Bacon v. Commissioner
This text of 2000 T.C. Memo. 257 (Bacon v. Commissioner) is published on Counsel Stack Legal Research, covering United States Tax Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
MEMORANDUM FINDINGS OF FACT AND OPINION
RUWE, JUDGE: Respondent determined deficiencies in petitioners' Federal income taxes, an addition to tax, and penalties as follows:
Addition to Tax Penalties
_______________ ____________
Year Deficiency Sec. 6653(b)(1) 1 Sec. 6663(a)
____ __________ _______________ ____________
1988 $ 107,589 $ 83,609 ---
1989 70,297 --- $ 52,723
1990 147,326 --- 110,495
1991 77,606 --- 58,205
1992 13,927 --- 10,445
After concessions, 1 the issues for decision are: (1) Whether petitioners underreported their income for each *303 year in issue; (2) whether any part of an underpayment for each year in issue is due to fraud; and (3) whether assessment of the alleged deficiencies is barred by the statute of limitations.
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. Throughout this opinion, all amounts have been rounded to the nearest dollar.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. The petitioners, Robert G. Bacon (Mr. Bacon), and Barbara Bacon (Mrs. Bacon), are husband and wife. At the time they filed their petition in this case, they resided in Cinnaminson, New Jersey.
Mr. Bacon is a high school graduate. He briefly attended college as a part-time student where he completed courses in Accounting I and II. Mrs. Bacon is a college graduate.
In 1980, Mr. Bacon purchased a bar/restaurant called the Jug Handle Inn under the name of Radtam, Inc., a corporation (Radtam). Mr. Bacon was the sole *304 shareholder of Radtam during the years in issue. The primary source of income for the Jug Handle Inn during this time period was from the sale of food, beer, and liquor. The Jug Handle Inn also derived revenue from lottery sales.
Petitioners timely filed joint Federal income tax returns for each of the years in issue. Petitioners reported adjusted gross income on their Federal income tax returns for the years in issue as follows: 2
Adjusted
Year Gross Income
____ ____________
1988 $ 44,221
1989 90,840
1990 97,478
1991 99,117
_______
Total 331,656
During the years in issue, petitioner made deposits into their personal bank accounts in the following amounts: 3
Gross
Year Deposits
____ __________
1988 $ 843,032
1989 530,188
1990 1,285,386
1991 1,149,802
_________
Total 3,808,408
Some of these deposits were made in the form of cash. Some of these deposits came *305 from two of Radtam's bank accounts. 4 Cash deposits and deposits from the Radtam accounts that were made into petitioners' personal bank accounts for the years in issue were as follows:
Cash Deposits from
Deposits Radtam Accounts
________ _______________
1988 $ 64,372 $ 503,855
1989 41,202 293,313
1990 90,804 453,688
1991 394,311 227,543
________ _________
Total 590,689 1,478,399
During the years in issue, petitioners purchased seven parcels of real property in Mrs. Bacon's name as follows: 5
| Balance Paid | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| at Closing | Cash Paid | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase Date | Purchase Price | Net of Loans | at Closing 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1. 02/23/88 | 2*306 $ 412,000 | $ 3,167 | $ 3,167 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2. 03/04/88 | 3 585,000 | 285,000 | --- | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 3. 03/31/89 | (195,000) | Free access — add to your briefcase to read the full text and ask questions with AI ROBERT G. BACON AND BARBARA BACON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Bacon v. Commissioner No. 2993-97 T.C. Memo 2000-257; 2000 Tax Ct. Memo LEXIS 302; 80 T.C.M. (CCH) 219; T.C.M. (RIA) 54003; August 15, 2000, Filed John R. Crayton, for petitioners. Richard H. Gannon and Linda Love Vines, for respondent. Ruwe, Robert P. RUWE MEMORANDUM FINDINGS OF FACT AND OPINION RUWE, JUDGE: Respondent determined deficiencies in petitioners' Federal income taxes, an addition to tax, and penalties as follows: Addition to Tax Penalties _______________ ____________ Year Deficiency Sec. 6653(b)(1) 1 Sec. 6663(a) ____ __________ _______________ ____________ 1988 $ 107,589 $ 83,609 --- 1989 70,297 --- $ 52,723 1990 147,326 --- 110,495 1991 77,606 --- 58,205 1992 13,927 --- 10,445 After concessions, 1 the issues for decision are: (1) Whether petitioners underreported their income for each *303 year in issue; (2) whether any part of an underpayment for each year in issue is due to fraud; and (3) whether assessment of the alleged deficiencies is barred by the statute of limitations. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. Throughout this opinion, all amounts have been rounded to the nearest dollar. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. The petitioners, Robert G. Bacon (Mr. Bacon), and Barbara Bacon (Mrs. Bacon), are husband and wife. At the time they filed their petition in this case, they resided in Cinnaminson, New Jersey. Mr. Bacon is a high school graduate. He briefly attended college as a part-time student where he completed courses in Accounting I and II. Mrs. Bacon is a college graduate. In 1980, Mr. Bacon purchased a bar/restaurant called the Jug Handle Inn under the name of Radtam, Inc., a corporation (Radtam). Mr. Bacon was the sole *304 shareholder of Radtam during the years in issue. The primary source of income for the Jug Handle Inn during this time period was from the sale of food, beer, and liquor. The Jug Handle Inn also derived revenue from lottery sales. Petitioners timely filed joint Federal income tax returns for each of the years in issue. Petitioners reported adjusted gross income on their Federal income tax returns for the years in issue as follows: 2 Adjusted Year Gross Income ____ ____________ 1988 $ 44,221 1989 90,840 1990 97,478 1991 99,117 _______ Total 331,656 During the years in issue, petitioner made deposits into their personal bank accounts in the following amounts: 3 Gross Year Deposits ____ __________ 1988 $ 843,032 1989 530,188 1990 1,285,386 1991 1,149,802 _________ Total 3,808,408 Some of these deposits were made in the form of cash. Some of these deposits came *305 from two of Radtam's bank accounts. 4 Cash deposits and deposits from the Radtam accounts that were made into petitioners' personal bank accounts for the years in issue were as follows: Cash Deposits from Deposits Radtam Accounts ________ _______________ 1988 $ 64,372 $ 503,855 1989 41,202 293,313 1990 90,804 453,688 1991 394,311 227,543 ________ _________ Total 590,689 1,478,399 During the years in issue, petitioners purchased seven parcels of real property in Mrs. Bacon's name as follows: 5
On or about October 19, 1989, petitioners paid Collective Federal Savings Bank $ 10,657 to modify the terms of their loan agreement on property located at 218 E. 18th Street, North Beach Haven, New Jersey. Petitioners paid with a cashier's check, which was paid for with a check drawn on the Radtam lottery account at Security Savings & Loan. 6 During the taxable years in issue, petitioners made the following expenditures: Year Item Purchase Price ____ ____ ______________ 1990 Boston Whaler 1*308 $ 15,850 1990 Chrysler Voyager 1991 U.S. Savings Bonds ________ Total (37,350) On June 15, 1989, Mr. Bacon's cousin, Tadeusz Ras, purchased a residence. Of the total purchase price, $ 50,220 was paid in cash. A check in the amount of $ 16,600 was also part of the purchase money used to acquire the property. On June 15, 1989, $ 16,600 was withdrawn from Radtam's savings account at Chemical Bank. 7 On June 27, 1989, Tadeusz Ras executed a mortgage on his residence in favor of Mrs. Bacon for $ 64,000. Beginning on or before July 1989, petitioners prepared monthly summary sheets on behalf of Radtam, which purportedly listed total deposits into its bank accounts for the month, breaking down the total by category such as food, sales tax, beer, liquor, etc. These monthly summary sheets were furnished to petitioners' accountant who prepared Radtam's corporate tax returns. 8 In addition to the monthly summary sheets, each month petitioners provided their accountant *309 with corporate bank statements and a schedule of corporate disbursements. The bank statements furnished to the accountant reflected two of Radtam's accounts at Security Savings & Loan. However, Radtam also maintained a savings account at Chemical Bank 9 from July 1, 1988, through June 30, 1992. Before 1991, petitioners' accountant was not made aware that Radtam had a bank account with Chemical Bank. Sometime after 1991, and after the Internal Revenue Service (IRS) began its investigation, petitioners started providing their accountant with monthly summary sheets listing deposits into the Chemical Bank account. Radtam reported gross receipts and taxable income on its corporate income tax returns as follows: FYE FYE FYE FYE FYE 6/30/88 6/30/89 6/30/90 6/30/91 6/30/92 _______ _______ _______ _______ _______ Gross Receipts $ 453,734 $ 684,395 $ 868,601 $ 901,615 $ 803,517 Taxable Income 1 18,657 (616) 12,308 (242) 7,331 For purposes of preparing petitioners' Federal income tax returns, Mrs. Bacon prepared annual *310 summaries of personal income sources and expenses relating to petitioners' real properties, which she gave to their accountant. Mrs. Bacon also provided the accountant with Forms 1099 and settlement sheets from each real estate purchase. In 1991, Mr. Bacon purchased a bar/restaurant called the Whistler's Inn under the name Bradam, Inc. (Bradam). Mr. Bacon was the sole shareholder of Bradam in 1991. The primary source of income for Whistler's Inn was from the sale of food, beer, and liquor. On or about April 17, 1991, Bradam entered into an agreement to purchase a liquor license, restrictive covenant, and equipment relating to the Whistler's Inn. At settlement, Bradam applied a $ 50,000 cashier's check toward the purchase. The cashier's check was purchased with amounts withdrawn from Radtam's savings account. 10 On or about January 6, 1992, Mr. Bacon filed an application for a VISA card listing his occupation as tavern owner of Radtam Inc. t/a Jug Handle Inn and stating that his annual salary was $ 299,000. Mr. Bacon reported no salary, wages, or dividends from Radtam on his income tax returns for the years in issue. On July 14, 1992, both petitioners met with and *311 were interviewed by two special agents from the IRS. During this interview, Mr. Bacon told the agents that petitioners and their children had received extensive cash gifts from Mr. Bacon's grandfather in $ 10,000 cash increments. According to Mr. Bacon, he received a $ 10,000 cash gift each year since his 18th birthday, his wife received an annual $ 10,000 cash gift since they have been married, and their children each received an annual $ 10,000 cash gift since their birth. Mr. Bacon told respondent's agents that the gifts were from his grandfather and were received through a brother-in-law and that neither petitioners nor their children had ever met their grandfather. Mr. Bacon told the agents that he was told never to tell anyone about the gifts and never to put the money in a bank. Mr. Bacon told the special agents that he may have had as much as $ 650,000 cash on hand at the beginning of 1988. At trial, petitioners stipulated that at the beginning of 1988, they had approximately $ 35,000 cash on hand. During the years in issue, petitioners did not receive any gifts, inheritances, legacies, or devises. OPINION Respondent determined deficiencies for the years *312 in issue by using the bank deposit method. Bank deposits are prima facie evidence of income. See Using the bank deposit method, respondent determined in the notice of deficiency that petitioners understated their income for the years 1988 through 1991 in the following amounts: 1*313 1988 ____ ____ ____ ____ $ 362,461 $ 226,693 $ 500,851 $ 236,417 The parties have stipulated that if a bank deposit analysis is to be used, then the following adjustments must be made to respondent's bank deposit analysis in the notice of deficiency: 12 1988 1989 1990 1991 ____ ____ ____ ____ Mathematical errors: --- $ 71,907 $ 78,361 $ 368,032 Less reductions for nontaxable items & credits: 1 (284,603) (150,922) (268,424) (434,422) Plus cash expendi- tures debits: _________ _______ _________ ________ Net adjustments to statutory notice: (252,136) 94,974 (140,101) 8,997 Respondent has submitted *314 schedules with his brief that show petitioners' unreported income for the years in issue is as follows:
With the *316 exceptions noted below (see infra notes 13, 14, and 15), respondent's final bank deposits analysis, as adjusted pursuant to the parties' stipulations, is supported by the facts. On the basis of stipulated facts and evidence admitted at trial, we find that petitioners had unreported income of $ 102,748 13*317 in 1988, $ 320,661 Petitioners argue that respondent's bank deposit method is fundamentally flawed. Admittedly, there have been a significant number of adjustments to respondent's bank deposit analysis, and the computations involve considerable detail. Nevertheless, the facts in the record, most of which were stipulated, support respondent's final computations as adjusted. Indeed, on brief, petitioners focus their factual dispute on only four specific matters in the bank deposit analysis. We address each of the specific factual matters that petitioners dispute. Petitioners assert that respondent should reduce their 1988 unreported taxable income under the bank deposit analysis by $ 35,000. According to petitioners, the adjustment is necessary because they had $ 35,000 cash on hand at the beginning of the year. An adjustment to respondent's bank deposit analysis would be appropriate if petitioners had less than $ 35,000 at the end of *318 the year. If petitioners started with $ 35,000 cash at the beginning of the year but had less than $ 35,000 at the end of the year, then the difference could have been nontaxable source of deposits to petitioners' bank accounts or a nontaxable source of cash expenditures by petitioners. However, Mr. Bacon testified that he kept substantial amounts of cash on hand at all times during the years in issue. Indeed, petitioners prepared a loan application dated March 8, 1990, which reflected $ 35,000 cash on hand. There is no credible evidence that petitioners' cash on hand was less than $ 35,000 at the end of any of the years in issue. On the basis of the record, we cannot conclude that an adjustment to respondent's bank deposit analysis is justified for cash on hand. Respondent increased petitioners' 1989 unreported income under the bank deposit analysis by $ 64,000 due to an alleged transfer from Mrs. Bacon to Tadeusz Ras (Mr. Ras). Petitioners argue that the alleged transfer should be eliminated from the bank deposit analysis, since no transfer ever took place. Mr. Ras is Mr. Bacon's cousin and has been continuously employed by Radtam since 1991. When Mr. Ras started *319 working for Mr. Bacon in 1991, he was paid approximately $ 5 to $ 6 per hour. Mr. Ras cared for Mr. Bacon's grandmother before he was employed by Radtam. On June 15, 1989, Mr. Ras purchased a house. According to the settlement statement, Mr. Ras owed the seller $ 108,213 and satisfied this obligation with $ 50,220 in cash and paid the remainder with a number of checks. One of the checks used to purchase the house was in the amount of $ 16,600. On the day of Mr. Ras' purchase, the sum of $ 16,600 was withdrawn from Radtam's savings account at Chemical Bank. 16 On June 27, 1989, Mr. Ras executed a mortgage on his residence in favor of Mrs. Bacon in the amount of $ 64,000. Mr. Ras testified that his grandmother, not Mrs. Bacon, provided him with the money to purchase the house. When he was asked how his grandmother managed to accumulate $ 50,220 in cash, Mr. Ras was unable to provide an answer. When he was asked who issued the checks for the remainder of the purchase price, Mr. Ras could not provide a definite answer, nor could he deny that Mr. Bacon provided him with some of the checks. When he was asked why he signed a $ 64,000 mortgage in favor of Mrs. Bacon *320 if she had not lent him the money, Mr. Ras said that Mr. Bacon told him to sign and that he would sign anything that Mr. Bacon gave him. We do not find Mr. Ras' explanation to be credible. On the basis of the facts, we find that petitioners provided Mr. Ras with $ 64,000 and that he in turn executed a mortgage on the house in the amount of $ 64,000. Petitioners argue that respondent should reduce their unreported taxable income under the bank deposit analysis by $ 9,000 for 1988 and $ 4,000 for 1990. According to petitioners, they issued checks totaling $ 13,000 to make deposits on unconsummated real estate transactions. This resulted, according to petitioners, in the return of $ 13,000 of nontaxable funds that were either redeposited or cashed. Petitioners have not established that these transactions ever took place or that the amounts in question were returned to them. No adjustment to respondent's bank deposit analysis is necessary for this item. Petitioners argue that respondent should reduce their unreported taxable income under the bank deposit analysis by $ 319,109. Petitioners allege that such an adjustment is necessary because *321 in 1989 Radtam owed Mrs. Bacon $ 319,109. Petitioners argue that, to the extent that the bank deposit analysis indicates the underreporting of income from Radtam, petitioners should be given credit for $ 319,109 as being for the repayment of previous loans from Mrs. Bacon. Respondent argues that petitioners have not substantiated that Radtam owed Mrs. Bacon $ 319,109 in 1989. To support petitioners' contention, petitioners rely on Radtam's Federal income tax return for the fiscal year ended June 30, 1989. Page four of the income tax return included a balance sheet which listed "Mortgages, notes, bonds payable in less than 1 year" (notes payable) of $ 319,109. The income tax return does not identify the persons or entities to whom Radtam owed $ 319,109. Petitioners' C.P.A., Jerome Collins, prepared the June 30, 1989, Federal income tax return. 17 The income tax return was filed in March of 1991. Mr. Collins testified that he did not ask either Mr. Bacon or Mrs. Bacon whether the $ 319,109 entry on the June 30, 1989, balance sheet was a loan payable to Mrs. Bacon. Furthermore, *322 Mr. Collins testified that he did not see any documents that would indicate that the corporation owed Mrs. Bacon $ 319,109. 18 Petitioners did not provide corporate minutes, loan documents, promissory notes, mortgage documents, or other documents that would substantiate their assertion. Mr. O'Malley, petitioners' new C.P.A., testified that he does not know how Mr. Collins arrived at the loan payable figures that appeared on Radtam's Federal income tax return for the fiscal year ending June 30, 1989. Mr. O'Malley also testified that he could not obtain any information about the loans payable account. Radtam's Federal income tax returns for the fiscal years ending 1990, 1991, and 1992, were all filed in June of 1996. 19*324 None of those income tax returns contained any balance sheet information. The evidence does not support petitioners' assertion that Radtam owed Mrs. Bacon $ 319,109 in 1989, and we do not believe petitioners' assertion in this regard. Thus, we find that the bank deposit analysis does not have to be adjusted for this item. The next issue is whether any part of the underpayment of income tax for each year in issue is due to fraud. Respondent's notice of deficiency determined that petitioners *325 are liable for the addition to tax for fraud imposed under section 6653(b)(1) 21*326 for the taxable year 1988 and penalties under section 6663(a) Respondent has the burden of proving by clear and convincing evidence that an underpayment exists for the years in issue and that some portion of the underpayment is due to fraud. See sec. 7454(a); Rule 142(b); Respondent need not prove the precise amount of the underpayment resulting from fraud but only that some portion of the underpayment of tax for each year is due to fraud. See Where allegations of fraud are intertwined with unreported and indirectly reconstructed income, respondent is required to establish a likely taxable source for alleged unreported income or to disprove nontaxable sources alleged *327 by the taxpayer. See The evidence clearly establishes that the Jug Handle Inn was a likely source of unreported income. The evidence also establishes that petitioners had no nontaxable sources that could account for the unreported income. Mr. Bacon originally claimed to have had $ 650,000 in nontaxable cash gifts on hand at the beginning of 1988, which would have been a potential nontaxable source. However, at trial petitioners stipulated that they only had $ 35,000 cash on hand at the beginning of 1988. Petitioners stipulated that they did not receive any gifts, inheritances, legacies, or devises. Respondent's final bank deposit analysis is based primarily on stipulated facts. The record contains clear and convincing affirmative evidence that petitioners underpaid their 1988, 1989, 1990, and 1991 Federal income taxes. Respondent must prove that a portion of the underpayment is attributable to the fraudulent intent of petitioners. Fraud is the intentional wrongdoing motivated by a specific purpose to evade a tax known or believed to be owing. See Fraudulent intent can seldom be established by a single act or by direct proof of the taxpayer's intention. It is usually found by surveying the taxpayer's whole course of conduct and is to be proven as any other fact from all the evidence of record and reasonable inferences properly to be drawn therefrom. See The courts have relied upon a number of indicia of fraud in deciding whether an underpayment of tax is due to fraud. While no single factor is necessarily sufficient to establish fraud, the existence of several indicia is persuasive circumstantial evidence of fraud. See Respondent argues that the following factors or "badges" of fraud are present in this case: (1) A substantial and *329 consistent understatement of income; (2) false statements made by petitioners during their interview with respondent's agents; (3) extensive dealings in cash; (4) failure to maintain adequate records; and (5) failure to furnish their return preparer with accurate information. 1. SUBSTANTIAL AND CONSISTENT UNDERSTATEMENT OF INCOMEThe consistent failure to report substantial amounts of income over a number of years, standing alone, is effective evidence of fraudulent intent. See 2. FALSE STATEMENTSRespondent argues that false statements made at the time petitioners were interviewed by respondent's agents are evidence of fraudulent intent. The Supreme Court has stated that an "affirmative willful attempt may be inferred from * * * any conduct, the likely effect of which would be to mislead or to conceal." When petitioners first met with respondent's special agents regarding the years in question, Mr. Bacon told them that petitioners and their children had received extensive cash gifts from Mr. Bacon's grandfather in $ 10,000 cash increments. According to Mr. Bacon, he received a $ 10,000 cash gift each year since his 18th birthday, his wife received an annual $ 10,000 cash gift since they have been married, and their children each received an annual $ 10,000 cash gift since their birth. Mr. Bacon told respondent's agents that he received the cash gifts through a brother-in-law, that neither petitioners nor their children had ever met their grandfather, that they were told never to tell anyone about the gifts, and that they were never to put the money in the bank. Mr. Bacon told the agents that petitioners had as much as $ 650,000 cash on hand at the beginning of 1988. Mr. Bacon's statement about cash on hand was false. Petitioners stipulated that at the beginning of 1988, they had approximately $ 35,000 cash on hand. Had Mr. Bacon's statements about cash on hand at the *331 beginning of 1988 been true, petitioners would have had a nontaxable source from which to make deposits during the years in issue. We can conceive of no reason for such a false statement other than to mislead the agents. We find that Mr. Bacon's statements about cash on hand during this interview were intended to mislead the agents. 3. EXTENSIVE DEALINGS IN CASHDealing in cash to avoid scrutiny of one's finances is a badge of fraud. See Petitioners' extensive use of cash supports a reasonable inference that petitioners were knowingly and willfully attempting to understate their taxable income. 4. FAILURE TO MAINTAIN ADEQUATE RECORDSTaxpayers are required *332 to keep such records as are necessary for the determination of tax. See sec. 6001. The failure to keep adequate records is a badge of fraud. See During the years in issue, petitioners transferred $ 1,478,399 from two Radtam accounts into their personal bank accounts. Despite the significant transfers between Radtam's accounts and personal accounts, petitioners appear to have maintained no records of these transactions. Rather, they argue that they were unaware of the accounting problems being created and that they lacked the technical ability to keep corporate books or prepare tax returns. Petitioners also deposited $ 590,689 in cash into their personal bank accounts. At trial, Mr. Bacon testified he did not know the source of these significant cash deposits. While Mr. Bacon testified that he was unaware of the problems created by commingling funds, his testimony is self-serving, and we do not find him to be credible. Mr. Bacon appears to us to be an astute businessman and investor. It would have required relatively little, if any, technical ability to maintain, or hire a bookkeeper to maintain, a record of transfers between corporate and individual *333 accounts or records of the source of petitioners' substantial cash deposits to their personal accounts. Mrs. Bacon also had a working knowledge of Radtam's books and records. Mrs. Bacon testified about the "settling" of daily cash register receipts and the recording of Radtam's income during the years in issue. Mrs. Bacon prepared disbursement summaries from Radtam's account at Security Savings & Loan, which were furnished to petitioners' accountant. While Mr. Bacon handled most of the deposits, Mrs. Bacon handled some deposits and testified that she may have handled some large cash deposits. 5. FAILURE TO FURNISH THEIR TAX RETURN PREPARER WITHACCURATE INFORMATION The duty of filing accurate returns cannot be avoided by placing responsibility upon an agent. See Beginning on or before July 1989, petitioners prepared a monthly summary sheet on behalf of Radtam, which purportedly listed total deposits into its bank accounts for that month. These monthly summary sheets were furnished to petitioners' accountant who prepared Radtam's corporate tax returns. 24 In addition to *334 the monthly summary sheets, each month petitioners provided their accountant with corporate bank statements and a schedule of corporate disbursements. The bank statements provided to petitioners' accountant were primarily for two accounts at Security Savings & Loan. Yet Radtam maintained a savings account at Chemical Bank 25 from July 1, 1988, through June 30, 1992. It was not until after the commencement of the examination by respondent that petitioners' accountant learned that Radtam had a savings account with Chemical Bank. Mrs. Bacon prepared annual summaries of personal income sources and expenses relating to petitioners' real estate, which she gave to their accountant. Mrs. Bacon also provided the accountant with Forms 1099 and settlement sheets from each real estate purchase. During the years in issue, petitioners transferred $ 1,478,399 from two Radtam accounts and deposited $ 590,689 in cash into their personal accounts. Despite the significant deposits into petitioners' personal accounts, Mrs. Bacon did not disclose these *335 deposits or provide personal bank statements to their accountant. On or about January 6, 1992, Mr. Bacon filed an application for a VISA card listing his occupation as tavern owner of Radtam Inc. t/a Jug Handle Inn and listed his annual salary as $ 299,000. However, Mr. Bacon never reported receiving any salary or dividends from Radtam on his individual Federal income tax returns. 26 After considering the entire record, we hold that respondent has met his burden of proving that some portion of petitioners' underpayment for each year in issue is attributable to *336 fraud on the part of both Mr. and Mrs. Bacon. III. Statute of Limitations Section 6501(a) provides, generally, for a 3-year period of limitations. However, in the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time. See sec. 6501(c)(1). Where a joint Federal income tax return was filed, a finding that fraud was committed by either spouse keeps the period of limitations on assessment open with respect to both spouses. See Since we have already found that the returns for the years in issue were fraudulent, it follows that the exception found in section 6501(c)(1) applies, and the assessment of taxes for the years in issue is not barred. After concessions by respondent, Decision will be entered under Rule 155. APPENDIX A INCOME REPORTED ON TAX RETURNS BY YEAR 1988 1989 1990 1991 ______ ______ ______ ______ Wage/salary 1*338 $ 3,196 $ 3,008 $ 2,840 $ 3,003 Interest income 3,286 4,631 9,426 21,522 Dividend income *337 1,357 1,123 1,170 1,202 Sch. D income 1,088 -0- -0- -0- Pension/annuities 4,060 4,263 4,263 4,263 Social Security 5,094 4,710 5,544 5,850 Rents IRA deduction (2,000) (2,000) (2,250) (2,000) Adjusted gross income 44,221 90,840 97,478 99,117 APPENDIX B DEPOSITS MADE TO PERSONAL BANK ACCOUNTS Bank Account 1988 1989 1990 1991 ____________ ____ ____ ____ ____ Energy People Federal Credit Union 1 $ 5,000 --- --- --- Savings account No. XXXX5-004 Barnett Bank Checking account No. XXXXXX4397 16,316 $ 27,523 $ 125,640 $ 59,702 Horizon Bank n Security Savings & Loan Checking account No. XX-XXXX019-1 182,947 142,400 219,001 343,915 Passbook account No. XX-XXX6720 89,748 --- 15,575 6,400 First Fidelity Bank Money Market account No. XXXXXX6161 278,347 32,867 176,807 63,395 Chemical Bank Savings account No. XXX-XX3-349 --- 76,051 57,137 13,802 Collective Federal Bank Savings account No. XX-X-XX0909 --- 512 18,922 7,119 Money Market account No. XXXXXX7650 --- --- 277,265 24,719 Certificates of Deposit account No. XXXXXX6406 --- --- --- 97,000 Certificates *339 of Deposit account No. XXXXXX0714 --- --- --- 96,000 account No.XXXXXX0659 --- --- --- 97,000 ________ _______ _________ _________ Total Gross Deposits: 843,032 530,188 1,285,386 1,149,802 APPENDIX C Property Payments Terms and Payments Made ________ ________________________________ 1. 211 E. 17th Street, The contract sales price was $ 412,000 Long Beach Township, and the gross amount due from Mrs. New Jersey -- Bacon was $ 415,167. To finance the Purchased 2/23/88 purchase, Mrs. Bacon paid $ 3,167 in cash, assumed a $ 287,069 1 first mortgage on the property, and secured a $ 124,931 second mortgage on the property. During 1988, petitioners paid down the $ 287,070 first mortgage by $ 283,310. The payments *340 were made over an 8-month period of time, consisted of five payments, personal bank accounts. The $ 124,931 second mortgage required a single payment of $ 124,931 in 1 year. n 2. Lots 7, 8, 13, and Mrs. Bacon put down 10 percent or 14, Block 304, Marco $ 58,500 as a deposit, executed a Beach Unit 9 located $ 300,000 promissory note secured by a in Collier County, mortgage on the property, and paid the Florida. -- balance on or before the closing. n 3. 212 West Broad St., The contract sale price was $ 195,000. and Palmyra, New Jersey, At closing, $ 197,017, consisting of Purchased 3/31/89 $ 74,285 in cash and three checks totaling $ 122,732, was deposited with the settlement agent. The individual check amounts are: $ 82,000, $ 21,000, and $ 19,732. The source of funds, in part, for the $ 82,000 check was obtained in the form of cash withdrawals from Radtam's general and lottery accounts at the Security Savings & Loan. Additionally, $ 21,000 was withdrawn from Radtam's *341 savings account at Chemical Bank used to purchase a cashier's check, which was used to pay a portion of the purchase price. 4. Lot 26, Block 388, The property was purchased with $ 25,000 Unit 12, located in in personal funds and a $ 400,000 Collier County, purchase money mortgage was incurred. Florida -- Purchased 6/18/90 5. Lot 4, Block 304, The purchase price was $ 530,000 and the Unit 9, located in total amount due from buyer was Collier County, $ 533,896. At closing, Mrs. Bacon Florida -- provided $ 152,285, and the principal Purchased 6/29/90 amount of the new loan was $ 380,000. 6. 610 South Reed St., The property was paid for with $ 10,000 Cinnaminson, New Jersey, in cash, $ 1,592 in coin, and five Purchased 7/2/90 checks totaling $ 120,000. Mr. Bacon, as president of Radtam, Inc., was the source of the $ 11,592 in cash and coin. The source of the five checks are as follows: First, a check for $ 55,000 was purchased with $ 17,000 in funds withdrawn from the Radtam 600 account, $ 28,000 in funds withdrawn from petitioners' *342 personal savings account maintained at the same institution, 6 and a $ 10,000 check drawn on petitioners' personal checking account at the same institution. Second, $ 35,000 of the purchase price was paid by check drawn on petitioners' personal checking account at Barnett Bank. Third, $ 5,000 of the purchase price was paid by check drawn on petitioners' personal checking account at First Fidelity Bank. Fourth, a $ 20,000 check purchased from Security Savings & Loan, in part with $ 19,000 in cash tendered to the bank by petitioners on July 2, 1990, and a $ 5,000 check, drawn on the account of Thomas Begley, Jr., Esq., from funds deposited in the same account earlier in the year. 7. 407 North Canal St., Mrs. Bacon deposited $ 35,528 at Cinnaminson, New Jersey, closing for the property. The deposit Purchased 10/18/90 consisted of $ 5,528 in cash and a check for $ 30,000. The $ 30,000 7*344 cashier's check was purchased with a check drawn on petitioners' *343 Chemical Bank account. 8 APPENDIX D Bank deposits to personal accounts: Bank Account Number Deposit ____ ______________ _______ Energy People Federal Credit Union XXXX5-004 $ 5,000 Barnett Bank XXXXXX4397 16,316 Chemical Bank XXXXX140-3 239,218 Security Savings & Loan XX-XXXX019-1 182,947 & Loan XX-XXX6720 89,748 First Fidelity XXXXXX6161 278,347 Total gross deposits 811,576 Less: a. Redeposited items, transfers, checks to cash (221,947) b. Nontaxable items (5,094) c. Repayment to corporation (73,000) Equals: Net deposits 511,535 a. Wages/salary per return (3,196) b. Interest income per return (3,286) c. Dividend income per return (1,357) d. Schedule D per *345 return (1,088) e. Pension/annuities (4,060) f. Social Security (tax) (5,094) g. Rents (gross) (136,000) Equals: Total deposits in excess of reported 357,454 income Plus: a. Corporate checks written for personal benefit of taxpayers 5,007 Equals: Unreported income for 1988 362,461 APPENDIX E Bank Account Number Deposit ____ ______________ _______ Federal Credit Union XXXX5-004 --- Barnett Bank XXXXXX4397 $ 27,523 Chemical Bank XXXXX140-3 250,835 & Loan XX-XXXX019-1 142,400 & Loan XX-XXX6720 72,000 First Fidelity XXXXXX6161 27,867 Chemical Bank XXX-XX3-349 76,051 Collective Federal XX-X-XX0909 512 Total bank deposits - 1989 597,188 Cash *346 expenditures: a. Note receivable (Ras) 64,000 b. Purchase 212 W. Broad Street (3/31/89) 74,285 Rental income checks paid by Radtam, Inc. to taxpayer and not deposited into taxpayer's bank accounts used in above analysis. 41,000 Rental income checks paid to taxpayer by managing agent(s) of taxpayer's Marco Island, FL rental properties and not deposited into taxpayers' bank accounts used in above analysis. Agent: Horizon by Sea 3,250 Total gross income - 1989 779,723 Less nontaxable deposits/items: a. Paybacks to corp. from personal account (55,925) b. Social Security benefits (nontaxable) (4,710) c. Transfer between accounts (173,000) Receipts per return: a. Wages/salary per return (4,631) b. Interest income per return (3,008) c. Dividend income per return (1,123) d. Pension/annuities (4,263) e. Social Security (tax) (4,710) f. Rents (gross) (232,000) Equals: Total nontaxable deposits/items *347 (483,370) Total gross income unreported 296,353 Taxable income per return (71,907) Total income unreported 224,446 Personal items paid by corporation 2,247 Total unreported income - 1989 226,693 APPENDIX F Bank Account Number Deposit ____ ______________ _______ Federal Credit Union XXXX5-004 --- Barnett Bank XXXXXX4397 $ 125,640 Chemical Bank XXXXX140-3 395,039 & Loan XX-XXXX019-1 219,001 & Loan XX-XXX6720 15,575 First Fidelity XXXXXX6161 176,807 Chemical Bank XXX-XX3-349 57,137 Collective Federal XX-X-XX0909 18,922 Barnett Bank XXXXXX7650 277,265 Total bank deposits - 1990 1,285,386 Cash expenditures: a. Purchase 10/18/90 - 407 Canal Street 5,258 b. Purchase 7/2/90 - 610 Reed Street 11,592 c. Purchase 6/18/90 *348 - Lot 26 B 388 Unit 12 25,000 d. 1990 Plymouth Voyager 1 Rental income checks paid by Radtam, Inc., to taxpayer and not deposited into taxpayer's bank accounts used in above analysis. 44,000 Rental income checks paid to taxpayer by managing agent of taxpayer's Marco Island, FL rental properties and not deposited into taxpayer's bank accounts used in above analysi. Agents: Harborview Realty, Inc. 1,000 Horizon by Sea Realty 8,809 agent of taxpayer's New Jersey rental properties and not deposited into taxpayer's bank accounts used in analysis. Agents: Van Dyk Group, Inc. 3,080 Newbern Realty 9,774 Rental income checks paid to taxpayer directly by tenants for rental of Marco Island or New Jersey properties and not deposited into taxpayer's bank accounts used in above analysis. 16,761 Total gross income 1990 1,433,010 a. Transfer between accounts (487,811) b. Social Security benefits (nontaxable) (5,544) c. Check to cash 611 account *349 00506140 (30,000) a. Wages/salary per return (2,840) b. Interest income per return (9,426) c. Dividend income per return (1,170) d. Social Security (tax) (5,544) e. Rents (Gross) (311,700) f. Pension/annuities (4,263) Equals: Total nontaxable deposit/items (858,298) Total gross income unreported 574,712 Taxable income per return (73,861) Total income unreported - 1990 500,851 APPENDIX G Federal Credit Union XXXX5-004 Barnett Bank XXXXXX4397 $ 59,702 Chemical Bank XXXXX140-3 340,750 & Loan XX-XXXX019-1 343,915 & Loan XX-XXX6720 6,400 First Fidelity XXXXXX6161 63,395 Chemical Bank XXX-XX3-349 13,802 Collective Federal XX-X-XX0909*350 7,119 Barnett Bank XXXXXX7650 24,719 Barnett Bank C.D. XXXXXX0659 97,000 Total bank deposit - 1991 1,149,802 a. Purchase 3 Savings Bonds at face value of $ 10,000 15,000 accounts used in above analysis. 56,000 agent(s) of taxpayer's Marco Island, FL rental accounts used in above analysis. Agent(s): Horizon By Sea Inc. 9,951 used in above analysis. Agent(s): Bayshore Realty 3,816 Newbern Realty 13,710 taxpayer's *351 bank accounts used in above analysis. 31,790 Total gross income 1,280,069 a. Paybacks to corp. from personal account (87,500) b. Social Security benefits (nontaxable) (5,850) c. Transfer between accounts (177,500) a. Wages/salary per return (3,003) b. Interest income per return 21,522) c. Dividend income per return (1,202) d. Pension/annuities (4,263) e. Social Security (tax) (5,850) f. Rents (gross) (368,930) g. Barnett CD (3) (290,000) Equals: Total nontaxable deposit/items (965,620) Total gross income unreported 314,449 Taxable income per return (78,032) Total income unreported - 1991 236,417 APPENDIX H 1988 1989 1990 1991 ____ ____ ____ ____ Mathematical errors: Reported taxable income allowed twice --- 71,907 73,861 78,032 CD purchases *352 deducted as reported receipts --- --- --- 290,000 Transfer 1*355 included as $ 5,000.10. Should be $ 500.10 --- --- 4,500 --- Distributive share Radtam "S" Corp. income reported and included in deposits from corp. (38,341) --- --- --- Salary withholding - gross is taxable but only net was deposited 440 326 292 301 Transfers used to purchase CD's not in statutory notice --- --- --- (214,500) Transfers between accounts - not in statutory notice of deficiency: To First Fidelity 2 Bank --- --- (25,000) --- To Barnett 3 Bank --- --- (85,000) --- To Barnett 4 Bank --- --- (50,000) --- To Chemical 5 Bank --- --- --- (22,000) To Chemical 6 Bank from Commerce Bank --- --- --- (17,000) To Chemical 7 Bank --- --- --- (26,000) To Chemical 8 Bank --- --- --- (8,255) Refund of advance to Radtam --- (5,425) --- --- Corp. funds used to purchase 610 S. Reed --- --- 17,000 --- Radtam funds 9 used to pay King Mortgage on personal real estate --- *353 64,000 --- --- Cash expenditure/Lot 26 B 388 Unit 12 --- --- (25,000) --- Specific rental income checks deposited to corporate bank accounts - added separately in statutory notice of deficiency --- (44,250) (83,424) (115,267) Additional identified paybacks to corporations: Chemical 10 Bank (10,000) --- --- --- Chemical 11 Bank (10,000) --- --- --- Barnett 12 Bank (100) --- --- --- Barnett 13 Bank (100) --- --- --- Barnett Chemical Barnett 16 Bank --- --- --- (2,400) Deposits from bank statements originally missing: Chemical17 2/17/88 deposit 20,000 --- --- --- 2/22/88 deposit 339 --- --- --- Radtam withdrawals 11,118 --- --- --- First Fidelity18 Bank --- 5,000 --- --- Insurance claim - nondeposit refund - 4/29/92 property settlement refund 9/30/91 Cinnaminson Sewer Authority --- --- --- (14,000) Corporate withdrawal 2/1/91 used to purchase $68,000 cashier’s check.19 (Cashier’s check from personal account included as transfer in statutory notice) --- --- --- 25,000 Corporate *354 funds - purchase for Bradtam --- --- --- 50,000 Check No. 611 to cash - to Boatworks for purchase 407 Canal Street given as cash withdrawal in statutory notice. --- --- 30,000 --- Savings bond purchases not with cash. --- --- --- (15,000) Radtam check - points to refinance personal mortgage. --- 10,657 --- --- Interest income Commerce Bank - not in deposits --- --- 135 86 Interest income, Security Savings & Loan Interest income, Energy People Federal Credit Union 135 --- --- --- Deposits to Security Savings & Loan --- (72,000) --- --- Corporate checks used to purchase cashier’s check at Security Savings & Loan21*356 for purchase of 212 W. Broad Street Property --- 72,000 --- --- Proceeds mortgage refinance - deposit to Radtam savings account (2/29/88) (179,722) --- --- --- Personal funds deposited to corporate bank account on 2/1/88 (46,340) --- --- --- Corporate funds used to purchase 212 W. Broad (3/31/89) --- 21,000 --- --- Personal items paid by corporation: Per statutory notice --- (2,247) --- --- Corrections to statutory notice --- 860 Net adjustments to statutory notice (252,136) 94,974 (140,101) 8,997 APPENDIX I ____ _____________ _______ Energy People Federal Credit Union XXXX5-004 $ 5,000 Chemical Bank XXXXX140-3 270,674 First Fidelity XXXXXX6161 278,347 Total gross deposits 843,032 Per statutory notice to cash (221,947) Additional repayments to corporation (22,200) Proceeds of personal mortgage deposited in corporate account (179,722) Repayment of loan to petitioners deposited in corporate account *357 (46,339) Reduction to income - Subchapter S income (38,341) Equals: Net deposits 256,389 a. Wages/salary per return (3,196) d. Schedule D per return (1,088) __________ Equals: Gross income per tax return (154,081) Difference between gross salary and actual salary deposited 440 Plus corporate expenditures on petitioners' behalf 5,007 Total unreported income from bank deposits 107,755 APPENDIX J Bank Account Number Deposit ____ ______________ _______ Credit Union XXXX5-004 Barnett Bank XXXXXX4397 $ 27,523 Chemical Bank XXXXX140-3 250,835 & *358 Loan 23-8351019-1 1 142,400 & Loan XX-XXX6720 First Fidelity XXXXXX6161 32,867 Collective Federal XX-X-XX0909 512 Total bank deposits 530,188 a. Notes receivable (Ras) 64,000 c. Radtam check - Points paid to refinance personal mortgage 10,657 d. Corporate funds 2 used to purchase 212 West Broad Street 93,000 e. Corporate funds used to pay mortgage on 211 East 17th 64,000 3 305,942 bank accounts used in above analysis. 41,000 Fl., rental properties and not deposited into Agent: Horizon by Sea 3,250 *359 _______ Total gross income 880,380 Less nontaxable deposits/items per statutory notice: a. Paybacks to corp. from personal account (55,925) b. Social Security benefits (nontaxable) (4,710) c. Transfer between accounts (173,000) Additional repayments and transfers: a. Refund of advance to Radtam (5,425) b. Personal rental income deposited to corporate accounts (44,250) c. Additional paybacks to corporation (27,000) ___________ Total reductions to bank deposits (310,310) a. Wages/salary per return (4,631) b. Interest income per return (3,008) c. Dividend income per return (1,123) e. Social Security (tax) (4,710) f. Rents (gross) (232,000) Equals: Gross receipts per return (249,735) actual salary deposited 326 Plus personal items paid by corporation 860 Total unreported income from *360 bank deposits: 4 321,521 APPENDIX K Federal Credit Union XXXX5-004 --- & Loan XX-XXX6720 15,575 Collective Federal *361 XX-X-XX0909 18,922 Barnett Bank 1679177650 277,265 Total bank deposits - 1990 1,285,386 a. Purchase 10/18/90 407 Canal Street 5,258 b. Purchase 7/2/90 610 Reed Street 47,592 c. 1990 Plymouth Voyager 10/9 6,500 d. Boston Whaler boat 7/26 15,8501 Gross income deposited to corporate account: Personal rental income treated as income in Statutory Notice of Deficiency 83,424 Difference between gross salary and actual salary deposited 292 Personal items paid by corporation 2,535 Total increase in bank deposits: 161,451 b. Social Security benefits (nontaxable) (5,544) c. Check to cash 611 account XXXX6140 (30,000) a. Corrections to statutory notice of deficiency for check to cash 30,000 b. Correction of transfer listed in statutory notice of deficiency 4,500 c. Personal *362 rental income deposited to corporate accounts (83,424) d. Additional transfers not listed in statutory notice of deficiency (160,000) f. Pension/annuities (4,263) ____________ Total reductions: (1,067,222) Total gross income unreported: 379,615 APPENDIX L Federal Credit Union XXXX5-004 Chemical Bank XXXXX140-3 340,750 & Loan XX-XXXX019-1 *363 343,915 Collective Federal XX-X-XX0909 7,119 value of $ 10,000 15,000 b. Less: Correction - $ 15,000 paid by check (15,000) c. Use of Radtam funds to purchase assets for Bratam 50,000 notice of deficiency 1*365 115,267 deposited 301 Total increase in bank deposits: 165,568 a. Paybacks to corp. from personal account (87,500) b. Social Security benefits *364 (nontaxable) (5,850) c. Transfer between accounts (177,500) Additional repayments, transfers and nontaxable items: a. Transfers from personal accounts used to purchase Barnett Bank certificates of deposit (214,500) b. Personal rental income deposited to corporate accounts (115,267) c. Additional transfers not listed in statutory notice of deficiency (73,255) d. Additional payback to corporation (2,400) e. Nontaxable refund from sewer authority (14,000) f. Withdrawal from corporate account treated as a transfer in statutory notice of deficiency 25,000 a. Wages/salary per return (3,003) b. Interest income per return (21,522) c. Dividend income per return (1,202) d. Pension/annuities (4,263) e. Social Security (tax) (5,850) f. Rents (gross) (368,930) Total reductions: (1,070,042) Total gross income unreported: 245,328 Footnotes
RelatedSpies v. United States 317 U.S. 492 (Supreme Court, 1943) United States v. Beacon Brass Co. 344 U.S. 43 (Supreme Court, 1952) George Schwarzkopf v. Commissioner of Internal Revenue 246 F.2d 731 (Third Circuit, 1957) Chris D. Stoltzfus and Irma H. Stoltzfus v. United States 398 F.2d 1002 (Third Circuit, 1968) Robert W. Bradford v. Commissioner of Internal Revenue 796 F.2d 303 (Ninth Circuit, 1986) Joseph R. Dileo, Mary A. Dileo, Walter E. Mycek, Jr., Michele A. Mycek and Arcelo Reproduction Company, Inc. v. Commissioner of Internal Revenue 959 F.2d 16 (Second Circuit, 1992) American Properties, Inc. v. Commissioner 28 T.C. 1100 (U.S. Tax Court, 1957) Otsuki v. Commissioner 53 T.C. 96 (U.S. Tax Court, 1969) Vannaman v. Commissioner 54 T.C. 1011 (U.S. Tax Court, 1970) Gajewski v. Commissioner 67 T.C. 181 (U.S. Tax Court, 1976) Petzoldt v. Commissioner 92 T.C. No. 37 (U.S. Tax Court, 1989) Niedringhaus v. Commissioner 99 T.C. No. 11 (U.S. Tax Court, 1992) Schwarzkopf v. Commissioner 1956 T.C. Memo. 155 (U.S. Tax Court, 1956)
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