Court Opinion

ID: 4620158
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:42:05.684066+00
Date Added: 2024-06-11T07:55:46.681335
License: Public Domain

Charles M. Stewart and Annie E. Stewart v. Commissioner.Stewart v. CommissionerDocket No. 17786.United States Tax Court1949 Tax Ct. Memo LEXIS 12; 8 T.C.M. (CCH) 1075; T.C.M. (RIA) 49294; December 19, 1949B. A. Willcox, Esq., for the petitioners. Newman A. Townsend, Jr., Esq., for the respondent.  KERN Memorandum Findings of Fact and Opinion This proceeding involves determinations of deficiencies in petitioners' income tax for 1944, 1945, and 1946. Fraud penalties are in issue for each of these years. The deficiencies and fraud penalties are as follows: 50% FraudYearDeficiencyPenalty1944$ 249.87$ 124.9419451,463.63731.8219467,059.913,529.96Totals$8,773.41$4,386.72Respondent determined the amounts of petitioners' income for the respective years by the means of computations based upon bank deposits, real estate transactions, and unsubstantiated deductions. The correctness of these determinations is at issue here, together with the question of the*13  correctness of the imposition of the fraud penalties. Findings of Fact Petitioners, Charles M. and Annie E. Stewart, reside at Bradenton, Florida. Their income tax returns for 1944, 1945, and 1946, the years in question, were filed with the collector of internal revenue for the district of Florida. The original returns for the taxable years were separate returns of Charles. Amended joint returns were later filed by Charles and Annie for the same years. Petitioners are husband and wife. By previous marriages, Charles had two children and Annie had six children. Throughout 1944, 1945, and 1946 these eight children lived with and were supported by petitioners. During 1944, 1945, and 1946 Charles served as constable in Manatee County, Florida. He was first appointed to this position and was later elected for another term. His compensation consisted of fees for making arrests and serving legal papers. He received no salary, but fees were paid to him for his services as constable. Charles did not complete the term as constable for which he had been elected. During 1947 he was removed from office by the Governor of Florida. Petitioners' income tax returns for 1944, 1945, and 1946*14  were prepared by W. B. Shelby Critchlow, a lawyer with offices in Bradenton. They were based upon information furnished him by Charles. These returns disclosed all of the income which Charles revealed to Critchlow. Critchlow did not advise Charles that it was not necessary to report real estate transactions, other than those disclosed on the returns. The returns disclosed the following: 1944Income from duties as Constable$1,464.81Less: Auto expenses$804.65Other deductions174.00978.65Net Income$ 486.00 *Surtax exemptions claimed (9)$4,500.00Tax LiabilityNone1945Income from duties as Constable$1,462.12Gain on two real estate sales625.00Gross Income$2,087.12Less: Depreciation$212.40Auto expenses348.00Other deductions408.60969.00Net Income$1,118.12Surtax exemptions claimed (10)$5,000.00Tax liability$ 18.521946Income from duties as Constable$1,555.50Loss from sale of auto99.60Gross$1,455.90Less: Depreciation on car$220.05Auto expenses425.50645.55Adjusted Gross Income$ 810.45Number of exemptions listed (10)Tax liability under "Supplement T" tax tablesNone*15 In May or June, 1947, an internal revenue agent learned of Charles' suspension as constable and instituted an investigation into his returns for 1944, 1945, and 1946. Charles first stated that his returns were correct as filed; he later had an accountant prepare amended joint returns for Charles and Annie disclosing twelve real estate transactions. The amended returns revealed net short term gains from real estate transactions of $614.85, $2,068.58, and $909.45 for 1944, 1945, and 1946, respectively. In computing their net gains, petitioners claimed deductions for improvements and selling expenses. Charles stated that these had not been reported on the original returns because he understood that Critchlow and the accountant had advised him that by reason of his large family such a disclosure wasnot necessary. The amended return for 1946 failed to report one transaction in that year. At times petitioner received some rent from the properties which was not reported on the original or amended returns. Petitioners did not keep any personal records or books of account. From public records of Manatee County and from information*16  set forth on their amended returns, petitioners had the following transactions in real estate: Date ofTotalMortgageSalePurchase or SalePropertyPurchase PriceGivenPriceSept. 28, 1944Lot 27, Blk. B, Scrogins Subd.$2,800$2,300Nov. 10, 1944Lot 27, Blk. B., Scrogins Subd.$4,200Nov. 22, 1944Lot 14, Betts & Clark2,8002,000Dec. 18, 1944Lots 8 & 9, High School3,0001,600Jan. 5, 1945Lots 8 & 9, High School3,400Feb. 19, 1945Part NE 1/4 of SE 1/4, Sec. 253,4002,200Feb. 26, 1945Part NE 1/4 of SE 1/4, Sec. 253,400Mar. 5, 1945House & No. 80 ft. Riverview - acq. by ex-change for Lot 14, Betts & Clark Add.consideration500Mar. 29, 1945Lot 2, Block "F", Braeberg Plat1,600800May 31, 1945House & No. 80 ft. Riverview5,200July 16, 1945Lots 1 & 2 - Investment Subd.2,7000July 31, 1945Lots 4 & 5 - Glazier7000Feb. 2, 1946Braden Castle1,1000Feb. 6, 1946NW Turner Lot 13,4000Mar. 4, 19464th Ave. & Spring Lot2500Mar. 4, 1946NW Turner Lot5,500April 17, 1946Braden Castle Lots1,300April 19, 1946Paradise Farm Lot2500April 23, 19464th Ave. & Spring Lot300June 11, 1946High School Addn. Lots 24,0000Aug. 1, 1946High School Addn. Lots 24,200Aug. 1, 1946Glazier Gallup Lots 1 & 24,0000Oct. 4, 1946Paradise Farm500Oct. 4, 1946Glazier Gallup Lots 1 & 25,000*17 From these transactions, the revenue agent concluded that petitioners realized net short term capital gains of $1,400, $3,025, * and $3,800 for 1944, 1945, 1946, respectively. Cost and sales prices used by the revenue agent were obtained from petitioners' amended returns and the amounts indicated by the revenue stamps affixed to the deeds. No allowance was made by the revenue agent for cost of improvements or selling expenses because of his inability to ascertain evidence of such expenditurtures. During 1946, four mortgages given by petitioners in connection with certain of the above-described real estate transactions were satisfied, on the dates and in the amounts as follows: Date PaidPropertyAmount3/30/46Lot 27, Scrogins Sub$2,3005/22/46Lots 8 and 9, High School Sub.1,6007/ 5/46Lot 2, Block "F"80010/14/46Section 25, Range 172,140Total$6,840All of these properties had been disposed*18  of by petitioners in 1945. The purchasers had assumed the mortgages. During the investigation, the revenue agent asked Charles about his bank accounts. Charles produced a passbook on a savings account at the First National Bank of Bradenton in the name of "C. M. Stewart and Annie E. Stewart." This account was opened on January 14, 1947, with a deposit of $7,000, which Charles said had been given to him by an old uncle. At that time, Charles also said he had no other bank accounts. The revenue agent later discovered a checking account at the same bank in the name of "C. M. Stewart," which account had been opened October 7, 1945, closed March 31, 1947, and indicated a withdrawal of $7,000 on January 14, 1947. Upon further questioning, Charles denied that the $7,000 had come from an old uncle; he stated that it was comprised of $1,100 saved by Annie prior to their marriage, $1,400 which he had won at the dog races, and money which he had saved while working at the Tampa Shipbuilding Co. during the war. Petitioner had worked for the Tampa Shipbuilding Co. for some fourteen months prior to 1944. His income tax return for 1943 discloses total wages of $2,093.34 and exemption claimed*19  for the support of four minor children. During 1946 a total of $12,800 was deposited in the "C. M. Stewart" checking account at the First National Bank of Bradenton, including $3,750 in cash deposits. The revenue agent analyzed the deposits, some of which were identified with the above real estate transactions. He was not able to determine the origin of the following deposits of $3,810.72 for the period in question: 3-19-46 $3004- 1-46200 Currency69.904- 4-46122.494- 8-46200 Currency4-15-4650 Currency4-30-46200 Currency5- 8-4650 Currency5-10-4635625-14-46100 Currency5-23-46700 Currency5-29-46400 Currency709- 6-46261.3310- 5-4614011- 4-46400 Currency11-25-46150 Currency12-16-46100 Currency12-23-46200Total$3,810.72Respondent's notice of deficiency determined adjusted taxable net income for the years in question, as follows: 1944Net income per original return$ 486.00Plus: (a) Unreported capital gains$1,400.00(b) Deductions disallowed978.65(c) Miscellaneous income (composed of cash from undisclosed sourceinvested in real estate during year)2,700.005,078.65Adjusted taxable net income$ 5,564.651945Net income per original return$ 1,118.12Plus: (a) Unreported capital gains$2,400.00(b) Deductions disallowed968.60(c) Miscellaneous income (composed of cash from undisclosed sourceinvested in real estate during year)5,900.009,269.60Adjusted taxable net income$10,386.721946Net income per original return$ 810.35Plus: (a) Unreported capital gains$3,800.00(b) Deductions disallowed745.15 *(c) Miscellaneous income (composed of cash from undisclosed sourceinvested in real estate during year)9,300.00(d) Miscellaneous income (bank deposits from undisclosed source)3,810.72(e) Miscellaneous income (mortgages paid off during year)6,840.0024,495.87Adjusted taxable net income$25,306.22*20 Petitioners' adjusted taxable net income for the years in question, subject to exemptions, was as follows: 1944$ 3,164.6519454,386.72194610,716.22In the years in which it is concluded that there are deficiencies, no part of them was due to fraud with the intent to evade tax. Opinion KERN, Judge: Respondent, faced with the problem of ascertaining petitioners' correct income tax subject to tax for the years in question, and in the absence of cooperation from petitioners, resorted to the most acceptable means possible. See  Halle v. Commissioner, (CA-2) 175 Fed. (2d) 500, affirming  7 T.C. 245">7 T.C. 245. He used the amounts of petitioners' unexplained bank deposits, capital gains on the sale of property, the amount of money which appeared necessary to effectuate the various real estate transactions, and the sums used in the taxable years to discharge mortgages on properties which petitioners had owned. Their aggregate attributes sizable unreported incomes to petitioners, on which respondent is demanding fraud penalties. Petitioners assert that the increase*21  made by respondent in their capital gains reported in their amended returns is not correct by reason of his failure to adjust for costs of improvements and selling expenses. There is, however, no substantiating evidence in the record upon which we can find that funds were actually spent for such items or the amount thereof. The evidence shows, however, that in 1945 the amount of capital gain was $2,300 instead of $2,400. For the same reason we are not able to allow petitioner other miscellaneous deductions which he claims. Respondent also included as income sums of money invested in real estate which he regarded as cash acquired by petitioners from undisclosed sources. However, a careful analysis of respondent's recapitulation of the real estate transactions leads us to conclude that the chronology is such that petitioners in most instances used the proceeds of the sale of one property to acquire the next property. We have, accordingly, reduced these amounts to a considerable extent. The unidentified bank deposits with which respondent has petitioners charged equal $3,810.72 and all occur in the year 1946. They are deposits between March 19 and December 23, and are usually in*22  even hundreds or fifty dollars. Petitioners contend that some of these amounts represent collateral which Charles received in his official capacity, which was deposited in their bank account and accounted for on the disposition of the cases. His argument would be plausible if it were established by evidence such as the county record, which was admittedly available, or at least by a showing of offsetting withdrawals which could be identified with the deposits. On the state of the record, we must conclude that respondent did not err in including this amount in petitioners' income. Although the evidence leaves something to be desired, we believe that the record establishes and we have concluded that the income items attributed to petitioners, by reason of the discharge of mortgages on property which they had owned, were erroneous. The mortgages in question were satisfied by payment in 1946. All of the properties involved had been disposed of by petitioners in the previous year to purchasers who, we have concluded, assumed the mortgages. The final issue, that of the fraud penalties, must be concluded in petitioner's favor. Although the record suggests questionable practices on the*23  part of petitioners, we are not able to conclude that respondent has borne the burden of establishing fraud placed upon him by the statute. (I.R.C. section 1112) Many of the items going to make up the deficiencies stem from petitioner's failure to prove facts which might well have been shown. The limited experience, education, and ability of the parties are apparent throughout the case. Against such a background we are unable to conclude that respondent has presented clear and convincing proof which would lead us to the view that any part of the deficiencies was due to fraud with the intent to evade tax. (See:  Frank A. Maddas, 40 B.T.A. 572">40 B.T.A. 572, 578, aff'd. (CCA-3)  114 Fed. (2d) 548. Decision will be entered under Rule 50.  Footnotes*. There is a mathematical error of 16" on the return.↩1. Respondent concedes credit of $1,200 withdrawal from checking account. ↩2. Respondent concedes credit of $2,500 withdrawal from checking account.↩*. This figure was later changed in the explanation attached to the notice of deficiency.↩*. Including loss of $99.60 claimed on account of the sale of an automobile.↩