DocketNumber： Docket Nos. 23634-84; 23635-84.
Citation Numbers： 55 T.C.M. 175, 1988 Tax Ct. Memo LEXIS 96, 1988 T.C. Memo. 70
Filed Date： 2/23/1988
Status： Non-Precedential
Modified Date： 11/20/2020
MEMORANDUM FINDINGS OF FACT AND OPINION
GOFFE, Additions to Tax Petitioner Year Deficiency Sec. 6653(b) Demetrios and 1976 $ 2,762,12 $ 1,414.06 Helen Votsis 1977 6,697.20 3,348.60 (23634-84) 1978 4,335.51 2,167.76 1979 13,378.67 6,689.34 Chris and 1976 1,256.21 684.11 Christine Votsis 1977 3,543.05 1,828.53 (23635-84) 1978 6,333.04 3,166.52 1979 9,433.37 4,716.69
*99 The issues for decision are (1) whether petitioners received unreported income in amounts determined by respondent using the net worth method of income reconstruction; (2) whether any part of the underpayment of tax for each of the years in issue was due to fraud within the meaning of
FINDINGS OF FACT
Some of the facts have been stipulated. The stipulation of facts and attached exhibits are incorporated by this reference.
Petitioners filed their respective joint Federal income tax returns (Forms 1040) for the calendar years 1976, 1977, 1978 and 1979 with the Internal Revenue Service Center in Andover, Massachusetts. Petitioners all resided in Pittsford, New York, at the time their respective petitions were filed in these cases.
Petitioners Demetrios "Jim" Votsis and Chris Votsis are brothers who were born in Florina, Greece and moved to the United States with their family in 1963. The family arrived in this country with little or no money and lived in one side*100 of a house at 222 S. Woodland St. in Rochester, New York. Originally, seven Votsis family members lived in their side of the house, which included three bedrooms. At all relevant times, the mother, Elizabeth Votsis, was a houusewife; and the father, Apostolos Votsis, was the head of the house. After moving to this country, he supported the family by washing cars for five years, after which time he became a janitor.
Neither Demetrios nor Chris Votsis received any formal education to speak of beyond the age of thirteen. Between 1963 and 1970, both men lived at home with the Votsis family, and each held various low-paying jobs, including employment at several restaurants. During the years in issue, each man maintained at least seven savings, checking, and/or certificate of deposit accounts either in their own name or in trust for a family member. They frequently traveled to Greece and, upon reentering this country, never declared to U.S. Customs any sums of money in their possession. They also engaged in several property transactions involving market rate mortgage loans.
In 1970, Demetrios and Chris Votsis each got married while in Greece, returned with their wives to the United*101 States, and lived with the Votsis family at 222 S. Woodland St.
In 1971, petitioner Demetrios Votsis purchased a house at 1154 Monroe Ave. in Rochester, New York. In connection with that purchase, he submitted a Mortgage Loan Application to the Rochester Savings Bank. In listing his assets on the application, dated July 15, 1971, he made no reference to cash.
On October 13, 1972, petitioners Demetrios and Chris Votsis formed a partnership, the West Wayne Plaza Restaurant, of which each man was a 50 percent partner. They operated the restaurant strictly on a cash basis and maintained both a checking account and a payroll account for the restaurant. At no time did either petitioner Helen Votsis or petitioner Christine Votsis work at the restaurant or become involved in the operations of the restaurant.
The restaurant's bills were paid with cash from the restaurant's cash register, and Demetrios and Chris Votsis frequently took money from the cash register for their personal use. After the close of business each evening, Demetrios or Chris Votsis entered an amount purporting to be the restaurant's gross sales receipts for the day on a*102 "daily sheet."
For payroll purposes, the number of hours worked by restaurant employees was orally reported to Charles Bastuk. Mr. Bastuk was an accountant who prepared the restaurant's and petitioners' tax returns for the years in issue, based solely on information provided by petitioners Demetrios and Chris Votsis. At the end of each month, Mr. Bastuk picked up both the daily sheets and a box containing invoices and receipts for business expenses incurred during the month. He was not given cash register tapes substantiating business receipts. He did not audit the daily sheets, but merely recapped the total amount shown on each sheet to arrive at yearly totals which were used in preparing petitioners' respective tax returns.
In 1973, petitioners Helen and Christine Votsis each filed an Application to File Petition for Naturalization with the Immigration and Naturalization Service. Each application was accompanied by an Affidavit of Support by the wives' respective husbands. In their respective affidavits, Chris Votsis stated that he had "No assets," and Demetrios Votsis listed his assets while making no mention of any cash he may have accumulated.
*103 On September 4, 1973, Chris Votsis purchased a house in Rochester, New York.
On November 15, 1974, Demetrios Votsis went to the Marine Midland Bank in Rochester, New York, and exchanged 14,000 German marks and 16,000 Greek drachmas for approximately $ 7,000 in U.S. currency.
On May 25, 1975, petitioners Demetrios and Chris Votsis submitted a single "STATEMENT OF FINANCES" to the State of New York Liquor Authority in connection with a liquor license application for the restaurant. The statement requires applicants to list all their assets and liabilities, whether or not related to their restaurant business. Accordingly, they listed the restaurant's assets and their personal assets, but did not indicate that they possessed any cash. The liabilities enumerated were each man's mortgage on his residence and a partnership chattel mortgage on certain restaurant equipment.
On May 15, 1979, petitioner Demetrios Votsis applied for a charge account at Roth Bros. Manor House. The application required him to "list all credit lines, loans and accounts on which [he was] indebted," and showed the Rochester Savings Bank as the sole creditor. The attached financial statement enumerated*104 his assets and included no statement of cash he may have maintained at the time.
On or about November 14, 1979, petitioner Chris Votsis purchased his Pittsford, New York residence. The entire $ 8,388.30 cash downpayment was made with proceeds from the sale of certain shares of his stock made approximately a week earlier. Attached to the mortgage loan application for the purchase of the residence, Chris and Christine Votsis each submitted a document titled "EMPLOYER'S VERIFICATION" for the purpose of confirming their employment at the restaurant. Both documents were signed as "employer" by Chris Votsis' cousin, Gus Patiras, who actually worked only sporadically at the restaurant, and never in the capacity as employer. Although Christine Votsis never worked at the restaurant, her employment verification document states that she was employed as a cashier and hostess, and lists amounts purporting to be her annual earnings.
In December 1980, Internal Revenue Special Agent John Garvin visited the restaurant and contacted Demetrios Votsis, who declined to speak with Mr. Garvin. Mr. Garvin subsequently requested both the complete books and records of the restaurant*105 and the specifics regarding petitioners' cash on hand and sources of income for the years in issue. Petitioners merely responded that Demetrios and Chris Votsis each received a dowry at or about the time of their respective weddings and accumulated earnings from prior years. When pressed for details, they replied that Demetrios Votsis received a dowry and a loan *106 dowries, Mr. Garvin interviewed the alleged donors, both of whom were evasive and unspecific regarding various details of the alleged transfers. Mr. Garvin also interviewed Elizabeth Votsis regarding the supposed $ 10,000 gift from her husband to Demetrios and Chris Votsis. She gave conflicting stories about the specifics of the transfer. Nevertheless, respondent allowed $ 8,000 of the gift ($ 4,000 each).
Because the restaurant operated on a cash basis, and Mr. Garvin was never provided with a complete set of the restaurant's books and records, he reconstructed petitioners' income for the years in issue by using the net worth plus expenditures method. Under this method, petitioners' respective net worths were determined as of December 31 of each year in issue and showed an increase during each year. These increases were then adjusted to account for nondeductible personal expenditures and nontaxable income. The net worth calculations were made based on Mr. Garvin's conclusion that petitioners had no cash on hand during any of the years in issue. The net worth computations, as they appear in petitioners' respective deficiency notices, are summarized as follows:
| SUMMARY OF NET WORTH - | |||
| DEMETRIOS AND HELEN VOTSIS | |||
| 12/31/75 | 12/31/76 | 12/31/77 | |
| ASSETS | |||
| Cash in Banks | $ 21,902.97 | $ 24,749.82 | $ 46,361.71 |
| Securities | 9,091.34 | 9,091.34 | 14,401.34 |
| Real Estate | 42,030.00 | 43,840.00 | 43,840.00 |
| Mortgage Receivable | -- | -- | -- |
| Automobiles | 4,200,00 | 8,752.92 | 8,752.92 |
| Business Assets | 23,971.22 | 25,719.56 | 24,375.35 |
| TOTAL ASSETS | 101,195.53 | 112,153.64 | 137,731.32 |
| LIABILITIES | |||
| Security Trust Co. | 225.34 | -- | -- |
| Lincoln First Bank | 696.52 | -- | -- |
| Mortgages | 23,204,96 | 21,106,20 | 18,868.96 |
| Unrealized Gain | -- | -- | -- |
| Central Trust Co. | 7,579.23 | 4,317.87 | 648.36 |
| Depreciation Reserve | 7,896.18 | 11,535.33 | 15,267.37 |
| TOTAL LIABILITIES | 39,602.23 | 36,959.40 | 34,784.69 |
| NET WORTH | 61,593.30 | 75,194.24 | 102,946.63 |
| LESS: Prior Year Net Worth | (61,593.30) | (75,194.24) | |
| INCREASE IN NET WORTH | 13,600.94 | 27,752.39 | |
| ADD: Federal Income Taxes Paid | 546.86 | 887.92 | |
| ADD: Personal Expenditures | 7,134.22 | 10,405.02 | |
| LESS: Dividend Exclusion | (100.00) | (100.00) | |
| LESS: Capital Gain Deduction | -- | -- | |
| LESS: Unreported Capital Gain | -- | -- | |
| LESS: Refunds and Security Deposits | -- | (16.00) | |
| ADJUSTED GROSS INCOME | 21,182.02 | 38,929.33 | |
| LESS: Itemized Deductions | (2,800.00) | -0- | |
| LESS: Exemptions | (3,000.00) | (3,000.00) | |
| CORRECTED TAXABLE INCOME | 15,382.02 | 35,929.33 | |
| LESS: Reported Taxable Income | (1,444.79) | (7,622.85) | |
| UNREPORTED TAXABLE INCOME | $ 13,937.23 | $ 28,306.48 | |
| 12/31/78 | 12/31/79 | |
| ASSETS | ||
| Cash in Banks | $ 48,536.08 | $ 24,265.94 |
| Securities | 14,401.34 | 14,401.34 |
| Real Estate | 68,818.00 | 110,309.60 |
| Mortgage Receivable | -- | 32,082.96 |
| Automobiles | 8,752.92 | 8,752.92 |
| Business Assets | 24,313.74 | 25,316.23 |
| TOTAL ASSETS | 164,822.08 | 215,128.99 |
| LIABILITIES | ||
| Security Trust Co | -- | -- |
| Lincoln First Bank | -- | -- |
| Mortgages | 22,601.50 | 38,767.63 |
| Unrealized Gain | -- | 7,228.74 |
| Central Trust Co. | -- | -- |
| Depreciation Reserve | 20,403.47 | 20,624.86 |
| TOTAL LIABILITIES | 43,004.97 | 66,621.23 |
| NET WORTH | 121,817.11 | 148,507.76 |
| LESS: Prior Year Net Worth | (102,946.63) | (121,817.11) |
| INCREASE IN NET WORTH | 18,870.48 | 26,690.65 |
| ADD: Federal Income Taxes Paid | 1,433.63 | 1,491.38 |
| ADD: Personal Expenditures | 8,226.32 | 30,121.69 |
| LESS: Dividend Exclusion | (200.00) | (100.00) |
| LESS: Capital Gain Deduction | -- | (1,072.22) |
| LESS: Unreported Capital Gain | -- | (655.44) |
| LESS: Refunds and Security Deposits | (420.80) | (703.08) |
| ADJUSTED GROSS INCOME | 27,909.63 | 55,772.98 |
| LESS: Itemized Deductions | -0- | (2,718.64) |
| LESS: Exemptions | (3,000.00) | (5,000.00) |
| CORRECTED TAXABLE INCOME | 24,909.63 | 48,054.34 |
| LESS: Reported Taxable Income | (8,914.67) | (3,073.87) |
| UNREPORTED TAXABLE INCOME | $ 15,994.96 | $ 44,980.47 |
| SUMMARY OF NET WORTH - | |||
| CHRIS AND CHRISTINE VOTSIS | |||
| 12/31/75 | 12/31/76 | 12/31/77 | |
| ASSETS | |||
| Cash in Banks | $ 5,216.43 | $ 5,905.78 | $ 5,180.56 |
| Securities | 20,123.47 | 20,123.47 | 20,123.47 |
| Real Estate | 33,000.00 | 33,000.00 | 78,600.00 |
| Automobiles | 2,000.00 | 8,827.00 | 13,890.29 |
| Business Assets | 23,971.22 | 25,719.56 | 24,375.35 |
| TOTAL ASSETS | 84,311.12 | 93,575.81 | 142,169.67 |
| LIABILITIES | |||
| GMAC | -- | -- | 3,176.93 |
| Mortgages | 18,898.95 | 17,596.85 | 46,583.15 |
| Central Trust Co. | 7,579.23 | 4,317.87 | 648.36 |
| Depreciation Reserve | 7,631.13 | 10,115.88 | 14,207.77 |
| TOTAL LIABILITIES | 34,109.31 | 32,030.60 | 64,616,21 |
| NET WORTH | 50,201.81 | 61,545.21 | 77,553.46 |
| LESS: Prior Year Net Worth | (50,201.81) | (61,545.21) | |
| INCREASE IN NET WORTH | 11,343.40 | 16,008.25 | |
| ADD: Federal Income Taxes Paid | 546.86 | 882.92 | |
| ADD: Personal Expenditures | 8,141.11 | 9,621.07 | |
| ADD: Non-Deductible Capital Loss | -- | -- | |
| LESS: Dividend Exclusion | (100.00) | (100.00) | |
| LESS: Refunds and Security Deposits | -- | (256.84) | |
| ADJUSTED GROSS INCOME | 19,931.37 | 26,155.50 | |
| LESS: Itemized Deductions | (4,423.86) | (1,664.15) | |
| LESS: Exemptions | (3,000.00) | (3,000.00) | |
| CORRECTED TAXABLE INCOME | 12,507.51 | 21,491.75 | |
| LESS: Reported Taxable Income | (2,997.55) | (6,411.10) | |
| UNREPORTED TAXABLE INCOME | $ 9,509.96 | 15,080.15 | |
| 12/31/78 | 12/31/79 | |
| ASSETS | ||
| Cash in Banks | $ 22,245.71 | 2,952.24 |
| Securities | 20,123.47 | 10,937.75 |
| Real Estate | 78,600.00 | 192,059.06 |
| Automobiles | 20,034 | 20,034.30 |
| Business Assets | 24,313.74 | 25,316.23 |
| TOTAL ASSETS | 165,317.22 | 251,299.58 |
| LIABILITIES | ||
| GMAC | -- | -- |
| Mortgages | 42,887.63 | 90,893.51 |
| Central Trust Co. | -- | -- |
| Depreciation Reserve | 16,938.33 | 22,432.61 |
| TOTAL LIABILITIES | 59,825.96 | 113,326.12 |
| NET WORTH | 105,491.26 | 137,973.46 |
| LESS: Prior Year Net Worth | (77,553.46) | (105,491.26) |
| INCREASE IN NET WORTH | 27,937.80 | 32,482.20 |
| ADD: Federal Income Taxes Paid | 1,117.49 | 1.584.13 |
| ADD: Personal Expenditures | 10,521.63 | 10,640.43 |
| ADD: Non-Deductible Capital Loss | -- | 398.71 |
| LESS: Dividend Exclusion | (200.00) | (100.00) |
| LESS: Refunds and Security Deposits | (371.05) | (250.00) |
| ADJUSTED GROSS INCOME | 39,005.87 | 44,755.47 |
| LESS: Itemized Deductions | (1,792.42) | -0- |
| LESS: Exemptions | (3,750.00) | (5,000.00) |
| CORRECTED TAXABLE INCOME | 33,463.45 | 39,755.47 |
| LESS: Reported Taxable Income | (7,790.00) | (6,548.89) |
| UNREPORTED TAXABLE INCOME | $ 25,673.45 | $ 33,206.58 |
*110 To support his contention that petitioners had no cash on hand as of December 31, 1975, respondent prepared a 13-year "available currency analysis" (covering the years 1963-1975) of funds which would have been available to petitioners. Respondent's computations are as follows:
| AVAILABLE CURRENCY ANALYSIS - | |
| DEMETRIOS AND HELEN VOTSIS | |
| Earnings in the years 1963-1970 | $ 29,532.76 |
| PLUS: Gross Income - 1971 | $ 9,970.00 |
| SUBTOTAL | 39,502.76 |
| LESS: F.I.C.A. Taxes Paid 1963-1971 | (1,648.50) |
| Federal Income Taxes Paid 1968-1971 | [3,677.76) |
| Personal Living Expenses - 1971 | (3,620.00) |
| CURRENCY AVAILABLE - 12/31/71 | 30,556.30 |
| PLUS: Gross Income - 1972 | 943.00 |
| Gift from Apostolos Votsis | 4,000.00 |
| SUBTOTAL | 35,499.00 |
| LESS: Personal Living Expenses - 1972 | (3,740.00) |
| Net Worth - 12/31/72 | (12,900.00) |
| CURRENCY AVAILABLE - 12/31/72 | 18,859.50 |
| PLUS: Adjusted Gross Income - 1973 | 7,172.43 |
| SUBTOTAL | 26,031.93 |
| LESS: Personal Living Expenses - 1973 | (4,080.00) |
| Net Worth Increase - 12/31/73 | (19,004.75) |
| CURRENCY AVAILABLE - 12/31/73 | 2,947.18 |
| PLUS: Adjusted Gross Income - 1974 | 8,965.92 |
| SUBTOTAL | 11,913.10 |
| LESS: Personal Living Expenses - 1974 | (7,318.00) |
| Net Worth Increase - 12/31/74 | (12,948.86) |
| CURRENCY AVAILABLE - 12/31/74 | (8,353.76) |
| PLUS: Adjusted Gross Income - 1975 | 8,415.00 |
| SUBTOTAL | 61.24 |
| LESS: Personal Living Expenses - 1975 | (7,318.00) |
| Net Worth Increase - 12/31/75 | (16,739.69) |
| CURRENCY AVAILABLE - 12/31/75 | (23,996.45) |
| AVAILABLE CURRENCY ANALYSIS - | |
| CHRIS AND CHRISTINE VOTSIS | |
| Earnings in years 1963 through 1972 - Chris | $ 41,203.64 |
| - Christine | 2,437.86 |
| PLUS: Gift from Apostolos Votsis | 4,000.00 |
| SUBTOTAL | 47,641.50 |
| LESS: F.I.C.A. Taxes Paid 1963-1972 | (1,598.27) |
| Federal Income Taxes Paid 1963-1972 | (2,881.07) |
| Personal Living Expenses - 1971 | (2,860.00) |
| 1972 | (3,740.00) |
| Net Worth - 12/31/72 | (8,244.50) |
| CURRENCY AVAILABLE - 12/31/72 | 28,317.66 |
| PLUS: Adjusted Gross Income - 1973 | 7,704.44 |
| SUBTOTAL | 36,022.10 |
| LESS: Personal Living Expenses - 1973 | (4,740.00) |
| Net Worth Increase - 12/31/73 | (17,971.63) |
| CURRENCY AVAILABLE - 12/31/73 | 13,310.47 |
| PLUS: Adjusted Gross Income - 1974 | 7,956.45 |
| SUBTOTAL | 21,266.92 |
| LESS: Personal Living Expenses - 1974 | (7,318.00) |
| Net Worth Increase - 12/31/74 | (15,491.55) |
| CURRENCY AVAILABLE - 12/31/74 | (1,542.63) |
| PLUS: Adjusted Gross Income - 1975 | 8,504.61 |
| SUBTOTAL | 6,961.98 |
| LESS: Personal Living Expenses - 1975 | (7,318.00) |
| Net Worth Increase - 12/31/75 | (8,494.13) |
| CURRENCY AVAILABLE - 12/31/75 | (8,850.15) |
*112
On July 27, 1983, a Federal grand jury returned an eight-count indictment charging Demetrios and Chris Votsis with, inter alia, willfully attempting to evade and defeat Federal income taxes in violation of
*113 During a 1984 trip to Florina, Greece, petitioner Chris Votsis created back-dated "notes" to corroborate claims of prior loans to Demeterios Votsis and himself. The language in each note was identical, except for the names of the borrower and lender, the amount, and the date.
On February 12, 1987, petitioner Demetrios Votsis made three withdrawals from a Marine Midland Bank account in the form of bank checks, each containing the notation "re: To repay loan" and made payable as follows:
| Payee | Amount |
| John Gogos | $ 18,000 |
| Georgios Bardas | 6,000 |
| Petros Kostarelis | 12,000 |
Demetrios Votsis took these three checks with him on a two-week trip to Greece, beginning February 14, 1987. Each check was endorsed and cancelled by the National Bank of Greece, Florina Branch. The endorsing signature of Petros Kostarelis on the back of the $ 12,000 check, however, does not match that signature on the corresponding back-dated note drawn up in 1984.
OPINION
Using the net worth plus expenditures method, respondent determined that petitioners failed to report substantial amounts of taxable income in each of the years before the Court. Respondent also determined*114 that petitioners' omissions of taxable income and resulting underpayments of tax are due to fraud and, accordingly, determined that petitioners are liable for the fraud addition to tax under
A presumption of correctness attached to respondent's determinations of deficiencies, and petitioners bear the burden of showing by a preponderance of the evidence that those determinations are incorrect.
We had ample opportunity to observe petitioners Demetrios and Chris Votsis on the witness stand and to appraise their testimony in light of other evidence. Notwithstanding their lack of formal education, they appear to be astute businessmen possessing significant experience in the restaurant business. As the following discussion reveals, however, their stories contain many contradictions, and their testimony convinces us that they have little regard for the truth.
As a preliminary matter, we address both the back-dated notes which were executed in 1984 and the three 1987 bank checks offered as evidence of alleged prior loans. First, as to the notes, Demetrios and Chris Votsis claim to have received numerous loans between 1970 and 1978, none of which were reduced to writing at the time of the loan. During a trip to Greece in 1984, Chris Votsis executed a promissory note for each alleged loan on behalf of Demetrios Votsis and himself. Each note was back-dated to the date of the supposed loan. Only one "lender," Aneseies Tezias, testified at trial, *116 and he admitted that he was never made aware of the purpose of the note. *117 loans allowed him to make payments of the principal if and when it was convenient for him to do so, rather than requiring repayment at a time certain. Interest was never discussed or requested; and, although amounts were included in the bank checks purportedly as interest, they were arbitrary amounts not determined by using a fixed rate over the time the alleged loans remained outstanding. No periodic payments of principal or interest were made during the 9 to 13 years between the time of the alleged loans and the alleged repayment in 1987. We question the timing of the repayments prior to trial, since Demetrios Votsis is well aware of the significance of establishing loans for the purpose of his net worth. Our skepticism is supported by the fact that the signature of Petros Kostarelis on his bank check does not match that on the corresponding back-dated note drawn up in 1984. Accordingly, we disregard these checks as having any probative value in establishing the existence of the claimed corresponding loans.
We now turn to the issue of petitioners' deficiencies.
The first issue is whether petitioners underreported their taxable income in 1976, 1977, *118 1978 and 1979 as determined by respondent.
Petitioners failed to maintain a complete and adequate set of books and records as required by
Petitioners contend that respondent's calculations need to be adjusted to account for various nontaxable sources of funds such as loans, gifts, dowries, and accumulated cash. Petitioners bear the burden of proving any adjustments to the computations,*120 and if petitioners show that a part of respondent's computations are incorrect, it will neither destroy the presumption of correctness which attaches to the remainder of the computations nor invalidate the use of the net worth method.
The first step under the net worth method of income reconstruction is to accurately and clearly determine an opening net worth by competent evidence.
Petitioners content that respondent has not established their respective opening net worths with reasonable certainty and has grossly understated their cash on hand by failing to take into account the alleged receipt of the following nontaxable sources of funds:
| Petitioner | Source | Amount | Year | Nature |
| Demetrios Votsis | Stergios Nassis | $ 10,000 | 1970 | dowry |
| Apostolos Votsis | 5,000 | 1972 | gift | |
| John Gogos | 15,000 | 1974 | loan | |
| Anthony Gogos | 20,000 | 1974 | loan | |
| Stergios Nassis | 7,000 | 1974 | gift | |
| Chris Votsis | Stavos Gatsis | 25,000 | 1970 | dowry |
| Aneseies Tezias | 15,000 | 1970 | loan | |
| Cheryistolis Tavellaris | 15,000 | 1971 | loan | |
| Constantine Gatsis | 15,000 | 1971 | loan | |
| Apostolos Votsis | 5,000 | 1972 | gift | |
| Constantine Tsabazis | 15,000 | 1975 | loan |
*121 In addition, Demetrios and Chris Votsis also claim to have saved money while living with the Votsis family at 222 S. Woodland St. from 1963 until they each purchased their own homes in 1971 and 1973, respectively. However, with the exception of the two $ 5,000 gifts from Apostolos Votsis and the dowries, none of these sources of funds were mentioned during respondent's audit and investigation. We will address these alleged amounts chronologically.
First, Demetrios Votsis' wife and in-laws testified at trial that Demetrios Votsis received a $ 10,000 dowry while in Greece for his 1970 wedding. We note, however, that this Court may discount a witness' self-interested testimony and is not required to accept any testimony at its face value, even if uncontroverted, if it is unreasonable, questionable, or inherently improbable.
When in Greece for his 1970 wedding, Chris Votsis allegedly received a $ 25,000 dowry from Stavos Gatsis and a $ 15,000 loan from Aneseies Tezias. As to the dowry, Stavos Gatsis did*123 not testify at trial, and we discount Chris Votsis' uncorroborated testimony as merely self-serving. See
Chris Votsis further maintains that, during a subsequent trip to Greece in 1971, he received loans from several friends, none of whom testified at trial. Receipt of such loans is contrary both to the fact that he declared no money to U.S. Customs upon reentering this country and to his claims of an already existing cash hoard of $ 40,000 (the $ 25,000 dowry and $ 15,000 loan, both discussed above). The evidence*124 of borrowing money indicates an
In 1972, petitioners Demetrios and Chris Votsis allegedly received $ 5,000 each from their father towards opening the restaurant. Their mother testified on behalf of their late father, but she had no first-hand personal knowledge of the transfer. Additionally, neither Demetrios nor Chris Votsis made any mention of accumulated cash in their respective Affidavits of Support attached to their wives' 1973 petitions for naturalization. If petitioners in fact enjoyed the cash hoard they claim to have possessed, it was in their best interest to disclose that fact on the affidavits in order to assure that their wives would be provided for and would "not become public charges" after being naturalized as U.S. citizens. Nevertheless, respondent allowed Demetrios and Chris Votsis $ 4,000 of the $ 5,000 each claimed as a gift. Respondent's concession seems*125 to be extremely generous, and we find no basis upon which to allow any additional amounts.
In 1974, Demetrios Votsis allegedly received a $ 15,000 loan in Greece from John Gogos, a $ 20,000 loan in Greece from Anthony Gogos, and a gift from his father-in-law equal to approximately $ 7,000 worth of German marks and Greek drachmas. First, Demetrios Votsis offered no reasonable explanation as to why, if he actually possessed these sums, he did not claim the loans as liabilities and the gift as an asset on his May 25, 1975 Statement of Finances submitted to the New York Liquor Authority. Second, as to the two loans, neither "lender" testified at trial, and no such loan proceeds were declared to U.S. Customs upon his reentry into this country in 1974. Third, concerning the gift from his father-in-law, Demetrios Votsis presented a bank currency exchange statement which convinces us that he actually received the $ 7,000 gift. Thus, respondent's opening net worth computations shall be adjusted accordingly.
Next, Chris Votsis claims to have received a $ 15,000 loan in 1975 from Constantine Tsabazis, who did not testify at trial. As with Demetrios Votsis, Chris Votsis did not reveal*126 this or other alleged loans or gifts on his Statement of Finances submitted to the New York State Liquor Authority, even though the statement requires disclosure of all assets and liabilities whether or not related to petitioners' restaurant business. Accordingly, he has not carried his burden of showing receipt of the 1975 loan.
Our suspicions that Chris Votsis never received any of the claimed loans were confirmed by his confused testimony. He offered no reasonable explanation for failing to disclose the alleged loans on the liquor license application. When asked why he needed the loans, he responded "Well, just loans that were to purchase different, you know, like investment, you know. Because they had the money there. They were an investment, you know, they were afraid. I don't know."
Finally, we are persuaded that any cash which petitioners may have accumulated during or before 1973 while living with the Votsis family at 222 S. Woodland St. was consumed prior to 1976. Petitioners offer no evidence as to specific amounts of money allegedly saved, and it strains credulity to argue that they were able to accumulate any significant sums of money. The Votsis family came*127 to this country with little or no money and lived in only one side of a house. The women did not work, and the father supported the entire family from his income as a car washer and a janitor. Demetrios and Chris Votsis both contributed to some extent out of their earnings from various low-paying jobs. Therefore, we are not convinced that they possessed in 1976 any money they may have saved during or before 1973.
To summarize, we will allow an adjustment in respondent's opening net worth computations to account for the receipt by Demetrios Votsis of a $ 7,000 gift from his father-in-law in 1974. However, this adjustment still results in available currency for Demetrios Votsis of -$ 16,996.45 as of December 31, 1975 (-$ 23,996.45 plus the adjustment of $ 7,000). Unreported Taxable Income
Petitioners further argue that respondent erroneously calculated*128 their respective unreported taxable income for the years in issue by failing to account for the alleged receipt of the following nontaxable sources of funds during those years:
| Petitioner | Source | Amount | Year | Nature |
| Demetrios Votsis | Georgios Bardas | $ 5,000 | 1977 | loan |
| Nicholas Gogos | 18,000 | 1977 | loan | |
| Petros Kostarelis | 10,000 | 1978 | loan | |
| Apostolos Votsis | 14,000 | 1979 | gift | |
| Chris Votsis | Stavos Gatsis | 15,000 | 1979 | gift |
| Apostolos Votsis | 10,000 | 1979 | gift |
We will address each in turn.
Demetrios and Chris Votsis contend that they each had a small box hidden at their home in which they kept this money. At trial, however, neither could testify as to the amounts allegedly contained in their cash hoards or to specific amounts dedicated to particular uses during any of the years in issue.
Petitioner Demetrios Votsis claims to have received two loans in 1977 while in Greece, and one loan in 1978. These claims of needing money are inconsistent with his claims of possessing a $ 57,000 cash hoard by this time. See *129
Demetrios Votsis also maintains that he received a $ 14,000 gift from his father in 1979. We reject this claim as uncorroborated by any documentary evidence and inconsistent with the fact that Demetrios Votsis did not mention such amounts on his 1979 financial statement attached to a Roth Bros. Manor House charge account application.
Similarly, Chris Votsis claims to have received in 1979 gifts of $ 15,000 from his father-in-law and $ 10,000 from his father. However, Chris Votsis' self-serving testimony as to these transfers is uncorroborated and unbelievable. First, in connection with a 1979 mortgage loan application, Chris and Christine Votsis each submitted an "EMPLOYER'S VERIFICATION" in which they knowingly gave false statements that Christine Votsis was employed at the restaurant.*130 Additionally, both documents were improperly signed as "employer" by Chris Votsis' cousin, who only occasionally worked at the restaurant as an employee. *131 would keep a large cash hoard. The schedule of bank accounts that each maintained and the schedule of property transactions and borrowings each engaged in show them to be persons who invested extensively in property and who were not mistrustful of banks. Indeed, each placed substantial sums of money in interest-bearing accounts and borrowed substantial sums at market interest rates.
We now consider whether part of the underpayment of tax required to be shown on petitioner's Federal income tax returns for their taxable years 1976, 1977, 1978 and 1979 was due to fraud. *133
Respondent has established by clear and convincing evidence that petitioners had underpayments in each of the years in issue. The determinative*134 issue, therefore, is whether part of the underpayment in each of the years in issue was due to fraud.
The existence of fraud is a question of fact to be determined on the basis of the entire record.
A taxpayer criminally convicted under
Fraud is further evidence by petitioners' extensive dealings in cash, failure to keep adequate books and records, and failure to supply complete information about their income and expenses to their tax return preparer. *137
Petitioners' false statements (including misleading omissions) and implausible or inconsistent explanations of behavior are also indicia of fraud. *138
The circumstances of these cases, together with petitioners' conduct, convincingly expose their fraudulent intent. See
Next, we deal with whether petitioners Helen Votsis and Christine Votsis each qualify for relief from liability under the innocent spouse provision of
*140 Second, there must be a "substantial understatement of tax attributable to grossly erroneous items of one spouse."
*141
Third, the spouses seeking relief must establish that "in signing the joint returns [they] did not know, and had no reason to know that there was such substantial understatement."
Finally, we must determine whether, taking into consideration all of the facts, it is inequitable to hold Helen or Christine Votsis liable for the deficiencies in tax for the years in issue.
Therefore, we conclude that petitioners Helen and Christine Votsis have each sustained their burden of proving themselves entitled to the relief afforded to an innocent spouse pursuant to
To reflect the foregoing,
1. Unless otherwise indicated, section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise noted. ↩
2. This alleged loan refers to a $ 7,000 check dated January 1980 and given by Stergios Nassis to Demetrios Votsis. Although the transfer is claimed to be a loan to Demetrios Votsis, the check contains a notation indicating the purpose of the transfer was "To repay loan" from Demetrios Votsis to Stergios Nassis. Mr. Nassis testified at trial that the notation was made so others would not know of the loan to Demetrios Votsis. Regardless of the inconsistencies, we need not consider the effect of this transfer since it was made in 1980 and is beyond the years in issue. ↩
3.
Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $ 10,000 * * * or imprisoned not more than 5 years, or both, together with the costs of prosecution. ↩
4. The record does not reflect the disposition of the remaining counts charged in the indictment. ↩
5. Concerning the note for his alleged loan to Chris Votsis, Mr. Tezias testified, in part, as follows:
Q: Was there any reason given why, from Chris [Votsis], that you had to sign the [promissory note]?
A: No. We didn't discuss. ↩
6.
Every person liable for any tax imposed by this title, or for the collection therof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. * * * ↩
7. See also
8. See respondent's "Available Currency Analysis" in our Findings of Fact. ↩
9. Chris Votsis testified that he told his cousin to "just sign [the employer's verifications] on the bottom, you know, pretend you're the manager." ↩
10. See
11. See
12. As relevant to these cases,
13. See also
14.
(e) Spouse Relieved or Liability in Certain Cases. --
(1) In general. -- Under regulations prescribed by the Secretary, if --
(A) a joint return has been made under this section for a taxable year,
(B) on such return there is a substantial understatement of tax attributable to grossly erroneous items of one spouse,
(C) the other spouse establishes that in signing the return he or she did not know, and had no reason to know, that there was such substantial understatement, and
(D) taking into account all the facts and circumstances, it is inequitable to hold the other spouse liable for the deficiency in tax for such taxable year attributable to such substantial understatement,
then the other spouse shall be relieved of liability for tax (including interest, penalties, and other amounts) for such taxable year to the extent such liability is attributable to such substantial understatement.
(2) Grossly erroneous items. -- For purposes of this subsection, the term "grossly erroneous items" means, with respect to any spouse --
(A) any item of gross income attributable to such spouse which is omitted from gross income, and
(B) any claim of a deduction, credit, or basis by such spouse in an amount for which there is no basis in fact or law.
(3) Substantial understatement. -- For purposes of this subsection, the term "substantial understatement" means any understatement (as defined in
15. A "substantial understatement" is defined in
Morris Lipsitz, and Morris Lipsitz and Helen Lipsitz v. ... , 220 F.2d 871 ( 1955 )
Condor Merritt v. Commissioner of Internal Revenue , 301 F.2d 484 ( 1962 )
Haldane M. Plunkett v. Commissioner of Internal Revenue , 465 F.2d 299 ( 1972 )
Michael L. Rockwell, and Regina Rockwell v. Commissioner of ... , 512 F.2d 882 ( 1975 )
Quock Ting v. United States , 11 S. Ct. 733 ( 1891 )
anthony-v-thomas-v-commissioner-of-internal-revenue-estate-of-joseph-m , 223 F.2d 83 ( 1955 )
Howard Davis v. Commissioner of Internal Revenue , 239 F.2d 187 ( 1956 )
George Schwarzkopf v. Commissioner of Internal Revenue , 246 F.2d 731 ( 1957 )
Harry and Eugenia Gromacki v. Commissioner of Internal ... , 361 F.2d 727 ( 1966 )
Vincent Marcello, Sadie Marcello v. Commissioner of ... , 380 F.2d 494 ( 1967 )
Vincent Cefalu and Frances P. Cefalu v. Commissioner of ... , 276 F.2d 122 ( 1960 )
Robert W. Bradford v. Commissioner of Internal Revenue , 796 F.2d 303 ( 1986 )
Kercheval v. United States , 47 S. Ct. 582 ( 1927 )
Welch v. Helvering , 54 S. Ct. 8 ( 1933 )
Nathan Fleischer v. Commissioner of Internal Revenue , 403 F.2d 403 ( 1968 )
Clayton M. Korecky, Jr. v. Commissioner of Internal Revenue , 781 F.2d 1566 ( 1986 )
United States of America Ex Rel. Adrian Rosa v. Harold W. ... , 395 F.2d 721 ( 1968 )
Ruben R. Cortez v. United States , 337 F.2d 699 ( 1964 )
United States v. Leo Carlino , 400 F.2d 56 ( 1968 )
Gilbert Weiss v. Commissioner of Internal Revenue , 221 F.2d 152 ( 1955 )