OPINION
I. Use of Banh-Deposits Method
Petitioners contend that respondent’s use of the bank deposits-expenditures method of reconstructing their taxable income was arbitrary and unreasonable, and thus shifts to respondent the burden of proving the correct amount of the deficiencies for the years in question. Helvering v. Taylor, 293 U.S. 507 (1935).
It is clear that petitioners’ records were incomplete and inadequate, - and that they kept no books of account. In the absence of adequate records, an examination conducted by respondent’s agents disclosed that petitioners had sources of income and that they made substantial bank deposits during the years 1957 through 1960. In our opinion respondent was justified in determining petitioners’ taxable income by using the bank-deposits method. Where a taxpayer has made numerous deposits in bank accounts, the sources or nature of which are not accounted for or recorded in books and records maintained by him, determinations made by the Commissioner of income subject to tax on the basis of such deposits have been approved in many instances; and it has been repeatedly held that a presumption of correctness attaches to such determinations and that the taxpayer has the burden of overcoming such presumption. See sec. 446(b), I.R.C. 1954; Marcello v. Commissioner, 380 F. 2d 494 (C.A. 5, 1967); Estate of Robert Lyons Hague, 45 B.T.A. 104, 109, affd. 132 F. 2d 775, 776 (C.A. 2, 1943), certiorari denied 318 U.S. 787; Thomas B. Jones, 29 T.C. 601, 613-614 (1957); Hoefle v. Commissioner, 114 F. 2d 713, 714 (C.A. 6, 1940); Boyett v. Commissioner, 204 F. 2d 205, 208 (C.A. 5, 1953); Goe v. Commissioner, 198 F. 2d 851, 853 (C.A. 3, 1952); Doll v. Glenn, 231 F. 2d 186, 188 (C.A. 6, 1956); O'Dwyer v. Commissioner, 266 F. 2d 575, 588 (C.A. 4, 1959), affirming 28 T.C. 698 (1957), certiorari denied 361 U.S. 862. Use of the bank-deposits method is proper even when the taxpayer keeps books and records which support his return as filed. Campbell v. Guetersloh, 287 F. 2d 878 (C.A. 5, 1961). Respondent is not bound to accept a taxpayer’s return or his books at face value. Holland, v. United States, 348 U.S. 121 (1954). And, contrary to petitioners’ spurious argument, use of the bank-deposits method does not require the establishment of a beginning net worth.
Several memorandum opinions of this Court which are cited in petitioners’ brief are not in point. Each is distinguishable on its facts.
Although respondent made some errors in applying the bank deposits-expenditures method, his determination was far from arbitrary. “The fact that the Commissioner’s determination was not completely correct does not invalidate the method employed.” Marcello v. Commissioner, supra at 497. As our findings of fact reflect, we view this as a case in which it is particularly appropriate to place the burden upon the petitioners to show that their unexplained bank deposits did not in fact represent taxable income. Yet we find the testimony of Constance Harper (John did not testify) vague, confusing, and sometimes unconvincing and unworthy of belief. Certainly it does not support her sweeping assertions that the bank deposits, which were otherwise unaccounted for, did not constitute taxable income.
II. Inapplicability of Miranda Decision to Noncustodial Interviews in Oivil Tax Fraud Oases
During her interview with Revenue Agents Tryforos and Woulfo-witz on June 28, 1961, Constance Harper stated that she had no dividend income, that she had received no inheritances, and that she had no sources of income other than her rental properties. She now urges us, on the authority of Escobedo v. Illinois, 378 U.S. 478 (1964), and Miranda v. Arizona, 384 U.S. 436 (1966), either to exclude evidence of these statements or to accord them little or no weight. Petitioner’s arguments on this point depend on two propositions: (1) That Escobedo and Miranda apply to certain noncustody situations, and (2) that the rationale of those criminal cases extends to civil tax fraud proceedings. We conclude herein, contrary to her view, that Miranda warnings were not required because (1) this was a noncustodial, non-coercive interview and (2) that statements made by petitioner to the revenue agents are admissible without such warnings in this civil case.
We have found that petitioner’s statements were made voluntarily in response to the agents’ questions, and that she appeared neither frightened nor confused during the interview. We have also found that Tryforos was a member of the Manhattan “fraud squad” and that he contemplated the possibility of criminal fraud proceedings at the time of the interview. Thus we reject respondent’s argument that Tryforos “was not investigating her for fraud.” The nature of the questions posed at the interview indicate that Tryforos had previously investigated petitioner’s bank deposits, and that he sought some explanation of them. When, as might be expected, no satisfactory explanation was given by the petitioner, Tryforos recommended that the case be referred to the Intelligence Division. In these circumstances it is not significant that Tryforos was a revenue agent rather than a special agent. See Mathis v. United States, 391 U.S. 1 (1967).
A. Noncustodial Interrogation
In Miranda v. Arizona, supra, the Supreme Court held that the Government may not use statements stemming from custodial interrogation of the defendant in a criminal case unless it has first warned him fully of his constitutional rights under the fifth amendment2 of the Constitution, including the right to counsel3 as required by Escobedo v. Illinois, supra. It is plain that the Miranda decision was intended to apply only to the interrogation of a suspect then in custody and to prevent coercion by interrogators when a suspect is “otherwise deprived of his freedom of action in any significant way.” 384 U.S. at 444. Although the dissenters thought that the opinion was capable of an expansive interpretation,4 the majority carefully specified the perimeter of its Miranda rule, as indicated in the following statements:
More specifically, we deal with the admissibility of statements obtained from an individual who is subjected to custodial police interrogation and the necessity for procedures which assure that the individual is accorded his privilege under the Fifth Ajnendment to the Constitution not to be compelled to incriminate himself. [384 U.S. at 439]
* * * * ⅜ * *
Our holding will be spelled out with some specificity in the pages which follow but briefly stated it is this: the prosecution may not use statements, whether exculpatory or inculpatory, stemming from custodial interrogation of the defendant unless it demonstrates the use of procedural safeguards effective to secure the privilege against self-incrimination. By custodial interrogation, we mean questioning initiated by law enforcement officers after a person has been taken into custody or otherwise deprived of his freedom of action in any significant way4 [384 U.S. at 444]
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The constitutional issue we decide in each of these cases is the admissibility of statements obtained from a defendant questioned while in custody or otherwise deprived of his freedom of action in any significant way. * * * [384 U.S. at 445]
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The question in these cases is whether the privilege is fully applicable during a period of custodial interrogation. * * * [384 U.S. at 460]
We are satisfied that all the principles embodied in the privilege apply to informal compulsion exerted by law-enforcement officers during in-custody questioning. An individual swept from familiar surroundings into police custody, surrounded by antagonistic forces, and subjected to the techniques of persuasion described above cannot be otherwise than under compulsion to speak. As a practical matter, the compulsion to speak in the isolated setting of the police station may well toe greater than in courts or other official investigations, where there are often impartial observers to guard against intimidation or trickery.30 [384 U.S. at 461]
* ⅜ ⅝: * ⅜ * #
Today, then, there can. be no doubt that the Fifth Amendment privilege is available outside of criminal court proceedings and serves to protect persons in all settings in which their freedom of action is curtailed in any significant way from being compelled to incriminate themselves. We have concluded that without proper safeguards the process of in-custody interrogation of persons suspected or accused of crime contains inherently compelling pressures which work to undermine the individual's ¡will to ¡resist and to compel Rim to speak where Re would not otherwise ¡do so freely. * * * [384 U.S. at 467]
*******
To summarize, we hold that when an individual is taken into custody or otherwise deprived of his freedom by the authorities in any significant way and is subjected to questioning, the privilege against ¡self-incrimination is jeopardized. Procedural safeguards must be employed to protect the privilege and unless other fully effective means are adopted to notify the person of his right of silence and to assure that the exercise of the right will be scrupulously honored, the following measures ¡are required. He ¡must ibe warned prior to ¡any questioning that he has the right to remain silent, that anything he says can be used against him in a court of law, that he has the right to the presence of an attorney, and that if he cannot afford an attorney one will be appointed for him prior to any questioning if he ¡so desires. Opportunity to exercise these rights must be afforded to him throughout the interrogation. After such warnings have been given, and such opportunity afforded him, the individual may knowingly and intelligently waive these rights and agree to answer questions or make a statement. But unless and until such warnings and waiver are demonstrated by the prosecution at trial, no evidence obtained as a result of interrogation can b'e used against him.43 [384 U.S. at 478,479]
[Footnote omitted.]
It is noteworthy that in both Miranda and Escobedo the suspect had been subjected to substantial forms of coercion, and questioned in custody for long periods without access to counsel. While their confessions may have been “voluntary” under earlier cases, the Supreme Court disapproved of the police methods. Despairing of policing the police on a case-by-case basis, the Supreme Court announced requirements intended to better protect fifth and sixth amendment rights by creating a clear limit, well within the old boundary of coercive practices. It is significant that the Miranda rule was aimed at police methods, and that it replaced the voluntariness test. Actual coercion and the substantial risk of it are the targets of the Miranda opinion.
In Orozco v. Texas, 394 U.S. 324 (1968), the Supreme Court emphasized that a suspect need not be “in custody at the station house” to be entitled to Miranda warnings. The suspect, awakened in the early hours of morning by four policemen, questioned in his bedroom, and “under arrest and not free to leave,” had been “otherwise deprived of his freedom of action in a significant way.” 394 U.S. at 327. The situation did not differ from station-house interrogation in its potential for intimidation and coercion. But the Supreme Court made it clear that it did not “expand or extend to the slightest extent our Miranda decision-” Even though Miranda, and possibly Escobedo, may be properly applied to non-station-house situations, it is our view that such application should be limited to custodial circumstances, as in Orozco.
Before the Miranda decision it was well settled that a Treasury agent investigating the possibility of a crime against the revenue was not required to warn the taxpayer of his constitutional rights. See United States v. Spomar, 339 F. 2d 941, 943 (C.A. 1, 1964), certiorari denied 380 U.S. 975; United States v. Sclafani, 265 F. 2d 408, 414-415 (C.A. 2, 1959), certiorari denied 360 U.S. 918; Scanlon v. Frank, 223 F. 2d 382, 384-385 (C.A. 1, 1955); United States v. Frank, 245 F. 2d 284, 286 (C.A. 3, 1957), certiorari denied 355 U.S. 819; Montgomery v. United States, 203 F. 2d 887, 892 (C.A. 5, 1953) ; Biggs v. United States, 246 F. 2d 40, 44 (C.A. 6, 1957); and Zacher v. United States, 227 F. 2d 219, 226 (C.A. 8, 1955).
Several Courts of Appeals have been confronted with the question as to whether statements of a taxpayer under investigation by revenue agents or special agents of the Internal Revenue Service may be received in evidence when the taxpayer has not been given the so-called Miranda warnings. Every Court of Appeals, except the Seventh Circuit, has held that this prior rule remains unimpaired by the Miranda decision. So long as the taxpayer is not in custody 5 or otherwise deprived of his freedom of action in any significant way at the time he is interviewed by agents of the Internal Revenue Service, they need not give him warnings of his constitutional rights under the fifth and sixth amendments.6 Moreover, our consideration of many decisions of the Federal appellate courts reveals an unwillingness, in other than income tax cases, to require Miranda warnings in noncustody situations, i.e., prior to arrest.7
We have considered several cases which have approved suppression of evidence because internal revenue agents failed to give the taxpayers Miranda-ty^Q warnings. In two cases suppression was based on the agent’s failure to follow Internal Revenue Service rules regarding warnings. See United States v. Heffner, 420 F. 2d 809 (1969) ; United States v. Oliver, 70-1 U.S.T.C. par. 9233 (C.A. 10, 1970). In two other cases the Court found 'that the taxpayer had been interrogated in a coercive atmosphere. United States v. Lackey, 413 F. 2d 655 (C.A. 7, 1969); United States v. Gower, 271 F. Supp. 655 (M.D. Pa. 1967). The other cases stand for the broader proposition that once the investigation shifts from civil to criminal, as evidenced by the presence of a special agent or referral to the Intelligence Division, the taxpayer must be given Miranda warnings. United States v. Dickerson, 413 F. 2d 1111 (C.A. 7, 1969) ; United States v. Habig, 413 F. 2d 1108 (C.A. 7, 1969); United States v. Wainwright, 284 F. Supp. 129 (D. Colo. 1968) ; United States v. Kingry, an unreported case (N.D. Fla. 1967, 19 A.F.T.R. 2d 762, 67-1 U.S.T.C. par. 9262) ; United States v. Turzynski, 268 F. Supp. 847 (N.D. Ill. 1967); United States v. Schoenburg, an unreported case (D. Ariz. 1966, 19 A.F.T.R. 2d 348).
Arguments for extending Miranda and Escobedo to noncustodial criminal tax investigations are presented by the Court of Appeals for the Seventh Circuit in United States v. Dickerson, supra, and by a note appearing in the University of Chicago Law Review, “The Constitutional Right to Counsel in Tax Investigations,” note, 33 U.Chi.L.Rev. 134 (1965). The Dieherson panel (Fairchild, /., dissenting) concluded that to insure the admissibility of incriminating statements in a subsequent criminal proceeding it is necessary that Miranda warnings be given “at the inception of the first contact with the taxpayer after the case has been transferred to the Intelligence Division.” The note, written after Escobedo but before Miranda, goes even further by suggesting the extension of Miranda-type warnings by letter to all taxpayers at the beginning of any tax investigation, and would require additional warnings by special agents.
The reasoning of the Dickerson majority may be understood from the following excerpts:
We understand the teaching of Miranda to he that one confronted with governmental authority in an adversary situation should be accorded the opportunity to make an intelligent decision as to the assertion on relinquishment of those constitutional rights designed to protect him under precisely such circumstances. [413 P. 2d at 1114]
* * * # * * ♦
Incriminating statements elicited in reliance upon the taxpayer’s misapprehension as to the nature of the inquiry, his obligation to respond, and the possible consequences of doing so must be regarded as equally violative of constitutional protections as a custodial confession extracted without proper warnings. [413 P. 2d at 1116]
The opinion was also based on sources expressing doubt that any taxpayer “really felt free to walk out on investigators from the Internal Revenue Service” and the thought that the average citizen thinks “that the government prosecutes only the recalcitrant, uncooperative individual who is unwilling to pay what he owes.” 413 F. 2d 1116.
Notwithstanding the views of the Court of Appeals for the Seventh Circuit, we are not persuaded by its rationale or application of the Miranda rule. This Court agrees with the Second Circuit (United States v. Caiello, 420 F. 2d. 471), the Fourth Circuit (United States v. Browney, 421 F. 2d 48), and the Fifth Circuit (United States v. Prudden, 424 F. 2d 1021 (C.A. 5, 1970)), which have all rejected the reasoning of the majority opinion in Dickerson. We think the interpretation of Miranda and the fifth and sixth amendments by the Dickerson majority goes beyond their permissible limits. We may agree that a taxpayer does not feel entirely free to walk out on an agent of the Internal Revenue Service, that he may feel an obligation to respond to questions, and that he may not be alert to the consequences flowing from his remarks. No doubt a taxpayer experiences some fear, nervousness, or subtle pressure during an Internal Revenue Service audit or investigation, but, in the usual case, interrogation by Treasury agents simply does not approach the coercive level of a policeman in uniform, the sight of a gun or nightstick, arrest or threat of it, the nearby bars of the jail, and the sense of condemnation felt by police suspects.
We are not persuaded by the argument that a noncustodial interview takes unfair advantage of the taxpayer’s lack of legal advice. See note, 33 U. Chi. L. Rev. 134, supra. The taxpayer is aware that the purpose of the investigation is to determine his tax liability, and it can be assumed that he knows that there are penalties of some sort for cheating. We share tlie following views expressed by the Court of Appeals in United States v. Caiello, supra at 475 :
We can see no good reason for reauiring government agents to give Mira/nda TVamings whenever they deal with a citizen regarding possible tax liabilities under circumstances where the citizen is not under restraint and is at liberty to cooperate or not as he may choose. Every citizen must know and will be deemed to know that he is under an obligation honestly and fully to furnish correct information regarding his income and to pay the taxes which accordingly would be owing to the government. Every citizen also knows that false returns and fraudulent evasion of taxes are criminal offenses in violation of federal laws. So far as the citizen is concerned his duties and obligations and his liabilities for taxes for violation of law are the same regardless of the duties of the particular agents who may be assigned to investigate his returns, tax liabilities, and possible violations of the criminal law. And, of course, where there is no restraint and the contacts of the taxpayer and the agents extend over some period of time, there is ample opportunity for the taxpayer to seek such advice and assistance from third persons as he may desire. * * *
Absent coercion or the substantial risk of it, there can be no violation of fifth amendment rights. It was therefore unnecessary for Tryforos to warn petitioner of her constitutional rights in a noncustodial, non-coercive atmosphere.
Administration of the Federal tax laws depends heavily upon taxpayer cooperation and disclosure. Indeed, certain information is likely to come to light only through taxpayer cooperation. We will not erect an unnecessary barrier to voluntary disclosure and admissions by requiring warnings of constitutional rights where noncoerced statements are given to Treasury agents. United States v. Prudden, supra. To do so would foreclose the use of highly probative and reliable evidence.
In applying the safeguards of the fifth amendment and its sixth amendment corollaries we discern a tendency to rely and expand upon judicial slogans. The oft-used phrase “privilege against self-incrimination” is itself an example of this tendency. The criminal law in each and every case depends upon evidence by which the individual by word or deed incriminates himself. The plain language of the fifth amendment is that no person “shall be compelled in a criminal case to be a witness against himself.” The fifth amendment frame of reference is “a criminal case” and the key word is “compelled.” The exclusionary rule invoked in Mircmda has its roots in the word “compelled.” The coercive atmosphere of jails, prisons, and detention cells calls for negation and neutralization of that compulsive environment through the protection of the advice of counsel and the warning that the person is not “compelled” to be a witness against himself.
In our judgment the Miranda rule does not apply in the circumstances of this case. The statements made by Constance Harper to Revenue Agent Tryforos are admissible. All that has been shown here is tliat tlie audit begun by Tryforos became a criminal investigation, and tliat the petitioner was never so advised, although after retaining her counsel, he knew that a criminal investigation was being conducted. There is no evidence of misrepresentation, coercion, fraud, deceit, or trickery by the Treasury agents. This is simply a case of failure to warn in noncustodial surroundings. The Miranda case dealt with custodial interrogation, not only on its facts but also in the words repeatedly used by the Supreme Court to define the new doctrine. See 384 U.S. at 439, 440, 444, 445, 446, 457, 465, 477, and 478. Miranda thus clearly intends that the requirements of a warning of constitutional rights and a demonstration of intelligent waiver of those rights are to be confined to situations of “custodial interrogation.” The recitation of that term throughout the opinion and the prefacing of the decision with a lengthy recital of police abuses leave no doubt as to what situations the Supreme Court had in mind in reaching its decision. In United States v. Squeri, 398 F. 2d 785 (C.A. 2, 1968), the Court of Appeals said (p. 790) :
The Fifth. Amendment privilege prohibits .the government from compelling a person to incriminate himself. It was the compulsive aspect of custodial interrogation, and not the strength or extent of the government’s suspicions at the time the question was conducted, which led the court to impose the Miranda requirements with regard to custodial questioning. We believe that ¡the presence or absence of compelling .pressures, rather than the stage to which the government’s investigation has developed, determines whether the Miranda requirements apply .to any particular instance of questioning. * * ⅜
B. Civil Tax Fraud Proceeding
An alternative reason for treating petitioner’s statements at tlie June 28, 1961, interview as competent evidence in this case is that the absence of Miranda warnings does not bar the use of admissions in a civil tax fraud proceeding. The fifth and sixth amendments of the Constitution are generally not applicable in a civil case, although the limitation to criminal cases does not prevent persons from claiming the privilege in noncriminal proceedings when there exists the possibility of subsequent criminal prosecution. See, e.g., Grunewald v. United States, 353 U.S. 391 (1957) (grand jury) ; Quinn v. United States, 349 U.S. 155 (1959) (legislative investigation); Smith v. United States, 337 U.S. 137 (1949) (administrative investigation); McCarthy v. Arndstein, 266 U.S. 34 (1924) (civil cases). But when the threat of criminal prosecution is removed, by the grant of immunity “coextensive with the scope of the privilege against self-incrimination,” then testimony may be compelled. See Murphy v. Waterfront Commission, 378 U.S. 52 (1963).
Where there is no threat of criminal prosecution, a person may not claim the privilege, even if testifying may cause him to lose his job, Pfitzinger v. Civil Service Commission, 96 F. Supp. 1 (D.N.J. 1951), affirmed per curiam 192 F. 2d 934 (C.A. 3, 1951); or his citizenship, DaCosta v. Holland, 151 F. Supp. 746 (E.D. Pa. 1957) (deportation); United States v. Costello, 144 F. Supp. 779 (S.D.N.Y. 1956) (denaturalization) or his reputation, cf. United States v. Orman, 207 F. 2d 148 (C.A. 3, 1953) ; United States v. Thomas, 49 F. Supp. 547 (W.D. Ky. 1943); Brown v. Walker, 161 U.S. 591 (1896). These cases must he distinguished from those suggesting that it may be unconstitutional to impose like penalties for properly invoking the privilege. Compare Garrity v. New Jersey, 385 U.S. 493 (1967); Slochower v. Board of Education, 350 U.S. 551 (1956). In these latter cases there existed the threat of criminal prosecution.
In this case the threat of criminal prosecution has been removed. Even if it had not been, the cases declining to compel testimony because of the possibility of prosecution are not applicable. Here the statements have already been made, and a decision to admit them does not compel testimony, nor does it require their admission or exclusion in a criminal case.
One case appears to allow the claim of privilege in a civil proceeding where there was no threat of further criminal prosecution. Boyd v. United States, 116 U.S. 616 (1886), followed in Lees v. United States, 150 U.S. 476 (1893). Relying on “that one cardinal rule of the court of chancery * * * never to decree a discovery which might tend to convict the party of a crime, or to forfeit his property,” 116 U.S. at 631, Justice Bradley said that it violated the fourth and fifth amendments to compel the production of papers in a forfeiture proceeding. See also Ullmann v. United States, 350 U.S. 422, 442 (1956) (Douglas J., dissenting). (“Any forfeiture of rights as a result of compelled testimony is at war with the Fifth Amendment.”) However, the forfeiture in Boyd was merely an adjunct to the criminal proceedings, involving the instruments of the crime and requiring conviction for the crime. It has been held inapplicable where the forfeiture proceeding was independent of any criminal proceeding. Kent v. United States, 157 F. 2d 1 (C.A. 5, 1946) (on rehearing).
A civil tax fraud case is not “a criminal case” or the adjunct of one. The civil aspects of Federal tax controversies should not be confused with separate criminal penalties. Spies v. United States, 317 U.S. 492 (1942); Acker v. Commissioner, 258 F. 2d 568 (C.A. 6, 1956), affirming 26 T.C. 107 (1956). In Helvering v. Mitchell, 303 U.S. 391 (1938), the Supreme Court pointed out the distinction between civil additions to tax for fraud and criminal fraud penalties: In its remedial nature, an addition to tax for fraud resembles the treble damages provision for enforcement of the Emergency Price Control Act of 1942. See Craig v. Porter, 157 F. 2d 410 (C.A. 8, 1946). The defendant in a civil enforcement proceeding under that Act was not permitted to claim fifth amendment protection. Craig v. Porter, supra; Bowles v. Seitz, 62 F. Supp. 773 (W.D. Tenn. 1945); Bowles v. Bernard, 57 F. Supp. 94 (E.D. Wis. 1944); Bowles v. Chew, 53 F. Supp. 787 (N.D. Cal 1944); cf. Martino v. Holzworth, 158 F. 2d 845 (C.A. 8, 1947). See also Schinkal v. United States, 225 F. 2d 882 (C.A. 9, 1955).
The remedial character of sanctions imposing additions to a tax has been made clear by this Court in passing upon similar legislation. They are provided primarily as a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and loss resulting from the taxpayer’s fraud. * * *
“ ‘Penalty’ is a term of varying and uncertain meaning.” Life & Casualty Co. v. McCray, 291 U.S. 566, 574 (1934). In an area where Congress has expressly provided for criminal penalties, we conclude that a lesser sanction, requiring a lesser burden of proof, is not a criminal penalty. Helvering v. Mitchell, supra. It follows that in this civil tax case the fifth amendment is no bar to the admissibility of petitioner’s prior statements to the revenue agents.
III. Understatements of Income, Overstatements of Expenses, and Fraud
It is clear from our findings of fact that the petitioners failed to report substantial amounts of rental income during the years 1957 through 1960. It is now well established that in a civil tax fraud case “consistent failure to report substantial amounts of income over a number of years, standing alone, is effective evidence of fraudulent intent.” Schwarzkopf v. Commissioner, 246 F. 2d 731, 734 (C.A. 3, 1957); Kurnick v. Commissioner, 232 F. 2d 678 (C.A. 6, 1956); Merritt v. Commissioner, 301 F. 2d 484 (C.A. 5, 1962); and Anderson v. Commissioner, 250 F. 2d 242 (C.A. 5, 1957).
Petitioners failed to report any of their income from interest and dividends. Although we recognize the mitigating factors that Forms 1099 were not then required to be sent to petitioner and that her education was limited, the consistent omission of these substantial amounts of income each year is, we think, indicative of fraud.
In addition, we have found that petitioners’ expenses were far less than the amounts claimed on their income tax returns. The disparity generally results from their failure to meet their burden of proof because most of their records were unavailable. The amounts we have allowed for rent, fuel, taxes, water, utilities, insurance, and telephone are those which were substantiated and allowed by respondent. Petitioners have not proved any greater amounts. All of the amounts we have found for other expenses are derived from Constance Harper’s sketchy testimony and scanty records. Depreciation on the buildings Avas calculated at 4 percent per year, allocating 60 percent of the cost to the buildings, as agreed by the respondent. Of course, petitioners’ failure of proof on these expense items for deficiency purposes does not relieve respondent of the ultimate burden of proving fraud by clear and convincing evidence. To do otherwise would be piling inference on inference. See Thomas B. Jones, 29 T.C. 601 (1957) (each party failed to meet its burden); cf. Valetti v. Commissioner, 260 F. 2d 185 (C.A. 3, 1958); Goldberg v. Commissioner, 239 F. 2d 316 (C.A. 5, 1956). “[B]are figures have a way of acquiring an existence of their own, independent of the evidence which gave rise to them.” Holland v. United States, 348 U.S. at 128.
But two expense items in particular should be mentioned. First, petitioners claimed rental expense of $4,080 in each year for the properties at 16 and 18 West 130th Street. The lease provided for rent of $3,491.40 per year. Petitioner testified that she was required to pay an additional $120 per quarter for unexplained reasons. No such provision appears in the lease. We find her testimony unreliable. Secondly, petitioners’ reported income and exjaenses remained virtually the same in 1959 and 1960, even though they had sold in December 1959 2 of the 10 rental properties they operated. Even by their own reckoning this means the loss of 24 rooms, income of $174.91 per month, and the expenses incident to these properties. Respondent has obscured the force of these facts by his willingness to allow expenses uniform in amount over all 4 years, but nonetheless this is evidence that petitioners’ income tax return for 1960, at least, did not reflect their actual circumstances. We think these two items suggest that petitioners were padding their expenses in all 4 years, and that their strikingly similar returns in 1959 and 1960 did not reflect their actual income and expenses, but were designed with the hope that through consistency they might escape audit and pay less tax. Cf. John McKeon, 39 B.T.A. 813 (1939).
When bank deposits calculations disclosed that petitioners had understated their gross income from rentals, they attempted to show a, nontaxable source for this unreported income. Constance Harper testified that her brother, Lionel Cushnie, died in Jamaica in 1950, leaving her property valued at 22,000 pounds. She said this property was converted to cash and left in joint savings accounts with her cousin, Coralee Williams. She further testified that she was unable to get the money out of Jamaica until the late 1950’s, when she and her family began bringing it up a “thousand pounds at a time.” We find such testimony unworthy of belief. From 1957 through 1960, when petitioner supposedly was bringing thousands of pounds from Jamaica to Now York, she was in fact transferring $38,000 from New York to Jamaican bank accounts. Respondent introduced the checks which were deposited to her Jamaican accounts. Also, when interviewed by Agents Tryforos and Woidfowitz about tlie source of her bank deposits, petitioner stated that slie bad received no inheritances, which suggests that the 1950 inheritance has no bearing on the years in controversy.
Petitioner also introduced calculations intended to show that her rental income did not exceed the amount reported. This, of course, raises the source problem. Using maximum legal rent figures, excluding basement rooms, and assuming 75-percent occupancy in her buildings, petitioner’s figures do correspond with her returns. Respondent did not attack this statement directly, by determining whether petitioner did indeed charge the legal rent, or whether she rented basement rooms, or whether her occupancy exceeded 75 percent. Instead, respondent chose to rely on petitioner’s statements to its agents. Petitioner stated that she had no source of income other than her rental properties. Having already determined that this statement is both admissible and reliable, we find that respondent has succeeded in negating nontaxable sources for petitioner’s unreported income. See Holland v. United States, supra.
Petitioners sold their properties at 20 and 22 West 130th Street in December 1959. They did not report these sales in either 1959 or 1960. Constance Harper’s explanation was that, she thought that she must first recover her basis before recognizing and reporting the gain. We cannot accept her explanation for failure to report the sales. Petitioners purchased the building at 22 West 130th Street on April 20, 1938, for $11,200. They allocated $8,000 to the building and depreciated it at 4 percent per year. By the time of sale their basis would have been reduced by depreciation of $6,922.20 to $4,277.80. They received $4,000 by closing, and $116.68 per month on the mortgage, beginning January 28, 1960. By the first half of 1960, petitioners’ receipts exceeded their basis. Yet -they did not disclose the sale, or any income from it, in 1960. Under the circumstances we think they deliberately concealed these sales with the intent of evading the payment of taxes on money received from the properties in 1959 and 1960.
Petitioners were under a duty to keep adequate books and records. Sec. 6001 and the regulations thereunder. Their failure to do so is some evidence of fraud. Bollella v. Commissioner, 374 F. 2d 96 (C.A. 6, 1967), affirming a Memorandum Opinion of this Court. However, the failure to produce what records they did have, prior to their destruction by fire and water, raises troublesome issues. At that 'time petitioners faced the possibility of criminal prosecution, and they refused to produce possibly incriminating records. Whether they could be compelled to produce them involves examination of the scope of the fifth amendment and the required-records doctrine. See Shapiro v. United States, 335 U.S. 1 (1948) ; Reisman v. Caplin, 375 U.S. 440 (1964); United States v. Powell, 379 U.S. 48 (1964); Spevack v. Klein, 385 U.S. 511 (1967). If they could not be compelled to do so, there remains the question of what inferences, and what civil consequences, may flow from the exercise of this constitutional right. See Garrity v. New Jersey, supra; Spevack v. Klein, supra; Griffin v. California, 380 U.S. 609 (1965). In view of other evidence of fraud in this case, we have found it unnecessary to draw any inference from petitioners’ failure to produce records.
All in all, we conclude on this record that petitioners’ failure to maintain accurate and complete records, their failure to report as income substantial receipts from their rental business as well as interest and dividends, their overstatement of particular business expenses, their concealment of real property sales, and Constance’s inconsistent, unreliable, and misleading statements to the revenue agents, were part and parcel of a conscious and deliberate attempt to evade the payment of their tax liabilities for each of 'the years 1957 through 1960. Accordingly, we hold that respondent has met his burden of proving fraud by clear and convincing evidence. We also sustain respondent’s determination of the deficiencies subject to the modifications contained in our Findings of Fact. Cf. Cefalu v. Commissioner, 276 F. 2d 122 (C.A. 5, 1960).
IV.Statute of Limitations
Having determined that a part of the underpayment of tax for the year 1957 was due to fraud with intent to evade tax, it follows that the assessment of the deficiency for that year, and for all of the years before us, is not barred by the statute of limitations. See sec. 6501 (c) (1). In any event, petitioners did not plead the statute of limitations for the other years.
V.Dependency Exemptions
We are satisfied that in each of the years 1957 through 1960 the petitioners provided over half of the total support of Joy Cushnie, a niece, and Maude Curlew, an aunt. See secs. 151 (e) and 152 (a). Accordingly, petitioners should be allowed dependency exemption deductions for both of them for those years. And since John Harper had attained the age of 65 before the end of 1959, petitioners are entitled to an additional exemption of $600 for him in each of the years 1959 and 1960. Petitioners failed to claim any additional exemption for John on their Federal income tax returns for 1959 and 1960.
VI.Sales of Real Property — Installment Method
Petitioners did not report on their income tax returns for either 1959 or 1960 the sales or any income from the sales of their real property at 20 and 22 West 130th Street. The sales were made on December 28,1959, and petitioners received $4,000 for each property in 1959, or a total of $8,000. In 1960 they received $1,400.16 in mortgage payments on each property, or a total of $2,800.32. For the first time at the trial of this case petitioners’ counsel stated that they elect to report these real property sales on the installment method pursuant to the provisions of section 453.8 This purported election was reiterated in written form in their opening brief. In support of their contention that they now have the right to elect to report the sales of the real property on the installment method, petitioners cite and rely on section 1.453-8 (b), Income Tax Regs.; Rev. Rul. 65-297, 1965-2 C.B. 152; and C'de Baca v. Commissioner, 326 F. 2d 189 (C.A. 5, 1964), reversing 38 T.C. 609 (1962).
Section 1.453-8(b) (1), Income Tax Regs., provides as follows:
(b) Sales of real property and casual sales of personal property. (1) A taxpayer who sells or otherwise disposes of real property, or who makes a casual sale or other casual disposition of personal property, and who elects to report the income therefrom on the installment method must set forth in his income tax return (or in a statement 'attached thereto) for the year of the sale or Other disposition the computation of the gross profit on the sale or other disposition under the installment method. In any taxable year in which the taxpayer receives payments attributable to such sale or other disposition, he must also show in his income tax return the computation of the amount of income which is being reported in that year on such sale or other disposition.
This regulation was held valid and reasonable in Ackerman v. Commissioner, 318 F. 2d 402 (C.A. 10, 1963), which required the election to report a sale of real property on the installment method to be made in a timely filed income tax return for the taxable year of the sale. See and compare John P. Reaver, 42 T.C. 72 (1964).
Prior to the promulgation of the regulations under section 453, several cases arose which involved section 44 of the 1939 Code (the predecessor of section 453) and the then applicable regulations, section 39.44-3, Regs. 118. See, e.g., Hornberger v. Commissioner, 289 F 2d 602 (C.A. 5, 1961), reversing a Memorandum Opinion of this Court; C'de Baca v. Commissioner, supra; and F. E. McGillick Co., 42 T.C. 1059 (1964). Neither the 1939 Code section nor the regulations in force until September 1958 required an election to be made by the taxpayer at a certain time or in a certain manner. There was no mention of an election. Hornberger v. Commissioner, supra at 604.
In the Hornberger case a sale of realty through inadvertence was not reported on the taxpayer’s return for the year of sale. This Court held that the taxpayer was not entitled to correct the omission and gain the benefit of the installment method because the election to use such method was untimely. But the Court of Appeals, in reversing us, concluded that the Commissioner, in denying the taxpayer the privilege of using the installment method, was reading into the statute a requirement for timely election not found thei'e, and was seeking to invoke a heavy sanction not expressly authorized in either the statute or the regulations. The Court of Appeals stated (289 F. 2d at 604) :
It is, of course, necessary for the taxpayer to report his income for tax purposes. Normally, this obligation is met by taxpayers who report all transactions that result in taxable income. To the extent that one fails to do this he is immediately faced with the obligation of accounting for such failure. If due to negligence or fraud moderate to heavy sanctions are imposed. If resulting from honest error, as liei-e, all that is required is that the omission be rectified, if not voluntarily by the, taxpayer, then upon deficiency notice from the Commissioner. Here the government seeks t» invoke a heavy sanction in the case of a non-negligent good faith omission that the statute does not expressly authorize.
In the Hde Baca case the taxpayer sold a farm during 1953 but negligently failed to file a 1953 income tax return until March 1957. We held that since the taxpayer’s income tax return for 1953 was not timely filed, she had f orfeited the right to report the profits received from the sale of the farm in 1953 on the installment method. Again the Court of Appeals for the Fifth Circuit reversed. In doing so, it made the following comments (326 F. 2d at 191) :
Tlie Commissioner liere placed great significance upon 'tlie fact that in the Horribergcr case tlie omission was non-negligent. Nevertheless, it is just as true that neither the statute nor the regulation authorizes this sanction in the case of a negligent omission, as in the ease of a non-negligent omission. AVe think that the penalty provisions for negligence and for failure to make a timely estimate completely exhaust the power in tlie Commissioner or the 'courts to penalize for these omissions. The law does not lightly impose penalties and courts look with disfavor on forfeitures. Other cases favoring the taxpayer’s general contention that the election «requirements of § 44(h) are not to .be applied in a more restrictive fashion than is here deckled are United States v. Eversman, 6 Cir., 133 F. 2d 261; Scales v. Commissioners, 6 Cir., 211 F. 2d 133; Nunn v. Grey (W.D. Ken.) 196 F. Supp. 305; and Stouffer v. United States, 225 F. Supp. 965 (S.D. Ohio). AVe think, however, that we need go no further than the Hornberger case to find the controlling principle here, that is, that the statute does not authorize the imposition of .an added penalty for the late filing of the 1953 tax return in the nature of a forfeiture of the rights of the taxpayer to make an election to treat as an installment sale a sale which in all other respects is subject to such treatment.
Ill the subsequently court reviewed opinion in F. E. McGillick Co., supra, we decided to “follow the principles announced by the Court of Appeals” in the Cda Baca case.
In 1965 the Internal Revenue 'Service modified its position in Rev. Rul. 65-297, swpra, by stating, in part, as follows:
if, in good, faith, the taxpayer failed to exercise the installment method election on a timely filed original return for the year of sale, the IRS will recognize as valid elections made under the following circumstances:
1. Those eases where the sale took place in a taxable year ended before December 18,1958, if the election was made in the return for the year the first payment from the sale was received. December 18,1958, is the date the present regulations were effective.
2. Those cases where election of the installment method was made on an amended return for the year of sale not barred by the statute of limitations or the operation of any other law or rule of law, if the facts indicate no election inconsistent with the installment election had Seen made with respect to the sale.
3. Those cases where the election was made on a delinquent return for the year of sale.
[Emphasis added.]
It is obvious that paragraphs 1 and 3 of the above-quoted revenue ruling are inapplicable to tlie situation facing us in this case. The question is whether paragraph 2 applies. Wo think it does not apply for three reasons: (1) The petitioners did not in good faith fail to exercise the installment method election; (2) the petitioners have to date made no election of the installment method on an amended return for 1959 or for that matter on any return for any year; and (3) the failure of the petitioners to report the sales and income received therefrom in 1959 and 1960 is “inconsistent” with the election of the installment method. Where, as here, a taxpayer fraudulently conceals sates of real property by failing to report them or the income received therefrom on his income tax return and attempts to exercise his election to report the sates on the installment method only after his fraudulent omission is discovered by the Commissioner, the attempted election will be treated as invalid and he will not be entitled to the benefits of the installment method of reporting the gain on the sales. We think a good-faith disclosure of the sate on the taxpayer’s income tax return (original or amended) or in a statement attached thereto is necessary for a valid election to be made under section 1.453-8 (b), Income Tax Regs; Mamula v. Commissioner, 346 F. 2d 1016, 1019-1020 (C.A. 9, 1965); and see John P. Reaver, supra at 81-82, where this Court said:
Here, petitioners made an honest mistalce and rectified it at tlie first opportunity. We discern no reason why petitioners’ amended return for the year of sale, filed within the period for determining a deficiency for 1958 or for any year afCeoted, should not he deemed to be compliance with the requirements of the regulations. Petitioners have never adopted, any position ineonsistent with that reflected in the amended return; they have never represented that they were using any other method Of account for their gain on the sale; the entire receipts were included m income; all the information required l>y the regulations was supplied in the amended retwrn, and respondent at no time could have been misled to his disadvantage. [Emphasis added.]
To be sharply distinguished is the case of Bookwalter v. Mayer, 345 F. 2d 476 (C.A. 8, 1965), where the taxpayers, after making a full disclosure of the sate to revenue agents in several conferences, were advised that it was not necessary for them to make an election in their 1958 income tax return. Thus their good-faith “silence” in the 1958 return, as contrasted to the deliberate concealment in the instant case, did not cause the taxpayers to forfeit their right to make the election when they offered to file an amended return for 1958 when the Government later changed its position to the taxpayers’ detriment.
We also find the O'de Baca case distinguishable from this case on three grounds: (1) It involved an untimely, not a fraudulent, return; (2) it involved section 39.44-3 (1) of Eegs. 118 and not section 1.453-8 (b), Income Tax Regs.; and (3) the taxpayer there, unlike the petitioners here, had not adopted a position inconsistent with that reflected in her delinquent return. In any event, we are not inclined to extend the rationale of Ghle Baca beyond those cases where a good faith election is made on a delinquent return.
Accordingly, we hold that since the petitioners have failed to make a valid election to report their sales of real property on the installment method, they are not entitled to return the income and profit on the sales under the provisions of section 453 (b).
Reviewed by the Court.
Decision will be entered wnder Rule 60.