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LEO SHAHEEN, JR., Petitioner
v. COMMISSIONER OF INTERNAL REVENUE, RespondentShaheen v. CommissionerDocket No. 14299-85.United States Tax Court T.C. Memo 1987-486; 1987 Tax Ct. Memo LEXIS 482; 54 T.C.M. 661; T.C.M. (RIA) 87486;September 28, 1987. Jack Crawley, Jr., for the petitioner.1987 Tax Ct. Memo LEXIS 482">*483James E. Gray, for the respondent.KORNERMEMORANDUM FINDINGS OF FACT AND OPINION
KORNER,
Judge: Respondent determined deficiencies in petitioner's Federal income tax and additions to tax as follows:Addition to Tax Year Deficiency 1978 $ 12,594.76 $ 6,297.38 1979 3,507.40 1,753.70 1980 18,663.70 9,331.85 1981 8,762.70 4,381.35 The issues that we must decide are: (1) whether petitioner received unreported income in each of the years at issue; (2) if so, whether petitioner's failure to report the income was due to fraud; and (3) whether the statute of limitations bars the assessment and collection of any deficiencies found to exist for 1978, 1979, and 1980.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.
Background Petitioner was a resident of1987 Tax Ct. Memo LEXIS 482">*484 Raleigh, North Carolina, when he filed his petition herein. He timely filed individual Federal income tax returns for each of the years at issue.
Petitioner was born and raised in North Carolina. When he was a child, his parents owned and operated a grocery store in Raleigh. When he was in high school, petitioner helped his parents run their grocery store. 1987 Tax Ct. Memo LEXIS 482">*485 money. Instead of depositing the family funds in a bank, she hid them in the family home. At first, she stored the cash under her mattress. In early January 1970, she moved the cash to an empty compartment in the back of her washing machine so that it would be more difficult for robbers to locate. About the same time, petitioner used part of his savings to purchase United States savings bonds.
Petitioner's father died in 1961 and his mother died in 1970. Petitioner received $ 1,500 of life insurance when his mother died. After his mother died, petitioner took charge of the family savings. In June 1973, he began to invest his current earnings and cash from the savings in interest paying certificates of deposit and savings accounts. He shopped to obtain the highest yields. He was so concerned about maximizing his yields that he redeemed his savings bonds and invested the proceeds in a certificate of deposit that yielded a higher rate. By the end of 1977, petitioner had a total of slightly more than $ 100,000 invested in interest paying certificates of deposit and savings accounts. Of that amount, 1987 Tax Ct. Memo LEXIS 482">*486 $ 64,000 was invested in certificates of deposit.
During the years 1953, and 1956 through 1969, petitioner received the following amounts of earned income:
Year Income 1953 $ 102.75 1956 1,418.00 1957 2,083.60 1958 1,953.78 1959 2,353.07 1960 2,173.33 1961 2,206.03 1962 2,219.11 1963 2,271.35 1964 2,748.77 1965 2,963.96 1966 2,986.45 1967 3,499.30 1968 3,942.00 1969 4,703.00 Total $ 37,624.50 Petitioner's earned income for the years 1961 through 1969 consisted entirely of his earnings from his scrap metal business.
For the years 1970 through 1981, petitioner reported the following amounts of adjusted gross income on his Federal income tax returns:
Reported Adjusted Year Gross Income 1970 $ 5,005.93 1971 6,162.74 1972 8,128.00 1973 9,941.70 1974 16,694.00 1975 17,992.00 1976 20,018.62 1977 22,338.00 1978 27,399.00 1979 35,081.45 1980 43,740.00 1981 58,397.00 Total $ 270,898.44 The above amounts of adjusted gross income include the following reported results from petitioner's scrap metal business. 1987 Tax Ct. Memo LEXIS 482">*487
Other Gross Cost of Business Net Year Receipts Goods Sold Expenses Profit 1970 $ 12,808.57 $ 6,676.01 $ 1,126.63 $ 5,005.93 1971 16,532.00 9,086.46 1,282.80 6,162.74 1972 17,873.33 8,325.57 1,420.07 8,127.69 1973 21,511.94 10,807.05 1,415.57 9,289.32 1974 17,333.43 6,571.25 1,466.85 9,295.33 1975 21,804.46 6,677.06 1,985.41 13,141.99 1976 37,742.95 21,121,05 2,491.81 14,130.09 1977 48,558.82 30.433.32 2,604.02 15,521.48 1978 69,047.84 47,729.44 3,257.92 1979 75,070.00 49,270.00 3,546.03 22,253.97 1980 65,442.83 44,823.25 4,504.93 16,114.65 1981 68,036.21 45,265.00 4,635.46 13,135.75 During the years at issue, petitioner's scrap metal business was primarily a cash business. He maintained no checking account and issued no checks for purchases. Petitioner is unable to substantiate his cost of goods sold for each of the years at issue because he kept no records of those expenses.
The difference between the adjusted1987 Tax Ct. Memo LEXIS 482">*488 gross income petitioner reported for each of the years at issue and the net profit petitioner reported from his scrap metal business represents interest income. Petitioner reported the following amounts of interest income in the years at issue:
Net Interest Year Income 1978 $ 9,339.00 1979 12,827.48 1980 27,625.00 1981 45,261.00 Petitioner received no nontaxable income, receipts, cash, or other assets during the years at issue.
The amount of gross income that petitioner stated in his returns for 1978 and 1980 was as follows:
Scrap Metal Interest Business Total 1978 $ 9,339.00 $ 69,047.84 $ 78,386.84 1980 27,625.00 65,442.83 93,067.83 Each of petitioner's Federal income tax returns for the taxable years 1978 through 1980 was prepared by a tax return preparer. The only records petitioner submitted to the preparer were summary sheets prepared by petitioner reflecting petitioner's income and expenses.
Respondent's Audit Respondent audited petitioner's Federal income tax returns for the years at issue. Marion Petty, one of respondent's revenue agents, met with petitioner in April 1982. During1987 Tax Ct. Memo LEXIS 482">*489 the meeting, Petty asked petitioner how much cash he maintained on hand. Petitioner responded that he kept between $ 4,000 and $ 5,000 on hand, which he used for business purposes. Petitioner denied having inherited anything from his parents, and stated that he had received a total of only $ 2,000 of insurance when they died.
When Petty next spoke with petitioner on May 11, 1982, Petty told petitioner that it appeared that the increase in his savings and certificates of deposit during the years at issue was much greater than the income he had reported. Petitioner then explained that he had between $ 30,000 and $ 40,000 of cash that he had saved during the 1960's on hand at the beginning of 1978 and that he had deposited the cash during the years 1978 through 1981.
Petitioner elaborated upon his story when he spoke with Terence J. O'Brien, one of respondent's special agents, on July 26, 1982. At that interview, petitioner estimated that he had approximately $ 60,000 to $ 70,000 in savings at his home in 1973 when he purchased his first certificate of deposit. He explained that he never counted the cash, and that it would have amounted to as much as $ 100,000.
When asked1987 Tax Ct. Memo LEXIS 482">*490 by O'Brien to substantiate the expenses he claimed on his returns, petitioner furnished O'Brien with receipts for repairs. He told O'Brien that although he had maintained records substantiating the other expenses he claimed, he was unable to locate the records.
As petitioner was unable to supply respondent with the documentation he needed to complete his audit, respondent was forced to recompute petitioner's income for the years at issue using the net worth and personal expenditures methods of income reconstruction.
Year Net Income 1978 $ 24,667.45 1979 8,704.16 1980 32,578.16 1981 14,189.36 Total $ 80,139.13 1987 Tax Ct. Memo LEXIS 482">*491 Respondent determined that the unreported income was profit from petitioner's scrap metal business.
In arriving at his determination of petitioner's unreported income, respondent determined that petitioner had on hand the following amounts of cash and undeposited checks:
Amount on Hand December 31 Asset 1977 1978 1979 1980 1981 Operating Cash $ 5,300.00 $ 5,300.00 $ 5,300.00 $ 5,300.00 $ 5,300.00 Other Cash 15,394.65 29,565.56 895.45 - 975.00 Undeposited Checks - 2,391.24 40,240.74 - 1,100.00 $ 20,694.65 $ 37,256.80 $ 46,436.19 $ 5,300.00 $ 7,375.00 Respondent issued petitioner a statutory notice of deficiency reflecting the above determinations on March 29, 1985.
OPINION
Introduction As a general rule, petitioners have the burden of disproving deficiencies determined by respondent in a notice of deficiency,
Welch v. Helvering, 290 U.S. 111">290 U.S. 111Bonelli v. Commissioner, T.C. Memo. 1965-26Deficiency Respondent is entitled to reconstruct petitioner's income by using the net worth plus personal expenditures method, as petitioner maintained no records to substantiate the bulk of the expenses he claimed on his returns.
Holland v. United States, 348 U.S. 121">348 U.S. 121Thomas v. Commissioner, 223 F.2d 83">223 F.2d 83The two errors asserted by petitioner bear upon the increase in net worth determined by respondent. Petitioner asserts that respondent's determinations overstated the increase in his net worth during the years at issue because they excluded a cash hoard he allegedly had on hand at the end of 1977 and because they understated the amount of the certificates of deposit he owned at the end of 1977. According to petitioner, he used cash he withdrew from the hoard and the proceeds of maturing certificates of deposit to purchase assets that were included in respondent's net worth determination.
Certificates of Deposit - Respondent's net worth computation includes $ 64,000 of certificates of deposit in petitioner's net worth as of December 31, 1977. Petitioner contends that he owned $ 88,000 of certificates of deposit on that date.Petitioner offered no evidence, and did1987 Tax Ct. Memo LEXIS 482">*494 not testify, that he held any certificates of deposit at December 31, 1977 other than the $ 64,000 of certificates allowed by respondent.
Respondent established that petitioner had only $ 64,000 of certificates of deposit on December 31, 1977 by calling as witnesses a current employee and a former employee of Raleigh Federal Savings and Loan ("Raleigh Federal"), the institution with which petitioner dealt in that period. Both testified that they thoroughly reviewed Raleigh Federal's records and that the records disclosed that, on December 31, 1977, petitioner held only the $ 64,000 of certificates of deposit that respondent allowed in the net worth computation. We conclude that respondent has proven that petitioner had on December 31, 1977, only the $ 64,000 of certificates of deposit included in the net worth computation.
Cash on Hand - Petitioner asserts that he had a cash hoard on December 31, 1977, of between $ 45,000 and $ 100,000, and that he used the cash to purchase certificates of deposit during the years at issue. Respondent established the amount of cash petitioner had on hand by the testimony of Henry Harmon, a certified public accountant employed by respondent1987 Tax Ct. Memo LEXIS 482">*495 as a revenue agent. Harmon testified how he computed petitioner's cash on hand and that he computed that petitioner had $ 20,694.65 of cash on hand as of December 31, 1977. Respondent allowed petitioner that amount of cash on hand in his notice of deficiency.The only support for petitioner's contention that he had more cash on hand than was allowed by respondent was petitioner's own testimony.
Urban Redevelopment Corp. v. Commissioner, 294 F.2d 328">294 F.2d 328, 294 F.2d 328">332 (4th Cir. 1961)34 T.C. 845">34 T.C. 845 (1960);Archer v. Commissioner, 227 F.2d 270">227 F.2d 2701987 Tax Ct. Memo LEXIS 482">*496 Second, inconsistencies in petitioner's testimony lead us to conclude that it is inherently improbable that he had more cash on hand than was allowed by respondent. Petitioner conceded that he took out a number of loans during the years at issue, some of which were for only $ 5,300. Petitioner's borrowing of money indicates the
absence, rather than thepresence, of a large accumulation of cash.223 F.2d 83"> . Petitioner's explanation for borrowing the money rather than withdrawing cash from his hoard -- that it was easier for him to obtain a loan than to remove the cash -- was difficult for us to believe. The explanation is curious in light of petitioner's testimony that he removed cash from the hoard on numerous occasions during the years at issue to purchase certificates of deposit.Thomas v. Commissioner, supra at 88Petitioner's position that he had a larger cash hoard than respondent allowed also conflicts with his testimony that he invested his funds to earn the highest yields available. He testified that he cashed savings bonds and reinvested the proceeds in certificates of deposit to increase the interest rate being earned on the funds, and that he deposited1987 Tax Ct. Memo LEXIS 482">*497 funds from maturing certificates of deposit into a passbook savings account during 1976 and 1977 until he had accumulated the $ 100,000 he needed "to get a pretty good rate." Petitioner's assertion that he maintained a large cash hoard on which he received no interest is inconsistent with his testimony that he attempted to maximize his interest income. The fact that he accumulated funds in a savings account in 1976 and 1977 until he had enough to purchase a high yielding certificate of deposit indicates further that he did not have a larger amount of cash on hand outside of banks at the end of 1977 than respondent allowed.
Petitioner could point to no good reason for keeping a large amount of cash on hand. His testimony that he kept cash because "maybe I needed a truck or something or maybe I wanted to buy another house or something" was unpersuasive, particularly considering the admitted ease with which he could borrow money. We conclude that a preponderance of the evidence establishes that petitioner had no more cash on hand at December 31, 1977, than was allowed by respondent.
Although respondent's statutory notice and the net worth computations contained therein are not1987 Tax Ct. Memo LEXIS 482">*498 evidence in the first instance,
Rockwell v. Commissioner, 512 F.2d 882">512 F.2d 882423 U.S. 1015">423 U.S. 1015 (1975), where items in the net worth statement have been admitted, stipulated or proved, they become evidence of petitioner's income during the years at issue. SeeHoffman v. Commissioner, 298 F.2d 784">298 F.2d 784T.C. Memo. 1960-160 ;227 F.2d 270"> . Petitioner has stipulated to all but two aspects of the net worth computations, and we have concluded that respondent has proven by a preponderance of the evidence that his version of those two aspects is correct. We accordingly hold that respondent has proven by a preponderance of the evidence that petitioner received during the years at issue the unreported net income determined in the notice of deficiency. FraudArcher v. Commissioner, supra at 272Having concluded that the preponderance of the evidence establishes that petitioner1987 Tax Ct. Memo LEXIS 482">*499 received the unreported income determined by respondent, we must next decide whether petitioner is liable for the addition to tax for fraud provided by section 6653(b). To establish fraud, respondent must show that the taxpayer intended to evade taxes known or believed to be owing by conduct calculated to conceal, mislead, or otherwise prevent the collection of such taxes.
Rowlee v. Commissioner, 80 T.C. 1111">80 T.C. 1111The existence of fraud is a question of fact to be resolved upon consideration of the entire record.
80 T.C. 1111"> Rowlee v. Commissioner; supra ; Gajewski v. Commissioner, 67 T.C. 181">67 T.C. 181578 F.2d 1383">578 F.2d 1383 (8th Cir. 1978). Fraud is never presumed, but rather must be established by affirmative evidence.Beaver v. Commissioner, 55 T.C. 85">55 T.C. 85Habersham-Bey v. Commissioner, 78 T.C. 304">78 T.C. 304Estate of Beck v. Commissioner, 56 T.C. 297">56 T.C. 297Spies v. United States, 317 U.S. 492">317 U.S. 49280 T.C. 1111"> . The taxpayer's entire course of conduct may establish the requisite fraudulent intent.Rowlee v. Commissioner; supra at 1123Stone v. Commissioner, 55 T.C. 213">55 T.C. 213Otsuki v. Commissioner, 53 T.C. 96">53 T.C. 96The burden is on respondent to prove, by clear and convincing evidence, that petitioner has an underpayment for each of the years at issue, and that some part of the underpayment was due to fraud. Sec. 7454(a); Rule 142(b);
55 T.C. 213"> . Respondent need not, however, prove civil fraud "beyond a reasonable doubt."Stone v. Commissioner, supra at 220Webb v. Commissioner, 394 F.2d 366">394 F.2d 366T.C. Memo. 1966-81 .After considering and accounting due weight to all the evidence before us, we conclude that respondent has failed to meet1987 Tax Ct. Memo LEXIS 482">*501 his burden of proving by clear and convincing evidence that petitioner is liable for the addition to tax for fraud.
First, we do not believe that the evidence
clearly and convincingly establishes deficiencies in the years at issue. Although we sustained the underreporting of income determined by respondent, we did so on the grounds that his determination is supported by a preponderance of the evidence. We do not view the evidence asclearly and convincingly refuting petitioner's contention that the apparent increases in his net worth were due to withdrawals from the cash hoard. Although we consider it unlikely, the circumstances of this case leave us unconvinced that it didnot occur. The evidence of petitioner's family's history of maintaining its savings in cash, and respondent's own determination that petitioner retained on hand relatively large sums of cash and bank checks for which he had no apparent need, leads us to believe that petitioner's hoard may in fact have been larger than respondent determined, which is petitioner's position.Apart from the fact that the record does not clearly and convincingly establish deficiencies in the years at issue, we do1987 Tax Ct. Memo LEXIS 482">*502 not view petitioner's behavior as establishing a fraudulent intent. The testimony of respondent's agents establishes that petitioner was cooperative, and that he met with them on many occasions to answer their questions and produce for them records that were available to him. Respondent argues on brief that petitioner made inconsistent statements concerning his alleged cash hoard, and that those inconsistent statements indicate a fraudulent intent. We do not view petitioner's statements concerning his claimed cash hoard to necessarily be inconsistent. The statements that respondent alleges to be inconsistent appear to us to address the size and location of his hoard at different times. Statements indicating that the size of his hoard decreased over time are entirely consistent with petitioner's testimony that he made periodic withdrawals from the hoard. Another argument that respondent makes on brief to support his determination that petitioner's understatements are due to fraud is that petitioner had Tony Cannon, petitioner's uncle, testify falsely at trial in an attempt to mislead this Court. Respondent asserts that Cannon's allegedly inconsistent statements "represent petitioner's1987 Tax Ct. Memo LEXIS 482">*503 bungled attempt to mislead respondent and this Court * * *." Although we agree with respondent that Cannon's testimony was confusing on the point of whether he had actually seen petitioner place cash in petitioner's washing machine, Cannon testified clearly that (1) he had seen petitioner's cash, (2) he did not know how much cash petitioner had, and (3) he never actually saw cash in petitioner's washing machine. In these circumstances, we are unable to conclude that Cannon's confusion established either that he testified falsely or, more importantly, that petitioner knowingly used his false testimony to mislead this Court. In short, we are unable to conclude that petitioner's behavior establishes a fraudulent intent.
Statute of Limitations Having concluded that petitioner received the unreported income determined by respondent, but that respondent failed to prove that petitioner is liable for the addition to tax for fraud, we must next determine whether the statute of limitations bars the assessment and collection of the deficiencies for 1978, 1979, and 1980. supra, the three year statute of limitations of section 6501(a) bars the assessment and1987 Tax Ct. Memo LEXIS 482">*504 collection of the deficiencies unless an exception applies. The two exceptions that respondent argues apply are: (1) the exception provided by section 6501(c)(1), and (2) the exception provided by section 6501(e)(1)(A).
Section 6501(c)(1) - Respondent's primary position is that the statute of limitations is open for 1978, 1979, and 1980 due to the exception provided by section 6501(c)(1). Section 6501(c)(1) provides, in relevant part, that in the case of the filing of "a false or fraudulent return with the intent to evade tax, the tax may be assessed * * * at any time." The burden that respondent bears of proving the applicability of the section 6501(c)(1) exception to the general three-year statute of limitations is the same burden as that which respondent bears in sustaining the addition to tax for fraud under section 6653(b).Ruidoso Racing Association, Inc. v. Commissioner, 476 F.2d 502">476 F.2d 502T.C. Memo. 1971-194 ;Asphalt Industries, Inc. v. Commissioner, 384 F.2d 229">384 F.2d 22946 T.C. 622">46 T.C. 622 (1966).1987 Tax Ct. Memo LEXIS 482">*505 As we have already held that respondent failed to sustain the addition to tax for fraud under section 6653(b), we hold that respondent has similarly failed to establish that the exception provided by section 6501(c)(1) to the normal three year statute of limitations applies.Section 6501(e)(1)(A) - Respondent's alternate position is that the statute of limitations is open for 1978 and 1980 due to the exception provided by section 6501(e)(1)(A)).We have found as a fact that1987 Tax Ct. Memo LEXIS 482">*506 petitioner reported, and upheld respondent's determination that he failed to report, the following amounts of income:
Unreported Reported Year Net Income Gross Income 1978 $ 24,667.45 $ 78,386.84 1980 32,578.16 93,067.83 The amounts of unreported net income for both 1978 and 1980 exceed 25 percent of the gross income stated in the returns. To establish that the six-year statute of limitations provided by section 6501(e)(1)(A) applies for both years, respondent must prove that the unreported net income results from omitted gross income rather than excessive deductions.
Courtney v. Commissioner, 28 T.C. 658">28 T.C. 658Respondent introduced no evidence that petitioner's unreported net income, which he determined was from petitioner's scrap metal business, is due to unreported gross sales of the business. The little evidence of the source of the unreported income contained in the record indicates that it is due to overstated costs of goods sold and business expenses rather than understated gross sales. Respondent's agents Petty and O'Brien testified at trial that petitioner produced1987 Tax Ct. Memo LEXIS 482">*507 records of his sales that tied in very closely with the sales he reported on his returns. They testified, however, that petitioner failed to produce any records substantiating the deductions he claimed for scrap purchases.
We accordingly conclude that respondent has failed to prove that the exception provided by section 6501(e)(1)(A) to the normal three-year statute of limitations applies to 1978 and 1980.
As we have concluded that respondent has failed to prove that either section 6501(c)(1) or section 6501(e)(1)(A) applies to extend the normal three-year statute of limitations for 1978, 1979, and 1980, we hold that respondent is barred from assessing and collecting deficiencies for those years.
As to the year 1981, respondent's determination of deficiency only is approved.
To reflect the foregoing,
Decision will be entered under Rule 155. Footnotes
1. All statutory references are to the Internal Revenue Code of 1954, as in effect in the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, except as otherwise noted. ↩
2. Petitioner's father had only one leg, and his mother had diabetes. Petitioner's only sibling, an older brother, drowned in 1947. ↩
3. Petitioner apparently has never married, and has no other family. ↩
*. These amounts were rounded to the nearest dollar when they were carried forward from Schedule C's and reported on petitioner's 1040 Forms. ↩
4. Under the net worth method, a taxpayer's income is determined to be the amount by which his year-end net worth exceeds his net worth at the beginning of the year. The result is then reduced by the part of the increase in net worth that is due to nontaxable sources, and is increased by nondeductible personal expenses.
United States v. Giacalone, 574 F.2d 328">574 F.2d 328439 U.S. 834">439 U.S. 834↩ (1978).5. As each of petitioner's returns was timely filed, the normal three year statute of limitations for the assessment of the deficiencies for 1978, 1979, and 1980 expired on April 15 of 1982, 1983, and 1984, respectively. Sec. 6501(a). The statutory notice of deficiency was not mailed until March 29, 1985. ↩
6. Although Tony Cannon, petitioner's uncle, testified that he had seen petitioner hide cash, he testified that he never knew how much cash petitioner had. ↩
7. As we have already noted, respondent bears this burden solely for purposes of the extended period of limitations under sec. 6501(e)(1)(A), and for the years 1978, 1979 and 1980. ↩
8. No issue is raised concerning the statute of limitations for 1981. ↩
9. Respondent does not contend that the statute of limitations is open for 1979 under sec. 6501(e)(1)(A). ↩
Document Info
Docket Number： Docket No. 14299-85.
Citation Numbers： 54 T.C.M. 661, 1987 Tax Ct. Memo LEXIS 482, 1987 T.C. Memo. 486
Filed Date： 9/28/1987
Precedential Status： Non-Precedential
Modified Date： 11/20/2020