Court Opinion

ID: 4596377
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:16:59.904083+00
Date Added: 2024-06-11T07:51:36.456849
License: Public Domain

Sam Steinberg and Rose Steinberg v. Commissioner.Steinberg v. CommissionerDocket No. 83549.United States Tax CourtT.C. Memo 1962-108; 1962 Tax Ct. Memo LEXIS 202; 21 T.C.M. (CCH) 593; T.C.M. (RIA) 62108; May 2, 1962*202  1. Held, that part of the deficiency for each taxable year is due to fraud with intent to evade tax within the meaning of section 293(b), I.R.C. 1939. Additions to tax under said section approved. 2. Held, that petitioners' failure to file a return for 1948 was not due to reasonable cause. Addition to tax for said failure, imposed under section 291(a), is approved. 3. Held, that an addition to tax under section 294(d)(1)(A) for failure to file declarations of estimated tax for all taxable years involved except 1952, and also an addition to tax for 1952 under section 294(d)(2) for substantial underestimate of estimated tax, approved. 4. Held, that the return for each of the years 1949 through 1953 was false or fraudulent with intent to evade tax, within the meaning of section 276(a). Accordingly assessment of the deficiencies and additions to tax for each of the years 1949, 1950 and 1951, is not barred by limitation.  Lawrence McTurnan, Esq., and George M. Mott, Esq., Hume Mansur Bldg., Indianapolis, Ind., for the petitioners. Conley G. Wilkerson, Esq., for the respondent.  PIERCE Memorandum Findings of Fact and Opinion PIERCE, Judge: The respondent determined deficiencies and additions *203 to tax against the petitioners, for calendar years and in amounts, as follows: 1Additions to TaxSec.Sec.YearDeficiencySec. 293(b)Sec. 291(a)294(d)(1)(A)294(d)(2)1948$1,873.88$ 936.94$468.47$168.66$112.4319493,445.321,722.66310.07206.7219501,736.58868.29160.07106.7119511,319.24659.62115.4276.9519521,406.19703.0979.1819532,922.031,461.02301.62201.08The issues presented for decision are: (1) Is at least a part of the deficiency in income tax for each of the taxable years due to fraud with intent to evade tax, within the meaning of section 293(b)? (2) Was petitioners' failure to file any return for the taxable year 1948 due to reasonable cause and not due to willful neglect, within the meaning of section 291(a)? (3) Was petitioners' failure to file a declaration of estimated tax for any of the taxable years here involved except 1952, due to reasonable cause and not due to willful neglect, within the meaning of section 294(d)(1)(A)? (4) Are the petitioners liable for an addition to tax for the year 1952, under section 294(d)(2), for substantial underestimate of estimated tax? (5) Is assessment *204 of the deficiencies in income tax and of any additions to tax for the years 1949, 1950 and 1951, barred by the statute of limitation contained in section 275(a)? The parties have agreed in their written stipulation of facts that the computation of net income by the net worth method, as set forth in the statement attached to the respondent's answer, is "true and correct" with two exceptions mentioned in paragraph 2 of said stipulation. Accordingly, the deficiencies in income tax determined by the respondent through his use of the net worth method, as modified to give effect to the above-mentioned exceptions, are no longer in issue. Petitioners have now conceded that assessments of any deficiencies or additions to tax for the taxable years 1948, 1952 and 1953, are not barred by limitation. The respondent has now conceded that the petitioners are not liable for additions to tax under section 294(d)(2), for any of the taxable years except 1952. Findings of Fact Some of the facts were stipulated. The stipulation of facts, together with the exhibits identified therein, is incorporated herein by reference. The petitioners, Sam and Rose Steinberg, are husband and wife; and they reside in Indianapolis, *205 Indiana. Their income tax return for each of the calendar years 1949 through 1953 was filed with the collector or director of internal revenue at Indianapolis. They filed no return, either individually or jointly, for the year 1948. The term "petitioner" in the singular, as used herein, will have reference to Sam Steinberg.  Petitioner was born of immigrant parents in New Jersey in 1899. During the taxable years here involved, he was from 48 to 54 years of age. He was compelled to leave school at the end of the sixth grade, so that he could go to work and help provide for his mother. For approximately 15 years after leaving school, petitioner was employed by various retail stores in the capacity of stock clerk or sales clerk. From about 1927 to 1937, he operated, one after another, various neighborhood grocery stores in the Indianapolis area. In 1937 he purchased a house and lot at 21st and Martindale, in Indianapolis; and during the next 4 years, he operated on these premises, a junk and scrap iron business. He discontinued this junk business in about 1941; and he then entered into a partnership with his brother-in-law, Joseph Smith, for the operation of a neighborhood tavern in Indianapolis. *206 For the next 4 years, until about 1945, petitioner and Smith operated said tavern; and in the last mentioned year, they acquired another tavern which they operated, apparently until 1946 or 1947. In about 1946 or 1947, petitioner and Smith formed another partnership to operate a pawn shop,  known as the S and S Loan Company, in Anderson, Indiana, which is a town located about 33 miles from Indianapolis. They continued to operate this pawn shop business as equal partners, until about the end of 1951 when Smith withdrew therefrom. In 1952 and 1953 petitioner operated said pawn shop business as a sole proprietor. The following table shows the amount of petitioner's share of the partnership income of the S and S Loan Company for each of the years 1949, 1950 and 1951, as reported by him on his income tax returns; and also the amount of his income as a sole proprietor of said business for the years 1952 and 1953, as reported on his returns for those years: YearIncome reported1949$1,217.89 *19502,080.06 *19511,963.75 *19521,224.48 **19531,526.59 **In addition to petitioner's activities as partner and proprietor of S and S *207 Loan Company, he owned or had an interest in at least two rental properties in Indianapolis, throughout the taxable years. The first of these was a commercial property located at 21st and Martindale, where petitioner had formerly operated his junk business. On this property, petitioner erected a new building in about 1946 or 1947, which he has at all times since leased to a company known as Production Plating, Inc. Petitioners and respondent have stipulated that the following rental payments were received by petitioners from Production Plating, Inc., during the following taxable years: YearRental received1948$2,52019492,52019502,76019512,76019522,76019532,760In petitioners' returns for the years 1949 through 1953, they did not report any of the foregoing rental payments; and as hereinabove found, they did not file any return for the year 1948. The second of the above-mentioned rental properties from which petitioner derived income during the taxable years, was an 8-unit frame apartment building located on Balsam Avenue in Indianapolis. This building was owned in equal shares by petitioner and his above-mentioned brother-in-law, Joseph Smith; and it was acquired by them in 1947. Petitioner *208 reported on his income tax returns, the following amounts as his share of the net rentals (after expenses) from said Balsam Avenue apartment: Share ofYearnet rentals1949$350.611950855.621951622.401952874.491953448.34 Petitioner also had other sources of income during the taxable years. Among such additional sources of income was the construction and sale of residential houses. The following table shows as to each such house: (1) The address; (2) the year when built; (3) the amount of petitioner's total investment therein; and (4) the year when sold: YearPetitioner'sYearAddress *builtInvestmentsold1. 5634 Carollton1949$14,32019502. 6036 Riverview Drive195019,90019513. 7520 North Pennsylvania195130,90019534. 8120 Broadway1953Not shown19535. 8110 Broadway195321,00019546. 562 East 81st Street195318,0001954The record does not reveal the sale prices received by petitioner for these houses. Petitioners did not report for income tax purposes, any of the sales of properties numbered 1 through 4 in the above table. 2*209  They did report however, gains from the sales of the properties numbered 5 and 6 on their 1954 return which was filed shortly after the respondent's agents began investigation of petitioners' tax returns for the preceding years here involved. Petitioner, in addition to the sales of houses which he had constructed, sold in 1952 a one-third interest in certain unimproved lots located at 38th and Ruckle Streets in Indianapolis. He did not report this transaction on any income tax return. The petitioners and the respondent have stipulated that the following computation of net income by the net worth method is true and correct: 3Computation of Net Income by Net Worth MethodDecemberDecemberDecemberDecember31, 194731, 194831, 194931, 1950ASSETS: Bank Accounts: Merchants National Bank,$ 808.48Checking AccountMerchants National Bank,$ 4.44$ 4.44$ 4.444.44Saving #7627Merchants National Bank,19.91Mass. Ave., CheckingIndianapolis Hebrew CreditUnionPeoples State Bank, Savings17.7517.7517.75Acct. #3631 (Rose)Union Federal Savings & Loan#MR1367AutomobilePontiac1,800.001,800.00Capital Account, S and S Loan5,537.907,583.335,681.214,641.27CompanyAccounts Receivable, L.SchablerReal Estate: 3843 Broadway7,500.007,500.007,500.007,500.002104 Martindale23,500.0023,500.0023,500.0023,500.001 Business lot, 21st &1,500.00Martindale8110 Broadway562 East 81st Street8120 Broadway7520 North Penn2,500.005634 Carrollton1,500.0014,320.007599 North Meridian3546-48 Balsam Apt. Bldg.,12,500.0012,500.0012,500.0012,500.001/2 interest3546-48 Balsam Apt. Bldg.,RemodelingLots, 38th & Ruckle, 1/34,500.004,500.004,500.004,500.00interest6036 Riverview Drive19,900.00Castelton PropertyTotal Assets$55,042.34$57,105.52$69,823.40$77,691.85Total Assets (brought$55,042.34$57,105.52$69,823.40$77,691.85forward)Less Liabilities and Reserves20,085.9021,898.2020,611.4121,063.58Net Assets$34,956.44$35,207.22$49,211.99$56,628.27Less Net Assets Preceding34,956.4435,207.2249,211.99Year EndIncrease in Net Assets$ 250.78$14,004.77$ 7,416.28Add Personal Expendituresincluding Federal Income TaxPayments7,514.665,514.665,174.66Adjusted Gross Income revised$ 7,765.44$19,519.43$12,590.94Adjusted Gross Income01,568.502,935.68reported on returnUnreported Adjusted Gross$ 7,765.44$17,950.93$ 9,655.26IncomeLessLIABILITIES: Loans PayablePeoples State Bank Loan Card$ 2,000.00$ 8,500.00#1Peoples State Bank Loan Card0#10851Peoples State Bank Loan Card2,562.500#11907Peoples State Bank Loan Card$ 978.00#1584APeoples State Bank Loan Card#4640APeoples State Bank Rose Loan264.00Card #14088Peoples State Bank Rose Loan$ 220.00Card #15640Peoples State Bank Rose Loan238.00Card #16988Peoples State Bank Rose LoanCard #19655Union Federal Savings & LoanLoan Card #11438Merchants National BankAccounts PayableSpickelmier Supply Co.Adams-Rogers Co.Potter Coal and MaterialMortgages PayableIndianapolis Life Insurance12,000.00Co.Union Federal Savings and9,800.00LoanCrown Hill Cemetery Assn.9,436.007,324.935,125.222,619.95United Christian Missionary4,569.913,463.552,292.041,225.16SocietyRobert J. Wadsworth (2ndMortgage)Equitable Life of IowaNorthwestern Mutual InsuranceCo.Northwestern Mutual InsuranceCo.Mutual Benefit Life InsuranceCo.Depreciation Reserve1/2 Balsam Apartments549.99733.32916.651,099.982104 Martindale967.501,612.502,257.502,902.50Total Liabilities and$20,085.90$21,898.30$20,611.41$21,063.58Reserves*210 Computation of Net Income by NetWorth MethodDecemberDecemberDecember31, 195131, 195231, 1953ASSETS: Bank Accounts: Merchants National Bank,$ 1,767.52$ 3,939.41$ 34.51Checking AccountMerchants National Bank,4.443.443.44Saving #7627Merchants National Bank,18.9117.9116.91Mass. Ave., CheckingIndianapolis Hebrew Credit247.01UnionPeoples State Bank, Savings17.751,425.4433.89Acct. #3631 (Rose)Union Federal Savings & Loan82.22#MR1367AutomobilePontiac1,800.002,200.002,200.00Capital Account, S and S Loan6,735.0212,879.5311,286.12CompanyAccounts Receivable, L.6,379.005,152.255,856.53SchablerReal Estate: 3843 Broadway2104 Martindale23,500.0023,500.0023,500.001 Business lot, 21st &Martindale8110 Broadway1,833.3321,000.00562 East 81st Street1,833.3418,000.008120 Broadway1,833.337520 North Penn30,900.0030,900.005634 Carrollton7599 North Meridian9,500.0030,000.0030,000.003546-48 Balsam Apt. Bldg.,12,500.0012,500.0012,500.001/2 interest3546-48 Balsam Apt. Bldg.,6,840.006,840.006,840.00RemodelingLots, 38th & Ruckle, 1/34,500.00interest6036 Riverview DriveCastelton Property9,750.00Total Assets$104,462.64$134,857.98$141,350.63Total Assets (brought$104,462.64$134,857.98$141,350.63forward)Less Liabilities and Reserves43,626.3072,981.3369,147.57Net Assets$ 60,836.34$ 61,876.65$ 72,203.06Less Net Assets Preceding56,628.2760,836.3461,876.65Year EndIncrease in Net Assets$ 4,208.07$ 1,040.31$ 10,326.41Add Personal Expendituresincluding Federal Income TaxPayments5,216.667,580.045,174.66Adjusted Gross Income revised$ 9,424.73$ 8,620.35$ 15,501.07Adjusted Gross Income2,586.152,098.973,974.93reported on returnUnreported Adjusted Gross$ 6,838.58$ 6,521.38$ 11,526.14Income3,000.00 *$ 3,838.58LIABILITIES: Loans PayablePeoples State Bank Loan Card#1Peoples State Bank Loan Card#10851Peoples State Bank Loan Card#11907Peoples State Bank Loan Card$ 318.000#1584APeoples State Bank Loan Card$ 587.50#4640APeoples State Bank Rose LoanCard #14088Peoples State Bank Rose LoanCard #15640Peoples State Bank Rose LoanCard #16988Peoples State Bank Rose Loan408.00Card #19655Union Federal Savings & Loan$ 3,237.32Loan Card #11438Merchants National Bank10,000.0020,000.000Accounts PayableSpickelmier Supply Co.4.45Adams-Rogers Co.14.24Potter Coal and MaterialMortgages PayableIndianapolis Life InsuranceCo.Union Federal Savings andLoanCrown Hill Cemetery Assn.United Christian Missionary8,065.047,396.966,556.44SocietyRobert J. Wadsworth (2nd3,466.34Mortgage)Equitable Life of Iowa20,000.0019,400.00Northwestern Mutual Insurance14,000.00Co.Northwestern Mutual Insurance16,000.00Co.Mutual Benefit Life Insurance20,000.0019,323.49Co.Depreciation Reserve1/2 Balsam Apartments1,283.311,466.641,649.972104 Martindale3,547.504,192.504,837.50Total Liabilities and$ 43,626.30$ 72,981.33$ 69,147.57Reserves*211 The following table shows: (1) The amount of petitioners' adjusted gross income as reported on their income tax return for each of the years 1949 through 1953; (2) the stipulated amount of their "adjusted gross income revised" (as shown in the above net worth computation), for each of the years 1948 through 1953; and (3) the amount of the understatement of adjusted gross income for each year: Adjusted grossAdjusted gross incomeUnderstatement ofincome perper net worthadjusted grossYearreturncomputationincome1948*$ 7,765.44$ 7,765.441949$ 1,568.5019,519.4317,950.9319502,935.6812,590.949,655.2619512,586.159,424.736,838.5819522,098.978,620.356,521.3819533,974.9315,501.0711,526.14Totals$13,164.23$73,421.96$60,257.73The following table shows: (1) Petitioners' adjusted gross income as reported on their income tax return for each of the years 1949 through 1953; and (2) the stipulated amount of their personal living *212 expenditures (as shown in the agreed net worth computation) for each of the years 1948 through 1953: Adjusted grossPersonal livingincome perexpendituresYearreturnas stipulated1948$7,514.661949$1,568.505,514.6619502,935.685,174.6619512,586.155,216.6619522,098.977,580.0419533,974.935,174.66During the course of respondent's investigation of petitioners' tax returns for the years here involved, petitioner Sam Steinberg gave misleading and untruthful answers to several inquiries made by respondent's investigating agents. In response to a question as to whether he had sold any real estate in 1952 or 1953, petitioner stated that he had not. However, as hereinabove found, petitioner did sell in 1952 his interest in the unimproved real estate at 38th and Ruckle Streets; and in 1953, he sold the houses at 7520 North Pennsylvania and at 8120 Broadway. Upon petitioner being confronted by one of the investigating agents with evidence of these sales, he admitted that he had sold these properties. Also,  when the investigating agent asked petitioner for a list of all real properties which he had owned during the taxable years, petitioner supplied an incomplete list which did not include either: (1) *213 The rental commercial property at 21st and Martindale, from which petitioner was at the time receiving rent of more than $2,700 per year; or (2) any of the four properties on which petitioner had built the above-mentioned houses that he had sold during the taxable years 1950, 1951 and 1953. Petitioner did not file a declaration of estimated tax for any of the taxable years 1949 through 1951, or for the taxable year 1953. However, petitioner did file a declaration of estimated tax for 1952, whereon he estimated his tax for said year at $50; whereas his tax liability for said year (exclusive of self-employment tax), as determined by respondent and not here in dispute, was $1,369.74. Ultimate Facts  The deficiency for each of the taxable years involved was due, at least in part, to fraud with intent to evade tax. Petitioners' failure to file an income tax return for the year 1948 was not due to reasonable cause. Petitioners' return for each of the years 1949, 1950 and 1951, was false or fraudulent with intent to evade tax. Opinion 1. The principal question presented in this case is whether the admitted deficiency for each of the taxable years 1948 through 1953, is due, at least in part, *214 to fraud with intent to evade tax within the meaning of section 293(b) of the 1939 Code. Such question is one of fact. The respondent has the burden of establishing fraud by clear and convincing evidence. Section 1112.  We are convinced, after seeing and hearing the witnesses, and after considering and weighing all the evidence herein, that respondent has fully sustained his said burden. Accordingly, we have hereinbefore made a finding of ultimate fact to that effect. The evidence herein reveals that, beginning in 1948 and continuing through the year 1953, petitioner either failed to file a return or understated his taxable income for every year. Such understatements were substantial in amount, ranging from about $6,800 to almost $18,000 per year; whereas the amounts of adjusted gross income which petitioners reported for these same years ranged only from $1,500 to $4,000. Moreover, the stipulated amount of petitioners' personal living expenses for each of the years 1949 through 1953 was, as we have hereinbefore found, substantially in excess of the amounts of their reported adjusted gross income for each such year. We are convinced that each of the abovementioned understatements of *215 taxable income was due, not to mere innocent mistakes or oversight, but rather to willful fraud, motivated by an intent to evade taxes. It has been judicially recognized that "a consistent pattern of underreporting large amounts of income" is, in itself, evidence of a fraudulent intent. See  Holland v. United States, 348 U.S. 121">348 U.S. 121;  Schwarzkopf v. Commissioner, (C.A. 3), 246 F.2d 731">246 F. 2d 731; and  Epstein v. United States, (C.A. 6) 246 F. 2d 563, certiorari denied  355 U.S. 868">355 U.S. 868. We are impressed also by the fact that petitioners failed to return for taxation in each of the years involved, certain specific transactions. For example, although they ranging from more than $2,500 to $2,700 per year on the commercial property at 21st and Martindale, they did not report any of the same. Also, they did not report any of the principal petitioner's real estate sales transactions, including either his sales of vacant lots, or his sales of the houses which he built. We are persuaded that petitioner's uncorroborated testimony, wherein he attempted to make explanations for these omissions, is not worthy of belief. We regard as noteworthy also, the false and misleading answers which petitioner gave the investigating *216 agents - some of which misleading statements have been recounted in our Findings of Fact. This type fo conduct likewise5 has been held to be indicative of fraudulent intent. See  Abraham Galant, 26 T.C. 354">26 T.C. 354, 365, and  Madeline v. Smith 32 T.C. 985">32 T.C. 985, 987. Notwithstanding that petitioner had only a limited amount of formal education, he had been engaged since 1927 in numerous business enterprises, and we are convinced after seeing and hearing him testify, that he was an intelligent businessman who must have been aware of the amounts of income which he derived during the taxable years. We hold, consonant with our ultimate finding of fact on this point, that at least part of the deficiency for each of the taxable years here involved, was due to fraud with intent to evade tax, within the meaning of section 293(b). We approve respondent's action in imposing an addition to tax for fraud under said section, for each of said years. 2. We turn next to the addition to tax determined under section 291(a), for petitioners' failure to file any return for the year 1948. Notwithstanding that petitioners admitted in their pleadings that no return was filed for 1948, the principal petitioner testified *217 at the trial that he was "pretty positive" that he had filed such return. Such testimony, however, was not convincing; and we are satisfied, after considering both the said admission in the pleadings, and also the evidence on this point which was adduced by the respondent, that petitioner did not file any return for 1948; and that such failure was not due to reasonable cause. We approve the respondent's determination under section 291(a) for the failure to file a return for 1948. 3. As to the additions to tax imposed under section 294(d)(1)(A), for failure to file declarations of estimated tax for any of the taxable years except 1952, the petitioners offered no testimony or other evidence to explain such failure. We therefore sustain the respondent's action in imposing such additions to tax. Concerning the addition to tax imposed under section 294(d)(2) for substantial underestimation of estimated tax for the year 1952, that section provides for the imposition of such an addition to tax if 80 percent of the correct tax exceeds the amount of the tax estimated by the taxpayer on his declaration. Reasonable cause is no defense under this section of the statute.   H. R. Smith, 20 T.C. 663">20 T.C. 663. *218 We have hereinbefore found as a fact that petitioners estimated their 1952 tax at only $50; whereas 80 percent of their corrected tax liability is over $1,000. Accordingly, we approve the respondent's imposition of the addition to tax for 1952 under section 294(d)(2). 4. There remains the question of whether assessment of the deficiency in tax and the additions to tax for each of the years 1949, 1950 and 1951, is barred by limitation. 4Section 276(a) provide that in the case of a false or fraudulent return with intent to evade tax, the tax may be assessed at any time. We have hereinbefore found as an ultimate fact that the return filed by the petitioners for each of said years 1949, 1950 and 1951, was false or fraudulent with intent to evade tax. Accordingly, we hold that assessment of deficiencies and additions to tax for each of these years is not barred by limitation. Decision will be entered under Rule 50.  Footnotes1. All section references are to the Internal Revenue Code of 1939, unless otherwise specified.↩*. Partner's 50 percent share of profits. ↩**. Sole proprietor's profits.↩*. All addresses are in Indianapolis.↩2. Petitioner testified at the trial that the houses numbered 1, 2 and 3 in the above table actually were built by, and belonged to, his son-in-law, Louis Schabler; and that he (petitioner) held only bare legal title thereto. Such testimony, which was not corroborated, is contrary to the net worth computation reproduced infra, which includes said properties among petitioner's assets and which has been stipulated to be "true and correct." We have, after seeing and hearing petitioner testify, and also after considering statements which he made to the investigating agents, rejected his testimony in regard to said three properties, as not being credible.3. This computation contains the adjustments which the parties stipulated were required to be made therein. See paragraph 2 of the stipulation of facts.↩*. To allow for nontaxable gain on sale of personal residence. ↩*. Petitioners, as hereinbefore found, did not file a return for 1948.↩4. As mentioned in our preliminary statement herein, the parties are in agreement that any assessments for the years 1948, 1952 and 1953, are not barred by limitation.↩