DocketNumber： Docket No. 17512-87
Filed Date： 9/28/1989
Status： Non-Precedential
Modified Date： 11/21/2020
MEMORANDUM FINDINGS OF FACT AND OPINION
SHIELDS,
| Additions to tax | |||||
| Year | Deficiency | Section 6653(b)(1) Section 6661 1982 | $ 5,037.70 | $ 2,518.85 | $ 1,259.42 |
| 1983 | 11,585.20 | 5,792.60 | 2,896.30 | ||
| 1984 | 13,986.86 | 6,993.43 | 3,496.72 | ||
*542 At trial respondent conceded that petitioner is entitled to an additional deduction in the amount of $ 1,400 for education expenses in 1983, and petitioner conceded that he had unreported interest income for the same year in the amount of $ 213. After these concessions the issues remaining for decision are: (1) whether petitioner had unreported income of $ 16,231.80 in 1982, $ 27,489.31 in 1983, and $ 37,640.69 in 1984; (2) whether part of the deficiency for any year is due to fraud; (3) whether an assessment for 1982 is barred by the statute of limitations; and (4) whether there is a substantial understatement of income tax for each year within the meaning of section 6661.
For convenience and clarity our findings of fact and opinion are combined. Some of the facts have been stipulated and are so found, the parties' stipulations and related exhibits being incorporated herein by reference.
Petitioner was a resident of Fremont, California, at the time of filing his petition. He filed a timely income tax return for each of the years 1982, 1983, and 1984.
Petitioner was born in 1955 in Berkeley, California, to Sylvia Brown and her then husband, Tommy Lee Brown. His natural*543 parents had moved in 1953 from Kansas to California where his mother was employed by a telephone company and Mr. Brown worked in the oil fields. Before petitioner was born his father left his mother in California and purportedly went to Utah in search of work. For some time petitioner's mother was unable to find any trace of Mr. Brown, but about the time petitioner was born she was informed by her father in a long distance telephone call that Mr. Brown had been convicted of armed robbery and was incarcerated in Missouri for a period of seven to ten years. When petitioner was about five years old, his mother remarried Don Farr. In or about 1964 or 1965 she and Mr. Farr were divorced and she and petitioner moved to Russell, Kansas, her hometown, where she operated a flower shop and in 1966 or 1967 became the wife of Victor Roth. Petitioner lived with his mother and Mr. Roth until he graduated from high school in 1973.
Prior to and for several years after returning to Russell, petitioner's mother had no contact with Mr. Brown. In 1971 or 1972 she learned from her brother that Mr. Brown was living in Liberal, Kansas, which was about 150 miles from Russell. In 1972, when petitioner*544 was 17 years old and a junior in high school, his mother had her brother contact Mr. Brown with a view to arranging a meeting by petitioner with him. A few days later Mr. Brown walked into her flower shop unannounced and after some conversation requested that she permit petitioner to live with him in Liberal and finish his schooling there. During this conversation petitioner also entered the flower shop and met his father for the first time. During this first meeting Mr. Brown gave petitioner a Lord Elgin watch and suggested that petitioner visit him and his family in Liberal.
Tommy Lee Brown had been released from prison after serving about four years and had gone to work in the oil fields in Kansas. In August of 1959 he had remarried and by his second wife, Mary B. Brown had three children. At the time she married Mr. Brown, Mary B. Brown was aware that he had been in prison, that he had been married before, and that he had a son by the previous marriage which he had never seen. Prior to meeting with petitioner in 1972, Mr. Brown told his wife that he was going to Russell to see petitioner.
From their first meeting in 1972 until after his graduation from high school in*545 1973, petitioner visited in Liberal with his father and his father's second family on one or two weekends out of every month. At first these visits were strained but generally they were cordial apparently because there was no strong feeling of hostility by either petitioner, his stepmother, or her children. When petitioner graduated from high school in 1973 his father gave him $ 400 in cash. Neither petitioner's mother nor his stepmother were present when his father gave him the watch or the $ 400 but they both knew about these gifts. In fact Mr. Brown told the stepmother about these gifts before they were made.
After graduating from high school, petitioner moved to Liberal and lived with Mr. and Mrs. Brown and their children for a few months. He then moved into a garage apartment in Liberal which he rented for $ 50 per month. Petitioner continued to live in Liberal during the balance of 1973 and part of 1974 during which he worked at Tradewind Industries for a net monthly salary of about $ 480. In 1973 petitioner bought a 1967 Cadillac for $ 600 which he financed through a bank. He later sold this car to Mr. Roth and financed the purchase of a 1969 Oldsmobile for $ 900. Mr. *546 and Mrs. Roth paid for the insurance on both of these cars. At trial petitioner estimated that his expenses during this period were nominal, and he was able to save about $ 300 per month.
In 1974 petitioner moved to Denver where he lived with Mr. and Mrs. Roth while working at Arby's Restaurant for six months at about $ 200 per month, and four months at Windsor Gardens where he earned a net salary of about $ 580 per month. During 1975 and 1976 petitioner continued to live with the Roths and to work as a junior buyer at Windsor Gardens where he earned a net monthly salary of about $ 580 in 1975 and $ 660 for ten months in 1976. During this period he was able to save most of his earnings since he was living with the Roths and had no expenditures for rent or food.
In the latter part of 1976 petitioner left Mr. and Mrs. Roth in Denver and moved to Colorado Springs where for the last three months of 1976 and the first eight months of 1977 he worked as a waiter at the Broadmoor Hotel netting about $ 1,600 per month. For four months in 1978 and ten months in 1979 petitioner worked as an orderly at Penrose Hospital in Colorado Springs at a net monthly salary of $ 590 in 1978 and $ *547 600 in 1979. In Colorado Springs he shared an apartment with a roommate at $ 100 per month. While working at Arby's in Denver and at the Broadmoor in Colorado Springs, petitioner was provided meals and uniforms by his employers. As a result, during these periods his living expenses were nominal.
In 1979 petitioner moved to Oakland, California, where he worked for six months as a security guard for a net salary of $ 750 per month. In 1980 petitioner worked for seven months as a reservations agent for World Airways at a salary of $ 750 per month. During 1980 he also worked full time as a waiter in a Jack-in-the-Box Restaurant. At some date in 1980 petitioner's mother joined him in California and lived in his apartment during 1981, 1982, 1983, and 1984. During this period she received some support from Mr. Roth but petitioner claimed her as a dependant in 1983 and 1984 because he furnished more than 50 percent of her support. During these years 1981 through 1984 he managed to hold his living expenses to about $ 450 per month.
During 1981, 1982, and through March 1983, petitioner was employed as a travel agent at the Bob Page Travel Agency where he earned a net income of $ *548 600 to $ 650 and had estimated living expenses of $ 450 to $ 500 per month. From 1981 through 1984 petitioner was also employed full time at Mountain Mike's Pizza Parlor where he earned $ 4,000 to $ 6,000 each year. From March of 1983 through the end of 1984 petitioner was employed as a travel agent at the Fremont World Travel Agency where he received a net salary of $ 7,253.38 in 1983 and $ 12,684 in 1984.
On his income tax returns for 1982, 1983, and 1984 petitioner reported gross incomes as follows:
| Gross Income Reported | |||
| Source | 1982 | 1983 | 1984 |
| Wages | |||
| Bob Page Travel | $ 10,118.62 | $ 2,572.39 | |
| Fremont World Travel | 7,253.38 | $ 12,684.00 | |
| Mtn. Mike's Pizza | 6,034.90 | 5,108.00 | 5,435.00 |
| Interest | |||
| Wells Fargo, et al. | 636.00 | 865.00 | 754.00 |
| State Tax Refunds | |||
| California | 180.00 | 214.00 | 157.00 |
| Totals (Rounded) | $ 16,970.00 | $ 16,012.00 | $ 19,030.00 |
About the end of 1981 petitioner opened both a savings account and a checking account at Wells Fargo Bank in Fremont. Petitioner had no bank accounts prior to this date with the exception of a small savings account which he had opened and closed in 1973 in Liberal. His initial deposits*549 in 1981 to the savings account at Wells Fargo totaled about $ 8,000 or $ 9,000. His average balance in this account during 1982, 1983, and 1984 was about $ 8,000.
During 1982, 1983, and 1984 petitioner made deposits to his checking account at Wells Fargo Bank in the total respective amounts of $ 29,867.80, $ 40,988.04, and $ 53,876.38.
By comparing the deposits made by petitioner to the checking account during 1982 with the gross income reported by petitioner on his return for that year, respondent determined that petitioner had unreported income in 1982 in the amount of $ 16,231.80 computed as follows:
| Total deposits to checking account | $ 29,867.80 | |
| Less | ||
| Wages reported net of withholdings | $ 12,820.00 | |
| Interest reported | 636.00 | |
| Tax refund reported | 180.00 | (13,636.00) |
| Unreported income | $ 16,231.80 |
By comparing the deposits made by petitioner to his checking account during 1983 with the gross income reported by petitioner on his return for that year, respondent determined that petitioner had unreported income in 1983 in the amount of $ 27,489.31 computed as follows:
| Total deposits to checking account | $ 40,988.04 | |
| Less | ||
| Wages reported net of withholdings | $ 12,419.73 | |
| Interest reported | 865.00 | |
| Tax refund reported | 214.00 | (13,498.73) |
| Unreported income |
By comparing the deposits made by petitioner to his checking account in 1984 with the amount of income reported on his return for that year, respondent determined that petitioner had unreported income in 1984 in the amount of $ 37,640.69 computed as follows:
| Total deposits to checking account | $ 53,876.38 | |
| Less | ||
| Wages reported net of withholdings | $ 15,324.69 | |
| Interest reported | 754.00 | |
| Tax refund reported | 157.00 | (16,235.69) |
| Unreported income | $ 37,640.69 |
At trial petitioner testified that the source of the $ 8,000 or $ 9,000 used in 1981 to open his savings account and the source of the excess of deposits made to his checking account during 1982, 1983, and 1984 over his reported earnings for such years was a cash hoard which he had accumulated prior to 1982. According to petitioner $ 45,000 of the cash hoard was given to him on four different occasions by his father and the balance of about $ 47,000 was accumulated by petitioner from his earnings during 1973 through 1981.
With respect*551 to the gifts from his father, petitioner stated that after he graduated from high school in May of 1973 he lived for two or three months with his father and stepmother in Liberal. He then moved out of their house and into a garage apartment where he lived until July of 1974 but visited his father or his father's second family once or twice a week. Shortly before he left Liberal in July of 1974 and moved to Denver to live with his mother and Mr. Roth, petitioner testified his father came to his garage apartment for a visit and they had a conversation about his pending move to Colorado and his future plans with respect to schooling. During the conversation petitioner stated his father gave him an envelope and said something like "this is to help you with education when you * * * decide to do it." After his father left petitioner said he opened the envelope and was surprised to find it contained $ 5,000.
Petitioner further testified that in September of 1974 he returned to Liberal from Denver in order to get some items which he had left in storage and, while visiting alone with his father, was given a second envelope containing $ 10,000 in cash including some $ 100 bills. During*552 this visit petitioner stated that his father told him the gift "was because of all the lost years of not raising me, for support, that he did not pay for me for all those years."
Petitioner also testified that in 1976 while he was living with his mother and Mr. Roth in Denver his father came to Denver on a business trip and visited with him. They met at a restaurant, had dinner, and discussed the fact that petitioner was not yet in college. In the car after dinner his father gave him a third envelope containing $ 15,000.
Again, according to petitioner, his father, his stepbrother, and a friend of his stepbrother visited him in 1977 while he was living in Colorado Springs in an apartment which he shared with a roommate. They all visited together for a time but eventually his father indicated he wanted to have a private conversation and he and petitioner went into the bedroom of the the apartment where, after asking about petitioner's mother, the father again stated that it was important for petitioner to go to college and that he was giving him another $ 15,000 because petitioner was not going to be mentioned in his father's will. At this time his father gave him a fourth envelope*553 containing another $ 15,000.
On January 29, 1983, petitioner received a telephone call from his father's brother in which petitioner was informed that his father had been killed in an accident. Petitioner was never contacted about his father's estate and never received any part of the estate or the proceeds of at least four insurance policies on his father's life.
Petitioner stated that on the occasion that he received the first gift of money from his father, his father said that it was not necessary "to mention the money to anyone; my mother or to the Brown family, as he made that a gift to me and did not want them to know of this gift, that it would cause hardships between the families." Petitioner further stated that similar statements were made by his father on each of the other three occasions that he received gifts of money from his father and it was for this reason that he never told anyone about the gifts. He did tell his mother that his father had given him some money but she was not aware of any amount other than the $ 400 given to petitioner upon his graduation from high school.
Petitioner said that upon receipt of the first of the disputed gifts from his father -- *554 the $ 5,000 in July of 1974 -- he placed those funds in "a little box with flaps" which he first kept in his closet. He further testified that he later placed these funds, as well as the subsequent gifts from his father, and his accumulated earnings in a Tupperware bread box inside a U-Haul box which he kept hidden in his closets in Denver, Colorado Springs, and later in California. While moving, he kept these boxes in the locked trunk of his car. He stated that until about 1981 he never considered the possibility of depositing the funds in a bank account because such action might have disclosed the existence of the funds to his mother or to other parties which would have been contrary to his father's instructions. Petitioner also stated that he did not trust banks because of Mr. Roth's distrust of such institutions as revealed by Mr. Roth's frequent stories concerning bank failures. In the fall of 1981 he opened a savings account at the Wells Fargo Bank and in different deposits placed a total of about $ 8,000 or $ 9,000 in that account. During 1982 through 1984 the average balance in the savings account was about $ 8,000.
Petitioner was unable to produce at trial any record*555 of that portion of his cash hoard which was allegedly accumulated from his own earnings during 1973 through 1981. His explanation for the lack of such records was that he made no simultaneous written record of the accumulations and of course there were no third party records such as those that would have been generated by a bank account. However, he estimated at trial that his accumulation of cash from earnings during the years 1973 through 1981 proceeded somewhat as follows: