realty and was leased to london's cafe inc on date petitioners paid dollar_figure for improvements to the building on date mrs london purchased a ½-acre tract of land in marblehead massachusetts for dollar_figure she paid the purchase_price by check on the same day during and petitioners paid dollar_figure and dollar_figure respectively for improvements to the land petitioners sold this property on date for dollar_figure on date petitioners purchased the property pincite black oak road weston massachusetts as tenants_by_the_entirety they paid dollar_figure for the property dollar_figure from their own funds and dollar_figure from funds borrowed from the broadway national bank in chelsea massachusetts this property was petitioners' primary residence during the years at issue on date mr london purchased a condominium unit no located pincite beacon street brookline massachusetts for dollar_figure petitioner borrowed the funds used to purchase the property from the broadway national bank as collateral for the loan petitioner gave the bank two certificates of deposit which were worth dollar_figure and dollar_figure respectively as of date the maturity_date of both certificates petitioner sold the condominium unit on date for dollar_figure on date petitioners purchased property as tenants_by_the_entirety pincite greeley avenue west hyannis port massachusetts for dollar_figure hyannis port property they borrowed dollar_figure from the broadway national bank to purchase the property and agreed to repay the loan in years with interest at the rate of percent per year the loan required petitioners to make monthly payments of dollar_figure for months and to pay the balance on date petitioners gave dollar_figure of the loan proceeds to alger schilling the escrow attorneys to pay part of the purchase_price they used dollar_figure of the loan proceeds to discharge the mortgage on their weston property and used the remaining dollar_figure of the loan proceeds to pay for attorney and filing fees petitioners paid the balance of the purchase_price of the hyannis port property by depositing the following checks into the escrow account of alger schilling amount mrs london mrs london alger shilling mrs london mrs london mrs london mrs london payee bank broadway natl bank bnb acct no shawmut county bank --cashier's check cape cod co-op bnb--cashier's check bnb--cashier's check bnb--cashier's check bnb--cashier's check dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure the following is a summary of petitioners' real_estate purchase real_estate date mrs london mr london joint total chestnut st chelsea improvements marblehead improvements dollar_figure big_number big_number big_number -- -- -- -- -- -- -- dollar_figure -- -- -- big_number black oak rd weston beacon st unit no brookline -- -- dollar_figure big_number -- dollar_figure -- big_number greeley ave w hyannis port improvements -- -- big_number big_number big_number big_number big_number big_number big_number 1sold on 2sold on financial statement on date petitioners submitted a financial statement to the broadway national bank to obtain the loan mentioned above in connection with their purchase of the property located pincite black oak road weston massachusetts the statement was signed by mr london and provides the following information assets cash on hand in banks u s government securities series_e_bonds listed securities shares am tel shares general motors shares boston edison shares john hancock market_value dollar_figure big_number big_number big_number real_estate owned brick bldg --chelsea ma land--marblehead ma cost big_number big_number autos and other personal_property cash_value life_insurance dollar_figure big_number big_number big_number big_number big_number other assets investment in m l associates total assets liabilities notes payable to banks--secured automobiles total liabilities net_worth jewelry and home furnishings big_number big_number big_number big_number big_number on date petitioners' hyannis port house was burglarized in reporting the burglary to the police petitioners claimed that property worth approximately dollar_figure was stolen among the stolen items they reported to their insurance_company there were six oriental rugs worth about dollar_figure one baume-mercier watch worth about dollar_figure several items of jewelry worth about dollar_figure five-piece sterling silver place settings worth about dollar_figure and several paintings and a lithograph worth about dollar_figure automobiles petitioners purchased eight cars during the period from through the following is a summary of the cars purchased by petitioners during that period cars date purchased cost title buick dollar_figure mrs london volvo dla wagon buick estate wagon big_number mrs london big_number mrs london cadillac eldorado big_number mrs london volvo glt station wagon mercedes sec coupe big_number mrs london big_number mr london mercedes tdt station wagon big_number mrs london1 mercedes sel sedan big_number mr london2 1mrs london made a dollar_figure downpayment and financed the balance petitioners paid the balance due on date 2mr london traded in his mercedes which had a trade-in value of dollar_figure and he financed the balance by obtaining a loan from broadway natl bank for dollar_figure petitioners repaid the loan by date petitioner's parents both prior to and after petitioners' marriage mr london's parents were involved with mr london in the operation of heller's cafe petitioner's father worked at the bar and petitioner's mother was responsible for ordering supplies for the bar and paying some of the bar's bills when petitioner's mother was not feeling well petitioner's wife would order supplies for the bar petitioner's father died on date from through petitioner's mother lived pincite franklin avenue chelsea massachusetts on date she sold that property for dollar_figure but she continued to live there for about year after the sale in she rented an apartment in a subsidized housing development located pincite admiral's hill chelsea she lived in that apartment from until her death on date during the period from through petitioner's mother received the following proceeds from the sale of real_estate sold amount received everett ave elm st spruce st real_estate date 1dollar_figure and broadway dollar_figure franklin ave dollar_figure total received dollar_figure 1these properties were sold for dollar_figure petitioner's mother paid dollar_figure in taxes and dollar_figure to discharge a mortgage on the property and she received the difference dollar_figure dollar_figure - dollar_figure all of the above properties are located in chelsea massachusetts mr london's parents held a safe deposit box no at the broadway national bank in date the safe deposit box was in the name of mr london and his parents as joint_tenants in the safe deposit box was changed to another box no and it was held jointly by petitioners and mr london's mother petitioner's parents filed federal_income_tax returns for taxable years through his mother filed a federal_income_tax return for the taxable_year but she did not file individual income_tax returns for taxable years through set out below is the amount of federal_income_tax paid_by petitioner's parents from through and including year tax dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure big_number tax abated dollar_figure big_number tax abated dollar_figure -- -- dollar_figure dollar_figure dollar_figure dollar_figure -- dollar_figure dollar_figure no return filed no return filed no return filed no refund filed no refund filed no refund filed no refund filed petitioner's parents did not file a gift_tax_return form_709 or an estate_tax_return form_706 during the period from through and neither left a probate_estate petitioner and his parents shared a close personal and financial relationship in fact before he was married petitioner gave his mother most of his earnings and kept only a small allowance through the years petitioner and his parents purchased various assets jointly including stocks and bonds petitioners' income_tax returns mr gerald silverstein a public accountant prepared petitioners' joint individual income_tax returns for taxable years through mr london annually provided mr silverstein with the information necessary to prepare petitioners' individual returns from time to time mrs london also delivered to mr silverstein forms and other information necessary to prepare the returns after mr silverstein prepared each return he would give it to mr london mr silverstein signed petitioners' signatures on their return for he was not present when petitioners' returns for and were signed mr abraham trugman a certified_public_accountant prepared the schedules c profit or loss from business or profession for mr london's check-cashing business m l associates mr london supplied mr trugman with bank statements deposit slips and machine tapes showing the weekly check-cashing income of the business mr london forwarded the schedules c to mr silverstein for use in preparing petitioners' joint individual income_tax returns mr trugman never met mr silverstein the following is a summary of the joint income_tax returns filed by or on behalf of petitioners for through wages -- -- -- 1dollar_figure -- -- -- -- -- -- wages-- heller's cafe mrs london mr london dollar_figure big_number dollar_figure big_number dollar_figure big_number -- -- dollar_figure -- dollar_figure -- dollar_figure -- dollar_figure -- dollar_figure -- dollar_figure -- wages-- m l associates mrs london mr london -- -- -- -- -- -- -- -- -- -- -- -- -- -- big_number -- big_number -- big_number -- schedule b interest_income dividend2 big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number state refund -- -- -- -- -- -- -- -- schedule c m l associates schedule d capital_gain -- big_number big_number big_number big_number big_number big_number big_number big_number big_number -- -- -- -- -- -- -- -- big_number big_number schedule e chestnut st big_number big_number big_number big_number big_number big_number big_number big_number big_number total income big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number taxable_income big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number 1no form_w-2 wage and tax statement attached to return 2dividend income after exclusion 3rental income from chestnut st the site of heller's cafe was reported on petitioners' schedule e each of petitioners' returns describes the occupation of both mr and mrs london as manager mrs london received forms w-2 wage and tax statement from london's cafe inc and m l associates reporting the following wages year london's cafe inc m l associates dollar_figure big_number big_number -- big_number big_number big_number big_number big_number big_number -- -- -- -- -- -- -- dollar_figure big_number big_number petitioners' returns also report individual retire- ment account contributions on behalf of mrs london in the amount of dollar_figure for each year through and including and in the amount of dollar_figure for through and including we note that petitioners' return for includes form_5329 return for individual retirement savings arrangement on behalf of mrs london on which no is checked in response to the question are you a non- working spouse for whom this arrangement has been established we also note that petitioners' returns for through and including include schedule w deduction for a married couple when both work on which petitioners claimed deductions provided by sec_221 for two-earner married couples petitioners filed no federal_income_tax return for taxable years through they made the following estimated_tax payments for those years year estimated_tax dollar_figure big_number big_number big_number big_number big_number big_number big_number returns of london's cafe inc mr silverstein prepared returns on forms u s_corporation income_tax return for london's cafe inc for taxable years through for each of those years london's cafe inc reported zero taxable_income the following schedule summarizes the amounts reported on behalf of london's cafe inc gross_receipts cost of goods gross_profit total deduction taxable_income before certain deductions net_operating_loss_deduction taxable_income dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number big_number dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number dollar_figure big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number -- -- big_number -- -- -- big_number -- big_number -- big_number -- big_number -- big_number -- the returns were signed by the following individuals taxable_year officer's signature officer's title mrs ida london mrs london mr london mrs london mr london treasurer director clerk clerk clerk respondent's determination respondent recomputed petitioners' taxable_income for and using the net_worth_method of reconstructing income as the starting point for that computation respondent used the net_worth shown on the financial statement that petitioners submitted to the broadway national bank in dollar_figure respondent then computed petitioners' net_worth for through respondent determined that petitioners had received unreported income of dollar_figure and dollar_figure for taxable years and respectively the explanation of items attached to the notice_of_deficiency issued to mrs london states as follows it is determined that you realized additional income for in the amount of dollar_figure because the comparison of all known expenditures with all known receipts as shown on exhibit a attached hereto has established an understate- ment of income since you failed to include such additional income on your income_tax return taxable_income is increased in the amount of dollar_figure it is determined that you realized additional income for in the amount of dollar_figure because the comparison of all known expenditures with all known receipts as shown on exhibit a attached hereto has established an understate- ment of income since you failed to include such additional income on your income_tax return taxable_income is increased in the amount of dollar_figure based thereon respondent computed increases in tax of dollar_figure and dollar_figure for and respectively respondent also determined with respect to and that petitioners are liable for the additions to tax for fraud under sec_6653 and and the addition_to_tax for substantial_understatement of liability under sec_6661 opinion admissibility of mr london's deposition in the wrongful_levy suit at trial mrs london called her husband to testify as a witness in response to each of the questions put to him by mrs london's attorney and by the court mr london invoked his fifth_amendment privilege_against self- incrimination and refused to answer the question counsel for mrs london then offered into evidence the deposition of mr london taken during the wrongful_levy suit described above petitioners argue that mr london is unavailable as a witness in these cases because he validly claimed his privilege_against self-incrimination under the fifth_amendment see rule a of the federal rules of evidence or because he would have persisted in refusing to testify despite any order of this court directing him to do so see rule a of the federal rules of evidence accordingly petitioners argue that mr london's deposition is admissible into the record of these cases under rule b of the federal rules of evidence which provides an exception to the hearsay rule with respect to former testimony of the declarant respondent objects to the admission of mr london's deposition into evidence respondent asserts that the deposition is hearsay for which there is no exception respondent asserts that mrs london has not shown her husband's unavailability as a witness within the meaning of that term in rule a of the federal rules of evidence in this connection respondent asserts that mr london did not validly claim the fifth_amendment privilege_against self-incrimination because any criminal prosecution of him is remote or speculative respondent also asserts that the court did not order mr london to testify and thus there is no basis to claim his unavailability on the ground that he persisted in refusing to testify in the face of an order of the court to do so moreover respondent asserts that even if the court finds that mr london is unavailable his deposition in the wrongful_levy suit is not the type of former testimony described by rule b of the federal rules of evidence because the purpose of the deposition was to investigate mrs london's claim of an interest in two brokerage accounts neither of which was included as an asset in the net_worth statement used in these cases notwithstanding respondent's objection to the introduction of the entire deposition into evidence respondent proffered approximately pages of the deposition as an admission by a party opponent in response petitioners argue that if this portion of the deposition is accepted into evidence then rule of the federal rules of evidence requires the receipt of the entire deposition into evidence on the ground that the entire deposition ought in fairness to be considered contemporaneously with the portion introduced by respondent in reviewing mr london's fifth_amendment claims it is worthwhile to review the following statement from our opinion in 92_tc_661 it is well established that the fifth_amendment may excuse a taxpayer from responding to discovery or from testifying in this court dellacroce v commissioner supra t c the witness may invoke the privilege when he reasonably apprehends a risk of self- incrimination although no criminal charges are pending against him 390_us_39 341_us_479 the privilege not only extends to testimony which would support a conviction but also to testimony which would furnish a link in the chain of evidence needed to prosecute hoffman v united_states supra if the testimony is incriminating then the propriety of invoking the privilege depends on whether the risk of prosecution is real 406_us_472 marchetti v united_states supra pincite 797_f2d_936 n 11th cir affg per curiam an unreported order and decision of this court it is further well established that the privilege does not protect against a fear of prosecution which is remote speculative or fanciful zicarelli v new jersey state commission of investigation supra marchetti v united_states supra stubbs v commissioner supra however the privilege must be accorded liberal construction in favor of the right it was intended to secure hoffman v united_states supra the supreme court stated in 341_us_479 that under the fifth_amendment a response may not be compelled unless it is 'perfectly clear from a careful consideration of all the circumstances in the case that the witness is mistaken and that the answer s cannot possibly have such tendency' to incriminate hoffman v united_states supra pincite quoting temple v commonwealth va in these cases mr london's attorney argues that his client's fears of incrimination are reasonable he notes the fact that the government chose not to prosecute the gambling count of the second superseding indictment he also argues that any testimony by mr london about his activities during through could be used as a predicate in a rico prosecution for a later period we cannot say that mr london's position is clearly mistaken see hoffman v united_states supra pincite accordingly we agree with petitioners that mr london was unavailable at trial due to his assertion of the fifth_amendment privilege_against self-incrimination we also agree that mr london's deposition in the wrongful_levy suit constitutes former testimony described by rule b of the federal rules of evidence therefore mr london's deposition in the wrongful_levy suit is hereby accepted into evidence admissibility of the tapes and transcripts from the electronic surveillance of heller's cafe at trial respondent sought to introduce into evidence the tape recordings and transcripts of conversations that were intercepted during the electronic surveillance of heller's cafe described above petitioners object to the tape recordings and transcripts of the intercepted conversations and to certain other evidence that they claim was derived from the intercepted conversations consisting of the testimony of various government agents about the search conducted at heller's cafe on date we refer to all of the evidence that is the subject of petitioners' objection as the intercepted communications petitioners' position is that u s c sec_2515 a statutory suppression provision enacted as part of the federal wiretapping statute title iii of the omnibus crime control and safe streets act of publaw_90_351 stat prohibits the reception of the intercepted communications into evidence in these proceedings title u s c sec_2515 provides as follows whenever any wire or oral communication has been intercepted no part of the contents of such communication and no evidence derived therefrom may be received in evidence in any trial hearing or other proceeding in or before any court grand jury department officer agency regulatory body legislative committee or other authority of the united_states a state or a political_subdivision thereof if the disclosure of that information would be in violation of this chapter according to petitioners the disclosure of the intercepted communications in these proceedings is contrary to u s c sec_2517 and thus it would be in violation of this chapter ie u s c sections title u s c sec_2517 provides as follows when an investigative or law enforcement officer while engaged in intercepting wire oral or electronic communications in the manner authorized herein intercepts wire oral or electronic communications relating to offenses other than those specified in the order of authorization or approval the contents thereof and evidence derived therefrom may be disclosed or used as provided in subsections and of this section such contents and any evidence derived therefrom may be used under subsection of this section when authorized or approved by a judge of competent jurisdiction where such judge finds on subsequent application that the contents were otherwise intercepted in accordance with the provisions of this chapter such application shall be made as soon as practicable petitioners contend that the intercepted communications relate to offenses other than those specified in the order of authorization or approval within the meaning of u s c sec_2517 petitioners argue that respondent accordingly was required to obtain authorization or approval by a court of competent jurisdiction before the contents of the intercepted communications could be disclosed or used in these cases u s c sec_2517 respondent having failed to obtain such an order petitioners argue that respondent's disclosure of the contents of the electronic surveillance in these cases would violate u s c sec_2517 and thus such contents are not admissible in evidence in this proceeding pursuant to u s c sec_2515 congress enacted u s c sec_2517 and imposed the requirement of making a subsequent application to obtain judicial approval to disclose communications involving offenses other than those specified in the order of authorization or approval in order to provide assurance that the government could not secure a wiretap authorization order to investigate an offense as a subterfuge to acquire evidence of a different offense for which the prerequisites to an authorization order were lacking see eg 721_f2d_19 1st cir 700_f2d_1 1st cir 556_f2d_1209 5th cir 690_fsupp_1165 e d n y congress intended the subsequent application to include a showing that the original order was lawfully obtained that it was sought in good_faith and not as subterfuge search and that the communication was in fact incidentally intercepted during the course of a lawfully executed order s rept 90th cong 2d sess reprinted in u s c c a n we agree with respondent that u s c sec_2515 of the federal wiretap statute does not require suppression of the wiretap evidence in these cases first we do not agree that disclosure of the intercepted communications in these cases would violate u s c sec_2517 obviously if there is no violation of u s c sec_2517 then there is no predicate for petitioners' argument that suppression of the wiretap evidence is required by u s c sec_2515 title u s c sec_2517 applies only to communications relating to offenses other than those specified in the order of authorization or approval we interpret the term offenses as used in u s c sec_2517 in conformity with the use of the same term in u s c sec_2516 to mean crimes or criminal conduct however respondent is not using the contents of the intercepted communications in this proceeding as proof of tax_evasion or some other tax offense to the contrary respondent is using the intercepted communications in these civil tax cases to satisfy the commissioner's burden_of_proof with respect to the fraud addition under sec_6653 and this is a civil not a criminal_penalty 303_us_391 we acknowledge that it might also be possible to use the intercepted communications as evidence of one or more tax crimes but that is not the use to which they are being put here we do not believe that u s c sec_2517 is violated by disclosure of the intercepted communications in a civil_proceeding by reason of the fact that the same communications could theoretically be used to prove offenses other than those originally specified see united_states v campagnuolo supra pincite5 it is difficult to perceive how u s c sec_2517 would be violated in these cases in view of the fact that the government does not seek to use the intercepted communications as evidence of a tax offense see united_states v campagnuolo supra contrary to petitioners' position the introduction of the intercepted communications in these cases appears to be specifically approved by u s c sec_2517 which states as follows any person who has received by any means authorized by this chapter any information concerning a wire oral or electronic communication or evidence derived therefrom intercepted in accordance with the provisions of this chapter may disclose the contents of that communication or such derivative evidence while giving testimony under oath or affirmation in any proceeding held under the authority of the united_states or of any state or political_subdivision thereof second even assuming ad arguendo that disclosure of the intercepted communications in these cases without first obtaining judicial approval would constitute a violation of u s c sec_2517 we do not agree that suppression of the communications would be required under u s c sec_2515 that provision is intended to be read in light of u s c sec_2518 which defines the class of persons entitled to make a motion to suppress and enumerates the circumstances that trigger suppression under sec_2515 s rept supra reprinted in u s c c a n title sec_2518 provides the following three grounds for a motion to suppress i the communication was unlawfully intercepted ii the order of authorization or approval under which it was intercepted is insufficient on its face or iii the interception was not made in conformity with the order of authorization or approval in reviewing the relationship of those provisions u s c sec_2515 and sec_2518 the supreme court held in 416_us_505 and 416_us_562 that not every failure to comply fully with any requirement provided in title iii would render the interception of wire or oral communications 'unlawful ' 429_us_413 quoting united_states v chavez supra pincite according to the supreme court suppression is required only for a failure to satisfy any of those statutory requirements that directly and substantially implement the congressional intention to limit the use of intercept procedures to those situations clearly calling for the employment of this extraordinary investigative device id pincite quoting united_states v giordano supra pincite title u s c sec_2517 deals with the use and disclosure of intercepted wire or oral communications in specified circumstances s rept supra reprinted in u s c c a n therefore a violation of u s c sec_2517 would not seem to implicate the suppression remedy specified in u s c sec_2518 which applies to unlawful interceptions based upon this reasoning a number of courts have held that suppression under u s c sec_2515 is not a remedy for violation of u s c sec_2517 e g 124_f3d_411 3d cir 47_f3d_963 8th cir 780_f2d_838 10th cir 773_f2d_1128 10th cir 767_f2d_285 6th cir 601_f2d_319 7th cir 533_f2d_838 3d cir 477_f2d_999 3d cir affd on other grounds 420_us_770 449_fsupp_698 e d n y according to these courts the remedy for an unauthorized disclosure is found in u s c section which provides a civil_action for damages to any person whose wire oral or electronic communication is intercepted disclosed or intentionally used in violation of title iii it is unnecessary in the instant cases for us to follow the above cases and to decide that as a matter of law the statutory suppression rule set forth in u s c sec_2515 is never applicable as a sanction for violation of sec_2517 to decide these cases it is only necessary to conclude as we do that the facts and circumstances are such that suppression is not an appropriate remedy the same approach was taken in 547_f2d_872 5th cir see 752_f2d_415 9th cir 588_f2d_521 5th cir 76_tc_122 in these cases like fleming v united_states supra the subject communications were lawfully intercepted during a duly authorized wiretap and the court orders authorizing or approving the original interception and its extension were sought in good_faith and not as subterfuge in fact mr london's jury conviction of conspiring to conduct and actually conducting the affairs of an enterprise through a pattern or racketeering activity money laundering failing to file ctr's conspiring to commit extortion and aiding_and_abetting extortion was affirmed by the court_of_appeals 66_f3d_1227 1st cir furthermore in these cases like fleming v united_states supra the intercepted communications were made part of the public record of mr london's criminal prosecution so that petitioners' privacy interest in the subject communication is extremely weak in passing we note that on appeal mr london seeking to overturn the district court's denial of his motion to suppress evidence argued that the electronic surveillance conducted at heller's cafe in violated the federal wiretap law in five ways no department of justice official designated in u s c sec_2516 had authorized the local united_states attorney to apply for the initial interception orders the orders improperly allowed the government to monitor conversations relating to money laundering which was not an offense for which interception could be ordered see u s c sec_2516 a - o on the date the interception orders issued the government intercepted and disclosed extortion-related conversations--conversations pertaining to the paying of rent to ferrara--beyond the scope of the court's orders the court ordered and the government employed inadequate minimization procedures under u s c sec_2518 and the government's application misled the district_court as to the necessity for conducting electronic surveillance in violation of u s c sec_2518 the court_of_appeals rejected mr london's position and affirmed the district court's denial of the suppression motion united_states v london supra in fleming v united_states supra the court rejected the taxpayer's argument that the contents of the intercepted communications should be suppressed under u s c sec_2515 because the disclosure of the evidence to revenue agents was not authorized by u s c sec_2517 in view of ambiguities that the court found in u s c sec_2515 and sec_2517 the court interpreted the statute in light of its purposes and found that no purpose would be served by excluding lawfully seized evidence see fleming v united_states supra pincite the court set forth its holding as follows we hold only that evidence derived from communications lawfully intercepted as part of a bona_fide criminal investigation that results in the taxpayer's conviction may properly be admitted in a civil tax proceeding at least when the evidence is already part of the public record of the prior criminal prosecution similarly we can see no purpose in suppressing in this civil tax proceeding the contents of the intercepted communications which were lawfully seized as part of a bona_fide criminal investigation that resulted in mr london's conviction and which previously were made part of the public record in that criminal prosecution spatafore v united_states supra griffin v united_states supra fleming v united_states supra estate of best v commissioner supra the case on which petitioners rely 528_f2d_214 7th cir is distinguishable in that case the government sought and received authorization to intercept telephone conversations for the purpose of investigating a violation of u s c section which prohibits the operation of an illegal gambling business in interstate commerce nevertheless the government presented the intercepted conversations to a grand jury and obtained the defendant's indictment under u s c section which prohibits the transmission of wagers and wagering information in interstate commerce united_states v brodson supra pincite the government failed to seek an order under u s c sec_2517 until approximately months later just prior to trial united_states v brodson supra unlike the instant cases united_states v brodson supra involved an attempted use by the government of the fruits of a wiretap to prove a crime other than that specified in the order of authorization or approval accordingly the court_of_appeals approved the district court's dismissal of the indictment as a sanction for the government's failure to obtain the order required by u s c sec_2517 net_worth computation taxpayers are required to keep adequate books_or_records from which their correct_tax liability can be determined sec_6001 in the absence of such books_or_records the commissioner is entitled to reconstruct a taxpayer's income by any reasonable means sec_446 the net_worth_method is an indirect method of reconstruct- ing taxable_income that has long been approved by the courts see eg 348_us_121 904_f2d_101 1st cir affg tcmemo_1989_94 and tcmemo_1988_299 726_f2d_876 1st cir mazzoni v commissioner 451_f2d_197 3d cir affg tcmemo_1970_144 and tcmemo_1970_37 388_f2d_862 1st cir under the net_worth_method the commissioner seeks to compute taxable_income in a given year by determining from all available evidence of assets and liabilities the increase or decrease in the taxpayer's net_worth over a 12-month_period adding to it his nondeductible expenses for that year and subtracting from that sum any amount attributable to nontaxable sources mcgarry v united_states supra pincite a net_worth increase computed for a given year creates an inference of taxable_income if the commissioner shows a likely source of unreported income or negates possible nontaxable sources e g 355_us_595 manzoli v commissioner supra pincite the commissioner must clearly and accurately establish the opening net_worth of the taxpayer by competent evidence see manzoli v commissioner supra pincite 890_f2d_711 5th cir 232_f2d_520 1st cir revg and remanding tcmemo_1955_46 in the instant cases petitioners did not provide any books_or_records from which their tax_liability could be computed and respondent chose to reconstruct petitioners' income using the net_worth_method as the starting point for the net_worth computations respondent used dollar_figure the net_worth reported on the financial statement that they submitted on date to the broadway national bank in connection with their loan application to purchase the property located pincite black oak road respondent then computed petitioners' net_worth for the years through and including according to respondent's computation petitioners' net_worth increased from dollar_figure to dollar_figure during that time the likely source of the increases in petitioners' net_worth is the profits from mr london's unlawful activities respondent's net_worth statement is summarized in appendix a hereto petitioners attack the net_worth statement on three grounds first petitioners assert that respondent did not take into account the balances in five bank accounts second petitioners contend that respondent used incorrect balances with respect to three bank accounts finally petitioners argue that respondent failed to take into account a cash hoard derived by petitioners as gifts given from mr london's mother mrs ida london we describe each of petitioners' factual contentions in detail below even if we assume that respondent's net_worth statement should be adjusted in order to take into account all of petitioners' contentions that would cause no change in the taxable_income determined by respondent for the year and this is shown in appendix b hereto in which all of the changes suggested by petitioners have been made and there is no change in respondent's computation of taxable_income for and omitted bank balances petitioners assert that respondent's net_worth statement is wrong because it does not take into account the balances that petitioners maintained at five banks with respect to which they reported interest_income on their federal_income_tax returns for through the five banks are atlantic savings commonwealth bank marblehead savings metropolitan credit_union and national grand bank petitioners assert that the median rate of interest_paid by banks in the years of the net_worth investigation wa sec_5 and that a reasonable way to ascertain a balance in a given account is to multiply the interest figure by sic based upon this approach it appears that petitioners are complaining that respondent omitted the following account balances from the net_worth statement in these cases atlantic sav metro credit_union metro credit_union metro credit_union commonwealth bank commonwealth bank commonwealth bank commonwealth bank natl grand bank dollar_figure -- -- -- big_number big_number big_number big_number big_number dollar_figure big_number big_number big_number big_number big_number big_number -- big_number dollar_figure big_number -- -- big_number -- -- -- -- dollar_figure -- -- -- -- -- -- -- -- dollar_figure -- -- -- big_number -- -- -- -- dollar_figure -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- natl grand bank natl grand bank marblehead sav big_number big_number big_number big_number big_number -- -- -- -- -- -- -- -- -- -- -- -- big_number big_number big_number big_number big_number -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- if we were to accept petitioners' assertion that they maintained balances in the accounts at the five banks in the amounts and for the years shown above we would agree with their contention that respondent's net_worth statement should have included those bank balances as assets it is unnecessary to make that finding however because even if it were true it would not change respondent's computation of petitioners' taxable_income for and the revised net_worth statement attached hereto as appendix b shows that inclusion of the above bank balances as assets would not cause any change in respondent's computation of taxable_income for and incorrect bank balances petitioners also complain that the balances included in respondent's net_worth statement for accounts at three banks are wrong first petitioners complain that respondent's net_worth statement includes a balance of dollar_figure for petitioners' shawmut county bank account no for the first time in whereas in fact the account was opened in with an initial deposit of dollar_figure in effect it appears that petitioners are complaining that their total assets are understated by dollar_figure from when the account was opened through the year before respondent included the account in the net_worth computation second petitioners complain that the provident institution for savings account which is included on respondent's net_worth statement beginning in had been opened in or prior to and had substantial balances prior to respondent included this account on the net_worth statement for the first time in with a balance of dollar_figure petitioners contend that they maintained balances in the account prior to that year essentially petitioners complain that respondent's net_worth statement understates their total assets by the amount that was in the provident institution for savings account from through the year before respondent included the account in his net_worth computation third petitioners complained at trial that respondent's net_worth statement fails to include yearend balances that were on deposit in the carmel credit_union account no from through respondent first included the carmel credit_union account in with a balance of dollar_figure petitioners contend that their total assets are understated by the amounts that were in the carmel credit_union account from through and including a check register from that account shows a balance in the account of dollar_figure at the end of dollar_figure at the end of and dollar_figure at the end of in the revised net_worth statement attached hereto as appendix b we have adjusted respondent's net_worth statement by including a balance of dollar_figure in the shawmut county bank account for the years through by including a balance of dollar_figure in the provident institute for savings account for through and by including the yearend balances shown by the check register for the carmel credit_union account no for through appendix b demonstrates that even if we accept petitioners' position that respondent's net_worth statement is in error with respect to those balances the errors have no effect on respondent's computation of petitioners' net_worth or taxable_income for and cash hoard obtained as gifts from mr london's mother finally petitioners argue that respondent's net_worth statement is wrong because it fails to take into account a cash hoard obtained as gifts from petitioner's mother mrs ida london according to petitioners mrs ida london gave them cash from treasury bonds and other_securities worth from dollar_figure to dollar_figure the proceeds from the sale in of mrs ida london's property pincite and broadway in the amount of dollar_figure the proceeds from the sale in of mrs ida london's home at franklin avenue in the amount of dollar_figure treasury bills and certificates of deposit in an amount from dollar_figure to dollar_figure and occasional cash gifts petitioners argue that respondent's disregard of a possible cash hoard bond proceeds and other_property of ida london and disregard for the existence of a plausible explanation as to the informal transfer of parental property to their only child only daughter-in-law and grandchildren indicates that the net_worth statement is wrong and cannot retain its presumption of correctness in this case at the outset we note that the record as to each of the assets that petitioner's mother allegedly gave to petitioners is vague as to the amount of the asset and the time that she allegedly transferred it to her son and his family for example mrs london testified that her mother-in-law had close to dollar_figure in bonds whereas a list of the bonds that petitioner sought to introduce into evidence totaled dollar_figure according to respondent's agent of which dollar_figure had not been redeemed at the time of trial on the other hand petitioner proposed the following finding of fact which states that bonds totaling dollar_figure were cashed prior to date agent sullivan testified bonds were cashed prior to april tr in the following amounts and years dollar_figure big_number big_number big_number big_number big_number there are also outstanding evidentiary issues such as whether the list of bonds referred to above can be accepted into evidence as the past recollection recorded of mrs london under rule of the federal rules of evidence in passing we note that we found mrs london's testimony regarding the gifts that her family received from her husband's mother to have been vague self- serving and not credible of course we are not obligated to accept such testimony see 87_tc_74 moreover we are skeptical of petitioners' argument that mrs ida london was able to accumulate such large sums of cash by her frugal lifestyle first the only source of mrs ida london's income was london's cafe inc which did not report any taxable_income in the years from through furthermore the tax paid_by petitioner's parents during the last years of mr isadore london's life shows that the couple earned very little income and mrs ida london filed no tax_return during the last years of her life petitioner's parents did not file gift or estate_tax returns during through and they left no probate_estate furthermore on date when mrs ida london sold her home on franklin avenue she rented an apartment located in a subsidized housing project it is unnecessary to resolve the factual and evidentiary issues presented by petitioners' cash hoard defense because even accepting petitioners' assertion that mrs ida london transferred her property to them we would still hold for respondent this is true because even if we were to accept petitioners' position that mrs ida london transferred the subject assets to them there is nothing in the record to establish that the net_worth increases computed by respondent for and are in any way linked to any of those assets for example in the case of the bonds the principal source of alleged gifts petitioners ask the court to find based upon agent sullivan's testimony that the bonds were cashed prior to date however there is no testimony or other evidence concerning the manner in which this alleged sum was expended or indicating it has any relationship to the net_worth increases in and see 388_f2d_862 1st cir the same is true of the proceeds from the sale of mrs ida london's property pincite and broadway for dollar_figure in and the proceeds from the sale of her home at franklin avenue in the amount of dollar_figure in in the case of the funds that were invested in treasury bills or certificates of deposit through mrs ida london's account at broadway national bank petitioners' proof suggests that approximately dollar_figure to dollar_figure were invested through the account beginning in but there is no evidence to suggest that such funds were withdrawn from the account prior to or during or for the above reasons we sustain respondent's determination of petitioners' taxable_income for and whether petitioners filed a joint_return for we disagree with petitioners' contention that they did not file a joint_return for and therefore mrs london cannot be held liable for any deficiency thereon petitioners' position is based solely upon the contention that she did not sign the return however it is clear that there can be a binding joint_return even though one of the spouses fails to sign the return e g o'connor v commissi412_f2d_304 2d cir affg in part revg in part and remanding tcmemo_1967_ 251_f2d_44 8th cir affg 27_tc_2700 210_f2d_247 3d cir affg per curiam 18_tc_1032 in this case there is ample evidence from which we infer that mrs london intended to file a joint_return with her husband for example mrs london had a long history of filing joint tax returns the return included her wage income and income from other sources such as jointly held property her petition in this court does not assert that she did not file a joint_return most significantly at trial she testified only that she did not sign the return she did not testify that she had no intention to file a joint_return or that mr london signed the return without her consent additions to tax for fraud respondent determined that petitioners are liable for the additions to tax for fraud under sec_6653 and with respect to their and returns sec_6653 imposed an addition_to_tax in the amount of percent of the underpayment if any part of the underpayment is due to fraud and sec_6653 imposed an addition_to_tax in the amount of percent of the interest payable under sec_6601 with respect to the portion of the underpayment which is attributable to fraud for purposes of sec_6653 fraud is defined as an actual intentional wrongdoing or intentionally committing an act specifically to evade a tax believed to be owing 118_f2d_308 5th cir revg 40_bta_424 respondent bears the burden of proving by clear_and_convincing evidence that there is an underpayment_of_tax and that some part of this underpayment is due to fraud sec_7454 rule b fraud is established by showing that the taxpayer intended to evade tax believed to be owing by conduct intended to conceal mislead or otherwise prevent the collection of such tax 91_tc_874 80_tc_1111 in the case of a joint_return respondent must prove some part of the underpayment is due to the fraud of each spouse sec_6653 56_tc_982 affd 470_f2d_87 1st cir 56_tc_213 the existence of fraud is a question of fact to be resolved upon consideration of the entire record 96_tc_858 affd 959_f2d_16 2d cir 67_tc_181 affd without published opinion 578_f2d_1383 8th cir fraud will never be imputed or presumed but must be established by clear_and_convincing evidence 55_tc_85 since direct proof of a taxpayer's fraudulent intent is rarely available fraud may be shown by circumstantial evidence 79_tc_995 affd per curiam 748_f2d_331 6th cir a taxpayer's entire course of conduct may establish the requisite fraudulent intent stone v commissioner supra pincite 53_tc_96 courts have developed several indicia or badges_of_fraud these badges_of_fraud include understating income maintaining inadequate records failing to file tax returns implausible or inconsistent explana- tions of behavior concealing income or assets failing to cooperate with tax authorities engaging in illegal activities an intent to mislead which may be inferred from a pattern of conduct lack of credibility of the taxpayer's testimony filing false documents and dealing in cash 317_us_492 796_f2d_303 9th cir affg tcmemo_1984_601 recklitis v commissioner supra pincite although no single factor is necessarily sufficient to establish fraud the combination of a number of factors may be persuasive evidence of fraud 732_f2d_1459 6th cir affg per curiam tcmemo_1982_603 a taxpayer's intelligence and education are also relevant for purposes of determining fraudulent intent stephenson v commissioner supra pincite mr london concedes that his guilty plea to tax_evasion in violation of sec_7201 for estops him from denying liability for additions to tax for fraud under sec_6653 and b for that year the issues remaining for decision are whether mr london is liable for the additions to tax for fraud for petitioners' return and whether mrs london is liable for the additions to tax for fraud for and respondent contends that the following facts when taken as a whole establish that petitioners' underpayment_of_tax for and was attributable to fraud there is a large discrepancy between petitioners' actual income and the income reported on their returns for and petitioners did not keep adequate books_or_records from which their tax_liability could be computed mr london was engaged in illegal activities mr london attempted to conceal his illegal activities mrs london was actively involved in petitioners' finances mr london did not supply complete information about the check-cashing business' income and expenses to mr trugman the accountant who prepared the schedule c for m l associates and mrs london's explanations of her behavior are implausible or inconsistent we agree with respondent that several indicia of fraud are present with respect to mr london in these cases mr london failed to report income in the amounts of dollar_figure for and dollar_figure for these understatements represented approximately a 20-percent omission_of_income for and a 45-percent omission for substantial understatements of income in successive years when coupled with other circumstances showing an intent to conceal or misstate income justify an inference of fraud holland v united_states u s pincite 799_f2d_166 5th cir affg tcmemo_1985_148 moreover the fact that mr london engaged in illegal activities and was con- victed of rico offenses money laundering extortion and failure_to_file ctr's is a badge of fraud bradford v commissioner supra pincite mr london has not shown that he maintained adequate books_and_records for m l associates his check-cashing business special_agent rooks testified that he found no formal books_and_records for m l associates mr london's failure to maintain adequate_records is indicative of fraud 89_tc_1280 in addition mr london supplied inaccurate information to mr trugman an accountant who prepared the schedules c for m l associates mr trugman testified that he was not able to track all the deposits made into accounts for m l associates providing incorrect information to a tax_return_preparer is also a badge of fraud 67_tc_143 upon consideration of the entire record we find that respondent has proven by clear_and_convincing evidence that mr london acted with the requisite fraudulent intent and that the entire understatement_of_tax for and is due to mr london's fraud as determined by respondent accordingly we sustain respondent's determination that mr london is liable for the additions to tax for fraud under sec_6653 and we reach a different conclusion with respect to mrs london in her case we do not believe that respondent has proven by clear_and_convincing evidence that she intended to evade tax believed to be owing by conduct intended to conceal mislead or otherwise prevent the collection of such tax see recklitis v commissioner t c pincite rowlee v commissioner t c pincite respondent's proof of mrs london's fraud is principally based on the contention that she was deeply involved in the couple's business and financial affairs we agree that mrs london owned stock in london cafe inc wrote checks on various accounts maintained by petitioners and purchased assets such as real_estate and automobiles however there is no evidence of her involvement in mr london's illegal activities the source of the unreported income for example during the surveillance of heller's cafe mrs london was never observed in the bar she was not a target of the government's investigation as to the unreported income mr london insulated his wife from the reporting of that income by supplying information for preparation of the schedules c profit or loss from business or profession to mr trugman the schedules c were then given to mr silverstein for preparation of petitioners' joint individual income_tax returns there is no evidence that mrs london was involved in the accounting for or reporting of income from mr london's illegal activities upon consideration of the entire record we find no clear_and_convincing evidence that mrs london took any_action intended to conceal mislead or otherwise prevent the collection of federal_income_tax additions to tax under sec_6661 respondent determined that petitioners are liable for the addition_to_tax for substantial_understatement of liability under sec_6661 sec_6661 imposes an addition_to_tax of percent of any underpayment attributable to a substantial_understatement_of_income_tax which is assessed after date 90_tc_498 a substantial_understatement is any understatement which exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6661 petitioners bear the burden of proving that respondent's determinations are incorrect rule a petitioners failed to address this issue at trial or in their posttrial briefs they have shown no reason why they are not liable for the addition_to_tax accordingly we sustain respondent's determination that petitioners are liable for the addition_to_tax for substantial understate- ment of liability under sec_6661 innocent spouse relief petitioners claim that mrs london is eligible to be relieved of liability for the tax deficiencies and additions to tax for and under former sec_6013 following passage of sec_6015 by the internal_revenue_service restructuring and reform act of publaw_105_206 112_stat_685 the court is deferring consideration of this issue until the parties have been given an opportunity to provide the court with their positions concerning the effect of the new law to reflect the foregoing an appropriate order will be issued appendix a net_worth statement total assets liabilities dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure net_worth less prior year's net_worth dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure increase decrease in net_worth dollar_figure big_number dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure plus nondeductible expenditures nondeductible capital_loss subtotal less non-taxable items corrected agi excess_itemized_deductions personal exemptions corrected taxable_income taxable_income per return unreported income dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure -0- dollar_figure dollar_figure dollar_figure -0- dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure big_number dollar_figure appendix b revised net_worth statement pre-1976 atlantic sav commonwealth bank commonwealth bank commonwealth bank commonwealth bank marblehead sav metro credit_union metro credit_union metro credit_union grand natl bank grand natl bank grand natl bank shawmut bk of boston provident carmel adjustments dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure -0- total assets per net_worth statement dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure adjusted total assets liabilities net_worth less prior year's net_worth dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure increase decrease in net_worth dollar_figure big_number dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure nondeductible expenditures nondeductible capital_loss subtotal non-taxable items bonds treasury bills proceeds from sale of home at franklin ave proceeds from sale of broadway other non-taxable items corrected agi excess_itemized_deductions personal exemptions corrected taxable_income taxable_income per return unreported income dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure - - dollar_figure dollar_figure dollar_figure - - dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure big_number dollar_figure


t c memo united_states tax_court dale a rinehart and jeana l yeager f k a jeana l rinehart commissioner of internal revenue respondent et al petitioners v docket nos filed date frank c hider for petitioners abbey b garber for respondent memorandum findings_of_fact and opinion vasquez judge this case is before the court on petitioners’ motion for leave to file out of time a motion for cases of the following petitioners are consolidated herewith jeana l yeager docket no dale a rinehart docket no jeana l yeager docket no reconsideration of opinion motion for leave and petitioners’ motion for reconsideration of opinion and memorandum brief in support thereof motion for reconsideration regarding our opinion in rinehart v commissioner tcmemo_2002_71 rinehart ii respondent determined deficiencies in and penalties on petitioners’ federal income taxes as follows docket no year deficiency dollar_figure big_number big_number big_number big_number penalty sec_6662 dollar_figure big_number big_number big_number big_number in rinehart v commissioner tcmemo_2002_9 rinehart i we addressed the issue of whether dale a rinehart’s mr rinehart horse breeding activity was an activity_not_engaged_in_for_profit for and in rinehart ii we addressed the issues of whether petitioners had cancellation_of_indebtedness_income cod income for and whether petitioners were liable for penalties pursuant to sec_6662 in rinehart i and rinehart ii we made no findings and reached no conclusions regarding petitioners’ marital status for federal_income_tax purposes unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure in the motion for leave and the motion for reconsideration petitioners argue that the court needs to address petitioners’ marital status in order to resolve computational adjustments and the sec_6662 penalties contained in the notices of deficiencies petitioners contend they will be harmed absent a ruling on these issues accordingly even though they seek to file the motion for reconsideration considerably more than days after our written opinion in rinehart ii was served they argue that in the interest of justice we should permit them leave to file the motion for reconsideration and reconsider our opinion respondent does not object to granting petitioners leave to file the motion for reconsideration we agree that it is in the interest of justice to permit petitioners to file the motion for reconsideration accordingly we shall grant the motion for leave and we shall grant the motion for reconsideration in order to address the following issues the marital status of mr rinehart and petitioner jeana l yeager ms yeager for federal_income_tax purposes for and and whether petitioners are liable for penalties pursuant to sec_6662 related to claiming a petitioners do not seek reconsideration of any of our other findings or conclusions in rinehart ii we use the term ms yeager for convenience only the use of this term is not a finding regarding petitioners’ marital status during the years in issue filing_status of single on their and tax returns rule findings_of_fact we incorporate our findings in rinehart i and rinehart ii herein by this reference marriage divorce and annulment in ms yeager married william z williams in the state of washington sometime thereafter mr williams filed for divorce in date the superior court of washington issued a decree of dissolution dissolving ms yeager and mr williams’ marriage decree of dissolution the court decreed that ms yeager’s name was changed to jeana lee yeager ms yeager did not contest the divorce in date petitioners married in texas ms yeager received a copy of the decree of dissolution before she married mr rinehart shortly after his marriage to ms yeager mr rinehart filed a life event change form with his employer american airlines to notify it of his marriage to ms yeager mr rinehart filed this form so that ms yeager would be afforded spousal benefits from american airlines in date mr rinehart filed forms with american airlines designating ms yeager the beneficiary of his retirement benefits program in or about date ms yeager filed a complaint for declaratory_judgment against mr williams in the state of washington as a result of the divorce ms yeager wanted to be released from a management_contract between mr williams and herself in this complaint ms yeager acknowledged that she was divorced from mr williams and referred to mr williams as her ex-husband in date richard g rutan and the trustee for voyager aircraft inc voyager filed a complaint for money damages listing ms yeager as a defendant rutan lawsuit on date in the district_court 336th judicial district grayson county texas the texas state court mr rinehart sought an uncontested annulment from ms yeager pursuant to sec_2 of the texas family code mr rinehart claimed that ms yeager’s marriage to mr williams was never dissolved by divorce annulment or death on the same day ms yeager filed a waiver of service appearance and admission of facts the waiver in the waiver the rutan lawsuit arose from ms yeager’s involvement with mr rutan and voyager in an attempt to fly an airplane around the world without stopping or refueling in date mr rutan and ms yeager accomplished this feat an aviation milestone and as a result the airplane used to accomplish it hangs in the smithsonian air and space museum in the rutan lawsuit mr rutan alleged that ms yeager misappropriated memorabilia and funds from voyager in sec dollar_figure of the texas family code was renumbered sec tex fam code sec vernon ms yeager indicated that she did not contest the annulment in the waiver ms yeager swore that when she married mr rinehart the divorce action between her and mr williams was not final and was still pending before the court in washington state also that same day the texas state court issued a decree of annulment declaring petitioners’ marriage null and void at ms yeager’s request the texas state court ordered and decreed that ms yeager’s legal name was jeana lee williams the reason petitioners obtained the annulment was to insulate mr rinehart’s assets from ms yeager’s creditors even though the texas state court annulled petitioners’ marriage ms yeager considered herself divorced from mr williams because mr williams had not taken any legal action to set_aside the divorce in date month after the decree of annulment was issued ms yeager filed for bankruptcy in the bankruptcy petition ms yeager stated that she was divorced and that mr williams was her ex-husband on the bankruptcy petition ms yeager listed her last name as yeager and not williams ms yeager filed the bankruptcy petition days before the final settlement conference and approximately week before the trial in the rutan lawsuit sometime after the filing of the bankruptcy petition the rutan lawsuit was settled mr rutan dropped the rutan lawsuit after learning that ms yeager had filed for bankruptcy was divorced and was earning only dollar_figure a month as a ranch hand in date and date mr rinehart signed health insurance benefit forms that listed ms yeager as his wife sometime after date mr rinehart mailed a letter to american airlines discussing the surgical health benefits for his wife ms yeager around date mr williams died in date mr rinehart initialed a pension benefit election form that listed ms yeager as his wife in date respondent served a set of interrogatories on ms yeager in date ms yeager responded to these interrogatories in her responses ms yeager admitted that she had received documents from the court in washington state that the divorce from mr williams was final and she was finally divorced from mr williams in date from the date of their marriage through the time of trial petitioners lived together during this time petitioners held themselves out as husband and wife during and subsequent to the years in issue people referred to mr rinehart as mr yeager and to ms yeager as mrs rinehart ms yeager was eligible for spousal benefits including health_insurance_coverage from american airlines only if she and mr rinehart were married tax returns petitioners timely filed their tax returns for and petitioners filed a joint_return for and filed separate returns claiming a filing_status of single for and ms yeager listed her last name as yeager and not williams on her and returns petitioners filed a joint federal_income_tax return for on this return ms yeager listed her last name as rinehart in date month prior to the trial in this case mr rinehart filed a form 1040x amended u s individual_income_tax_return for changing his filing_status from married filing joint_return to single ms yeager also filed an amended_return for claiming single status on the amended_return ms yeager listed her last name as yeager opinion i marital status a burden_of_proof as a preliminary matter petitioners argued that respondent raised a new issue in the answer by asserting that petitioners should be treated as married for their federal_income_tax filing_status and consequently respondent bears the burden_of_proof on the issue of whether petitioners should be treated as married during the years in issue generally petitioners bear the burden_of_proof rule a respondent however bears the burden_of_proof with respect to any new_matter pleaded in the answer id an assertion in the answer is treated as a new_matter when it either increases the original deficiency or requires the presentation of different evidence 112_tc_183 93_tc_500 a new_theory that merely clarifies or develops the original determination is not a new_matter in respect of which respondent bears the burden_of_proof shea v commissioner supra pincite wayne bolt nut co v commissioner supra pincite in notices of deficiency for and issued to petitioners respondent determined that petitioners were married and that petitioners’ correct filing_status for and was married filing separate the explanation of adjustments contained in petitioners’ notices of deficiency states since you were married and domiciled in a community_property_state we have computed your tax_liability in accordance with community_property_laws in their separate petitions petitioners claimed that they were not married during the years in issue because the texas state court had annulled their marriage in reply to sec_7491 is not applicable to this case rinehart v commissioner tcmemo_2002_9 petitioners’ allegation respondent responded in his answers that petitioners should be treated as married during the years in issue for purposes of their federal_income_tax filing_status even though their marriage was annulled in respondent’s clarification of the basis of his determination that petitioners should be treated as married did not increase the original deficiency or require the presentation of different evidence accordingly we conclude that petitioners bear the burden_of_proof on this issuedollar_figure b effect of the annulment petitioners were married in date in date mr rinehart sought an annulment of petitioners’ marriage and the texas state court issued a decree of annulment declaring petitioners’ marriage null and void on their and federal_income_tax returns petitioners designated their filing_status as single petitioners argue that the effect of the decree of annulment was to render the marriage void from its inception and that their filing_status of single for and was correct and they were also entitled to claim a filing_status of single for the evidence regarding the annulment of petitioners’ marriage was directly related to respondent’s determination that petitioners were married and that texas community_property_laws applied we note however that our resolution of this issue does not depend on which party bears the burden_of_proof the determination of whether an individual is married shall be made as of the close of the taxable_year sec_7703 marital status for federal tax purposes is defined by state law 64_tc_552 affd 550_f2d_1201 9th cir in general we give full faith and credit to a determination of marital status by a state court possessed of jurisdiction over the subject matter and parties e g stark v commissioner tcmemo_2003_47 we are however only bound to follow interpretations of state law as announced by the highest court of that state 387_us_456 accordingly we conclude that in the unusual circumstances of this case we are not bound by the decision of the texas state court regarding petitioners’ marital status id 79_tc_415 indeed petitioners’ actions perpetrated a fraud on the texas state court and we believe that the texas supreme court would not enforce such a decree against third parties such as respondent in this case ms yeager’s marriage to mr williams was dissolved in as of the close of and and through the time of trial petitioners lived together as husband and wife and represented themselves to others as being married petitioners never intended to and never did physically separate from each other before or after the annulment petitioners supplied information to the texas state court that conflicted with information ms yeager provided to the bankruptcy court mr rinehart provided to his employer and ms yeager provided to a washington state court in her complaint for declaratory_judgment petitioners’ annulment was grounded on their collusive falsehoods mr rinehart was wrong when in seeking an annulment from the texas state court he stated that ms yeager’s marriage to mr williams had not been dissolved by divorce likewise ms yeager was wrong when in acceding to the annulment she represented to the texas state court that her divorce action with mr williams was not final and was still pending in washington state these were not honest mistakes based on the foregoing we sustain respondent’ sec_11 we note that there is an additional reason for disregarding the annulment for tax purposes in general an annulment has the effect of declaring a marriage void ab initio under texas law home of the holy infancy v kaska s w 2d tex it thus relates back to erase the marriage from the outset id the doctrine_of relation back however is not absolute in texas 3_f3d_131 5th cir courts have recognized that annulment is a legal fiction and the relation_back_doctrine is a limited concept id home of the holy infancy v kaska supra pincite i n cases involving the rights of third parties courts have been especially wary lest the logical appeal of the fiction should obscure fundamental problems and lead to unjust or ill-advised results respecting a third party’s rights home of the holy infancy v kaska supra pincite quoting sefton v sefton p 2d cal in the present case mr rinehart filed his petition for an continued determination regarding petitioners’ filing_status for the years in issuedollar_figure ii sec_6662 penalties pursuant to sec_6662 a taxpayer may be liable for a penalty of percent on the portion of an underpayment_of_tax due to negligence or disregard of rules or regulationsdollar_figure sec_6662 sec_6664 provides that no accuracy-related_penalty shall be imposed with respect to any portion of an underpayment if it is shown that there was reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion the decision as to whether the taxpayer acted with reasonable_cause and in good_faith depends upon all continued annulment only month before ms yeager filed her bankruptcy petition up until that time and since that time petitioners held themselves out as being married furthermore as we previously stated in order to obtain the annulment petitioners supplied incorrect information to the texas state court their attempt to claim that they were not married as a result of the decree of annulment does not promote the purposes for which the relation_back_doctrine was intended petitioners also argue that respondent ignores his own rulings ie revrul_76_255 1976_2_cb_40 regarding the effect of their annulment we disagree petitioners’ situation is factually similar to situation in the revenue ruling-- applying the sham_transaction doctrine to taxpayers who divorced because it would be advantageous for them to be unmarried at the end of the calendar_year but who never intended to remain unmarried and did not remain unmarried see 668_f2d_1382 4th cir sec_7491 is not applicable to these cases see supra note the pertinent facts and circumstances sec_1_6664-4 income_tax regs with regard to claiming a filing_status of single on their tax returns for and we do not believe that petitioners acted with reasonable_cause and in good_faith see supra pp accordingly we hold that petitioners are liable for the accuracy-related_penalties related to their claiming a filing_status of single on their tax returns for and to reflect the foregoing an appropriate order will be issued