DocketNumber： Tax Ct. Dkt. No. 24601-93. Docket No. 18987-94
Citation Numbers： 76 T.C.M. 539, 1998 Tax Ct. Memo LEXIS 348, 1998 T.C. Memo. 346
Judges： WHALEN
Filed Date： 9/29/1998
Status： Non-Precedential
Modified Date： 4/18/2021
MEMORANDUM FINDINGS OF FACT AND OPINION
WHALEN, JUDGE: Respondent determined the following deficiencies in and additions to petitioners' Federal income tax:
| Additions to Tax | ||||
| Year | Deficiency | Sec. 6653(b)(1) | Sec. 6653(b)(2) | Sec. 6661 |
| 1983 | $ 148,421 | $ 74,211 | 50% of the | $ 37,105 |
| interest due | ||||
| on $ 148,421 | ||||
| 1985 | 105,160 | 52,580 | 50% of the | 26,290 |
| interest due | ||||
| on $ 105,160 | ||||
All section references are to the Internal Revenue Code as in effect during the years in issue.
After concessions, the issues for decision are: (1) Whether Mr. London's deposition in a prior proceeding is admissible in evidence on the ground that he is unavailable as a witness within the meaning of
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts, supplemental stipulation of facts, and attached exhibits are incorporated herein by this reference. Petitioners are husband and wife. They filed a joint Federal income tax return for each of the years in issue. Respondent issued a separate notice of deficiency to each petitioner, and each petitioner filed a petition for redetermination in this Court. The two cases were consolidated pursuant to
Mr. London graduated from high school in 1957. From 1957 to 1962, he attended Bordentown Military Academy, the University of Maryland, and Boston University, but he did not graduate from any of those institutions. Mrs. London received a bachelor of arts degree from Emmanuel College where she majored in biology. She also received a teaching certificate from Salem State College. After graduating from college, Mrs. London worked for Massachusetts Institute of Technology as a laboratory assistant. She was later employed by the New England Baptist Hospital where she taught biological studies to nursing students. She left her employment at the hospital in August 1969.
Petitioners were married on May 22, 1969, in Chelsea, Massachusetts. After they were married, they rented an apartment in an area known as Glovers Landing, in Marblehead, Massachusetts, where they resided for approximately 3 years before moving to an apartment on Blueberry Hill Road, in Marblehead, Massachusetts. Petitioners lived in that apartment until September 10, 1976, when they purchased a house at 79 Black Oak Road, Weston, Massachusetts.
Petitioners had1998 Tax Ct. Memo LEXIS 348">*353 four children, Roanna, Terrence, Hellene, and Shauna. Roanna attended Colgate University from 1987 through 1991, Terrence attended the University of Michigan from 1989 through 1993, Hellene attended the University of Vermont from 1992 through 1996, and Shauna was a first year student at Georgetown University at the time of trial. Terrence received a partial athletic scholarship during college. Petitioners paid the tuition for each child's college education.
LONDON'S CAFE, INC.
From 1957 through 1985, Mr. London was a stockholder in London's Cafe, Inc., a corporation which operated a bar in Chelsea, Massachusetts. Prior to 1974, the bar was owned and managed by Mr. London's parents, who also held the bar's liquor license. According to records filed with the Secretary of State of the Commonwealth of Massachusetts in 1960, petitioner's mother, Mrs. Ida London, was president and treasurer of the predecessor of London's Cafe, Inc., and petitioner's father, Mr. Isadore London, was an officer of the corporation.
Gradually, petitioners took over more of the ownership of the corporation, London's Cafe, Inc., and Mr. London took more responsibility for operation of the bar. In an application1998 Tax Ct. Memo LEXIS 348">*354 filed with the liquor licensing authority in the Commonwealth of Massachusetts on March 28, 1974, Mrs. London is identified as the owner of 51 of the 100 outstanding shares of stock and as a director of the corporation. Petitioner's mother is identified as the owner of 49 shares and as president of the corporation. Mr. London is identified as "clerk". Shortly thereafter, in April 1974, Mrs. London applied for and was granted the liquor license to operate London's Cafe, Inc., d/b/a Heller's Cafe. Mrs. London is identified in the application as "Manager and Director". The parties have stipulated that Mrs. London was the "liquor licensee" of London's Cafe, Inc., d/b/a/ Heller's Cafe from 1974 through at least December 1986. In this opinion, we refer to the corporation as London's Cafe, Inc., and to the bar as Heller's Cafe.
CHECK-CASHING BUSINESS
From 1977 through 1993, Mr. London also conducted a check- cashing business as a sole proprietorship, M.L. Associates, from an enclosed area in Heller's Cafe. M.L. Associates charged its customers a fee for cashing checks. The fee ranged from 1 to 15 percent of the total amount of the check. Mr. London also lent money to customers and charged1998 Tax Ct. Memo LEXIS 348">*355 various rates of interest ranging from 5 to 200 percent per week.
Mr. London used two bank accounts for the check-cashing business, Essex Bank account No. XXX-159-7 and Shawmut County Bank account No. XXX-781-0. During the years 1980 through 1985, the aggregate deposits made to these accounts are as follows:
| Year | Amount |
| 1980 | $ 16,074,523.13 |
| 1981 | 16,827,056.79 |
| 1982 | 21,791,552.32 |
| 1983 | 29,202,291.31 |
| 1984 | 31,614,968.77 |
| 1985 | 40,767,857.96 |
| Total: | 156,278,250.28 |
M.L. Associates issued Forms W-2, Wage and Tax Statement, to petitioners' children, Roanna and Terrence, for 1983, 1984, and 1985. The Forms W-2 report that each child was paid $ 3,600, $ 3,900, and $ 3,900 for 1983, 1984, and 1985, respectively.
PETITIONER'S CRIMINAL ACTIVITY
On August 6, 1969, the police raided Heller's Cafe. They arrested Mr. Isadore London for "allowing his premises to be used for gaming", and they arrested petitioner for "setting up and promoting a lottery". In September 1969, the U.S. District Court for the District of Massachusetts found petitioner and his father guilty of those offenses.
Mr. London and his father were arrested a second time in 1974. On November 7, 1974, 1998 Tax Ct. Memo LEXIS 348">*356 they were indicted and on July 24, 1975, they pleaded guilty to unlawfully, knowingly, and willfully conducting an illegal gambling business in violation of title
From 1983 through 1985, officials from the Criminal Investigation Division of the Internal Revenue Service, the Drug Enforcement Administration, the Federal Bureau of Investigation (FBI), and the Massachusetts State police investigated Heller's Cafe for possible violation of the laws prohibiting gambling, loan- sharking, drug trafficking, money laundering, and for possible failure to submit currency transaction reports (CTR's).
On October 28, 1986, in response to an application and affidavit submitted by Federal agents, the U.S. District Court for the District of Massachusetts issued two orders authorizing Federal agents to conduct electronic surveillance at Heller's Cafe for a 30- day period. One order authorized the agents to intercept communications in and adjacent1998 Tax Ct. Memo LEXIS 348">*357 to the enclosed area where Mr. London conducted the business of M.L. Associates. The second order authorized Federal agents to monitor and record telephone communications on two telephones at Heller's Cafe, a pay phone located on the premises and a private phone line belonging to M.L. Associates. The District Court extended the orders for an additional 30 days on December 3, 1986. Federal agents terminated electronic surveillance of Heller's Cafe before the end of December 1986.
On December 17, 1986, pursuant to a search warrant, a task force of FBI agents and Massachusetts State police officers conducted a search of Heller's Cafe. The search warrant authorized the task force to search for evidence of unlawful gambling, loan-sharking, distribution of narcotics, money laundering, and failure to file CTR's. During the course of the search, the agents seized drugs, weapons, records of M.L. Associates, records of bookmaking activities, and money in the aggregate amount of $ 125,376, consisting of a $ 20,000 cashier's check and currency of $ 105,376 found in a safe in the enclosed area. Mr. London was present when Federal agents searched Heller's Cafe.
On April 11, 1990, Mr. 1998 Tax Ct. Memo LEXIS 348">*358 London was indicted by a Federal grand jury for two counts of income tax evasion in violation of section 7201. The grand jury returned superseding indictments on May 10, 1990, and on September 5, 1991. The second superseding indictment charged Mr. London with the following violations of the law:
| Count No. | Title and Sec. | Nature of Offense |
| 1 | 18 U.S.C. 1962 | RICO--conspiracy |
| 2 | 18 U.S.C. 1962(c) and 2 | RICO--substantive |
| 3--16 | 18 U.S.C. 1956 and 2 | Money Laundering |
| 17--43 | 31 U.S.C. 5313, 5322(b) | Failure to file CTR's |
| 44 | 18 U.S.C. 1951 | Conspiring to commit extortion |
| 45--47 | 18 U.S.C. 1951 and 2 | Aiding and abetting extortion |
| 48 | 18 U.S.C. 894 | Loan-sharking |
| 49 | 18 U.S.C. 1955 and 2 | Operating a gambling business |
| 50 | 26 U.S.C. 7201 | Tax evasion for 1983 |
| 51 | 26 U.S.C. 7201 | Tax evasion for 1985 |
By the start of Mr. London's1998 Tax Ct. Memo LEXIS 348">*359 trial on January 4, 1993, the 51 counts of the second superseding indictment had been reduced to 30 counts. Several counts, including the count charging Mr. London with gambling, were dismissed by the Government, and several other counts were dismissed by the District Court. The two counts of tax evasion (counts 50 and 51) were among the counts that were not tried, but the record of these cases does not explain why. On February 19, 1993, a jury returned guilty verdicts with respect to 29 counts involving RICO, money laundering, failure to file CTR's, and extortion. The jury acquitted Mr. London on one count of money laundering. During the jury trial, the contents of the communications intercepted during the electronic surveillance of Heller's Cafe were introduced into evidence. On March 3, 1993, Mr. London pleaded guilty to willful evasion of his 1985 Federal income tax under section 7201.
On June 30, 1993, the District Court gave Mr. London the following sentence for all of the offenses on which he was convicted:
The defendant is hereby committed to the custody of the United States Bureau of Prisons to be imprisoned for a term of 188 months on counts 1 & 2, 5-16, 44, 45 & 47 to 1998 Tax Ct. Memo LEXIS 348">*360 be served concurrently with each other; 96 months on counts 17, 18, 21, 23, 25, 26, 29, 32, 34, 35, 37 & 40 to be served concurrently with each other and with counts 1 & 2; 48 months on count 51, to be served concurrently with counts 1 & 2.
The defendant is remanded to the custody of the United States marshal.
The District Court fined him $ 500,000 on counts 5 through 16 for money laundering. On the same day, the District Court also entered an Order of Forfeiture under which it gave the United States title to an additional $ 865,000 which Mr. London had agreed to forfeit. The District Court entered judgment against Mr. London for his criminal offenses on July 7, 1993. This judgment was affirmed by the
HELLER'S CAFE LIQUOR LICENSE
On December 13, 1993, the Board of Excise of the City of Chelsea, issued a "Decision" revoking the liquor license of Heller's Cafe, effective December 20, 1993. The decision states in relevant part:
the Board finds that the Licensee London's Cafe, Inc. permitted a violation of a condition of its license or of the laws of 1998 Tax Ct. Memo LEXIS 348">*361 the Commonwealth of Massachusetts by permitting Mr. London to use the licensed premises for a racketeering enterprise, loan sharking, extortion, money laundering and currency violations.
In its decision, the Board of Excise also found the following:
All of the issued and outstanding stock of London's Cafe, Inc., d/b/a Heller's Cafe ("Heller's"), is and was at all times relevant hereto owned of record by Patricia London. Mrs. London was and is the licensed manager at all times relevant hereto.
On June 22, 1994, the Alcoholic Beverages Control Commission of the Commonwealth of Massachusetts approved the Board's decision, and that action was affirmed on October 30, 1995, by the Superior Court of the Commonwealth of Massachusetts, Suffolk County. The memorandum of decision and order issued by the Superior Court on October 30, 1995, states that "Patricia London was the record owner and manager of Heller's from 1985 to December, 1993."
WRONGFUL LEVY SUIT
In 1993, the Commissioner levied on stock brokerage accounts at Paine Webber and Kidder Peabody which petitioners owned jointly. Mrs. London challenged the levy in a civil suit brought against the Commissioner in the U.S. District Court1998 Tax Ct. Memo LEXIS 348">*362 of the District of Massachusetts. The Government took Mr. London's deposition while the suit was pending. In 1996, the parties to the suit agreed to a settlement under which Mrs. London received $ 214,342 of assets in the Paine Webber account and she was permitted to keep her individual retirement account at Paine Webber, amounting to $ 91,472.22, as of March 1996. Under the settlement, Mrs. London also retained one-half of the Kidder Peabody account or approximately $ 60,000.
BANK ACCOUNTS
During the years 1976 through 1985, petitioners either individually, jointly, or with Mr. London's parents, maintained the following bank accounts:
| Banks Accounts | Account No. | Date Opened |
| Broadway Natl. Bank | XX-378-7 | 1/3/84 |
| Broadway Natl. Bank | XX-063-5 | Before 1975 |
| Broadway Natl. Bank | XX-450-6 | 3/24/80 |
| Broadway Natl. Bank | XX-028-4 | 2/13/68 |
| Broadway Natl. Bank | ||
| (Heller's Cafe) | XX-001-2 | 3/2/60 |
| Carmel Credit Union | X1614 | Before 12/31/76 |
| Carmel Credit Union | X7795 | Before 1/1/77 |
| Essex Bank (M.L. Associates) | XXX-159-7 | 6/81 |
| Provident Inst. for Sav. | XX-6612 | 8/25/69 |
| Shawmut County Bank (Roanna) | XXX-946-1 | 1/4/84 |
| Shawmut County Bank (M.L. | ||
| Associates) | XXX-781-0 | During 1977 |
| Shawmut County Bank | XXX-084-3 | 8/6/77 |
1998 Tax Ct. Memo LEXIS 348">*363 Mrs. London wrote checks on the three accounts which she held jointly with her husband, Broadway National Bank account No. XX-378-7, Broadway National Bank account No. XX-450-6, and Shawmut County Bank account No. XXX-084-3.
In addition to the above accounts, petitioners reported on the Schedules B, Interest and Dividend Income, filed as part of their Federal income tax returns for 1976 through 1981 that they had received interest income from accounts at five banks, Atlantic Savings Bank, Commonwealth Bank, Marblehead Savings Bank, Metropolitan Credit Union, and Grand National Bank. The interest reported from those accounts is set out in the following schedule:
| 1976 | 1977 | 1978 | 1979 | 1980 | |
| Atlantic Sav. | $ 897 | $ 313 | $ 155 | $ 683 | $ 30 |
| Metro. Credit Union | -- | 71 | 661 | -- | -- |
| Metro. Credit Union | -- | 71 | -- | -- | -- |
| Metro. Credit Union | -- | 71 | -- | -- | -- |
| Commonwealth Bank | 60 | 151 | 519 | -- | 623 |
| Commonwealth Bank | 141 | 151 | -- | -- | -- |
| Commonwealth Bank | 159 | 174 | -- | -- | -- |
| Commonwealth Bank | 141 | -- | -- | -- | -- |
| Nat. Grand Bank | 452 | 225 | -- | -- | -- |
| Nat. Grand Bank | 479 | 255 | -- | -- | -- |
| Natl. Grand Bank | 482 | 211 | -- | -- | -- |
| Marblehead Sav. | 590 | -- | 3 | -- | -- |
| 1981 | 1982 | 1983 | 1984 | 1985 | |
| Atlantic Sav. | $ 16 | -- | -- | -- | -- |
| Metro Credit Union | -- | -- | -- | -- | |
| Metro Credit Union | -- | -- | -- | -- | -- |
| Metro Credit Union | -- | -- | -- | -- | -- |
| Commonwealth Bank | -- | -- | -- | -- | -- |
| Commonwealth Bank | -- | -- | -- | -- | -- |
| Commonwealth Bank | -- | -- | -- | -- | -- |
| Commonwealth Bank | -- | -- | -- | -- | -- |
| Nat. Grand Bank | -- | -- | -- | -- | -- |
| Nat. Grand Bank | -- | -- | -- | -- | -- |
| Natl. Grand Bank | -- | -- | -- | -- | -- |
| Marblehead Sav. | -- | -- | -- | -- | -- |
1998 Tax Ct. Memo LEXIS 348">*364 They also reported receiving a small amount of interest income during each of the years 1982 through 1985 from an account at Boston Five Cents Savings.
STOCKS
Petitioners purchased the following stocks and securities during the period 1976 through 1985:
| Date | ||||
| Name | No. of Units | Purchased | ||
| AT&T | 150 | Pre-1977 | ||
| General Motors Corp. | 150 | Pre-1977 | ||
| Boston Edison | 200 | Pre-1977 | ||
| John Hancock | 200 | Pre-1977 | ||
| Big Piney Oil & Gas | 2,000 | 5/27/81 | ||
| Mass. St. Go. 5.8 JJ | 150,000 | 10/01/81 | ||
| Mass. St. Go. 6.4 JJ | 60,000 | 10/27/81 | ||
| Utah Power & Light | 2,000 | 12/17/81 | ||
| Xerox Corp. | 600 | 2/16/82 | ||
| Santa Fe S. Pac. | 1,804 | 2/26/82 | ||
| Florida Fed. Sav. | 1,000 | 6/03/83 | ||
| San Diego Gas & Elec. | 2,000 | 6/08/83 | ||
| Western Co. of N. Am. | 3,000 | 6/08/83 | ||
| Isomedix, Inc. | 500 | 7/21/83 | ||
| Haber, Inc. (Silver Tech) | 11,000 | Pension Ins. Group Am. | 6,000 | 2/14/84 |
| Arkla, Inc. | 1,200 | 3/01/84 | ||
| Mass. St. Go. 6.5 FA | 150,000 | 4/26/84 | ||
| Zenith Natl. Ins. Corp. | 500 | 5/04/84 | ||
| Zenith Natl. Ins. Corp. | 1,500 | 5/07/84 | ||
| Mass. St. Go. 9.0 MS | 50,000 | 11/30/84 | ||
| So. Calif. Edison Co. | 200 | 4/25/85 | ||
| So. Calif. Edison Co. | 1,600 | 4/25/85 | ||
| Mass. Med. Ctr. 10.2 J | 10,000 | 4/25/85 | ||
| Mass. Med. Ctr. 10.4 J | 50,000 | 4/25/85 | ||
| Kidder Peabody Acct. Fund |
1998 Tax Ct. Memo LEXIS 348">*365 Petitioners reported on the Schedules B, Interest and Dividend Income, filed as part of their returns for 1977, 1979, and 1980, that the General Motors, Boston Edison, John Hancock, and AT&T stocks were jointly owned. On the Schedule B filed as part of their return for 1984, petitioners also reported that they had received dividend income from Southwestern Bell, Ameritech, U.S. West, Bell Atlantic, NYNEX, Bell South, and Pacific Telesis.
REAL ESTATE
On May 7, 1974, petitioners paid $ 15,050 to purchase the building at 110 Chestnut Street, Chelsea, Massachusetts, the site of Heller's Cafe. Title to the building was taken in Mrs. London's name d/b/a London Realty and was leased to London's Cafe, Inc. On June 1, 1974, petitioners paid $ 3,547 for improvements to the building.
On July 1, 1975, Mrs. London purchased a 1/2-acre tract of land in Marblehead, Massachusetts, for $ 37,000. She paid the purchase price by check on the same day. During 1975 and 1976, petitioners paid $ 4,500 and $ 11,500, respectively, for improvements to the land. Petitioners sold this property on August 2, 1984, for $ 125,000.
On September 10, 1976, petitioners purchased the property at1998 Tax Ct. Memo LEXIS 348">*366 79 Black Oak Road, Weston, Massachusetts, as tenants by the entirety. They paid $ 146,000 for the property, $ 66,000 from their own funds, and $ 80,000 from funds borrowed from the Broadway National Bank in Chelsea, Massachusetts. This property was petitioners' primary residence during the years at issue.
On October 7, 1982, Mr. London purchased a condominium unit, No. 304, located at 1265 Beacon Street, Brookline, Massachusetts, for $ 174,336. Petitioner borrowed the funds used to purchase the property from the Broadway National Bank. As collateral for the loan, petitioner gave the bank two certificates of deposit which were worth $ 100,882.29 and $ 100,909, respectively, as of October 12, 1982, the maturity date of both certificates. Petitioner sold the condominium unit on May 24, 1985, for $ 187,000.
On June 18, 1984, petitioners purchased property as tenants by the entirety at 140 Greeley Avenue, West Hyannis Port, Massachusetts, for $ 467,500 (Hyannis Port property). They borrowed $ 270,000 from the Broadway National Bank to purchase the property and agreed to repay the loan in 3 years with interest at the rate of 11.5 percent per year. The1998 Tax Ct. Memo LEXIS 348">*367 loan required petitioners to make monthly payments of $ 3,148.20 for 36 months and to pay the balance on June 18, 1987. Petitioners gave $ 198,737.35 of the loan proceeds to Alger & Schilling, the escrow attorneys, to pay part of the purchase price. They used $ 69,882.65 of the loan proceeds to discharge the mortgage on their Weston property, and used the remaining $ 1,380 of the loan proceeds to pay for attorney and filing fees. Petitioners paid the balance of the purchase price of the Hyannis Port property by depositing the following checks into the escrow account of Alger & Schilling:
| Payee | Bank | Amount |
| Mrs. London | Broadway Natl. Bank (BNB) | $ 2,968.00 |
| acct. No. 90-378-7 | ||
| Mrs. London | Shawmut County Bank | 10,000.00 |
| --cashier's check | ||
| Alger & Shilling | Cape Cod Co-op | 25,000.00 |
| Mrs. London | BNB--cashier's check | 100,000.00 |
| Mrs. London | BNB--cashier's check | 100,000.00 |
| Mrs. London | BNB--cashier's check | 30,000.00 |
| Mrs. London | BNB--cashier's check | 1,262.65 |
| 269,230.65 |
The following is a summary of petitioner's real estate:
| Purchase | Mrs. | Mr. | |||
| Real Estate | Date | London | London | Joint | Total |
| 110 Chestnut | 5/7/74 | $ 15,050 | -- | -- | -- |
| St. Chelsea | |||||
| improvements | 3,547 | -- | -- | $ 18,597 | |
| Marblehead | 37,000 | -- | -- | -- | |
| improvements | 16,000 | -- | -- | 53,000 | |
| 79 Black Oak | 9/10/76 | -- | -- | $ 146,000 | 146,000 |
| Rd. Weston | |||||
| 1265 Beacon St. | -- | $ 174,336 | -- | 174,336 | |
| Unit No. 304 | |||||
| Brookline | |||||
| 140 Greeley Ave. | 6/18/84 | ||||
| W. Hyannis Port | -- | 467,500 | |||
| improvements | -- | 77,013 | 544,513 | ||
| 71,597 | 174,336 | 690,513 | 936,446 |
1998 Tax Ct. Memo LEXIS 348">*368 FINANCIAL STATEMENT
On August 16, 1976, petitioners submitted a financial statement to the Broadway National Bank to obtain the loan, mentioned above, in connection with their purchase of the property located at 79 Black Oak Road, Weston, Massachusetts. The statement was signed by Mr. London and provides the following information:
| Assets | ||
| Cash on hand in banks | $ 85,000 | |
| U.S. Government Securities: | ||
| Series E bonds | 20,000 | |
| Listed Securities: | Market Value | |
| 150 Shares Am. Tel. | $ 8,000 | |
| 150 Shares General Motors | 9,000 | |
| 200 Shres Boston Edison | 6,000 | |
| 200 Shares John Hancock | 4,000 | |
| 27,000 | ||
| Real Estate Owned: | Cost | |
| Brick bldg.--Chelsea, MA | 18,597 | |
| Land--Marblehead, MA | 37,500 | |
| 56,097 | ||
| Autos and other person property | ||
| Cash value life insurance | 14,000 | |
| Other Assets: | ||
| Investment in M.L. Associates | 50,000 | |
| Total assets | 254,597 | |
| Liabilities | ||
| Notes payable to banks--secured: | ||
| Automobiles | 3,000 | |
| Total liabilities | 3,000 | |
| Net worth | 251,597 |
JEWELRY AND HOME FURNISHINGS
On December 20, 1984, petitioners' Hyannis Port house was burglarized. In reporting the burglary to the police, petitioners claimed that property worth approximately $ 29,027 was 1998 Tax Ct. Memo LEXIS 348">*369 stolen. Among the stolen items they reported to their insurance company, there were six oriental rugs worth about $ 10,560, one Baume-Mercier watch worth about $ 3,500, several items of jewelry worth about $ 255, 12 five- piece sterling silver place settings worth about $ 4,500, and several paintings and a lithograph worth about $ 6,089.
AUTOMOBILES
Petitioners purchased eight cars during the period from 1975 through 1985. The following is a summary of the cars purchased by petitioners during that period:
| Date | |||
| Cars | Purchased | Cost | Title |
| 1975 Buick | 7/18/75 | $ 7,303 | Mrs. London |
| 1976 Volvo 265 | 7/16/76 | 8,400 | Mrs. London |
| DLA wagon | |||
| 1978 Buick | 3/11/78 | 9,981 | Mrs. London |
| Estate wagon | |||
| 1980 Cadillac | 3/1/80 | 17,700 | Mrs. London |
| Eldorado | |||
| 1981 Volvo GLT | 6/30/81 | 14,976 | Mrs. London |
| station wagon | |||
| 1982 Mercedes | 2/10/83 | 35,000 | Mr. London |
| 500 SEC coupe | |||
| 1983 Mercedes 300 | 8/29/83 | 35,000 | Mrs. London TDT station wagon |
| 1985 Mercedes | 3/26/85 | 49,000 | Mr. London 500 SEL sedan |
1998 Tax Ct. Memo LEXIS 348">*370 PETITIONER'S PARENTS
Both prior to and after petitioners' marriage, Mr. London's parents were involved with Mr. London in the operation of Heller's Cafe. Petitioner's father worked at the bar and petitioner's mother was responsible for ordering supplies for the bar, and paying some of the bar's bills. When petitioner's mother was not feeling well, petitioner's wife would order supplies for the bar. Petitioner's father died on October 2, 1980.
From 1969 through 1982, petitioner's mother lived at 57 Franklin Avenue, Chelsea, Massachusetts. On February 11, 1981, she sold that property for $ 28,000 but she continued to live there for about 1 year after the sale. In 1982, she rented an apartment in a subsidized housing development located at 5 Admiral's Hill, Chelsea. She lived in that apartment from 1982 until her death on June 10, 1988.
During the period from 1975 through 1981, petitioner's mother received the following proceeds from the sale of real estate:
| Real Estate | Date Sold | Amount Received |
| 122-124 Everett Ave. | ||
| 47-49-51 Elm St. | ||
| 123-131 Spruce St. | 3/3/75 | |
| 400 and 402 Broadway | 9/15/80 | 27,000.00 |
| 57 Franklin Ave. | 2/11/81 | 28,000 |
| Total received: | $ 104,784.47 |
1998 Tax Ct. Memo LEXIS 348">*371 All of the above properties are located in Chelsea, Massachusetts.
Mr. London's parents held a safe deposit box (No. 1618) at the Broadway National Bank. In June 1980, the safe deposit box was in the name of Mr. London and his parents as joint tenants. In 1984, the safe deposit box was changed to another box, No. 891, and it was held jointly by petitioners and Mr. London's mother.
Petitioner's parents filed Federal income tax returns for taxable years 1966 through 1980. His mother filed a Federal income tax return for the taxable year 1981, but she did not file individual income tax returns for taxable years 1982 through 1988. Set out below is the amount of Federal income tax paid by petitioner's parents from 1966 through and including 1988:
| Year | Tax |
| 1966 | $ 1,639.04 |
| 1967 | 1,843.34 |
| 1968 | 2,068.27 |
| 1969 | 2,316.72 |
| 1970 | 2,221.51 |
| (2,221.51) Tax Abated | |
| 1971 | 2,037.13 |
| (2,037.13) Tax Abated | |
| 1972 | 828.24 |
| 1973 | -- |
| 1974 | -- |
| 1975 | 4,905.00 |
| 1976 | 370.00 |
| 1977 | 116.00 |
| 1978 | 160.00 |
| 1979 | -- |
| 1980 | 1,445.00 |
| 1981 | 1,209.00 |
| 1982 | No return filed |
| 1983 | No return filed |
| 1984 | No return filed |
| 1985 | No refund filed |
| 1986 | No refund filed |
| 1987 | No refund filed |
| 1988 | No refund filed |
1998 Tax Ct. Memo LEXIS 348">*372 Petitioner's parents did not file a gift tax return (Form 709), or an estate tax return (Form 706), during the period from 1966 through 1994, and neither left a probate estate.
Petitioner and his parents shared a close personal and financial relationship. In fact, before he was married, petitioner gave his mother most of his earnings and kept only a small allowance. Through the years, petitioner and his parents purchased various assets jointly, including stocks and bonds.
PETITIONERS' INCOME TAX RETURNS
Mr. Gerald Silverstein, a public accountant, prepared petitioners, joint individual income tax returns for taxable years 1976 through 1985. Mr. London annually provided Mr. Silverstein with the information necessary to prepare petitioners, individual returns. From time to time, Mrs. London also delivered to Mr. Silverstein Forms 1099 and other information necessary to prepare the returns. After Mr. Silverstein prepared each return, he would give it to Mr. London. Mr. Silverstein signed petitioners' signatures on their return for 1984. He was not present when petitioners' returns for 1983 and 1985 were signed.
Mr. Abraham Trugman, a certified public accountant, prepared the Schedules1998 Tax Ct. Memo LEXIS 348">*373 C, Profit or (Loss) From Business or Profession, for Mr. London's check-cashing business, M.L. Associates. Mr. London supplied Mr. Trugman with bank statements, deposit slips, and machine tapes showing the weekly check-cashing income of the business. Mr. London forwarded the Schedules C to Mr. Silverstein for use in preparing petitioners' joint individual income tax returns. Mr. Trugman never met Mr. Silverstein.
The following is a summary of the joint income tax returns filed by, or on behalf of, petitioners for 1976 through 1985:
| 1976 | 1977 | 1978 | 1979 | 1980 | 1981 | |
| Wages | -- | -- | -- | -- | -- | |
| Wages- | ||||||
| Heller's Cafe | ||||||
| Mrs. London | $ 2,650 | $ 2,600 | $ 2,600 | -- | $ 2,600 | $ 2,600 |
| Mr. London | 13,950 | 18,200 | 2,600 | -- | -- | -- |
| Wages- | ||||||
| M.L. Associates | ||||||
| Mrs. London | -- | -- | -- | -- | -- | -- |
| Mr. London | -- | -- | -- | -- | -- | -- |
| Schedule B | ||||||
| Interest | ||||||
| income | 4,056 | 2,794 | 2,345 | 2,905 | 10,812 | 27,431 |
| Dividend 2,346 | 2,187 | 2,192 | 2,197 | 2,045 | 1,914 | |
| State refund | -- | -- | 500 | 87 | -- | -- |
| Schedule C | ||||||
| M.L. Associates | -- | 2,432 | 46,992 | 51,255 | 53,068 | 64,180 |
| Schedule D | ||||||
| Capital gain | -- | -- | -- | -- | -- | -- |
| Schedule E | ||||||
| 110 Chestnut | ||||||
| St. 20,454 | 12,712 | 1,052 | 187 | 1,831 | (1,207) | |
| Total income | 43,456 | 40,925 | 58,281 | 59,231 | 70,356 | 94,918 |
| Taxable income | 28,519 | 27,418 | 41,836 | 43,595 | 54,427 | 69,571 |
1998 Tax Ct. Memo LEXIS 348">*374 TABLE CONTINUED
| 1982 | 1983 | 1984 | 1985 | |
| Wages | -- | -- | -- | -- |
| Wages- | ||||
| Heller's Cafe | ||||
| Mrs. London | $ 2,650 | $ 2,600 | $ 2,600 | $ 2,600 |
| Mr. London | -- | -- | -- | -- |
| Wages- | ||||
| M.L. Associates | ||||
| Mrs. London | -- | 1,920 | 2,080 | 3,900 |
| Mr. London | -- | -- | -- | -- |
| Schedule B | ||||
| Interest | ||||
| income | 18,043 | 29,212 | 31,954 | 37,095 |
| Dividend | 9,432 | 7,207 | 17,580 | 15,332 |
| State refund | -- | -- | -- | -- |
| Schedule C | ||||
| M.L. Associates | 63,969 | 70,009 | 91,340 | 101,671 |
| Schedule D | ||||
| Capital gain | -- | -- | 38,060 | 10,226 |
| Schedule E | ||||
| 110 Chestnut | ||||
| St. | 41,000 | (2,044) | (1,512) | (3,128) |
| Total income | 98,194 | 108,904 | 182,102 | 167,696 |
| Taxable income | 74,868 | 65,001 | 112,665 | 96,882 |
Each of petitioners' returns describes the occupation of both Mr. and Mrs. London as "manager". Mrs. London received Forms W- 2, Wage and Tax Statement, from London's Cafe, Inc., and M.L. Associates reporting the following wages:
| Year | London's Cafe, Inc. | M.L. Associates |
| 1976 | $ 2,650 | -- |
| 1977 | 2,600 | -- |
| 1978 | 2,600 | -- |
| 1979 | -- | -- |
| 1980 | 2,600 | -- |
| 1981 | 2,600 | -- |
| 1982 | 2,650 | -- |
| 1983 | 2,600 | $ 1,920 |
| 1984 | 2,600 | 2,080 |
| 1985 | 2,600 | 3,900 |
1998 Tax Ct. Memo LEXIS 348">*375 Petitioners' returns also report individual retirement account contributions on behalf of Mrs. London in the amount of $ 390 for each year 1976 through and including 1981, and in the amount of $ 2,000 for 1982 through and including 1985. We note that petitioners' return for 1977 includes Form 5329, Return for Individual Retirement Savings Arrangement, on behalf of Mrs. London, on which "No" is checked in response to the question "Are you a non-working spouse for whom this arrangement has been established?" We also note that petitioners' returns for 1982 through and including 1985 include Schedule W, Deduction for a Married Couple When Both Work, on which petitioners claimed deductions provided by section 221(a) for two- earner married couples.
Petitioners filed no Federal income tax return for taxable years 1986 through 1993. They made the following estimated tax payments for those years:
| Year | Estimated Tax |
| 1986 | 34,700 |
| 1987 | 36,000 |
| 1988 | 36,000 |
| 1989 | 36,000 |
| 1990 | 40,046 |
| 1991 | 48,000 |
| 1992 | 24,000 |
| 1993 | 12,000 |
RETURNS OF LONDON'S CAFE, INC.
Mr. Silverstein prepared returns on Forms 1120, U.S. Corporation Income Tax Return, for London's Cafe, Inc., for taxable1998 Tax Ct. Memo LEXIS 348">*376 years 1976 through 1985. For each of those 10 years, London's Cafe, Inc., reported zero taxable income. The following schedule summarizes the amounts reported on behalf of London's Cafe, Inc.:
| 1976 | 1977 | 1978 | 1979 | 1980 | |
| Gross receipts | $ 63,052 | $ 66,650 | $ 56,807 | $ 52,236 | $ 52,385 |
| Cost of goods | 32,875 | 34,992 | 43,596 | 41,069 | 40,932 |
| Gross profit | 30,177 | 31,658 | 13,211 | 11,167 | 11,453 |
| Total deduction | 30,840 | 34,506 | 13,757 | 11,552 | 10,878 |
| Taxable income before | |||||
| certain deductions | (663) | (2,848) | (546) | (385) | 575 |
| Net operating loss | |||||
| deduction | -- | -- | -- | -- | 575 |
| Taxable income | (663) | (2,848) | (546) | (385) | -- |
TABLE CONTINUED
| 1981 | 1982 | 1983 | 1984 | 1985 | |
| Gross receipts | $ 54,777 | $ 55,654 | $ 63,989 | $ 66,146 | $ 77,369 |
| Cost of goods | 43,342 | 42,966 | 51,036 | 53,982 | 62,769 |
| Gross profit | 11,435 | 12,688 | 12,953 | 12,164 | 14,600 |
| Total deduction | 10,049 | 11,435 | 11,424 | 10,797 | 12,584 |
| Taxable income before | 1,386 | 1,253 | 1,529 | 1,367 | 2,016 |
| certain deductions | |||||
| Net operating | |||||
| loss deduction | 1,386 | 1,253 | 1,529 | 1,367 | 2,016 |
| Taxable income | -- | -- | -- | -- |
The returns were signed by the following individuals:
| Taxable | Officer's | Officer's |
| Year | Signature | Title |
| 1976 | Mrs. Ida London | Treasurer |
| 1977 | Mrs. London | Director |
| 1978 | Mr. London | Clerk |
| 1979 | Mrs. London | Clerk |
| 1980-85 | Mr. London | Clerk |
1998 Tax Ct. Memo LEXIS 348">*377 RESPONDENT'S DETERMINATION
Respondent recomputed petitioners' taxable income for 1983 and 1985 using the net worth method of reconstructing income. As the starting point for that computation, respondent used the net worth shown on the financial statement that petitioners submitted to the Broadway National Bank in 1976, $ 251,597. Respondent then computed petitioners' net worth for 1976 through 1985.
Respondent determined that petitioners had received unreported income of $ 311,974 and $ 213,120 for taxable years 1983 and 1985, respectively. The "explanation of items" attached to the notice of deficiency issued to Mrs. London states as follows:
It is determined that you realized additional income for 1983 in the amount of $ 311,974.00 because the comparison of all known expenditures with all known receipts, as shown on Exhibit A attached hereto, has established an understatement of income. Since you failed to include such additional income on your income tax return, taxable income is increased in the amount of $ 311,974.00.
* * * * *
It is determined that you realized additional income for 1985 in the amount of $ 213,120.00 because the comparison of all known1998 Tax Ct. Memo LEXIS 348">*378 expenditures with all known receipts, as shown on Exhibit A attached hereto, has established an understatement of income. Since you failed to include such additional income on your income tax return, taxable income is increased in the amount of $ 213,120.00.
Based thereon, respondent computed increases in tax of $ 148,421 and $ 105,160 for 1983 and 1985, respectively. Respondent also determined with respect to 1983 and 1985 that petitioners are liable for the additions to tax for fraud under
OPINION
ADMISSIBILITY OF MR. LONDON'S DEPOSITION IN THE WRONGFUL LEVY SUIT
At trial, Mrs. London called her husband to testify as a witness. In response to each of the questions put to him by Mrs. London's attorney and by the Court, Mr. London invoked his
Respondent objects to the admission of Mr. London's deposition into evidence. Respondent asserts that the deposition is hearsay for which there is no exception. Respondent asserts that Mrs. London has not shown her husband's "unavailability" as a witness within the meaning of that term in
Notwithstanding respondent's objection to the introduction of the entire deposition into evidence, respondent proffered approximately 11 pages of the deposition as an admission by a party opponent. In response, petitioners argue that if this portion of the deposition is accepted into evidence, then
In reviewing Mr. London's
It is well established that the
The Supreme Court stated in
In these cases, Mr. London's attorney argues that his client's fears of incrimination1998 Tax Ct. Memo LEXIS 348">*383 are reasonable. He notes the fact that the Government chose not to prosecute the gambling count of the second superseding indictment. He also argues that any testimony by Mr. London about his activities during 1983 through 1985 could be used as a predicate in a RICO prosecution for a later period. We cannot say that Mr. London's position is clearly mistaken. See
ADMISSIBILITY OF THE TAPES AND TRANSCRIPTS FROM THE ELECTRONIC SURVEILLANCE OF HELLER'S CAFE
At trial, respondent sought to introduce into evidence the tape recordings and transcripts of conversations that were intercepted during the electronic surveillance of Heller's Cafe, described above. Petitioners object to the tape recordings and transcripts1998 Tax Ct. Memo LEXIS 348">*384 of the intercepted conversations and to certain other evidence that they claim was derived from the intercepted conversations, consisting of the testimony of various Government agents about the search conducted at Heller's Cafe on December 17, 1986. We refer to all of the evidence that is the subject of petitioners' objection as "the intercepted communications".
Petitioners' position is that
Whenever any wire or oral communication has been intercepted, no part of the contents of such communication and no evidence derived therefrom may be received in evidence in any trial, hearing, or other proceeding in or before any court, grand jury, department, officer, agency, regulatory body, legislative committee, or other authority of the United States, a State, 1998 Tax Ct. Memo LEXIS 348">*385 or a political subdivision thereof if the disclosure of that information would be in violation of this chapter.
According to petitioners, the disclosure of the intercepted communications in these proceedings is contrary to
Title
When an investigative or law enforcement officer, while engaged in intercepting wire, oral, or electronic communications in the manner authorized herein, intercepts wire, oral, or electronic communications relating to offenses other than those specified in the order of authorization or approval, the contents thereof, and evidence derived therefrom, may be disclosed or used as provided in subsections (1) and (2) of this section. Such contents and any evidence derived therefrom may be used under subsection (3) of this section when authorized or approved by a judge of competent jurisdiction where such judge finds on subsequent application that the contents were otherwise intercepted in 1998 Tax Ct. Memo LEXIS 348">*386 accordance with the provisions of this chapter. Such application shall be made as soon as practicable.
Petitioners contend that the intercepted communications relate "to offenses other than those specified in the order of authorization or approval" within the meaning of
Congress enacted
We agree with respondent that
We acknowledge that it might also be possible to use the intercepted communications as evidence of one or more tax crimes but that is not the use to which they are being put here. We do not believe that
Any person who has received, by any means authorized by this chapter any information concerning a wire, oral, or electronic communication, or evidence derived therefrom intercepted in accordance with the provisions of this chapter may disclose the contents of that communication or such derivative evidence while giving testimony under oath or affirmation in any proceeding held under the authority of the United States or of any State or political subdivision thereof.
Second, even assuming, ad arguendo, that disclosure of the intercepted communications in these cases, without first obtaining judicial approval, would constitute a violation of
(i) the communication was unlawfully intercepted;
(ii) the order of authorization or approval under which it was intercepted is insufficient on its face; or
(iii) the interception was not made in conformity with the order of authorization or approval.
In reviewing the relationship of those provisions,
suppression is required only for a "failure to satisfy any of those statutory requirements that directly1998 Tax Ct. Memo LEXIS 348">*392 and substantially implement the congressional intention to limit the use of intercept procedures to those situations clearly calling for the employment of this extraordinary investigative device."
Title
It is unnecessary in the instant cases for us to follow the above cases and to decide that, as a matter of law, the statutory suppression rule set forth in
In these cases, like
In passing, we note that on appeal Mr. London, seeking to overturn the District Court's denial of his motion to suppress evidence, argued that the electronic surveillance conducted at Heller's Cafe in 1986 violated the Federal wiretap law in five ways:
(1) no Department of Justice official designated in
The Court of Appeals rejected Mr. London's position and affirmed the District Court's denial of the suppression motion.
In
We hold only that evidence derived from communications lawfully intercepted as part of a bona fide criminal investigation that results in the taxpayer's conviction may properly be admitted in a civil tax proceeding, at least when the evidence is already part of the public record of the prior criminal prosecution. * * *
Similarly, we can see no purpose in suppressing, in this civil tax proceeding, the contents of the intercepted communications which were lawfully seized as part of a bona fide criminal investigation that resulted in Mr. London's conviction and which previously were made part of the public record in that criminal prosecution.
The case on which petitioners rely,
NET WORTH COMPUTATION
Taxpayers are required to keep adequate books or records from which their correct tax liability can be determined.
Under1998 Tax Ct. Memo LEXIS 348">*400 the net worth method, the Commissioner seeks to compute taxable income in a given year by determining from all available evidence of assets and liabilities the increase (or decrease) in the taxpayer's net worth over a 12-month period, adding to it his nondeductible expenses for that year, and subtracting from that sum any amount attributable to nontaxable sources.
In the1998 Tax Ct. Memo LEXIS 348">*401 instant cases, petitioners did not provide any books or records from which their tax liability could be computed, and respondent chose to reconstruct petitioners' income using the net worth method. As the starting point for the net worth computations, respondent used $ 251,597, the net worth reported on the financial statement that they submitted on August 16, 1976, to the Broadway National Bank in connection with their loan application to purchase the property located at 79 Black Oak Road. Respondent then computed petitioners' net worth for the years 1976 through and including 1985. According to respondent's computation, petitioners' net worth increased from $ 251,597 to $ 1,908,738.01 during that time. The likely source of the increases in petitioners' net worth is the profits from Mr. London's unlawful activities. Respondent's net worth statement is summarized in Appendix A hereto.
Petitioners attack the net worth statement on three grounds. First, petitioners assert that respondent did not take into account the balances in five bank accounts. Second, petitioners contend that respondent used incorrect balances with respect to three bank accounts. Finally, petitioners1998 Tax Ct. Memo LEXIS 348">*402 argue that respondent failed to take into account a cash hoard derived by petitioners as gifts given from Mr. London's mother, Mrs. Ida London. We describe each of petitioners' factual contentions in detail below.
Even if we assume that respondent's net worth statement should be adjusted in order to take into account all of petitioners' contentions, that would cause no change in the taxable income determined by respondent for the year 1983 and 1985. This is shown in Appendix B hereto, in which all of the changes suggested by petitioners have been made and there is no change in respondent's computation of taxable income for 1983 and 1985.
OMITTED BANK BALANCES
Petitioners assert that respondent's net worth statement is wrong because it does not take into account the balances that petitioners maintained at five banks with respect to which they reported interest income on their Federal income tax returns for 1976 through 1981. The five banks are Atlantic Savings, Commonwealth Bank, Marblehead Savings, Metropolitan Credit Union, and National Grand Bank. Petitioners assert that "the median rate of interest paid by banks in the years of the net worth investigation was 5%" and that "a reasonable1998 Tax Ct. Memo LEXIS 348">*403 way to ascertain a balance in a given account is to multiply the interest figure by 20% (sic)." Based upon this approach, it appears that petitioners are complaining that respondent omitted the following account balances from the net worth statement in these cases:
| 1976 | 1977 | 1978 | 1979 | 1980 | |
| Atlantic Sav. | $ 17,940 | $ 6,260 | $ 3,100 | $ 13,660 | $ 600 |
| Metro. Credit | |||||
| Union | -- | 1,420 | 13,220 | -- | -- |
| Metro Credit | |||||
| Union | -- | 1,420 | -- | -- | -- |
| Metro Credit | |||||
| Union | -- | 1,420 | -- | -- | -- |
| Commonwealth Bank | 1,200 | 3,020 | 10,380 | -- | 12,460 |
| Commonwealth Bank | 2,820 | 3,020 | -- | -- | -- |
| Commonwealth Bank | 3,180 | 3,480 | -- | -- | -- |
| Commonwealth Bank | 2,820 | -- | -- | -- | -- |
| Natl. Grand Bank | 9,040 | 4,500 | -- | -- | -- |
| Natl. Grand Bank | 9,580 | 5,100 | -- | -- | -- |
| Natl. Grand Bank | 9,640 | 4,220 | -- | -- | -- |
| Marblehead Sav. | 11,800 | -- | 60 | -- | -- |
| 68,020 | 33,860 | 26,760 | 13,660 | 13,060 |
TABLE CONTINUED
| 1981 | 1982 | 1983 | 1984 | 1985 | |
| Atlantic Sav. | $ 320 | -- | -- | -- | -- |
| Metro. Credit | |||||
| Union | -- | -- | -- | -- | -- |
| Metro Credit | |||||
| Union | -- | -- | -- | -- | -- |
| Metro Credit | |||||
| Union | -- | -- | -- | -- | -- |
| Commonwealth Bank | -- | -- | -- | -- | -- |
| Commonwealth Bank | -- | -- | -- | -- | -- |
| Commonwealth Bank | -- | -- | -- | -- | -- |
| Commonwealth Bank | -- | -- | -- | -- | -- |
| Natl. Grand Bank | -- | -- | -- | -- | -- |
| Natl. Grand Bank | -- | -- | -- | -- | -- |
| Natl. Grand Bank | -- | -- | -- | -- | -- |
| Marblehead Sav. | -- | -- | -- | -- | -- |
| 320 | -- | -- | -- | -- |
1998 Tax Ct. Memo LEXIS 348">*404 If we were to accept petitioners' assertion that they maintained balances in the accounts at the five banks in the amounts and for the years shown above, we would agree with their contention that respondent's net worth statement should have included those bank balances as assets. It is unnecessary to make that finding, however, because even if it were true, it would not change respondent's computation of petitioners' taxable income for 1983 and 1985. The revised net worth statement attached hereto as Appendix B shows that inclusion of the above bank balances as assets would not cause any change in respondent's computation of taxable income for 1983 and 1985.
INCORRECT BANK BALANCES
Petitioners also complain that the balances included in respondent's net worth statement for accounts at three banks are wrong. First, petitioners complain that respondent's net worth statement includes a balance of $ 18,288.31 for petitioners' Shawmut County Bank account No. XXX-X4601, for the first time in 1984, whereas, in fact, the account was opened in 1977 with an initial deposit of $ 10,009.24. In effect, it appears that petitioners are complaining that their total assets are understated 1998 Tax Ct. Memo LEXIS 348">*405 by $ 10,009.24 from 1977 when the account was opened through 1983, the year before respondent included the account in the net worth computation.
Second, petitioners complain that the Provident Institution for Savings account which is included on respondent's net worth statement beginning in 1979, "had been opened in or prior to 1969 and had substantial balances prior to 1976." Respondent included this account on the net worth statement for the first time in 1979 with a balance of $ 8,168.06. Petitioners contend that they maintained balances in the account prior to that year. Essentially, petitioners complain that respondent's net worth statement understates their total assets by the amount that was in the Provident Institution for Savings account from 1976 through 1978, the year before respondent included the account in his net worth computation.
Third, petitioners complained at trial that respondent's net worth statement fails to include yearend balances that were on deposit in the Carmel Credit Union, account No. X7795, from 1976 through 1979. Respondent first included the Carmel Credit Union account in 1980 with a balance of $ 280.11. Petitioners contend that their total1998 Tax Ct. Memo LEXIS 348">*406 assets are understated by the amounts that were in the Carmel Credit Union account from 1976 through and including 1979. A check register from that account shows a balance in the account of $ 648 at the end of 1977, $ 727.25 at the end of 1978, and $ 25,105 at the end of 1979.
In the revised net worth statement attached hereto as Appendix B, we have adjusted respondent's net worth statement by including a balance of $ 10,009.24 in the Shawmut County Bank account for the years 1977 through 1983; by including a balance of $ 8,168.06 in the Provident Institute for Savings account for 1976 through 1978; and by including the yearend balances shown by the check register for the Carmel Credit Union account No. X7795 for 1977 through 1979. Appendix B demonstrates that, even if we accept petitioners' position that respondent's net worth statement is in error with respect to those balances, the errors have no effect on respondent's computation of petitioners' net worth or taxable income for 1983 and 1985.
CASH HOARD OBTAINED AS GIFTS FROM MR. LONDON'S MOTHER
Finally, petitioners argue that respondent's net worth statement is wrong because it fails to take into account a 1998 Tax Ct. Memo LEXIS 348">*407 cash hoard obtained as gifts from petitioner's mother, Mrs. Ida London. According to petitioners, Mrs. Ida London gave them cash from Treasury bonds and other securities, worth from $ 149,000 to $ 200,000, the proceeds from the sale in 1980 of Mrs. Ida London's property at 400 and 402 Broadway in the amount of $ 27,000, the proceeds from the sale in 1981 of Mrs. Ida London's home at Franklin Avenue in the amount of $ 28,000, Treasury bills and certificates of deposit in an amount from $ 100,000 to $ 200,000, and occasional cash gifts. Petitioners argue that respondent's "disregard of a possible cash hoard (bond proceeds and other property of Ida London) and disregard for the existence of a plausible explanation as to the informal transfer of parental property to their only child, only daughter-in- law, and grandchildren, indicates that the net worth statement is wrong and cannot retain its presumption of correctness in this case."
At the outset, we note that the record as to each of the assets that petitioner's mother allegedly gave to petitioners is vague as to the amount of the asset and the time that she allegedly transferred it to her son and his family. 1998 Tax Ct. Memo LEXIS 348">*408 For example, Mrs. London testified that her mother-in-law had "close to $ 200,000" in bonds whereas a list of the bonds that petitioner sought to introduce into evidence, totaled $ 162,050, according to respondent's agent, of which $ 12,450 had not been redeemed at the time of trial. On the other hand, petitioner proposed the following finding of fact which states that bonds totaling $ 180,500 were cashed prior to April 1980:
141. Agent Sullivan testified bonds were cashed prior to April, 1980 (Tr. 566) in the following amounts and years:
| 1971 | $ 500 |
| 1974 | 82,000 (82,700) |
| 1975 | 36,600 |
| 1976 | 5,500 |
| 1979 | 500 |
| 1980 | 54,700 |
There are also outstanding evidentiary issues, such as whether the list of bonds, referred to above, can be accepted into evidence as the past recollection recorded of Mrs. London under
Moreover, we are skeptical of petitioners' argument that Mrs. Ida London was able to accumulate such large sums of cash by her frugal lifestyle. First, the only source of Mrs. Ida London's income was London's Cafe, Inc., which did not report any taxable income in the 10 years from 1976 through 1985. Furthermore, the tax paid by petitioner's parents during the last 15 years of Mr. Isadore London's life shows that the couple earned very little income and Mrs. Ida London filed no tax return during the last 7 years of her life. Petitioner's parents did not file gift or estate tax returns during 1966 through 1994, and they left no probate estate. Furthermore, on February 11, 1981, when Mrs. Ida London sold her home on Franklin Avenue, she rented an apartment located in a subsidized housing project.
It is unnecessary to resolve the factual and evidentiary issues presented by petitioners' cash hoard defense because even accepting petitioners' assertion that Mrs. Ida London transferred her property to them, we would still hold for respondent. This is true because even if we were to accept petitioners' position that Mrs. Ida London transferred the subject assets to them, there is nothing in1998 Tax Ct. Memo LEXIS 348">*410 the record to establish that the net worth increases computed by respondent for 1983 and 1985 are in any way linked to any of those assets. For example, in the case of the bonds, the principal source of alleged gifts, petitioners ask the Court to find, based upon Agent Sullivan's testimony, that the bonds were cashed prior to April 1980. However, there is no testimony or other evidence concerning the manner in which this alleged sum was expended or indicating it has any relationship to the net worth increases in 1983 and 1985. See
WHETHER PETITIONERS FILED A JOINT RETURN FOR 1985
We disagree with petitioners' contention that they did not file a joint return for 1985, and, therefore, Mrs. London "cannot be held liable for any deficiency thereon." Petitioners' position is based solely upon the contention that she did not sign the 1985 return. However, it is clear that there can be a binding joint return even though one of the spouses fails to sign the return. E.g.,
ADDITIONS TO TAX FOR FRAUD
Respondent determined that petitioners are liable for the additions to tax for fraud under
Respondent bears the burden of proving by clear and convincing evidence: (1) That there is an underpayment of tax, and (2) that some part of this underpayment is due to fraud. Sec. 7454(a);
The existence of fraud is a question of fact to be resolved upon consideration of the entire record.
Courts have developed several indicia or "badges of fraud." These "badges of fraud" include: (1) Understating income; (2) maintaining inadequate records; (3) failing to file tax returns; (4) implausible or inconsistent explanations of behavior; (5) concealing income or assets; (6) failing to cooperate with tax authorities; (7) engaging in illegal activities; (8) an intent to mislead which may be inferred from a pattern of1998 Tax Ct. Memo LEXIS 348">*415 conduct; (9) lack of credibility of the taxpayer's testimony; (10) filing false documents; and (11) dealing in cash.
Mr. London concedes that his guilty plea to tax evasion in violation of section 7201 for 1985 estops him from denying liability for additions to tax for fraud under
Respondent contends that the following facts, when taken as a whole, establish that petitioners' underpayment of tax for 1983 and 1985 was attributable to fraud: (1) There is a large discrepancy between petitioners' actual income and the income reported on their returns for 1983 and 1985; (2) petitioners did not keep adequate books or records from which their tax liability could be computed; (3) Mr. London was engaged in illegal activities; (4) Mr. London attempted to conceal his illegal activities; (5) Mrs. London was actively involved in petitioners' finances; (6) Mr. London did not supply complete information about the check-cashing business' income and expenses to Mr. Trugman, the accountant who prepared the Schedule C for M.L. Associates; and (7) Mrs. London's explanations of her behavior are implausible or inconsistent.
We agree with respondent that several indicia of fraud are present with respect to Mr. London. In these cases, Mr. London failed to report income in the amounts of $ 311,974.34 for 1983 and $ 213,120.25 for 1985. These understatements represented1998 Tax Ct. Memo LEXIS 348">*417 approximately a 20-percent omission of income for 1983 and a 45-percent omission for 1985. Substantial understatements of income in successive years, when coupled with other circumstances showing an intent to conceal or misstate income, justify an inference of fraud.
Upon consideration of the entire record, we find that respondent has proven by clear and convincing evidence that Mr. London acted with the requisite fraudulent intent, and that the entire understatement of tax for 1983 and 1985 is due to Mr. London's fraud, as determined by respondent. Accordingly, we sustain respondent's determination that Mr. London is liable for the additions to tax for fraud under
We reach a different conclusion with respect to Mrs. London. In her case, we do not believe that respondent has proven by clear and convincing evidence that she intended to evade tax believed to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of such tax. See
ADDITIONS TO TAX UNDER
Respondent determined that petitioners are liable for the addition to tax for substantial understatement of liability under
Petitioners failed to address this issue at trial or in their posttrial briefs. They have shown no reason why they are not liable for the addition to tax. Accordingly, we sustain respondent's determination that petitioners are liable for the addition to tax for substantial understatement of liability under
INNOCENT SPOUSE RELIEF
Petitioners claim that Mrs. London is eligible to be relieved of liability for 1998 Tax Ct. Memo LEXIS 348">*421 the tax deficiencies and additions to tax for 1983 and 1985 under former section 6013(e). Following passage of section 6015 by the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3201(a), 112 Stat. 685, 734, the Court is deferring consideration of this issue until the parties have been given an opportunity to provide the Court with their positions concerning the effect of the new law.
To reflect the foregoing,
An appropriate order will be issued.
[SEE APPENDICES IN ORIGINAL]
1. An agreement to purchase the shares was signed by petitioners on 1/16/84.↩
2. Value as of 12/31/85.↩
1. Sold on 8/2/84.↩
2. Sold on 5/24/85.↩
1. Mrs. London made a $ 15,000 downpayment and financed the balance. Petitioners paid the balance due on Jan. 12, 1984.↩
2. Mr. London traded in his 1982 Mercedes, which had a trade-in value of $ 32,000, and he financed the balance by obtaining a loan from Broadway Natl. Bank for $ 20,000. Petitioners repaid the loan by Nov. 15, 1985.↩
1. These properties were sold for $ 61,000. Petitioner's mother paid $ 215.53 in taxes and $ 11,000 to discharge a mortgage on the property and she received the difference $ 49,784.47 ($ 61,000 - $ 11,215).↩
1. No Form W-2, Wage and Tax Statement, attached to 1979 return.↩
2. Dividend income after exclusion.↩
3. Rental income from 110 Chestnut St., the site of Heller's Cafe was reported on petitioners' Schedule E.↩
Helvering v. Mitchell , 58 S. Ct. 630 ( 1938 )
Estate of Temple v. Commissioner , 67 T.C. 143 ( 1976 )
Estate of Best v. Commissioner , 76 T.C. 122 ( 1981 )
United States v. Giordano , 94 S. Ct. 1820 ( 1974 )
United States v. Donovan , 97 S. Ct. 658 ( 1977 )
Pallottini v. Commissioner , 90 T.C. 498 ( 1988 )
united-states-v-steven-vento-in-74-1845-appeal-of-adrian-mastrangelo-in , 533 F.2d 838 ( 1976 )
United States v. Bobby M. Smith , 102 A.L.R. Fed. 627 ( 1989 )
United States v. Dearld Gene Davis, A/K/A "Doc" Davis, and ... , 780 F.2d 838 ( 1985 )
Constantine Thomas v. Commissioner of Internal Revenue , 232 F.2d 520 ( 1956 )
Charles J. Resha (84-5012), Jack Dickens (84-5015), Homer ... , 767 F.2d 285 ( 1985 )
John Fleming, as of the Estate of Robert W. Best v. United ... , 547 F.2d 872 ( 1977 )
Beaver v. Commissioner , 55 T.C. 85 ( 1970 )
Tokarski v. Commissioner , 87 T.C. 74 ( 1986 )
Charles H. Stubbs v. Commissioner of Internal Revenue ... , 797 F.2d 936 ( 1986 )
Stephenson v. Commissioner , 79 T.C. 995 ( 1982 )
Joseph R. Dileo, Mary A. Dileo, Walter E. Mycek, Jr., ... , 959 F.2d 16 ( 1992 )
United States v. Fred Campagnuolo, John Campagnuolo, and ... , 556 F.2d 1209 ( 1977 )
marion-d-griffin-and-madelyn-youngblood-simpkins-of-the-estate-of-john , 588 F.2d 521 ( 1979 )
Mitchell v. Commissioner of Internal Revenue , 118 F.2d 308 ( 1941 )