Thurston v. Commissioner

Cleveland Thurston, et al., 1 Petitioners, v. Commissioner of Internal Revenue, Respondent Thurston v. Commissioner Docket Nos. 44674, 44675, 44676, 44677 United States Tax Court 28 T.C. 350; 1957 U.S. Tax Ct. LEXIS 195; May 8, 1957, Filed *195 Decision will be entered under Rule 50. Held, respondent's determinations that deficiencies in income tax for the years 1941-1950, inclusive, were due to fraud with intent to evade tax not sustained where the evidence shows only ignorance and negligence on the part of the taxpayer. Melvin N. Greenberg, Esq., for the petitioners. *196 Lee C. Smith, Esq., for the respondent. Harron, Judge. HARRON *350 The Commissioner determined deficiencies in income tax for the years 1941-1950, both years inclusive, additions to the taxes under section 291 (a), 1939 Code, and additions to the deficiencies under section 293 (b) as follows: Year Deficiencies Sec. 291 (a) Sec. 293 (b) additions additions [1941] $ 213.07 $ 53.27 $ 106.53 [1942] 533.77 133.44 266.89 [1943] 1,678.19 419.55 839.10 [1944] 2,829.74 707.44 1,414.87 [1945] 3,393.23 848.31 1,696.62 [1946] 5,505.42 1,376.36 2,752.72 [1947] 1,107.68 276.92 553.84 [1948] 2,751.88 687.97 1,375.94 [1949] 1,708.20 427.05 854.10 [1950] 1,334.46 333.62 667.23 *351 The sole issue is whether, for each taxable year, all or part of the deficiency is due to fraud with intent to evade tax within the provisions of section 293 (b), 1939 Code. FINDINGS OF FACT. The issue relates only to the petitioner Cleveland Thurston. His wife, Juanita Thurston, is involved in the taxable years 1942-1950, inclusive, because she was married to Cleveland Thurston on October 28, 1942, and was his wife throughout the following years. Accordingly, Cleveland *197 Thurston is referred to hereinafter as the petitioner. No income tax returns were filed by petitioner for the taxable years 1941-1950, both years inclusive. Petitioner never filed a Federal income tax return for any year prior to 1941. During the taxable years until the present time, petitioner has resided in Homestead, Florida. Respondent computed the amounts of petitioner's taxable income for each of the taxable years by use of the increase in net worth plus expenditures method. Petitioner did not keep any books or records during the entire period, and he concedes that it was necessary and proper for the respondent to resort to this method. After the issuance of the statutory deficiency notices, and prior to trial, counsel for each party agreed upon a revised net worth statement and the amounts of taxable income determined on the basis of such revised statement with resulting decreases in each of the taxable years of the amounts of taxable income to the extent of from about $ 1,000 to $ 2,000, or more, for each year. Petitioner concedes that his failure to file an income tax return for each of the taxable years was due to willful neglect and not to reasonable cause. Petitioner*198 was born in Nassau in 1900, and he is a member of the colored race. He came to Key West, Florida, in 1902 with his mother and lived with her in the southern part of Florida until 1935, when they moved to Homestead, Florida, which is near Miami, and is a small town in an agricultural area. Petitioner has lived in Homestead since 1935. Petitioner, at all times, including the present, has been unable to read or write, except that he can sign his name. Also, he has never been able to do the simplest kind of arithmetic; i. e., he can neither add nor subtract figures. He was, consequently, unable to keep books or any written records of his income at any time including the taxable years. However, he was able to make change of money for customers, and he could recognize the denominations of currency. Part of petitioner's handicap can be indicated in the following way: He could not read figures; he could not put down figures in writing; and he could not *352 put down in writing the results of the additions of figures, to the limited extent that he might know mentally the sums of some simple additions of figures, because he could neither read nor write. From 1907 to 1924, petitioner*199 drove a horse and carriage in Miami. From 1924 to 1935, he drove taxis in Palm Beach. In 1935, when he and his mother moved to Homestead, petitioner started his first business venture, selling groceries at his mother's home. He borrowed $ 15 from her to start this business. Beginning in 1939, petitioner started other business ventures in Homestead in the colored section. In 1939 he opened a place which may be described as a tavern; in 1940 he purchased a small piece of property to which he moved his grocery store; in 1946 he opened a second eating place; and in 1949, he opened a recreation hall on property which he had acquired, where social gatherings were held and beer was sold which gave rise to calling the place the "Flamingo Club." During the war years, there were increased economic activities in Homestead and its vicinity, chiefly greater farming operations and new construction, and these activities attracted to Homestead many colored, migratory farm workers and other laborers. There was a shortage of housing facilities for such workers, but there was vacant land in the colored section of Homestead and real estate salesmen were willing to sell small lots for small downpayments. *200 Petitioner, from time to time, bought small lots and made small payments on them from about 1940 to 1948. He constructed crude shacks, or houses, on these lots with the help of his father-in-law, and sometimes another person. Only the building where the Flamingo Club was located had electricity and running water. All the rest were without running water, electricity, and window glass. Petitioner constructed about 37 such shacks and houses, and he rented living accommodations to laborers. Petitioner's real estate holdings included his own residence, a roominghouse having about 13 rooms, the property where his club was located which, in addition to the hall and tavern facilities, had about 15 rooms which could be rented, and some store properties. In his taverns, petitioner sold beer and wine. He was not licensed to sell whiskey or liquor. At his club, petitioner operated the game of chance called "bolita" for a syndicate which paid him 15 per cent of the amount he received from sales of tickets. From sales of tickets, he sometimes received $ 25 to $ 30 a week. During the taxable years 1941-1950, petitioner derived income from some or all of the following sources: Sales of groceries, *201 the operation of two taverns, rents, and the operation of the game, bolita. During 1942, 1943, 1944, 1945, 1946, and 1950, petitioner purchased Series E Government savings bonds for the following amounts: *353 Year Total purchase price [1942] $ 918.75 [1943] 4,256.25 [1944] 7,275.00 [1945] 6,675.00 [1946] 8,025.00 [1950] 2,775.00 Petitioner never had a bank account until 1949. He opened that account upon the suggestion of a beer salesman who, thereafter, wrote checks on petitioner's bank account for the payment of beer purchases, which petitioner signed, trusting the salesman to make out the checks properly. Beginning in 1942, and continuing through the years involved, petitioner obtained the assistance of a boy, who in 1942 was 13 years old, to write letters and total his bank balance. As computed on the basis of the agreed, revised net worth and expenditures statement, petitioner's taxable income for each of the taxable years was as follows: Year Taxable income [1941] $ 1,868.34 [1942] 2,377.09 [1943] 6,159.59 [1944] 9,123.34 [1945] 10,276.78 [1946] $ 16,201.04 [1947] 4,079.76 [1948] 12,893.29 [1949] 8,425.83 [1950] 8,000.59 Petitioner was not an employee at any time *202 during the years involved. Accordingly, he did not become acquainted with the payment of income taxes through the tax withholding system after it was adopted by the Government. On December 14, 1938, petitioner was convicted of unlawful possession of untaxed alcoholic beverages, in the Criminal Court of Record, Dade County, Florida. In the same court, on September 26, 1950, petitioner was convicted of possession of lottery tickets. On September 16, 1955, in the United States District Court for the Southern District of Florida, petitioner was charged with the misdemeanor of failing to file income tax returns for the years 1948 through 1950, under section 145 (a) of the Internal Revenue Code of 1939. He was not charged with a felony under section 145 (b), 1939 Code, for the fraudulent and willful evasion of income tax. Upon his plea of nolo contendere, petitioner was convicted of the charges for the years 1948 and 1949, only; he was sentenced to 6 months imprisonment, which he served; and he was fined $ 2,000, and was allowed 2 years within which to pay the fine. In each of the years 1945 to 1950, inclusive, petitioner paid local real property taxes and filed State personal property*203 returns, but the real property taxes were billed to him, and, as was customary in the colored section of Homestead, State employees made up petitioner's *354 personal property tax forms which they took to him. During the years 1942 to 1950, inclusive, petitioner applied for occupational licenses to operate his taverns. On June 26, 1948, Series E Government savings bonds were stolen from petitioner and he reported the theft to the police. During discussions with the chief of police, petitioner was told that he should have filed Federal income tax returns reporting the income used to purchase the bonds. Prior to receiving such advice, petitioner did not know that he was required to file income tax returns. He then consulted an acquaintance, Shine Robinson, a janitor in a bank, about how to proceed to get someone to prepare income tax returns. Robinson sent him to a man named Burton, an accountant who lived in Homestead, but Burton had given up his accounting practice, and he would not prepare any returns for petitioner. Thereafter, petitioner did not make any effort to have income tax returns prepared. Petitioner cooperated with agents of the Internal Revenue Service; he *204 disclosed all of his assets, concealing none; he turned over his savings bonds to the agents when he was told that he owed Federal income taxes. Petitioner was not guilty of fraud with intent to evade tax for any of the taxable years. The stipulated facts are found as stipulated, the stipulation is incorporated herein by this reference. OPINION. The question to be decided is whether all or part of the deficiency for each of the taxable years was due to fraud with intent to evade tax under section 293 (b), 1939 Code. Under this issue, respondent has the burden of proof. For many years prior to 1941, petitioner had a small income each year in an amount which was not reached by Federal income tax. From 1935 on, he lived in a colored settlement in the small town of Homestead and his acquaintances and activities were confined within that settlement. He was diligent and industrious in pursuing several income-producing activities, patronized exclusively by colored people, which produced income, but he did not have to exercise much skill in any of his income-producing activities. As a builder of crude shacks and houses, he was a laborer; as an operator of a small grocery store and two *205 taverns, he dealt in simple merchandise, wine, and beer. In buying beer and wine, he was helped by the salesmen. Operators of a syndicate from outside the town of Homestead provided him with the tickets and the simple accessories for the game, bolita. His customers and tenants were laborers. He could not read, write, add, or subtract. Starting in 1942, he had a boy, then 13 years old, help him with matters *355 that required reading and doing simple arithmetic. His success was due to a large extent to increase in the numbers of colored people in the district where he lived, which resulted from a boom in farming operations and construction work which was brought about by the war economy, and his ability to deal with people. During the period 1942 through 1950, petitioner realized income from his various business activities which was, in some years, fairly substantial. Petitioner did not keep any records of his receipts and disbursements and, until 1949, he did not have any bank account. Prior to the time he opened a bank account, he undoubtedly accumulated and handled a rather large amount of cash. He used a substantial amount of his earnings during the years 1943-1946, *206 inclusive, for the purchase of Government savings bonds. Therefore, he must have known that he had a substantial amount of earnings. When his savings bonds were stolen in June 1948, he was advised by the chief of police that he should have filed income tax returns reporting the income used to purchase bonds. Under all of the circumstances, the question here is, we think, the narrow question whether petitioner, during all of the years involved in this case, had the intent to defraud the Government by calculated tax evasion. That is to say, did the petitioner fail to file income tax returns for each of the years before us with the intent to avoid taxes lawfully due. The Commissioner argues that it is a strong factor in support of his determination of the additions for fraud that petitioner was able to manage business activities to the extent that he did and to accumulate income in each year, as well as assets, in substantial amounts. A strong suspicion that petitioner knew that he was liable for income tax and that he should have filed an income tax return each year might arise from the record. His rather sudden affluence, his alleged ignorance, his failure to go to informed persons*207 who were in a position to help him discharge his obligation to the Government to file returns, report income, and pay taxes are inadequate excuses for his failure to file returns. On the other hand, even though his ignorance of his obligations may appear to have been incredible, the issue must not be decided on the basis of suspicion. Fraud is never to be presumed. The Commissioner, to support the fraud penalties, must prove by clear and convincing evidence that the petitioner intended to defraud the Government. Negligence, careless indifference, or disregard of rules and regulations do not suffice to establish fraud. Walter M. Ferguson, Jr., 14 T. C. 846, 849; E. S. Iley, 19 T. C. 631, 635. Each case must stand on its own facts. Also, in considering whether a taxpayer had the intent to evade tax and to defraud the Government, "the trier of the facts must consider the native equipment *356 and the training and experience of the party charged." E. S. Iley, supra, at 635. The Court carefully observed the petitioner during the trial of this case, and took note of his demeanor and attitude, *208 of his ability to express himself, and of his understanding of the charges against him in this proceeding. Petitioner's conduct in failing to file income tax returns for the period involved has been considered in the light of his background, his environment, and his experience in business activities. The whole record has been searched for evidence of intent to defraud. We have kept in mind the approved standards of ascertainment of intent to defraud, and we have considered the decisions of this Court and of other courts involving the same issue. Our conclusion is that petitioner was extremely negligent, careless, and did not use the ordinary degree of care in trying to find out his obligations under law, and in trying to get such assistance as would have enabled him to file income tax returns reporting his income. Nevertheless, the evidence is not quite adequate to support respondent's burden of proving intent to defraud. It shows no act which is indicative of fraud. Petitioner's situation was that he was not conscious of his legal obligation to file income tax returns for each year. But his lack of comprehension is not shown to be a positive factor establishing fraud. Petitioner*209 had never filed a Federal income tax return. The record establishes that he did not know that he was required to file returns for the taxable years; and there is no doubt that he lacked the ability to prepare an income tax return. Our ultimate finding of fact upon the entire record is dispositive of the issue. Respondent has not proved by clear and convincing evidence that petitioner was guilty of fraud. See First Trust & Savings Bank v. United States, 206 F. 2d 97. Decision will be entered under Rule 50. Footnotes 1. Consolidated herewith are the following: Docket Nos. 44675, 44676, and 44677, Cleveland Thurston and Juanita Thurston.↩