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William G. Stratton and Shirley Stratton, Petitioners v. Commissioner of Internal Revenue, RespondentStratton v. CommissionerDocket No. 4166-65February 12, 1970, Filed
United States Tax Court *211Decision will be entered under Rule 50 .Petitioner was Governor of the State of Illinois for the 8 years here in question. He personally prepared and filed joint Federal income tax returns for 1953 through 1960, reporting a net income for the 8 years of $ 171,846.93. Respondent, using the net worth plus nondeductible expenditures method, determined petitioners' net income for the 8 years to be $ 369,096.29, which he reduced in his brief to $ 366,184.92. He also determined that at least a part of the deficiencies were due to fraud with intent to evade tax. Prior to this determination, petitioner was indicted, tried, and acquitted before a jury in the U.S. District Court, N. Dist. of Ill., E. Div., wherein he was charged with filing false and fraudulent joint income tax returns for the 4 years 1957 through 1960.
Held :1. Respondent was justified in using the net worth plus nondeductible expenditures method;
2. Petitioners' "corrected net income (1953) or taxable income (1954 through 1960)" is redetermined by this Court for the 8 years to be $ 254,032.51;
3. Respondent is not collaterally estopped to contend for the additions to tax here involved;
4. Respondent has not established fraud *212 on the part of the petitioners by the clear and convincing evidence which was his burden; and
5. The statute of limitations bars the assessment and collection of deficiencies, if any, for all the taxable years except the year 1958, in which year petitioner omitted from gross income an amount properly includable therein which was in excess of 25 percent of the amount of gross income stated in the 1958 return, thus making the 6-year statute of limitations applicable for that year.
Bruce,Judge .BRUCE*255 Respondent determined income tax deficiencies and additions to the tax in this case as follows: *256
Additions to tax Calendar year Deficiency Sec. 293(b), Sec. 6653(b), I.R.C. 1939 I.R.C. 1954 1953 $ 11,646.80 $ 5,823.40 1954 14,847.40 $ 7,423.76 1955 8,288.55 4,144.20 1956 16,556.50 8,278.28 1957 16,779.91 8,389.95 1958 19,833.32 9,916.66 1959 6,074.13 3,037.06 1960 6,440.72 3,220.36 Petitioners have assigned 13 errors which may be grouped into three issues, *213 as follows:
(1) Did petitioners understate income for the respective years 1953 through 1960 in the amounts as determined by respondent by the use of the net worth plus nondeductible expenditures method?
(2) Is some part of the deficiency in tax for the taxable year 1953 and underpayments in tax for the taxable years 1954 through 1960 due to fraud with intent to evade tax?
(3) Does the statute of limitations bar the assessment of deficiencies in tax for the taxable years 1953 through 1960? b)(5) of the Court's Rules of Practice why the facts and evidence recited in respondent's proposed stipulation of facts attached to the motion should not be accepted. By order of the Court dated April *214 12, 1967, the motion was granted. Thereupon petitioners filed a motion to vacate the order of the Court, which motion was duly calendared for hearing. After the hearing, the Court by order dated October 2, 1967, ordered certain facts to be accepted and certain exhibits to be received without prejudice to either party to introduce other and further evidence "at the time of the trial of this case."
At the later trial, the parties filed three separate stipulations of facts, which consisted of substantially all the evidence (some 8,300 pages of testimony and 373 exhibits) that had previously been received in the criminal trial before a jury during the period January 4, 1965, through March 10, 1965, of William G. Stratton in the U.S. District Court for the Northern District of Illinois *257 FINDINGS OF FACT
Our order dated October 2, 1967, and the stipulations of facts Nos. I, II, and III together with the exhibits, previously referred *215 to in our opening statement, are incorporated herein by this reference.
On July 12, 1965, the date of filing of the petition herein, petitioners were husband and wife with legal residence at 437 Vine Street, Morris, Ill.
For each of the years 1953 through 1960 petitioners filed joint income tax returns with the district director of internal revenue at Chicago, Ill.
Petitioner William G. Stratton (sometimes hereinafter referred to as petitioner) was born February 26, 1914, in Ingleside, Lake County, Ill. He was educated in the public schools of Lake County, Ill., and the University of Arizona in Tucson, Ariz., where he was graduated in June of 1934 with a bachelor of arts degree in political science.
In the fall of 1934 petitioner was married to Marion Hook (hereinafter sometimes referred to as Marion) of Gurnee, Ill. Two daughters were born of this marriage, Sandra on September 15, 1936, and Diana on May 5, 1939. Sandra married Patrick Gardner on April 22, 1961, and Diana married Norman Weiskopf on September 10, 1960.
On June 1, 1949, petitioner obtained a divorce from Marion on the grounds of desertion. Although custody of the children, Sandra and Diana, was granted to Marion, she *216 nevertheless permitted the children to live with petitioner from 1952 until they attained their majority.
Petitioner was the sole source of support for his family throughout the period of his marriage to Marion.
On December 27, 1950, petitioner married the former Shirley Breckenridge of Chicago, Ill., who was his wife throughout the years involved in this proceeding.
Petitioner Shirley Stratton (formerly Shirley Breckenridge and hereinafter sometimes referred to as Shirley) was born June 11, 1923, in Chicago, attended Lake View High School and the University of Chicago, both in that city.
Between July and November of 1942 Shirley was employed as a clerk by the Quaker Oats Co. in Chicago. On October 25, 1943, she secured employment with the LaSalle Hotel, Chicago, at $ 3.50 per day. The latter employment terminated on January 25, 1944. On January 28, 1944, she married one Clinton DeWitt, from whom she obtained a divorce on March 23, 1949, on the grounds of desertion. No alimony or property was awarded or exchanged hands as a result of the divorce proceedings.
Between November 1, 1947, and December 15, 1950, Shirley was employed by Reinsurance Agency, Inc., Chicago, as a secretary. *217 During *258 that period her salary ranged from a low of $ 200 per month to a high of $ 275 per month.
During all of the years here involved Shirley was continuously occupied with her varied and numerous activities as first lady of the State of Illinois.
From the fall of 1934 until April of 1940, petitioner was employed by the Calumet City Light & Power Co. and its successor, the Public Service Co. of Illinois, first as a meter reader and then as a salesman, successively at Calumet City, Lansing, and Ottawa, Ill. During this period (1934-40), he lived in Joliet, Ill., and beginning in 1937, at Morris, Ill.
In 1942 petitioner purchased a house at 437 Vine Street, Morris, Ill., at a cost of $ 8,300. He paid $ 3,300 down at the time of purchase and borrowed the $ 5,000 remaining balance securing the loan with a 5-year mortgage on the property. Title to the property was taken in the names of William G. Stratton and Marion G. Stratton.
In November 1940, petitioner was elected to a 2-year term as U.S. Congressman At Large from the State of Illinois. His salary was $ 10,000 per year. In November 1942, he was elected to a 2-year term as State treasurer for the State of Illinois. At that time *218 the salary for State treasurer was $ 12,000 per year. His term as State treasurer ended in January of 1945 and shortly thereafter he entered the U.S. Navy as a lieutenant junior grade. While overseas in 1945 his name was entered in the April 1946 primary as a candidate for the Republican nomination for U.S. Congressman At Large from the State of Illinois. He was the successful candidate in that primary. In July 1946 he was mustered out of the service.
In November 1946, petitioner was elected U.S. Congressman At Large from the State of Illinois for the term of office beginning January 1947 and ending January 1949. During his term of office in Washington, D.C., as Congressman At Large, petitioner's family remained and resided at the Morris, Ill., home.
In the primary of April 1948, petitioner received the Republican nomination as candidate for the office of secretary of state for Illinois. In the general election of November 1948 he was defeated.
Petitioner's $ 5,000 mortgage note on the 437 Vine Street property came due on November 30, 1947. On the following day petitioner and Marion executed a new promissory note in the amount of $ 5,000 which was secured by the Vine Street property. *219 The new note was payable $ 500 on December 1 of each of the years 1948 through 1951, with the balance of $ 3,000 falling due on December 1, 1952.
In January 1949, petitioner's term as Congressman At Large ended and he returned to his Morris home. He immediately began campaigning *259 for the Republican nomination for State treasurer for the State of Illinois, and devoted all of his time toward that end. He was successful in the April 1950 primary and was elected in the general election in November 1950 for a 2-year term beginning January 1951.
On February 10 and April 6, 1949, petitioner borrowed $ 250 and $ 100, respectively, on his life insurance policies.
The divorce decree severing the marriage of petitioner from Marion required petitioner to pay to the clerk of the court the sum of $ 150 per month for the care and support of Sandra and Diana, the payments to begin on June 1, 1949.
Marion received all of the money she was entitled to under the divorce decree from June 1, 1949, until the two girls were of age on September 15, 1957, and May 5, 1960, respectively. Petitioner continued to pay child support even after the children came to live permanently with him in 1952.
At the time of *220 the divorce petitioner and Marion entered into a property settlement pursuant to which Marion retained a portion of their furniture, a car, and received petitioner's personal note for $ 4,000 payable in 5 years bearing interest at 3 1/2 percent per annum for her one-half ownership of the Vine Street house. Petitioner received the Vine Street house and the balance of their furniture.
No cash was involved in the property settlement. Marion had her own bank account and petitioner had his. The divorce decree concluded with this sentence: "It being the intention of the parties hereto that the property rights of both parties shall be forever determined in all respects as if no marriage contract or relation had ever been entered into or had ever existed."
As security for the $ 4,000 note given Marion, petitioner executed a trust deed conveying the Vine Street house to the Circuit Court Clerk of Grundy County, Morris, Ill.
On June 22, 1953, petitioner paid Marion $ 4,428.17 in currency to extinguish the $ 4,000 note plus $ 428.17 interest that had accrued on the note. On the same date the Circuit Court Clerk of Grundy County released the trust deed on the Vine Street house.
On January 27, *221 1943, petitioner opened a checking account in his individual name at the First National Bank, Springfield, Ill. The account was closed on December 15, 1949.
At the time of his divorce on June 1, 1949, petitioner's checking account (hereinafter sometimes referred to as the regular account) at the First National Bank was overdrawn in the amount of $ 56.08. During the period June 1, 1949, until the account was closed on December 15, 1949, 13 checks totaling $ 1,572.20 drawn on the account were returned by the bank for nonpayment. At the time of closing, the *260 account was overdrawn by 55 cents which was either charged off by the bank or covered by a deposit of 55 cents.
On November 30, 1949, petitioner made a $ 500 payment on his home mortgage with the Grundy County National Bank. The $ 500 was borrowed by petitioner from his mother.
On or about September 6, 1949, petitioner sold a small parcel of land which had been given to him by his mother. He received something less than $ 1,000 for the land.
Petitioner's campaign treasurer in 1950 was Chester A. Todd, a friend of many years.
On February 24, 1950, Todd opened a checking account at the Suburban Trust & Savings Bank, Oak Park, Ill., *222 in the name of "William G. Stratton Campaign Fund." Todd was the only individual authorized to make deposits to and withdrawals from the account.
At the close of the year 1950, the balance in the campaign account was $ 310.86. During the year 1950, Todd made 42 deposits to this account totaling $ 17,358.50 ranging from a low of $ 25 to a high of $ 2,000. During the year 1950, there were 60 checks totaling $ 17,047.64 written against this account ranging from a low of 62 cents to a high of $ 2,700. On January 11, 1951, a deposit of $ 160 was made. Thereafter, three checks cleared the account so as by June 11, 1951, the balance was reduced to $ 63.62. The account was closed on November 19, 1951.
After petitioner became the Republican candidate for State treasurer in April of 1950, he received $ 500 to $ 1,000 per month from the Republican State Committee until his election in November of 1950.
On November 9, 1950, 2 days after he was elected State treasurer, petitioner made a $ 500 payment on his home mortgage at the Grundy County National Bank.
During the year 1950 petitioner deposited with the Circuit Court Clerk of Grundy County $ 1,775 as support payments for his minor children; *223 and paid $ 252.54 as premiums on his insurance policies.
On December 26, 1950, 1 day prior to her marriage to petitioner, Shirley had $ 116.78 in her checking account at the LaSalle National Bank and approximately $ 1,000 in cash.
In early January of 1951, petitioner moved to Springfield, Ill., the State capital, to commence his duties as treasurer. Shirley accompanied him to Springfield and for approximately 1 month they resided at the Abraham Lincoln Hotel in that city.
In early March of 1951, they rented and moved into an apartment owned by Robert D. Patton, who was later to become petitioner's partner in a farm venture. They resided in the Patton apartments until January of 1953.
*261 Petitioners' monthly rental at the Patton Apartments was $ 100. With the exception of one payment by check on July 23, 1951, in the amount of $ 100, all rental payments were made in the form of currency.
On February 3, 1951, petitioner reopened the regular account at the First National Bank, Springfield, in his name only. In October 1952, the account was changed to a joint account with Shirley. Throughout the years involved the account remained in existence as a joint account.
Shortly prior to November *224 1951, petitioner announced his candidacy for the office of Governor of the State of Illinois.
On November 19, 1951, the date Chester A. Todd closed the "William G. Stratton Campaign Fund" account at the Suburban Trust & Savings Bank, he opened a new account at the same bank in the name of "William G. Stratton for Governor Campaign Fund." The initial deposit was in the amount of $ 1,838.62, of which $ 63.62 was transferred from the old account. Todd was the sole individual authorized to make deposits to and withdrawals from the account.
In the April 1952 Republican primary, petitioner was the successful candidate for the office of Governor of the State of Illinois. He was elected to that office in November 1952.
The "William G. Stratton for Governor Campaign Fund" account at the Suburban Trust & Savings Bank was closed on June 6, 1953, by a withdrawal of the account balance of $ 268.08. From November 19, 1951, to June 6, 1953, inclusive, the deposits to this account and the checks or other charges to this account were as follows:
Deposits Checks and other charges Year Number Amount Number Amount 1951 15 *225 $ 9,038.62 10 $ 2,252.82 1952 115 295,789.09 671 299,775.32 1953 6 3,836.19 22 6,635.76 Total 308,663.90 308,663.90 In December of 1955, petitioner announced his candidacy for reelection to the office of Governor.
On January 7, 1956, the campaign account at the Suburban Trust & Savings Bank was reopened with an initial deposit of $ 3,500. Both Chester Todd and petitioner were listed on the signature card as authorized to make deposits to and withdrawals from the account. From January 7, 1956, to December 31, 1960, inclusive, the deposits to this account and the checks or other charges to this account, in amounts, were as follows: *262
Checks or Year Deposits other charges 1956 $ 262,883.08 $ 260,177.25 1957 2,051.25 4,235.64 1958 0 202.39 1959 0 0 1960 398,575.79 398,181.97 Total 663,510.12 662,797.25 Dec. 31, 1960, balance 712.87 663,510.12 663,510.12 On February 23, 1961, the account was closed.
Petitioner was successful in obtaining the Republican nomination for Governor in the April 1956 primary, and was reelected Governor in the general election of November 1956.
Petitioner was again successful in obtaining the Republican nomination for the office of Governor in the primary election in April 1960. He was defeated in the general election in November 1960.
Petitioners had three bank accounts *226 and a safe-deposit box at the First National Bank, Springfield, in addition to their regular account. On July 27, 1951, they opened a savings account in their joint names. On September 21, 1953, they opened a special checking account (hereinafter referred to as the special account) in their joint names. On February 13, 1957, they opened a checking account for limited transactions (hereinafter referred to as the L. T. account) in their joint names. The safe-deposit box was rented by Shirley on December 4, 1952. Although petitioner had access to the box as her attorney-in-fact, he did not enter it during the entire period here involved.
On November 28, 1952, petitioners rented a safe-deposit box at the Grundy County National Bank, Morris, Ill.
On March 28, 1958, petitioners opened a joint checking account at the Springfield Marine Bank, Springfield, Ill. The initial and only deposit made to this account was the proceeds of an $ 18,000 real estate loan from the Springfield Marine Bank. The account was closed on September 15, 1958.
On December 30, 1953, petitioner and Patton entered into a joint venture to purchase and operate as equal owners certain farm property located approximately *227 10 miles from Springfield. The joint venture was operated under the name of "Bobbill Farm."
The initial purchase consisted of 326 acres which was acquired on December 30, 1953, for $ 19,560. On that date petitioner delivered to Patton $ 10,000 in currency as petitioner's share of the acquisition cost plus expenses of the acquisition.
*263 In 1954 Bobbill Farm was expanded by the acquisition of two adjoining parcels of property, one 50-acre tract on September 2, at a cost of $ 3,200 and one 10-acre tract on October 18, for $ 750. On January 3, 1956, an additional tract of approximately 149 acres was purchased at a cost of $ 10,500.
On January 26, 1954, a checking account was opened at the Springfield Marine Bank under the name of "Bobbill Farm" with Shirley as the only party authorized to make deposits to and withdrawals from the account. The wife of Patton, Charlotte, became a signatory on the account on March 1, 1954. This account remained active throughout the years involved and was used for depositing farm receipts and the payment of farm expenses.
Throughout the years 1953 through 1960 petitioner had an account with the stock brokerage firm Reynolds & Co., Chicago. Shirley opened *228 an account with Reynolds & Co. in 1957. An account was opened for each daughter, Sandra and Diana, in 1953.
In early 1956, petitioner opened an account with the stock brokerage firm of Glore, Forgan & Co., Chicago. In late 1956, an account was opened for each daughter, Sandra and Diana, at Glore, Forgan & Co.
In 1952, petitioner entered into partnership with F. M. Pinney and Todd for the purpose of exploiting a leasehold interest in oil property located in Osage County, Okla. For each of the years 1953 through 1960 the partnership filed a U.S. Partnership Return of Income (Form 1065) with the district director of internal revenue, Oklahoma City, Okla.
The Pinney, Todd and Stratton partnership returns were prepared and filed by James R. Lytle, an accountant in Oklahoma. Petitioners reported on their joint returns their distributive share of the net profit or loss as reflected on the partnership returns.
Throughout the years 1955 through 1960, Shirley maintained a looseleaf register which was a running account of deposits to and checks drawn on her and petitioner's various bank accounts.
Shirley also maintained a running account of the activity in the Bobbill Farm bank account at the *229 Springfield Marine Bank. This record was maintained in a separate looseleaf register.
In addition to the two looseleaf registers, Shirley also maintained or supervised the maintenance of an itinerary schedule. This was a looseleaf schedule prepared in quintuplicate which listed each day's events for the period of a week. The schedule was distributed to petitioners' respective secretaries and one copy given to security personnel at the mansion.
On occasion Shirley would make notations on the itinerary schedule regarding the need for currency at some future date. The notations were to serve as a reminder to have the currency available.
*264 With the exception of Schedule F pertaining to Bobbill Farm for the years 1954 through 1960, petitioner prepared the joint income tax returns for all years in question. Schedule F was prepared by Patton.
The net worth plus nondeductible expenditures computation (Exhibit A) attached to the statement which in turn was attached to the deficiency notice is (except for Exhibits B, C, and D mentioned in Exhibit A) as follows: *265
*230Exhibit A Computations of Unreported Income Determined by the Net Worth Plus Nondeductible Expenditures Method 12/31/52 12/31/53 Assets Warrants and checks on hand $ 100.00 $ 431.57 Regular checking account, First National Bank 1,725.04 647.03 L.T. checking account, First National Bank 0 0 Special checking account, First National Bank 0 79.27 Savings account, First National Bank 4,633.49 250.00 Accounts receivable for oil run payments 0 128.90 Loan receivable from Donald J. Breckenridge 0 470.00 Investment in Bobbill Farm 0 10,000.00 Cost of stock 0 10,263.97 Cost of lodge located in Sangamon County, Ill 0 0 Cost of residence, Morris, Ill 8,300.00 8,300.00 Cost of improvements to residence, Morris, Ill 0 3,134.44 Investment in Pinney, Todd and Stratton (Exhibit B) 0 1,648.69 Cost of U.S. savings bonds 18.75 56.25 Cost of Morris Country Club bond 0 0 Cost of State of Israel bond 0 0 Cost of 1956 Lincoln 0 0 Cost of 1960 Chevrolet station wagon 0 0 Cost of furniture and furnishings 0 0 Cost of framed portraits 0 0 Cost of house boats and boat motors 0 0 Check in transit to Reynolds & Co 0 0 Accounts receivable from Reynolds & Co 0 0 Total assets 14,777.28 35,410.12 Liabilities Account payable -- Reynolds & Co 0 0 Accounts payable -- F. M. Pinney 0 1,700.83 Mortgage payable -- Marion Stratton Munyon 4,000.00 0 Mortgage payable -- Springfield Marine Bank 0 0 Total liabilities 4,000.00 1,700.83 Net worth at end of each year 10,777.28 33,709.29 Net worth at end of preceding year 10,777.28 Net worth increase (forward) 22,932.01 Net worth increase (brought forward) $ 22,932.01 Add: Nondeductible expenditures paid by checks drawn on the regular account First National Bank (Exhibit C) 14,927.51 Nondeductible expenditures not paid by checks drawn on the regular account First National Bank (Exhibit D) 2,764.13 Federal income tax withheld by the State of Illinois 3,960.30 Nondeductible loss on sale of houseboat Nondeductible loss on sale of stock Retirement withheld by State of Illinois 456.25 Subtotal 45,040.20 Subtract: Nontaxable gift of houseboat Nontaxable portion of long-term capital gain Dividend exclusion claimed on income tax return 0 Distributive share of percentage depletion -- Pinney, Todd and Stratton 0 Nontaxable insurance dividends from Veterans' Administration (66.00) Deduction for State sales tax (54.00) Deduction for exemptions claimed on return 0 Remainder 44,920.20 Add (subtract) adjustments to reflect salary from the State of Illinois in the amounts reported on returns 0 Corrected net income (1953) or taxable income (1954 through 1960) 44,920.20 Net income (1953) or taxable income (1954 through 1960) reported on returns 22,854.54 Unreported income 22,065.66
*231Exhibit A Computations of Unreported Income Determined by the Net Worth Plus Nondeductible Expenditures Method 12/31/54 12/31/55 Assets Warrants and checks on hand $ 25.00 $ 430.00 Regular checking account, First National Bank 2,707.01 1,434.07 L.T. checking account, First National Bank 0 0 Special checking account, First National Bank 606.95 1,430.66 Savings account, First National Bank 254.60 259.71 Accounts receivable for oil run payments 48.75 124.02 Loan receivable from Donald J. Breckenridge 145.00 1,560.00 Investment in Bobbill Farm 26,222.51 35,516.03 Cost of stock 11,039.10 15,023.85 Cost of lodge located in Sangamon County, Ill 0 0 Cost of residence, Morris, Ill 8,300.00 8,300.00 Cost of improvements to residence, Morris, Ill 15,632.67 15,632.67 Investment in Pinney, Todd and Stratton (Exhibit B) 1,519.77 1,390.85 Cost of U.S. savings bonds 468.75 468.75 Cost of Morris Country Club bond 0 0 Cost of State of Israel bond 0 0 Cost of 1956 Lincoln 0 0 Cost of 1960 Chevrolet station wagon 0 0 Cost of furniture and furnishings 700.00 700.00 Cost of framed portraits 0 3,500.00 Cost of house boats and boat motors 0 0 Check in transit to Reynolds & Co 0 0 Accounts receivable from Reynolds & Co 0 0 Total assets 67,670.11 85,770.61 Liabilities Account payable -- Reynolds & Co 0 0 Accounts payable -- F. M. Pinney 49.58 37.25 Mortgage payable -- Marion Stratton Munyon 0 0 Mortgage payable -- Springfield Marine Bank 0 0 Total liabilities 49.58 37.25 Net worth at end of each year 67,620.53 85,733.36 Net worth at end of preceding year 33,709.29 67,620.53 Net worth increase (forward) 33,911.24 18,112.83 Net worth increase (brought forward) $ 33,911.24 $ 18,112.83 Add: Nondeductible expenditures paid by checks drawn on the regular account First National Bank (Exhibit C) 11,951.23 15,791.48 Nondeductible expenditures not paid by checks drawn on the regular account First National Bank (Exhibit D) 6,107.43 1,890.49 Federal income tax withheld by the State of Illinois 3,894.48 3,894.58 Nondeductible loss on sale of houseboat Nondeductible loss on sale of stock Retirement withheld by State of Illinois 525.00 525.00 Subtotal 56,389.38 40,214.28 Subtract: Nontaxable gift of houseboat Nontaxable portion of long-term capital gain Dividend exclusion claimed on income tax return (50.00) (50.00) Distributive share of percentage depletion -- Pinney, Todd and Stratton (279.86) (478.11) Nontaxable insurance dividends from Veterans' Administration (64.80) (64.80) Deduction for State sales tax (112.00) (117.50) Deduction for exemptions claimed on return (3,000.00) (3,000.00) Remainder 52,882.72 36,503.87 Add (subtract) adjustments to reflect salary from the State of Illinois in the amounts reported on returns (2,083.33) 2,083.33 Corrected net income (1953) or taxable income (1954 through 1960) 50,799.39 38,587.20 Net income (1953) or taxable income (1954 through 1960) reported on returns 21,979.56 20,864.92 Unreported income 28,819.83 17,722.28
*232Exhibit A Computations of Unreported Income Determined by the Net Worth Plus Nondeductible Expenditures Method 12/31/56 12/31/57 Assets Warrants and checks on hand $ 450.00 $ 42.00 Regular checking account, First National Bank 2,598.40 2,553.29 L.T. checking account, First National Bank 0 83.82 Special checking account, First National Bank 1,114.90 169.06 Savings account, First National Bank 366.08 677.10 Accounts receivable for oil run payments 130.49 152.31 Loan receivable from Donald J. Breckenridge 1,065.00 735.00 Investment in Bobbill Farm 46,636.40 49,158.53 Cost of stock 18,248.85 31,520.96 Cost of lodge located in Sangamon County, Ill 0 18,316.43 Cost of residence, Morris, Ill 8,300.00 8,300.00 Cost of improvements to residence, Morris, Ill 19,455.50 19,455.50 Investment in Pinney, Todd and Stratton (Exhibit B) 1,508.24 1,354.65 Cost of U.S. savings bonds 468.75 468.75 Cost of Morris Country Club bond 200.00 200.00 Cost of State of Israel bond 0 0 Cost of 1956 Lincoln 4,677.75 4,677.75 Cost of 1960 Chevrolet station wagon 0 0 Cost of furniture and furnishings 1,108.00 1,108.00 Cost of framed portraits 7,432.56 7,432.56 Cost of house boats and boat motors 4,750.00 4,750.00 Check in transit to Reynolds & Co 0 1,492.50 Accounts receivable from Reynolds & Co 0 0 Total assets 118,510.92 152,648.21 Liabilities Account payable -- Reynolds & Co 0 1,501.53 Accounts payable -- F. M. Pinney 213.94 64.52 Mortgage payable -- Marion Stratton Munyon 0 0 Mortgage payable -- Springfield Marine Bank 0 0 Total liabilities 213.94 1,566.05 Net worth at end of each year 118,296.98 151,082.16 Net worth at end of preceding year 85,733.36 118,296.98 Net worth increase (forward) 32,563.62 32,785.18 Net worth increase (brought forward) $ 32,563.62 $ 32,785.18 Add: Nondeductible expenditures paid by checks drawn on the regular account First National Bank (Exhibit C) 12,980.49 9,364.89 Nondeductible expenditures not paid by checks drawn on the regular account First National Bank (Exhibit D) 11,147.67 14,204.33 Federal income tax withheld by the State of Illinois 3,894.48 3,894.48 Nondeductible loss on sale of houseboat Nondeductible loss on sale of stock Retirement withheld by State of Illinois 525.00 1,035.40 Subtotal 61,111.26 61,284.28 Subtract: Nontaxable gift of houseboat (4,750.00) Nontaxable portion of long-term capital gain (905.65) Dividend exclusion claimed on income tax return (50.00) (50.00) Distributive share of percentage depletion -- Pinney, Todd and Stratton (486.32) (556.90) Nontaxable insurance dividends from Veterans' Administration (62.40) (73.20) Deduction for State sales tax (361.25) (190.00) Deduction for exemptions claimed on return (3,000.00) (3,000.00) Remainder 52,401.29 56,508.53 Add (subtract) adjustments to reflect salary from the State of Illinois in the amounts reported on returns 0 (2,083.33) Corrected net income (1953) or taxable income (1954 through 1960) 52,401.29 54,425.20 Net income (1953) or taxable income (1954 through 1960) reported on returns 20,048.16 22,497.79 Unreported income 32,353.13 31,927.41
*233Exhibit A Computations of Unreported Income Determined by the Net Worth Plus Nondeductible Expenditures Method 12/31/58 12/31/59 Assets Warrants and checks on hand $ 903.75 $ 16.80 Regular checking account, First National Bank 666.48 154.18 L.T. checking account, First National Bank 163.44 168.12 Special checking account, First National Bank 849.77 492.66 Savings account, First National Bank 1,050.57 1,081.79 Accounts receivable for oil run payments 147.79 189.03 Loan receivable from Donald J. Breckenridge 470.00 730.00 Investment in Bobbill Farm 52,473.05 49,891.37 Cost of stock 20,400.64 22,891.67 Cost of lodge located in Sangamon County, Ill 60,917.82 62,741.68 Cost of residence, Morris, Ill 8,300.00 8,300.00 Cost of improvements to residence, Morris, Ill 19,455.50 19,455.50 Investment in Pinney, Todd and Stratton (Exhibit B) 1,320.97 1,173.75 Cost of U.S. savings bonds 468.75 468.75 Cost of Morris Country Club bond 200.00 200.00 Cost of State of Israel bond 100.00 100.00 Cost of 1956 Lincoln 4,677.75 4,677.75 Cost of 1960 Chevrolet station wagon 0 0 Cost of furniture and furnishings 8,788.03 11,358.10 Cost of framed portraits 7,432.56 7,432.56 Cost of house boats and boat motors 4,750.00 7,028.90 Check in transit to Reynolds & Co 0 0 Accounts receivable from Reynolds & Co 0 0 Total assets 193,536.87 198,552.61 Liabilities Account payable -- Reynolds & Co 0 0 Accounts payable -- F. M. Pinney 207.49 69.59 Mortgage payable -- Marion Stratton Munyon 0 0 Mortgage payable -- Springfield Marine Bank 8,468.66 3,140.08 Total liabilities 8,676.15 3,209.67 Net worth at end of each year 184,860.72 195,342.94 Net worth at end of preceding year 151,082.16 184,860.72 Net worth increase (forward) 33,778.56 10,482.22 Net worth increase (brought forward) $ 33,778.56 $ 10,482.22 Add: Nondeductible expenditures paid by checks drawn on the regular account First National Bank (Exhibit C) 9,790.35 13,259.24 Nondeductible expenditures not paid by checks drawn on the regular account First National Bank (Exhibit D) 12,822.47 8,398.36 Federal income tax withheld by the State of Illinois 3,894.48 3,894.48 Nondeductible loss on sale of houseboat 2,250.00 Nondeductible loss on sale of stock Retirement withheld by State of Illinois 1,749.96 1,749.96 Subtotal 62,035.82 40,034.26 Subtract: Nontaxable gift of houseboat Nontaxable portion of long-term capital gain (833.45) Dividend exclusion claimed on income tax return (75.00) (100.00) Distributive share of percentage depletion -- Pinney, Todd and Stratton (546.36) (545.50) Nontaxable insurance dividends from Veterans' Administration (70.80) (70.80) Deduction for State sales tax (431.80) (291.08) Deduction for exemptions claimed on return (3,000.00) (2,400.00) Remainder 57,078.41 36,626.88 Add (subtract) adjustments to reflect salary from the State of Illinois in the amounts reported on returns 2,083.33 (2,083.33) Corrected net income (1953) or taxable income (1954 through 1960) 59,161.74 34,543.55 Net income (1953) or taxable income (1954 through 1960) reported on returns 22,223.96 21,309.17 Unreported income 36,937.78 13,234.38 Exhibit A Computations of Unreported Income Determined by the Net Worth Plus Nondeductible Expenditures Method 12/31/60 Assets Warrants and checks on hand $ 377.16 Regular checking account, First National Bank 5,970.41 L.T. checking account, First National Bank 650.21 Special checking account, First National Bank 1,146.01 Savings account, First National Bank 1,114.47 Accounts receivable for oil run payments 97.81 Loan receivable from Donald J. Breckenridge 680.00 Investment in Bobbill Farm 48,549.09 Cost of stock 18,687.95 Cost of lodge located in Sangamon County, Ill 63,093.94 Cost of residence, Morris, Ill 8,300.00 Cost of improvements to residence, Morris, Ill 19,455.50 Investment in Pinney, Todd and Stratton (Exhibit B) 1,026.53 Cost of U.S. savings bonds 468.75 Cost of Morris Country Club bond 200.00 Cost of State of Israel bond 100.00 Cost of 1956 Lincoln 4,677.75 Cost of 1960 Chevrolet station wagon 2,570.00 Cost of furniture and furnishings 12,503.87 Cost of framed portraits 7,432.56 Cost of house boats and boat motors 7,028.90 Check in transit to Reynolds & Co 0 Accounts receivable from Reynolds & Co 2,206.57 Total assets 206,337.48 Liabilities Account payable -- Reynolds & Co 0 Accounts payable -- F. M. Pinney 1,967.93 Mortgage payable -- Marion Stratton Munyon 0 Mortgage payable -- Springfield Marine Bank 0 Total liabilities 1,967.93 Net worth at end of each year 204,369.55 Net worth at end of preceding year 195,342.94 Net worth increase (forward) 9,026.61 Net worth increase (brought forward) $ 9,026.61 Add: Nondeductible expenditures paid by checks drawn on the regular account First National Bank (Exhibit C) 13,669.28 Nondeductible expenditures not paid by checks drawn on the regular account First National Bank (Exhibit D) 7,569.92 Federal income tax withheld by the State of Illinois 3,894.48 Nondeductible loss on sale of houseboat Nondeductible loss on sale of stock 1,044.43 Retirement withheld by State of Illinois 1,749.97 Subtotal 36,954.69 Subtract: Nontaxable gift of houseboat Nontaxable portion of long-term capital gain Dividend exclusion claimed on income tax return (100.00) Distributive share of percentage depletion -- Pinney, Todd and Stratton (394.99) Nontaxable insurance dividends from Veterans' Administration (69.60) Deduction for State sales tax (332.38) Deduction for exemptions claimed on return (1,800.00) Remainder 34,257.72 Add (subtract) adjustments to reflect salary from the State of Illinois in the amounts reported on returns 0 Corrected net income (1953) or taxable income (1954 through 1960) 34,257.72 Net income (1953) or taxable income (1954 through 1960) reported on returns 20,068.83 Unreported income 14,188.89 *234 *267 On their joint income tax returns for the taxable years 1953 through 1960, petitioners reported income from nine sources. Following are the amounts of income from each source, deductions claimed, exemptions claimed, and net or taxable income as reported on the returns (Note: Under the 1939 Code personal exemptions are allowed as a credit against "net" income; under the 1954 Code they are allowed as "deductions" in computing "taxable" income):
State of Illinois Taxable year Illinois Central R R. Dividend salary director's income fees 1953 $ 22,998.54 $ 3,000 $ 135.00 1954 24,999.96 3,000 320.00 1955 24,999.96 4,350 *235 342.00 1956 24,999.96 4,800 634.00 1957 24,999.96 4,800 986.55 1958 25,000.00 3,400 716.80 1959 25,000.00 4,800 673.40 1960 25,000.00 4,800 775.18 Total 197,998.38 32,950 4,582.93 Taxable Net profit Net profit portion of net Taxable year (loss) from (loss) from capital gains oil investment Bobbill (losses) from Farm sale of capital assets 1953 ($ 2,279.00) 0 0 1954 324.63 ($ 2,333.24) 0 1955 815.68 (4,392.45) ($ 54.20) 1956 645.15 (5,394.12) 0 1957 926.91 (5,439.94) 1,002.81 1958 947.78 (2,751.78) 840.62 1959 970.94 (6,632.30) 0 1960 (1,004.05) (4,444.78) (1,000.00) Total 1,348.04 (31,388.61) 789.23 Miscellaneous Taxable year Interest Lectures income (loss) 1953 0 0 0 1954 0 0 0 1955 0 0 ($ 500) 1956 0 0 0 1957 0 0 0 1958 0 0 0 1959 $ 25 $ 1,100 0 1960 30 0 0 Total 55 1,100 (500) Deductions Exemptions Net or taxable Taxable year claimed claimed income per return 1953 $ 1,000.00 $ 3,000 $ 22,854.54 1954 1,331.79 3,000 21,979.56 1955 1,696.07 3,000 20,864.92 1956 2,636.83 3,000 20,048.16 1957 1,778.48 3,000 1958 2,929.46 3,000 22,223.96 1959 2,227.87 2,400 21,309.17 1960 2,297.52 1,800 Total 15,898.02 22,200 171,846.93 *268 On the dates shown in the table below, petitioners had assets and liabilities in amounts as indicated:
*23612/31/52 12/31/53 12/31/54 Assets Warrants and checks on hand $ 100.00 $ 431.57 $ 25.00 Regular account, First Nat. Bank 1,725.04 647.03 2,707.01 L. T. account, First Nat. Bank 0 0 0 Special account, First Nat. Bank 0 79.27 606.95 Savings account, First Nat. Bank 4,633.49 250.00 254.60 Account receivable for oil run payments 0 128.90 48.75 Loan receivable from Donald J. Breckenridge 0 470.00 145.00 Investment in Bobbill Farm 0 10,000.00 26,222.51 Cost of stock 0 10,263.97 11,039.10 Cost of lodge 0 0 0 Cost of residence, Morris, Ill 8,300.00 8,300.00 8,300.00 Cost of Morris Country Club bond 0 0 0 Cost of State of Israel bond 0 0 0 Cost of furniture and furnishings 0 0 700.00 Cost of portrait of Shirley 0 0 0 Check in transit to Reynolds & Co 0 0 0 Accounts receivable from Reynolds & Co 0 0 0 Liabilities Account payable -- Reynolds & Co 0 0 0 Accounts payable -- F. M. Pinney 0 1,700.83 49.58 Note payable -- Marion Stratton Munyon 4,000.00 0 0 Mortgage payable -- Springfield Marine Bank 0 0 0 12/31/55 12/31/56 12/31/57 Assets Warrants and checks on hand $ 430.00 $ 450.00 $ 42.00 Regular account, First Nat. Bank 1,434.07 2,598.40 2,553.29 L. T. account, First Nat. Bank 0 0 83.82 Special account, First Nat. Bank 1,430.66 1,114.90 169.06 Savings account, First Nat. Bank 259.71 366.08 677.10 Account receivable for oil run payments 124.02 130.49 152.31 Loan receivable from Donald J. Breckenridge 1,560.00 1,065.00 735.00 Investment in Bobbill Farm 35,516.03 46,636.40 49,158.53 Cost of stock 15,023.85 18,248.85 31,520.96 cost of lodge 0 0 18,316.43 Cost of residence, Morris, Ill 8,300.00 8,300.00 8,300.00 Cost of Morris Country Club bond 0 200.00 200.00 Cost of State of Israel bond 0 0 0 Cost of furniture and furnishings 700.00 1,108.00 1,108.00 Cost of portrait of Shirley 3,500.00 3,500.00 3,500.00 Check in transit to Reynolds & Co 0 0 1,492.50 Accounts receivable from Reynolds & Co 0 0 0 Liabilities Account payable -- Reynolds & Co 0 0 1,501.53 Accounts payable -- F. M. Pinney 37.25 213.94 64.52 Note payable -- Marion Stratton Munyon 0 0 0 Mortgage payable -- Springfield Marine Bank 0 0 0 12/31/58 12/31/59 12/31/60 Assets Warrants and checks on hand $ 903.75 $ 16.80 $ 377.16 Regular account, First Nat. Bank 666.48 154.18 5,970.41 L. T. account, First Nat. Bank 163.44 168.12 650.21 Special account, First Nat. Bank 849.77 492.66 1,146.01 Savings account, First Nat. Bank 1,050.57 1,081.79 1,114.47 Account receivable for oil run payments 147.79 189.03 97.81 Loan receivable from Donald J. Breckenridge 470.00 730.00 680.00 Investment in Bobbill Farm 52,473.05 49,891.37 48,549.09 Cost of stock 20,400.64 22,891.67 18,687.95 cost of lodge 60,917.82 62,741.68 63,093.94 Cost of residence, Morris, Ill 8,300.00 8,300.00 8,300.00 Cost of Morris Country Club bond 200.00 200.00 200.00 Cost of State of Israel bond 100.00 100.00 100.00 Cost of furniture and furnishings 8,788.03 11,358.10 12,503.87 Cost of portrait of Shirley 3,500.00 3,500.00 3,500.00 Check in transit to Reynolds & Co 0 0 0 Accounts receivable from Reyonolds & Co 0 0 2,206.57 Liabilities Account payable -- Reynolds & Co 0 0 0 Accounts payable -- F. M. Pinney 207.49 69.59 1,967.93 Note payable -- Marion Stratton Munyon 0 0 0 Mortgage payable -- Springfield Marine Bank 8,468.66 3,140.08 0 *237 *269 During the years 1953, 1954, and 1956, petitioners made improvements to their home in Morris at a total cost of $ 19,455.50. Following are the payees, a brief description of the improvements and year in which made, together with the cost thereof to petitioners:
12/31/53 12/31/54 12/31/56 Fred Kavenda -- plumbing and heating work $ 3,134.44 $ 1,320.24 C. Ayers -- new electrical service for kitchen and bathrooms, and remodeled porches 1,277.99 George S. Grimmett Co. -- general remodeling of kitchen 9,900.00 Narvick Bros. -- paneling and remodeling library $ 3,822.83 Total payments made each year 3,134.44 12,498.23 3,822.83 During the taxable years here involved petitioners resided at the Executive Mansion and used the Morris home mainly to conduct State business while traveling between Springfield and Chicago and as a place to receive election returns with a large number of approximately 200 friends.
On each of the dates as shown below the balance of petitioners' investment in the Pinney, Todd and Stratton partnership was in the amount as indicated:
Date Amount 12/31/52 0 12/31/53 $ 1,648.69 12/31/54 1,519.77 12/31/55 1,390.85 12/31/56 1,508.24 12/31/57 1,354.65 12/31/58 1,320.97 12/31/59 1,173.75 12/31/60 1,026.53 During *238 the period 1952 to 1954, inclusive, the U.S. Treasury Department issued four U.S. Government savings bonds, Series E, to petitioners at a total cost of $ 468.75.
As Governor, petitioner and his family had a number of automobiles at their disposal. Petitioner preferred not to use State cars while campaigning. In 1956, he purchased with campaign funds a second-hand Lincoln automobile for $ 4,677.75. The car was driven 38,000 miles in three campaigns. He placed the title to the car in Shirley's name to protect a desirable license number, No. 6. Upon leaving the office of Governor in 1961, he included the car in his 1961 income at $ 800, which was more than the actual value of it at that time.
In the latter part of June 1960, petitioner purchased a second-hand 1960 Chevrolet, four-door station wagon for the cash price of $ 2,570. It was purchased for the sole purpose of using it in the 1960 campaign. The car was used to transport campaign literature in advance of petitioner's helicopter during this campaign and was driven over 25,000 miles in 8 weeks. The depreciated cost of the car on December 31, 1960, was $ 2,000.
*270 In the latter part of 1955, petitioner commissioned John Doctoroff *239 to paint an oil portrait of Shirley for $ 3,500. In December 1955 petitioner personally paid Doctoroff this amount in currency from his personal reserves which he had at the Executive Mansion. The money did not come from a campaign fund.
In the early part of 1956 petitioner commissioned Doctoroff to paint an oil portrait of himself for $ 3,500. This portrait was used on his official campaign posters that were distributed throughout Illinois. It was also used on official State publications such as the "Illinois State Fair Booklet" and "Horse Show Programs." Petitioner's likeness appearing on billboards, hand literature, placards, news releases, and in newspapers were all made from this portrait. This portrait was paid for by check No. 1060 dated March 16, 1956, drawn on the Wm. G. Stratton For Governor Campaign Fund at the Suburban Trust & Savings Bank, Oak Park, Ill.
Doctoroff was a well-known campaign portrait artist who had painted portraits of two Presidents, two Vice Presidents, two unsuccessful presidential candidates, two other Governors of Illinois, two U.S. Senators, and the mayor of Chicago.
The cost of the portraits did not include the cost of the frames. Petitioner purchased *240 the frames in early 1956 at a cost of $ 207.73 for Shirley's portrait and $ 224.83 for petitioner's portrait.
After the portraits were finished they were hung on the second floor of the Governor's mansion. This floor was occasionally used for parties. The portraits remained at the mansion until they were moved to the 437 Vine Street home at Morris, Ill., after petitioner's term as Governor expired in January 1961.
In early 1956 petitioner acquired as a birthday gift a 30-foot Holiday houseboat which had been purchased by Andrew Fasseas on February 27, 1956, at a cost of $ 4,750. In the spring of 1959 petitioner sold the 30-foot houseboat to A. W. Helensmith for $ 2,500. Helensmith paid the purchase price by two personal checks; one on February 20, 1959, for $ 1,500 and the other on May 12, 1959, for $ 1,000.
On March 25, 1959, petitioner purchased a 35-foot houseboat for $ 5,760.43. On are about December 31, 1959, he purchased from Mercury Distributor Sales, Inc., two outboard motors at a cost of $ 1,268.47. Petitioner owned the houseboat and two outboard motors on December 31, 1960.
Petitioner personally received contributions totaling at least $ 113,750, of which $ 62,900 were *241 "campaign contributions" and $ 50,850 were "personal unrestricted cash gifts" to do with as he pleased. The unrestricted gifts were from the following donors in the years and amounts, as follows: *271
Prior to 1953 1953 1954 1955 1956 Kenneth H. Schnepp George R. Perrine $ 3,750 $ 500 $ 1,000 Judge Van Keuren 2,000 Judge Simpson 1,000 C. Wayland Brooks 2,500 Dwight H. Green 1,000 Peck 1,000 William Vicars 1,000 Dwight Friederich Frank O. Frisk and wife 3,000 $ 5,000 4,500 Julius Klein Andrew Fasseas 500 500 500 $ 500 500 Alfred B. Carius 50 50 50 50 Various 1,450 1,450 1,450 1,450 Totals 7,250 7,000 2,500 2,000 16,000 1957 1958 1959 1960 Kenneth H. Schnepp $ 500 $ 500 George R. Perrine 1,000 Judge Van Keuren 2,000 Judge Simpson 1,000 C. Wayland Brooks Dwight H. Green Peck William Vicars Dwight Friederich 500 Frank O. Frisk and wife 1,000 Julius Klein $ 500 $ 100 1,000 Andrew Fasseas 500 500 500 500 Alfred B. Carius 50 50 50 50 Various 1,450 1,450 1,450 1,450 Totals 2,500 2,100 2,500 9,000 During the years 1953 through 1960, the nondeductible expenditures of petitioners paid by checks drawn on the regular account and those not paid by checks were the respective aggregate amounts as follows:
Expenditures Year Regular not Total account paid by checks 1953 $ 13,169.68 $ 1,524.67 $ 14,694.35 1954 10,725.17 4,483.63 15,208.80 1955 13,182.41 1,463.76 14,646.17 1956 10,688.50 8,415.66 19,104.16 1957 8,492.69 8,634.21 17,126.90 1958 8,754.27 10,258.19 19,012.46 1959 10,465.15 6,950.10 17,415.25 1960 10,180.62 6,712.39 16,893.01 Totals 85,658.49 48,422.61 134,101.10 During *242 the years 1953 through 1960 Federal income taxes and retirement were withheld from petitioner's salary by the State of Illinois in the amounts and for the years as follows:
Federal income Retirement taxes withheld withheld from Year from salary salary 1953 $ 3,960.30 $ 456.25 1954 3,894.48 525.00 1955 3,894.48 525.00 1956 3,894.48 525.00 1957 3.894.48 1,035.40 1958 3,894.48 1,749.96 1959 3,894.48 1,749.96 1960 3,894.48 1,749.97 In 1957 and 1958 petitioners realized long-term capital gain from the sale of assets in the amounts of $ 1,811.30 and $ 1,666.89, respectively. The nontaxable portion of the long-term capital gain for said respective years was $ 905.65 and $ 833.45.
*272 On their income tax returns for the years 1954 through 1960 petitioners claimed dividend exclusions and deductions for exemptions in the amounts as shown below:
Dividend Deduction for Year exclusion exemptions 1954 0 $ 3,000.00 1955 $ 50.00 3,000.00 1956 50.00 3,000.00 1957 50.00 3,000.00 1958 75.00 3,000.00 1959 100.00 2,400.00 1960 100.00 1,800.00 Petitioners' distributive share of percentage depletion from the Pinney, Todd and Stratton oil operation for the years 1954 through 1960 was in the amounts as indicated below:
Year Amount 1954 $ 279.86 1955 478.11 1956 486.32 1957 556.90 1958 546.36 1959 545.50 1960 394.99 During *243 the taxable years petitioner received reimbursement of travel expense from the State of Illinois which he deposited in the regular checking account at the First National Bank in amounts as follows:
Year Amount 1953 $ 4,992.60 1954 6,081.57 1955 5,197.90 1956 5,969.40 1957 5,941.45 1958 5,073.09 1959 4,627.77 1960 3,043.46 During the years 1953 through 1960 petitioner received nontaxable insurance dividends from the Veterans' Administration in the amounts as follows:
Year Amount 1953 $ 66.00 1954 64.80 1955 64.80 1956 62.50 1957 73.20 1958 70.80 1959 70.80 1960 69.60 On occasion petitioner would receive and deposit his salary check from the State of Illinois on a date previous to the date reflected on the salary check. Checks for the closing month of each of the taxable years were dated and deposited as follows:
Pay period ending Check No. Date of check Net amount of Date deposited check 12/31/53 786349 1/5/54 $ 1,715 04 1/ 6/54 12/31/54 766599 1/3/55 1,715 04 12/31/54 12/31/55 784046 1/3/56 1,715 04 1/ 4/56 12/31/56 870981 1/3/57 1,715 04 1/ 4/57 12/31/57 511057 1/2/58 1,612 96 12/31/57 12/31/58 706023 1/2/59 1,612.96 1/ 2/59 12/31/59 931752 1/2/60 1,612.96 12/31/59 12/31/60 205262 1/3/61 1,612.96 12/30/60 *273 Petitioners' returns for the years 1958, 1959, and 1960 *244 were assigned to Revenue Agent Leo A. Dehen for audit in the spring of 1961. Shortly thereafter, the assignment was extended to cover the years 1956 and 1957.
Agent Dehen first interviewed petitioner at the Morris residence on July 5, 1961, for about 4 hours. At that interview petitioner was not represented by counsel.
Agent Dehen worked at the Morris home from 1 p.m. Wednesday, July 5, to 10 a.m. July 12, 1961, except for Saturday and Sunday. During the 4 full days Dehen was at the home from about 8 a.m. until 4:30 p.m. During that time he discussed with petitioner most of the canceled checks and bank statements pertaining to the regular, special, and L.T. accounts, as well as the Bobbill Farm account and personal checking account at the Springfield Marine Bank, all for the period 1958 through 1960. During a 2-week period following October 20, 1961, Dehen discussed with petitioner the canceled checks on the various accounts for the years 1956 and 1957, and the balance of the checks for 1958 through 1960 not previously discussed.
Prior to his going to the Morris home on July 5, 1961, Dehen was aware that petitioner had expended considerable sums of currency in 1957 and 1958 in connection *245 with the construction of a lodge situated at Cantrall, Ill., a short distance from Springfield.
One of the primary reasons Dehen discussed with petitioner the checks on the various bank accounts was to determine whether petitioner was converting checks to currency.
Throughout the discussions with Dehen petitioner was able to identify only one check drawn during the years 1956 through 1960 that had been negotiated for currency. That check was drawn to the LaSalle Hotel, Chicago, for $ 500 on June 12, 1959. Petitioner stated that the $ 500 was used to pay his tailor, George Mashbitz.
Shortly after Dehen left the Morris residence he was joined in his examination by a special agent, Charles E. Francisco, from the intelligence division of the district director's office, Springfield.
On September 25, 1961, and July 9, 1962, petitioner was questioned, in the presence of his attorney, Montgomery S. Winning, by the examining agents. The questions and answers were reduced to writing and subscribed and sworn to by petitioner.
In the losing campaign for secretary of state for Illinois in 1948, petitioner put in about $ 6,000 to $ 8,000 of his own personal funds. He considered this outlay in the *246 nature of a
contingent "receivable" and hoped to be reimbursed for the advance out of later political contributions. The campaign contributions of 1948 were not sufficient to meet the campaign expenses or to reimburse petitioner for the money he *274 had advanced. After his 1948 defeat, he immediately began campaigning for his successful election as State treasurer in November 1950 for a 2-year term beginning January 1951. The campaign contributions of 1950 were again not sufficient to meet the campaign expenses or to reimburse petitioner for the money he had advanced. In November 1951, when petitioner informally announced his candidacy for Governor, he personally paid out of his own funds the announcement expenses amounting to at least $ 2,000. Petitioner never permitted the solicitation of political contributions until he was an announced candidate. The formal announcement was made in January 1952 while he was still State treasurer. The expenses of this announcement party were at least $ 13,000, all of which petitioner paid out of his own funds. Thereafter, in 1952, there was deposited in the Suburban Trust & Savings Bank political contributions totaling $ 295,789.09. This permitted *247 petitioner to reimburse himself for the previously mentioned "out of pocket" advances of between $ 21,000 to $ 23,000. On December 31, 1952, petitioner had cash on hand not shown in the net worth statement attached to the deficiency notice of at least $ 15,000.After the expiration of petitioner's second term as Governor, he and Shirley returned to the Morris home to reside.
Petitioners' joint Federal income tax returns for the taxable years 1958, 1959, and 1960 were filed on the respective dates of April 15, 1959, April 15, 1960, and April 15, 1961.
The notice of deficiency was mailed to petitioners on April 13, 1965.
On their joint returns for the years 1958, 1959, and 1960 petitioners reported gross income in the respective amounts of $ 39,923.31, $ 37,596.17, and $ 39,532.11, as follows:
1958 1959 1960 Salary, State of Illinois $ 25,000.00 $ 25,000.00 $ 25,000.00 Director's fees, Illinois Central R R 3,400.00 4,800.00 4,800.00 Income from dividends (after exclusion) 716.80 673.40 775.18 Income from interest 25.00 30.00 Long-term capital gains (100%) 1,681.25 Income from lectures, etc 1,100.00 Distributive share of gross income of Bobbill Farm: 1958 (50% of $ 14,277.02) 7,138.51 1959 (50% of $ 8,028.25) 4,014.13 1960 (50% of $ 14,480,22) 7,240.11 Distributive share of gross income of Pinney, Todd and Stratton: 1958 (25% of $ 7,947.00) 1,986.75 1959 (25% of $ 7,934.56) 1,983.64 1960 (25% of $ 6,747.28) 1,686.82 Totals 39,923.31 37,596.17 39,532.11 25 percent of the gross income stated in the return was 9,980.83 9,399.04 9,883.03 *248 ULTIMATE FINDINGS OF FACT
The net worth plus nondeductible expenditures computation (Exhibit A) attached to the statement which in turn was attached to the deficiency notice, previously set out in our findings, is revised as follows: *275
*249Exhibit A Computations of Unreported Income Determined by the Net Worth Plus Nondeductible Expenditures Method 12/31/52 12/31/53 12/31/54 Assets Warrants and checks on hand $ 100.00 $ 431.57 $ 25.00 Regular checking account F.N.B 1,725.04 647.03 2,707.01 L. T. checking account F.N.B 0 0 0 Special checking account F.N.B 0 79.27 606.95 Savings account F.N.B 4,633.49 250.00 254.60 Other cash on hand on 12/31/52 15,000.00 0 0 Accounts record for oil run payments 0 128.90 48.75 Loan record from D. J. Breckenridge 0 470.00 145.00 Investment in Bobbhill Farm 0 10,000.00 26,222.51 Cost of stock 0 10,263.97 11,039.10 Cost of lodge 0 0 0 Cost of residence 8,300.00 8,300.00 8,300.00 Cost of improvements to residence 0 3,134.44 15,632.67 Investment in P. T. & S. 0 1,648.69 1,519.77 Cost of U.S. savings bonds 18.75 56.25 468.75 Cost of Morris C. C. bond 0 0 0 Cost of State of Israel bond 0 0 0 Depreciated cost of Chevrolet 0 0 0 Cost of furniture and furnishings 0 0 700.00 Cost of portrait of Shirley 0 0 0 Cost of frame for portrait 0 0 0 Cost of house boats and boat motors 0 0 0 Check in transit to Reynolds & Co. 0 0 0 Account record from Reynolds & Co. 0 0 0 Total assets 29,777.28 35,410.12 67,670.11 Liabilities Account payable -- Reynolds & Co 0 0 0 Account payable -- F. M. Pinney 0 1,700.83 49.58 Note payable -- Marion Stratton Munyon 4,000.00 0 0 Mortgage payable -- Springfield Marine Bank 0 0 0 Total liabilities 4,000.00 1,700.83 49.58 Net worth at end of each year 25,777.28 33,709.29 67,620.53 Net worth at end of preceeding year 0 25,777.28 33,709.29 Net worth increase (forward) 0 7,932.01 33,911.24 Net worth increase (brought forward) 7,932.01 33,911.24 Add: Nondeductible expenditures paid by checks drawn on regular account FNB 13,169.68 10,725.17 Nondeductible expenditures not paid by checks 1,524.67 4,483.63 Federal income tax withheld 3,960.30 3,894.48 Nondeductible loss on sale of houseboat 0 0 Nondeductible loss on sale of stock 0 0 Retirement withheld from salary 456.25 525.00 Subtotal 27,042.91 53,539.52 Subtract: Nontaxable gift of houseboat 0 0 Other nontaxable gifts (7,000.00) (2,500.00) Nontaxable portion of long-term capital gain 0 0 Dividend exclusions 0 (50.00) Distributive share of percentage depletion 0 (279.86) Nontaxable insurance dividends from Veterans' Administration (66.00) (64.80) Deduction for State sales tax (54.00) (112.00) Itemized or standard deduction (less sales tax) (1,000.00) (1,241.79) Exemptions claimed on return 0 (3,000.00) Remainder 18,922.91 46,291.07 Remainder (brought forward) 18,922.91 46,291.07 Add (subtract) adjustments to reflect salary from the State of Illinois in the amounts reported on returns 0 (2,083.33) Corrected net income (1953) or taxable income (1954 through 1960) 18,922.91 44,207.74 Net income (1953) or taxable income (1954 through 1960) reported on returns 22,854.54 21,979.56 Unreported or (overreported) income (3,931.63) 22,228.18
*250Exhibit A Computations of Unreported Income Determined by the Net Worth Plus Nondeductible Expenditures Method 12/31/55 12/31/56 12/31/57 Assets Warrants and checks on hand $ 430.00 $ 450.00 $ 42.00 Regular checking account F.N.B 1,434.07 2,598.40 2,553.29 L. T. checking account F.N.B 0 0 83.82 Special checking account F.N.B 1,430.66 1,114.90 169.06 Savings account F.N.B 259.71 366.08 677.10 Other cash on hand 12/31/52 0 0 0 Accounts record for oil run payments 124.02 130.49 152.31 Loan record from D. J. Breckenridge 1,560.00 1,065.00 735.00 Investment in Bobbhill Farm 35,516.03 46,636.40 49,158.53 Cost of stock 15,023.85 18,248.85 31,520.96 Cost of lodge 0 0 18,316.43 Cost of residence 8,300.00 8,300.00 8,300.00 Cost of improvements to residence 15,632.67 19,455.50 19,455.50 Investment in P. T. & S. 1,390.85 1,508.24 1,354.65 Cost of U.S. savings bonds 468.75 468.75 468.75 Cost of Morris C. C. bond 0 200.00 200.00 Cost of State of Israel bond 0 0 0 Depreciated cost of Chevrolet 0 0 0 Cost of furniture and furnishings 700.00 1,108.00 1,108.00 Cost of portrait of Shirley 3,500.00 3,500.00 3,500.00 Cost of frame for portrait 0 207.73 207.73 Cost of house boats and boat motors 0 4,750.00 4,750.00 Check in transit to Reynolds & Co. 0 0 1,492.50 Account record from Reynolds & Co. 0 0 0 Total assets 85,770.61 110,108.34 144,245.63 Liabilities Account payable -- Reynolds & Co 0 0 1,501.53 Account payable -- F. M. Pinney 37.25 213.94 64.52 Note payable -- Marion Stratton Munyon 0 0 0 Mortgage payable -- Springfield Marine Bank 0 0 0 Total libilities 37.25 213.94 1,566.05 Net worth at end of each year 85,733.36 109,894.40 142,679.58 Net worth at end of preceeding year 67,620.53 85,733.36 109,894.40 Net worth increase (forward) 18,112.83 24,161.04 32,785.18 Net worth increase (brought forward) 18,112.83 24,161.04 32,785.18 Add: Nondeductible expenditure paid by checks drawn on regular account FNB 13,182.41 10,688.50 8,492.69 Nondeductible expenditures not paid by checks 1,463.76 8,415.66 8,634.21 Federal income tax withheld 3,894.48 3,894.48 3,894.48 Nondeductible loss on sale of houseboat 0 0 0 Nondeductible loss on sale of stock 0 0 0 Retirement withheld from salary 525.00 525.00 1,035.40 Subtotal 37,178.48 47,684.68 54,841.96 Subtract: Nontaxable gift of houseboat 0 (4,750.00) 0 Other nontaxable gifts (2,000.00) (16,000.00) (2,500.00) Nontaxable portion of long-term capital gain 0 0 (905.65) Dividend exclusions (50.00) (50.00) (50.00) Distributive share of percentage depletion (478.11) (486.32) (556.90) Nontaxable insurance dividends from Veterans' Administration (64.80) (62.40) (73.20) Deduction for State sales tax (117.50) (361.25) (190.00) Itemized or standard deduction (less sales tax) (1,591.07) (2,486.83) (1,628.48) Exemptions claimed on return (3,000.00) (3,000.00) (3,000.00) Remainder 29,877.00 20,487.88 45,937.73 Remainder (brought forward) 29,877.00 20,487.88 45,937.73 Add (subtract) adjustments to reflect salary from the State of Illinois in the amounts reported on returns 2,083.33 0 (2,083.33) Corrected net income (1953) or taxable income (1954 through 1960) 31,960.33 20,487.88 43,854.40 Net income (1953) or taxable income (1954 through 1960) reported on returns 20,864.92 20,048.16 22,497.79 Unreported or (overreported) income 11,095.41 439.72 21,356.61 Exhibit A Computations of Unreported Income Determined by the Net Worth Plus Nondeductible Expenditures Method 12/31/58 12/31/59 12/31/60 Assets Warrants and checks on hand $ 903.75 $ 16.80 $ 377.16 Regular checking account F.N.B 666.48 154.18 5,970.41 L. T. checking account F.N.B 163.44 168.12 650.21 Special checking account F.N.B 849.77 492.66 1,146.01 Savings account F.N.B 1,050.57 1,081.79 1,114.47 Other cash on hand on 12/31/52 0 0 0 Accounts record for oil run payments 147.79 189.03 97.81 Loan record from D. J. Breckenridge 470.00 730.00 680.00 Investment in Bobbhill Farm 52,473.05 49,891.37 48,549.09 Cost of stock 20,400.64 22,891.67 18,687.95 Cost of lodge 60,917.82 62,741.68 63,093.94 Cost of residence 8,300.00 8,300.00 8,300.00 Cost of improvements to residence 19,455.50 19,455.50 19,455.50 Investment in P. T. & S. 1,320.97 1,173.75 1,026.53 Cost of U.S. savings bonds 468.75 468.75 468.75 Cost of Morris C. C. bond 200.00 200.00 200.00 Cost of State of Israel bond 100.00 100.00 100.00 Depreciated cost of Chevrolet 0 0 2,000.00 Cost of furniture and furnishings 8,788.03 11,358.10 12,503.87 Cost of portrait of Shirley 3,500.00 3,500.00 3,500.00 Cost of frame for portrait 207.73 207.73 207.73 Cost of house boats and boat motors 4,750.00 7,028.90 7,028.90 Check in transit to Reynolds & Co. 0 0 0 Account record from Reynolds & Co. 0 0 2,206.57 Total assets 185,134.29 190,150.03 197,364.90 Liabilities Account payable -- Reynolds & Co 0 0 0 Account payable -- F. M. Pinney 207.49 69.59 1,967.93 Note payable -- Marion Stratton Munyon 0 0 0 Mortgage payable -- Springfield Marine 8,468.66 3,140.08 0 Bank Total liabilities 8,676.15 3,209.67 1,967.93 Net worth at end of each year 176,458.14 186,940.36 195,396.97 Net worth at end of preceeding year 142,679.58 176,458.14 186,940.36 Net worth increase (forward) 33,778.56 10,482.22 8,456.61 Net worth increase (brought forward) 33,778.56 10,482.22 8,456.61 Add: Nondeductible expenditures paid by checks drawn on regular account FNB 8,754.27 10,465.15 10,180.62 Nondeductible expenditures not paid by checks 10,258.19 6,950.10 6,712.39 Federal income tax withheld 3,894.48 3,894.48 3,894.48 Nondeductible loss on sale of houseboat 0 2,250.00 0 Nondeductible loss on sale of stock 0 0 1,044.43 Retirement withheld from salary 1,749.96 1,749.96 1,749.96 Subtotal 58,435.46 35,791.91 32,038.49 Subtract: Nontaxable gift of houseboat 0 0 0 Other nontaxable gifts (2,100.00) (2,500.00) (9,000.00) Nontaxable portion of long-term capital gain (833.45) 0 0 Dividend exclusions (75.00) (100.00) (100.00) Distributive share of percentage depletion (546.36) (545.50) (394.99) Nontaxable insurance dividends from Veterans' Administration (70.80) (70.80) (69.60) Deduction for State sales tax (431.80) (291.08) (332.38) Itemized or standard deduction (less sales tax) (2,779.46) (2,077.87) (2,147.52) Exemptions claimed on return (3,000.00) (2,400.00) (1,800.00) Remainder 48,598.59 27,806.66 18,194.00 Remainder (brought forward) 48,598.59 27,806.66 18,194.00 Add (subtract) adjustments to reflect salary from the State of Illinois in the amounts reported on returns 2,083.33 (2,083.33) 0 Corrected net income (1953) or taxable income (1954 through 1960) 50,681.92 25,723.33 18,194.00 Net income (1953) or taxable income (1954 through 1960) reported on returns 22,223.96 21,309.17 20,068.83 Unreported or (overreported) income 28,457.96 4,414.16 (1,874.83) *251 *277 No part of the deficiency in tax for the taxable year 1953 "is due to fraud with intent to evade tax" as that phrase is used in
section 293(b) of the Internal Revenue Code of 1939 . No part of the underpayment in tax for each of the taxable years 1954 through 1960 "is due to fraud" as that phrase is used insection 6653(b) of the Internal Revenue Code of 1954 .The return for the taxable year 1953 was not "a false or fraudulent return with intent to evade tax" as that phrase is used in
section 276(a) of the Internal Revenue Code of 1939 . The return for each of the taxable years 1954 through 1960 was not "a false or fraudulent return with intent to evade tax" as that phrase is used insection 6501(c)(1) of the Internal Revenue Code of 1954 .The deficiencies determined by the respondent for the years 1953 through 1960, with the exception of the year 1958, are barred by the statute of limitations. For the year 1958, petitioners omitted from gross income "an amount properly includable therein which is in excess of 25 percent of the amount of gross income stated in the return" as that phrase is used in
section 6501(e)(1)(A) of the Internal Revenue Code of 1954 , thus entitling the respondent *252 to 6 years after the return was filed to assess or collect the tax.OPINION
The three issues previously stated are primarily questions of fact which have been resolved in our ultimate findings.
Respondent's case is premised on a net worth plus nondeductible expenditures approach covering the calendar years 1953 through 1960 while petitioner William G. Stratton was Governor of the State of Illinois. The respondent's computations under this approach which were part of the statement attached to the deficiency notice are set out in our findings. Petitioners challenge the appropriateness of respondent's use of the net worth method on the ground that they maintained adequate records of all income. Petitioner prides himself on the fact that he was able to and did personally prepare the joint returns from the records that were kept. He reported income from nine sources. In our findings we have set out the amounts of income from each source, deductions and exemptions claimed, and the net or taxable income for each year, the total of which for all years was $ 171,846.93. The respondent does not contest the correctness of this reporting but contends it does not tell the whole story. By use *253 of the net worth plus nondeductible expenditures approach the respondent determined petitioners' "Corrected net income (1953) or taxable income (1954 through 1960)" to be a total of $ 369,096.29, reduced in his brief (pages 58-A and 58-B) to $ 366,184.92, detailed by years, as follows: *278
Determined Contended Difference Year in deficiency for in appen. F. notice brief of brief 1953 $ 44,920.20 $ 44,920.23 $ 0.03 1954 50,799.39 50,749.28 (50.11) 1955 38,587.20 38,514.82 (72.38) 1956 52,401.29 51,388.29 (1,013.00) 1957 54,425.20 53,698.24 (726.96) 1958 59,161.74 58,852.90 (308.84) 1959 34,543.55 34,436.46 (107.09) 1960 34,257.72 33,624.70 (633.02) Totals 369,096.29 366,184.92 (2,911.37) Regarding petitioners' challenge to the appropriateness of respondent's approach it is well settled that respondent is justified in using this approach in order at least to test the relative accuracy of the taxpayer's reporting.
Holland v.United States , 348 U.S. 121">348 U.S. 121Davis v.Commissioner , 239 F. 2d 187353 U.S. 984">353 U.S. 984 (1957);Schwarzkopf v.Commissioner , 246 F. 2d 731, 733Cefalu v.Commissioner , 276 F. 2d 122, 126*256 Petitioners not only contend that respondent was not justified in using the net worth approach but question the correctness of practically every item set out in Exhibit A in our findings. We hold respondent was justified in using the net worth approach.
Holland v.United States, supra .Calendar year Our Reported by Percent Unreported or findings petitioners reported (overreported) 1953 $ 18,922.91 $ 22,854.54 120.7 ($ 3,931.63) 1954 44,207.74 21,979.56 49.7 22,228.18 1955 31,960.33 20,864.92 65.2 11,095.41 1956 20,487.88 20,048.16 97.8 439.72 1957 43,854.40 22.497.79 51.3 21,356.61 1958 50,681.92 22,223.96 43.8 28,457.96 1959 25,723.33 21,309.17 82.8 4,414.16 1960 18,194.00 20,068.83 110.3 (1,874.83) Totals 254,032.51 171,846.93 67.0 82,185.58 *257 The so-called "stipulations of facts numbers I, II, and III" mentioned in the first paragraph of our findings are in substance stipulations of
evidence rather thanfacts . As we said in our preliminary statementsupra the stipulations "consisted of substantially all the evidence (some 8,300 pages of testimony and 373 exhibits) that had previously been received in the criminal trial." See our fn. 3,supra . Petitioners in their brief characterize the evidence of "unreported income" offered in the instant case as "merely a second look at the same evidence" considered by the jury in the criminal trial.In arriving at our revised statement of net worth set out in our ultimate findings we have carefully considered all of the evidence in these stipulations together with all the additional evidence offered and received in the trial before us.
In our findings we have set out in a table the amounts of certain assets and liabilities petitioners had on the dates shown in the table. The basis for the facts in this table is our order dated October 2, 1967, in connection with the hearing had under Rule 31(b)(5) of our Rules of Practice. That disposed of a large number of the items in the net worth *258 statement, the correctness of which was questioned by petitioners.
One of the most time-consuming considerations dealt with respondent's request for finding (No. 102) in his brief dealing with "nondeductible expenditures of petitioners paid by checks drawn on the regular account and those not paid by checks" which in turn involved over 1,650 separate expenditures (grouped into 200 separate issues) contained in Exhibits T and U of the "proposed stipulation of facts" *280 attached to the motion to show cause as provided in Rule 31(
b )(5) filed April 11, 1967. We think it would be impracticable to discuss each of the 200 separate issues in this opinion. Suffice it to say respondent had requested a total "nondeductible expenditures" for the 8 years of $ 163,727.91, whereas after using our best judgment we have found the total for the 8 years to be $ 134,101.10, a reduction of $ 29,626.81. Our total of $ 134,101.10 is detailed by years both in our findings and ultimate findings.Another difference between our revised net worth statement and respondent's determination concerns the amount of "cash" on hand on December 31, 1952, the beginning of the taxable period. Respondent has requested we *259 find that "On December 31, 1952, petitioners had no cash on hand in excess of that determined by respondent" which was $ 100 in warrants and checks, $ 1,725.04 in the regular checking account, and $ 4,633.49 in the savings account. Prior to 1953, petitioner had advanced cash out of his own pocket of between $ 21,000 and $ 23,000 for various political expenses. He was entitled to be reimbursed for such advances from future campaign contributions. Cf.
Rev. Proc. 68-19 (1 C.B. 810">1968-1 C.B. 810 , 811). In 1952, there was deposited in the Suburban Trust & Savings Bank political contributions totaling $ 295,789,09. From all the evidence we have found as a fact that "On December 31, 1952, petitioner had cash on hand not shown in the net worth statement attached to the deficiency notice of at least $ 15,000." We hold that this amount should be included in the revised net worth statement as other cash on hand on December 31, 1952.Another difference between our revised net worth statement and respondent's determination concerns the amount of cash "gifts" petitioner received during the taxable years. This is probably the most important
factual determination in the case. It not only affects the amount *260 of the net or taxable income for each year as determined by the net worth method but it is a major factor in our consideration of the fraud issue yet to be discussed. Respondent admits that in 1956 petitioner was given a houseboat which cost $ 4,750, but aside from that he included no other gifts in the net worth statement. Out of almost a million dollars of contributions petitioner contends that he received over $ 100,000 as outright, unrestricted gifts for his own personal use to do with as he pleased. The line between an outright gift and a campaign contribution is a very thin line. Nevertheless, the IRS inRev. Proc. 68-19 ,supra , recognizes that a political candidate may receive outright gifts excludable from gross income undersection 102(a), I.R.C. 1954 .Rev. Proc. 68-19 provides:*281 The Service will presume in the absence of evidence to the contrary that contributions to a political candidate are political funds which are not intended for the unrestricted personal use of such recipient. If it can be shown that the funds were intended for the unrestricted personal use of the political candidate, then the Service will apply the principles set forth in
Commissioner v.Mose Duberstein, et al ., 363 U.S. 278 (1960)Ct. D. 1850, C.B. 1960-2, 428 andMax Kralstein, et ux ., 38 T.C. 810">38 T.C. 810C.B. 1963-2, 4 , to determine whether or not the funds may be excluded from his gross income undersection 102 of the Code.Paragraph 9 of stipulation No. III provides "if the individuals named below [26 of them] were called to testify in the instant case they would testify as they did in the United States District Court, Chicago, Illinois, in the case of
United States v.William G. Stratton , 64 CR 221unequivocally that they "intended" to makeoutright gifts to petitioner to do with as he pleased with no strings attached. The respondent has offered no evidence in rebuttal. We have carefully considered all of the testimony of these witnesses, and again using our best judgment have found that during the taxable years petitioner received personal unrestricted cash gifts *262 to do with as he pleased of at least $ 43,600. On the evidence presented, we find that the transfers totaling this amount were made from a "detached and disinterested generosity," "out of affection, respect, admiration, charity or like impulses."Commissioner v.Duberstein , 363 U.S. 278">363 U.S. 278The respondent in his determination made no allowance for the itemized or standard deduction. In our revised net worth statement we subtracted a total for the 8 years of $ 14,953.02 for such deduction. See
sec. 21, I.R.C. 1939 ;sec. 63, I.R.C. 1954 .The difference between the "Corrected net income (1953) or taxable income (1954 through 1960)" now contended for by respondent of $ 366,184.92 and our findings of $ 254,032.51 is $ 112,152.41. In this opinion we have accounted for $ 103,179.83 *282 three relatively small items totaling $ 8,972.58 *263 were used for campaign purposes and as such are not taxable to the political candidate. We agree with section 2 of
Rev. Proc. 68-19 ,supra , which provides as follows:Political funds are not taxable to the political candidate by or for whom they are collected if they are used for expenses of a political campaign or some similar purpose. However, any amount diverted from the channel of campaign activity and used by the political candidate for any personal purpose is income taxable to such candidate for the year in which the funds are so diverted. See
I.T. 3276 , C.B. 1939-1 (Part 1), 108, andRev. Rul. 54-80 ,C.B. 1954-1, 11 , cited with approval inWilliam O'Dwyer, et ux. v.Commissioner , 266 F. 2d 575 (4th Cir. 1959)361 U.S. 862">361 U.S. 862 (1959), andUnited States v.Leslie E. Jett , 352 F. 2d 179 (6th Cir. 1965)83 U.S.C. 935 (1966) .The *264 $ 570 was depreciation on the 1960 Chevrolet station wagon used in the 1960 campaign, and should be reflected in the net worth statement as a liability. supra 10.94-95, and Schmidt, Legal and Accounting Handbook of Federal Tax Fraud 319 (last sentence.) (P-H. 1963).
This concludes our determination of petitioners' net or taxable income for each of the taxable years by means of a revised net worth statement. We repeat here what was said by this Court in
Morris Lipsitz , 21 T.C. 917">21 T.C. 917220 F. 2d 871 (C.A. 4, 1955), certiorari denied350 U.S. 845">350 U.S. 845 :
We do not deem it necessary to explain our thought processes or chain of reasoning in making all our findings. To do so would expand this opinion beyond all reasonable length. Suffice it to say, our findings represent our best judgment, based on the entire record, on all the disputed items, and those findings form the basis for our ultimate findings of fact as to the amount of income for each of the years in question.Issue 2 . -- Now that it is settled byJohn W. Amos , 43 T.C. 50">43 T.C. 50360 F. 2d 358 (C.A. 4, 1965);Moore v.United States , 360 F. 2d 353Henry M. Rodney , 53 T.C. 287 (1969)conviction for tax evasion works a "collateral estoppel" on the issue of fraud in a subsequent civil suit over a fraud penalty covering the same years, petitioners contend that since petitioner William *283 G. Stratton wasacquitted on charges brought undersection 7201, I.R.C. 1954 , in the criminal case (see fn. 3),equity demands that the doctrine of collateral estoppel should apply herein to bar the assertion of penalties undersections 293(b), I.R.C. 1939 , and6653(b) ,I.R.C. 1954 . In their brief petitioners say "If this not be so, then the government is unfairly given the advantage of a 'one-way street,' Pierce, J. dissenting inAmos , p. 64."Unfortunately for petitioners, dissenting opinions are not the law. In his reply brief respondent states that "petitioners did not plead this issue" of collateral estoppel and that "The Court has held on numerous occasions that it will not consider issues which have not been pleaded."
J. William Frentz , 44 T.C. 485">44 T.C. 485375 F. 2d 662 (C.A. 6, 1967). Collateral estoppel is an issue that *266 must be specifically pleaded.Alfred Fortugno , 41 T.C. 316">41 T.C. 316353 F. 2d 429 (C.A. 3, 1965), certiorari granted384 U.S. 959">384 U.S. 959 , but later dismissed under Rule 60, 385 U.S. 954. Among petitioners' assignments of errors were assignments 4(1) and (m). greater in criminal cases than in civil cases.Helvering v.Mitchell , 391">303 U.S. 391William G. Lias , 280">24 T.C. 280235 F. 2d 879 (C.A. 4, 1956), certiorari denied353 U.S. 935">353 U.S. 935 (1957), we said (p. 321):The final contention of the petitioner that the jury found him not guilty of willful attempt to evade *267 income taxes for the years 1942 to 1946, inclusive, which cover a part of the years before us, requires no extended discussion. In
Helvering v.Mitchell , 303 U.S. 391">303 U.S. 391
InJohn W. Amos, supra What respondent does contend here is that under the doctrine of collateral estoppel a taxpayer who has been convicted of willfully attempting to evade his income taxes may not thereafter relitigate in this forum the question whether *284 the tax deficiencies resulting from his previous attempted evasion were "due to fraud." Clearly, such a contention is not inconsistent with the principle laid down in
Helvering v.Mitchell, supra greater burden of proof is required does not work an estoppel in a civil case dependent upon the same finding of fact, but wherein the burden of proof is lesser. * * *
And in the recent case ofTsuneo Otsuki , 53 T.C. 96 (1969)
However, even if *268 the petitioners were acquitted in a criminal tax evasion case, it in no way affects their liability for civil fraud in the present case.William G. Lias * * *We hold, therefore, that the respondent is not collaterally estopped to contend for the additions to tax here involved. Cf.
Robert Neaderland , 52 T.C. 532">52 T.C. 532While respondent may not be collaterally estopped to claim civil fraud it does not follow that he has sustained his burden of proof as to fraud. The determination of fraud is an issue of fact.
Welburn Mayock , 32 T.C. 966">32 T.C. 966Lessmann v.Commissioner , 327 F. 2d 990, 993Estate of William Kahr , 48 T.C. 929">48 T.C. 929Tsuneo Otsuki, supra .Sec. 7454(a), I.R.C. 1954 . His evidence of proof must be clear and convincing.Arlette Coat Co ., 14 T.C. 751">14 T.C. 751W. A. Shaw , 27 T.C. 561">27 T.C. 561252 F. 2d 681 (C.A. 6, 1958);Cefalu v.Commissioner, supra ; Tsuneo Otsuki, supra .James Nicholson , 32 B.T.A. 977">32 B.T.A. 97790 F. 2d 978 (C.A. 8, 1937);Estate of Louis L. Briden , 11 T.C. 1095">11 T.C. 1095Kirk v.Commissioner , 179 F. 2d 619Tsuneo Otsuki, supra
We have held that a mere understatement of income does not establish fraud.James Nicholson * * *. The existence of fraud with intent to evade tax must be affirmatively established.Drieborg v.Commissioner , 225 F. 2d 216, 218In the often-cited case of
Mitchell v.Commissioner , 118 F. 2d 308Welburn Mayock, supra M. Rea Gano , 19 B.T.A. 518">19 B.T.A. 518E. S. Iley, supra ."We have carefully examined the entire record in this case and have found no evidence that either of the petitioners had any intention of evading a tax believed to be owing. Petitioner personally prepared the joint returns from records that were meticulously kept. Respondent *285 has failed to point out one false item reported on these returns. Respondent's position simply is that petitioners kept accurate records of those items that could be checked by a revenue agent but failed to keep adequate records of a large amount of currency that must have been received by petitioner from some allegedly unknown source while he was Governor and which was used by petitioners for their personal purposes and that this is demonstrated by respondent's net worth statement which originally showed an alleged unreported income for the 8 years of $ 197,249.36, reduced in his brief to $ 194,337.99, and redetermined by this Court to be $ 82,185.58.
We *271 are satisfied from the evidence that this allegedly unknown source of currency came from close friends of petitioner either as campaign contributions or as outright gifts. We discussed this phase of the case at some length under the first issue and need not repeat that discussion here other than to say that these gifts and other alleged gifts considered by us not to be outright "gifts" but rather falling in the class of "campaign contributions" or political funds, no doubt account for the greater part of the alleged unreported income determined by the respondent.
In our opinion under the first issue we said "The line between an outright gift and a campaign contribution is a very thin line." If a contribution is an outright gift, it is excludable from gross income under
section 102(a) ,supra . If it falls within the class of political funds it is taxable to the political candidate only to the extent that it is "diverted from the channel of campaign activity and used by the political candidate for any personal purpose" as stated in section 2 ofRev. Proc. 68-19 ,supra , with which we agree.I.T. 3276 cited in section 2,supra , published in 1939, as far as material here, merely "held that *272 a political gift received by an individual or by a political organization is not taxable to the recipient." "This Ruling continued in effect until 1954, when it was purportedly 'modified' byRev. Rul. 54-80 * * *."O'Dwyer v.Commissioner , 266 F. 2d 575, 585-58628 T.C. 698">28 T.C. 698 (1957), certiorari denied361 U.S. 862">361 U.S. 862 (1959).Rev. Rul. 54-80 provides in part:Where a political gift is received by an individual or a political organization and it is held or used for the purposes intended, i.e., for present or future expenses of a political campaign or for some similar purpose, it is not taxable income to the recipient, See
I.T. 3276 ,supra . However, any amount diverted from the channel of campaign activities and used by a candidate or other individual for personal use constitutes taxable income to such candidate or other individual for the year in which the funds are so diverted. * * *I.T. 3276 ,supra , is modified to the extent that it is inconsistent with the views expressed herein.Petitioners vigorously contend that
Rev. Rul. 54-80 ,supra , is not the law. They also contend that it is in conflict withRev. Rul. 59-57*286 (1 C.B. 626">1959-1 C.B. 626 ) which states in part that "Any *273 individual who makes a contribution or gift in excess of $ 3,000 in any one calendar year to a political party or to a candidate for public office must file a Federal Gift Tax Return, Form 709." In their brief they argue:Of the many political experts called by petitioners, none indicated that he recognized
Revenue Ruling 54-80 as expressing the law of the land. Timothy Sheehan, formerly a Congressman and member of the Tax Writing Ways and Means Committee, specifically stated that it was not the law and that Congress had never intended such a law. Senator Dirksen expressed a similar opinion. None of the many political experts called by petitioners expressed any contrary opinion.All felt that a political contribution received by an individual candidate was his to do with as he desired without taxable consequences. No contrary political experts or opinions were adduced by respondent . [Emphasis supplied.]Petitioners' contention that
Rev. Rul. 54-80 ,supra , is not the law is without merit. The two cases ofO'Dwyer v.Commissioner, supra United States v.Jett , 352 F. 2d 179 (1965)383 U.S. 935">383 U.S. 935 , definitely hold to the contrary. The Court in theO'Dwyer case *274 said in part:We reach the conclusion that
Rev. Rul. 54-80 was declaratory of judicial interpretation of existing law and that it supplemented and amplifiedI.T. 3276 , supra, notwithstanding the use of the word "modified". The two rulings are not necessarily inconsistent.I.T. 3276 did not purport to state the result if the recipient of a political contribution diverted it to his personal use; that sequel was supplied byRev. Rul. 54-80 . * * *To the same effect see
United States v.Jett, supra at 182It thus becomes unnecessary to decide whether
Rev. Rul. 54-80 is in conflict withRev. Rul. 59-57 ,supra .Respondent relies solely upon his net worth statement to establish fraud. He contends that "the consistent understatement of substantial amounts of income over a number of years standing alone, is effective evidence of fraudulent intent." This is not always true, especially where the understatement of substantial amounts is due to a mistake of law. In
Spies v.United States , 317 U.S. 492">317 U.S. 492Welburn Mayock, supra We have found as a fact that petitioner did not file a false or fraudulent income tax return with intent to evade tax for the year 1948. We think the evidence presented herein permits of no other conclusion. Although petitioner may have been mistaken as to the legal consequences of the transactions we are satisfied he had no intention of evading a tax believed to be owing.
A mistake of law, if it was a mistake, is not equivalent to the fraud with intent to evade tax named in the statute . * * * [Emphasis supplied.]And in
Toledano v. Commissioner , 362 F. 2d 243
*287 The understatements of interest and dividend income were substantial and consistent. Being substantial and consistent these are evidence of fraud, but such evidence,without more , is not enough to carry the Commissioner's burden to establish fraud by clear and convincing evidence.Merritt v.Commissioner , 5th Cir. 1962, 301 F. 2d 484Toledano's conduct, in a number of ways, points to an absence of tax fraud. He waived limitations and
cooperated *276 with investigating agents . [Emphasis supplied.]In the
Merritt case the Fifth Circuit concluded that there were facts present other than the mere failure to return income. InMerritt for 7 years the understatement was about $ 80,000 compared with $ 103,000 of reported income, or about 44 percent unreported. In the instant case, we have determined the understatement for 8 years to be $ 82,185.58 compared with $ 171,846.93 of reported income, or about 33 percent unreported.Petitioner fully cooperated with the investigating agents in every way. He turned over to them all of his records, including approximately 2,000 canceled checks. He appeared at the office of the intelligence division of the Internal Revenue Service on three different occasions in 1961 and 1962, where approximately 577 questions and answers were recorded on 96 single-spaced typewritten pages. We are satisfied that petitioner tried to answer all of the questions put to him in a frank, unreserved, respectful, truthful, sincere, and cooperative manner. On August 30, 1962, petitioner again appeared at the office of the intelligence division for a final conference which lasted only 27 minutes. He was told that the *277 current investigation was nearing completion; that "consideration is being given to a possible recommendation that criminal proceedings be instituted against you for attempted evason of your income taxes"; and that "this interview is to enable you to produce any information, facts, or evidence which you desire to have considered in connection with this matter." Petitioner replied, in part, as follows:
My statement would begin by saying that so far as I know a record has been kept of everything that the law required in the way of income. All of my salary, business income, and things of that nature, have been meticulously accounted for and, to my knowledge, anything the law required in the way of reporting was done. I certainly respect the Department's views, and yet I think there are two sides, of course, to this question. During this investigation I have made available all of the information I had to expedite the search for information on the part of the Department. My family has done the same thing, of course, at my instruction. I think the problem involved here is a question of opinion more than any particular fact being involved.
It was my understanding that under the law I was *278 required to report all personal taxable income. I think the investigation has shown that has been done, that I have no hidden businesses or front businesses set up to give me an advantage of getting profit from the State or something of that kind. In other words, all of my business interests have been fully shown and reported.
* * * *
*288 It is my understanding that gifts are not reportable and not taxable. It is also true, of course, that political contributions are not reportable for State officers. I had several funds set up to handle my personal business. I think all of those have been checked out; I'm sure they have been. * * *
I made these returns in good faith. It is not easy when you are as busy as the Governor of a big state is, to do that -- to make his own returns. But I thought they met all of the necessary qualifications.
* * * *
I think the investigation shows I had no under-the-table business or dealings that were illegal or was given funds that weren't in the public interest or that were improper. I'm very proud of that record. I think it boils down to a question of the use of funds that I did not consider taxable. I certainly made no attempt to conceal or evade in *279 any of these operations, and, as I say, I think the whole problem resolves there to that point. I don't know of any particular questions I haven't answered. I don't personally know of any evidence of any taxable income that I haven't reported, but -- that's my feeling on the matter from our side of it.
We need not belabor this issue much longer. As we see this case we think the unreported income disclosed by the net worth computation came from the "personal" use by petitioner of "political funds" which he reasonably believed were "unrestricted gifts" to him to do with as he pleased, but being political contributions rather than outright gifts, and having been diverted from the channel of campaign activity and used by petitioner for "personal" purposes, became taxable income to him under the
O'Dwyer andJett decisions. A good example of one of the "political contributions" is the testimony of Ward Just (one of the 26 witnesses for petitioners). Just testified that he was a newspaper publisher in Illinois for about 40 years; that he had known petitioner for most of his 51 years; that Just's father and petitioner's father and their families were friends; that he supported petitioner *280 editorially; that a "group of Lake County citizens have supported him financially from time to time"; that the first time he made a financial contribution to petitioner was in the spring of 1956 when "I personally gave him" a thousand or twelve hundred dollars; that when asked "when you turned over these funds, this currency, to the Governor, do you recall whether or not you placed any restrictions on their expenditure?" Just answered "None whatsoever." Just also testified that during the period 1956 through 1960 he transferred to petitioner approximately an additional $ 18,000 also with no restrictions attached. While we have not included Just's contributions as outright gifts, we can well see where petitioner might reasonably believe that such, and similar political contributions from close friends were gifts and not income when used for personal purposes to increase his net worth. Petitioner was, of course, mistaken as to the law, but as we said in theMayock case "A mistake of law, if it was a mistake, is not equivalent to the fraud with intent to evade tax named in the statute."*289 We hold that the respondent has not established fraud on the part of the petitioners by the clear *281 and convincing evidence which was his burden.
Issue 3 . -- Since we have found no fraud, it follows that the statute of limitations is a bar to the assessment and collection of any deficiencies for the years 1953 through 1957.Sec. 375, I.R.C. 1939 , as to 1953; andsec. 6501(a), I.R.C. 1954 , as to 1954 through 1957. As to the years 1958 through 1960, the respondent has affirmatively alleged (see fn. 2) that he is entitled to the 6-year period provided for insection 6501(e)(1)(A) .C. A. Reis , 1 T.C. 9">1 T.C. 9 (1942)142 F. 2d 900 (C.A. 6, 1944);H. A. Hurley , 22 T.C. 1256">22 T.C. 1256233 F. 2d 177 (C.A. 6, 1956);David Courtney , 28 T.C. 658">28 T.C. 658Gaylord C. Peters , 51 T.C. 226">51 T.C. 226Philipp Bros. Chemicals, Inc . (Md .), 52 T.C. 240">52 T.C. 240H. A. Hurley, supra ; David Courtney, supra .Twenty-five percent of the amount of "gross income" stated in the returns for 1958, 1959, and 1960, was $ 9,980.83, $ 9,399.04, and $ 9,883.03, respectively.
Respondent contends that he has established that petitioners' unreported "taxable income" for the years 1958, 1959, and 1960, was $ 36,628.94, $ 13,127.29, and $ 13,555.87, respectively. In our revised net worth statement we have found *283 that petitioners' unreported or (overreported) "taxable income" for the same years was $ 28,457.96, $ 4,414.16, and ($ 1,874.83), respectively.
It is obvious that petitioners did not omit more than 25 percent of the gross income stated in their returns for the years 1959 and 1960, and that the statute of limitations bars the assessment and collection of deficiencies, if any, for those years.
The evidence shows that the "unreported" income disclosed by the net worth computation resulted from petitioner's use of "political *290 funds" for "personal purposes." Petitioners should have reported such funds which were used for personal purposes as a part of their gross income.
Sec. 61, I.R.C. 1954 . It follows that for 1958, petitioners omitted more than 25 percent of the gross income stated in their 1958 return, and that the 6-year statute of limitations is, therefore, applicable for that year. We so hold.Decision will be entered under Rule 50 .Footnotes
1. On Mar. 3, 1969, petitioners filed a motion to withdraw Crowley as counsel. By order of the Court dated Apr. 2, 1969, this motion was granted.↩
2. In the event the Court should find there is no fraud, respondent has affirmatively alleged that petitioners omitted from gross income amounts in excess of 25 percent of the gross income stated in the returns for the taxable years 1958, 1959, and 1960, and that under
sec. 6501(e)(1)(A), I.R.C. 1954↩ , the tax for those years may be assessed at any time within 6 years after the returns for those years were filed.3. At this trial, the jury found "William G. Stratton not guilty as charged." The case is unofficially reported in
15 A.F.T.R. 2d 775↩ and 65-1 U.S.T.C. par. 9289.1. Includes the transfer of $ 63.62.
1. After dividend exclusion.
2. Should have been $ 22,497.81 (error of 2 cents in petitioners' favor).↩
3. Should have been $ 20,058.83 (error of $ 10 in respondent's favor).↩
4. "[From
Holland ] To protect the revenue from those who do not 'render true accounts,' the Government must be free to use all legal evidence available to it in determining whether the story told by the taxpayer's books accurately reflects his financial history."[From
Davis ] Taxpayer obviously overlooks the fact that the net worth technique of computing income is not a method of accounting. It is no more than proof of income by circumstantial or indirect evidence. If a taxpayer's net worth has increased over a period of time and the increase is not due tonontaxable receipts or nontaxable appreciation of assets, the conclusion is inescapable that taxable income has been received. The fact that the taxpayer's books and other records are consistent with his income tax returns or are internally consistent proves nothing more than that they are consistent; it does not establish that they are truthful oraccurate . * * * In short, the apparentadequacy of the taxpayer's books is the very thing that the net worth method attacks by independently demonstrating the receipt of unrecorded and unreported taxable income . The Holland decision makes it clear that there are no conditions precedent to the utilization of the net worth technique. [Emphasis added.]"[After quoting the above quoted excerpt from
Holland , the Court inSchwarzkopf continued.] This quoted portion of the Holland case is recognized by petitioner as sanctioning the use of the net worth method to test the accuracy and completeness of the books of account. Thus, the net worth method serves two purposes: first, it may be used to test the correctness of the books; secondly, it is cogent evidence of the amount of income which went unreported. The fact that the books on their face appear to be adequate does not preclude the use of the net worth method."[From
Cefalu↩ ] The net worth method may be stated as a mathematical formula: increase in net worth, plus nondeductible disbursements, minus nontaxable receipts, equals taxable net income. n4 The net worth of the taxpayer must be arrived at carefully but not necessarily with mathematical certainty. * * * The primary essential is the establishment of an opening net worth. [Footnote omitted.]"5.
SEC. 102 . GIFTS AND INHERITANCES.(a) General Rule. -- Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.↩
6. See the following:
↩ Nondeductible expenditures $ 29,626.81 Cash on hand on Dec. 31, 1952 15,000.00 Other nontaxable gifts 43,600.00 Itemized or standard deduction 14,953.02 Total 103,179.83 7. See the following:
↩ Cost of 1956 Lincoln $ 4,677.75 Depreciation on cost of 1960 Chevrolet station wagon used in campaign 570.00 Cost of framed portrait used in campaign 3,724.83 Total 8,972.58 8. In our revised net worth statement we listed the "depreciated" cost of the Chevrolet as an asset at $ 2,000 (cost of $ 2,570 less allowable depreciation of $ 570).↩
9. "(l) The Commissioner erred in his determination that there was a deficiency due to fraud on the petitioners' 1953 income tax return and in his determination that there was an underpayment of tax due to fraud on the petitioners' income tax returns for the years 1954, 1955, 1956, 1957, 1958, 1959 and 1960.
"(m) The Commissioner has erroneously proposed the assessment of penalties under
Section 293(b) of the1939 Internal Revenue Code andSection 6653(b) of the1954 Internal Revenue Code ↩ in the following amounts for the following years: * * *"10.
SEC. 6501 . LIMITATIONS ON ASSESSMENT AND COLLECTION.(e) Substantial Omission of Items. -- Except as otherwise provided in subsection (c) --
(1) Income taxes. -- In the case of any tax imposed by subtitle A --
(A) General rule. -- If the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 percent of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 6 years after the return was filed. * * *↩
Document Info
Docket Number： Docket No. 4166-65
Citation Numbers： 54 T.C. 255, 1970 U.S. Tax Ct. LEXIS 211
Filed Date： 2/12/1970
Precedential Status： Precedential
Modified Date： 11/14/2024