Adame v. Commissioner

Estate of R. L. Adame, Deceased, Consuelo C. Adame, Independent Executrix, and Consuelo C. Adame, Surviving Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent Adame v. Commissioner Docket No. 79014 United States Tax Court 37 T.C. 807; 1962 U.S. Tax Ct. LEXIS 205; January 22, 1962, Filed *205 Decision will be entered under Rule 50. Held, that the amounts taken by Adame in the illegal transactions described in our Findings of Fact and for which he was subsequently indicted and convicted for theft by false pretext were income to him in the years when such amounts were taken and should have been reported as taxable income and that the decision of the Supreme Court in Commissioner v. Wilcox, 327 U.S. 404, is not applicable. Held, further, that the amounts were unreported on petitioners' joint returns with false and fraudulent intent to evade the tax and the statute of limitations has not run against assessment and collection of the tax for any of the years 1948 to 1953, inclusive. Held, further, that the Commissioner's additions to the tax under section 293(b), I.R.C. 1939, for fraud are sustained. Hume Cofer, Esq., and Douglass D. Hearne, Esq., for the petitioners. Roy E. Graham, Esq., for the respondent. Black, Judge. Raum, Forrester, Drennen, and Fay, JJ., concur in the result. Fisher, J., concurs in the results with respect to the fraud issues. BLACK *807 Respondent has determined deficiencies in the income tax of petitioners and additions to tax under sections 293(b), *206 294(d)(1)(A), and 294(d)(2), I.R.C. 1939, as follows: Additions to tax Year Deficiency Sec.293(b) Sec.294(d)(1)(A) Sec.294(d)(2) [1948] $ 1,800.36 $ 900.18 $ 158.40 $ 105.60 [1949] 3,131.66 1,565.83 281.52 187.66 [1950] 2,417.18 1,208.59 216.86 144.57 [1951] 3,801.54 1,900.77 340.56 227.04 [1952] 2,408.36 1,204.18 214.34 142.90 [1953] 2,050.19 1,025.10 179.35 119.50 *808 The issues presented for our determination are whether there was a willful and fraudulent intent to evade the taxes claimed for the years 1948 to 1952, inclusive, so as to arrest the running of the statute of limitations; whether there was unreported income for each of the years 1948 to 1953, inclusive; and whether there was a willful and fraudulent intent to evade the taxes claimed for the year 1953. Respondent has asserted the statutory exception to limitation for the years 1948 to 1952, inclusive, on the ground of fraud. Some of the issues were settled by the stipulations which were filed and effect will be given thereto under Rule 50. FINDINGS OF FACT. A stipulation and a supplemental stipulation of facts to which certain exhibits are attached were filed by the parties and are incorporated herein by this reference. An oral stipulation was also entered into by the *207 parties at the conclusion of the hearing by which it was agreed by the parties that: Exhibit V which is attached to our stipulation * * * does not include amounts paid by the taxpayer in the form of withholding during the years reflected on the exhibit. It only includes status of the account of the taxpayer other than withholding. Effect will be given to this oral stipulation in a computation under Rule 50. Petitioners are the estate of R. L. Adame, deceased, and Consuelo C. Adame, the widow of R. L. Adame, who appears as a petitioner both individually and as independent executrix of the estate. Petitioners resided in Duval County, Texas, and timely filed joint income tax returns for the years 1948 to 1953, inclusive, with the collector of internal revenue, Austin, Texas. Inasmuch as the activities of R. L. Adame are those with which we are here primarily concerned, petitioner or Adame, as hereinafter used, has reference to him. Adame became county superintendent of schools in Duval County, Texas, in 1934 and was superintendent during the years 1948 to 1953, inclusive. He was a college graduate and had previously taught bookkeeping and/or accounting in high school. Adame prepared his *208 and his wife's joint income tax returns for the years 1948 to 1953, inclusive. On February 13, 1947, petitioners purchased a house and lot in San Diego, Duval County, Texas, for $ 1,500. On August 20, 1948, petitioners sold this house and lot to Guadalupe Montemayor and his wife, Eloisa G. Montemayor, for $ 3,900, of which $ 2,900 was deposited to the account of Adame at the San Diego State Bank, San Diego, Texas, on August 21, 1948. No income from the sale of this property was reported in petitioners' 1948 joint income tax return. Adame and his wife Consuelo made extensive improvements on the house sold to *809 Montemayor and the original cost of the real estate plus the cost of the improvements made after its acquirement by the Adames equaled or exceeded the amount realized from the sale of the property. There was no profit to the Adames on this transaction. Petitioners' joint income tax returns which they duly filed for the taxable years 1950 and 1951 were accidentally destroyed in a fire at Austin, Texas, while in the custody of the district director of internal revenue. Petitioners' joint 1950 income tax return, as reconstructed, reported therein an adjusted gross income of $ 6,078.27. *209 An optional standard deduction of $ 607.83 was deducted from this amount, and the net income reported was $ 5,470.44. Petitioners reduced this net income by five personal exemptions amounting to $ 3,000. Petitioners paid an income tax of $ 429.86 for the taxable year 1950. It is agreed that no part of the $ 9,935.61 hereinafter shown as the difference was reported on this return. Petitioners' joint 1951 income tax return, as reconstructed, reported thereon an adjusted gross income of $ 6,318.33. An optional standard deduction of $ 631.83 was deducted from this amount, and the net income reported was $ 5,686.50. Petitioners reduced this net income by five personal exemptions amounting to $ 3,000. Petitioners paid income tax of $ 548.04 for the year 1951. It is agreed that no part of the $ 9,308.45 hereinafter shown as the difference was reported on this return. During the taxable year 1952, Adame received $ 1,960 as office and travel expenses, for which amount he did not need to account to the school board. Adame was allowed a $ 90-per-month allowance for office and travel expenses. In the statutory notice of deficiency sent to petitioners, the Commissioner allowed $ 461.96 *210 as office and travel expenses and disallowed the amount of $ 1,498.04, thus increasing petitioners' income by that amount. A total of $ 360 of the $ 1,960 was for 1951 travel and office expenses not previously drawn by Adame and did not represent taxable income to him. A total of $ 520 was an advance on Adame's office and travel expenses for 1953. Adame was required to pay for long-distance telephone calls, stationery, postage stamps, and other miscellaneous office supplies out of the $ 90-per-month allowance. In addition, Adame used his own automobile in traveling to the 27 or more common schools in Duval County that were under his supervision. Adame's office and travel expenses on the average exceeded $ 90 per month for 1952. During the taxable year 1952, Adame received an additional $ 160 in salary which was not reported in petitioners' joint income tax return. An additional $ 52 was paid to Adame in 1952 for the purpose of reimbursing him for the cost of a census roll, described on the county *810 payment transcript as "Cost Census Roll Scholastic." It did not represent income to him. Adame's authorized salary as county superintendent of schools, Duval County, Texas, for the taxable *211 years 1948 to 1953, inclusive, was as follows: Year Amount [1948] $ 4,320 [1949] 4,916 [1950] 6,718 [1951] 6,418 [1952] 7,468 [1953] 7,308 During the taxable years in question petitioners maintained several bank accounts. From 1948 to 1953, inclusive, Adame had a personal checking account with the San Diego State Bank, San Diego, Texas. Petitioners Adame and Consuelo had a joint checking account with the San Diego State Bank, San Diego, Texas, from 1951 to 1953, inclusive. From 1948 to 1951, inclusive, Adame had a personal checking account with the Texas State Bank, Alice, Texas; and from 1951 to 1953, inclusive, Adame and Consuelo had a joint checking account with the Merchants Exchange Bank, Benavides, Texas. Total annual deposits to each of these accounts and the totals of all bank deposits, together with the gross income reported in their income tax returns for the taxable years 1948 to 1953, inclusive, are as follows: Texas Merchants San Diego State Bank State Exchange Bank Bank Total Amount of Year annual income deposits reported Adame Adame and Adame Adame and Consuelo Consuelo [1948] $ 7,558.49 $ 5,263.00 $ 12,821.49 $ 4,320.00 [1949] 4,690.01 3,503.70 8,193.71 4,916.00 [1950] 4,866.88 5,908.31 10,775.19 6,078.27 [1951] 7,547.17 $ 246.29 2,914.80 $ 3,087.24 13,795.50 6,318.33 [1952] 10,271.24 246.29 1,680.00 12,197.53 7,308.00 [1953] 9,906.40 246.29 1,884.30 12,036.99 7,308.00 During *212 the taxable years 1948 to 1953, inclusive, there were approximately 27 common school districts in Duval County, Texas. These common school districts were administered by trustees of the various common school districts who authorized payments to teachers, bus-drivers, janitors, for school supplies, and other necessary expenses. These trustees, shortly after the school term began, would give 70 to 80 blank signed checks or vouchers to petitioner for payment of school expenses. The signed blank checks or vouchers were given to petitioner within the scope of his employment for the purpose of paying county schools' expenses. Certain school supplies for the common school districts of Duval County, Texas, were purchased from the San Diego Lumber and Hardware Company, San Diego, Texas, sometimes hereinafter called the Hardware Company. At various times Adame contacted the Hardware *811 Company and would inquire as to the amounts of the bills due from the county schools. The bills would be totaled and a list would be sent to Adame's office. At his convenience, Adame would go to the Hardware Company and present school checks in payment of the school accounts. In some instances the checks *213 presented by Adame would be in excess of the amounts due on the school accounts. An agent of the Hardware Company would take the checks to a local bank, cash them, return with the cash to the Hardware Company store or office, retain sufficient cash to pay the school accounts, write receipts in duplicate acknowledging payment, and give the total remaining amounts in cash to Adame. Adame would not take copies of the receipts and the Hardware Company kept both the originals and the duplicates. If Adame was not present the amounts of cash in excess of the bills owed to the Hardware Company would be placed in a sealed envelope with Adame's name thereon and the envelope placed in the cashbox for petitioner. Adame would call at the Hardware Company and receive the envelope with the cash therein. In some instances Adame would use some of the cash so received to pay his personal account at the Hardware Company. The amounts of cash which were the difference between the county school checks presented by Adame and the school bills at the Hardware Company were received by Adame, were converted to his own use and benefit, and were of the following amounts: Year Per school reports Per Hardware Difference Company records [1949] $ 16,142.45 $ 2,838.49 $ 13,303.96 [1950] 12,214.78 2,279.17 9,935.61 [1951] 16,917.05 7,608.60 9,308.45 [1952] 8,666.73 4,244.26 4,422.47 [1953] 11,384.73 2,878.22 8,506.51 *214 In addition, Adame received $ 6,368.06 in 1948 by the same scheme. Neither the Hardware Company nor any of its agents received any payments in excess of those actually due the Hardware Company for school accounts. Adame did not report as income the amounts received in cash from the Hardware Company described above during the years 1948 to 1953, inclusive. At the April Term 1954, the grand jurors for the County of Duval, Texas, indicted Adame for unlawfully and fraudulently taking more than $ 50 from the possession of the common school districts. At the April Term 1955, the grand jurors for the County of Duval, Texas, indicted Adame for unlawfully and fraudulently taking more than $ 200 from the possession of the common school districts and for fraudulently embezzling, misapplying, and converting to his own use *812 certain money which was the corporeal personal property of the district trustees for the school districts. Adame pleaded not guilty to all the charges. Under the first indictment Adame was found guilty of felony theft. The District Court of Brazos County, 85th Judicial District of Texas, rendered the following judgment on the verdict of the jury: It is therefore considered by the *215 court that the defendant R. L. Adame is adjudged to be guilty of the offense of felony theft, as found by the jury, * * * Under the second indictment Adame was found guilty of theft of property by false pretext as charged by the first count of the indictment, upon which the District Court of Val Verde County, Texas, rendered the following judgment: It is therefore considered by the Court that the defendant, R. L. Adame is adjudged to be quilty of the offense of theft of property over the value of fifty dollars by false pretext, as found by the jury, * * * Count one of the second indictment upon which Adame was convicted of theft by the jury reads as follows: that R. L. Adame on or about the 4th day of December, A.D. 1952, and anterior to the presentment of this Indictment, * * * did then and there unlawfully and fraudulently take Two Hundred ($ 200.00) Dollars in lawful money of the United States, of the value of Two Hundred ($ 200.00) Dollars, the same being the corporeal personal property of the District Trustees of District Number Twenty (20) and the County of Duval, State of Texas, a body politic and corporate in law, the same being generally known as Realitos Common School District *216 No. 20 of Duval County, Texas, from the possession of said school district, without the consent of the said school district or its Trustees, with the intent to deprive the said school district of the value thereof, and with the intent to appropriate [sic] it to the use and benefit of him, the said R. L. ADAME, against the peace and dignity of the State; Count two of the indictment indicted him for embezzlement but he was not convicted on that count of the indictment. OPINION. A large portion of the alleged deficiencies was based upon respondent's contention that $ 51,845.06 which Adame unlawfully obtained from the school districts constituted unreported taxable income. In addition, respondent asserts that there were further amounts of $ 1,200 not reported by petitioners in 1948 from a real estate transaction, and three items of $ 52, $ 160, and $ 1,498.04 not reported by petitioners in 1952 described in our Findings of Fact. Petitioners claim that the deficiencies asserted for the years 1948 through 1952 are barred by the statute of limitations and respondent has asserted the statutory exception to limitation on the grounds that there was a willful attempt and fraudulent intent to evade *217 the taxes claimed. 1 *813 For the years 1948 through 1953, respondent has the burden of proof as to the issue of fraud. 2 As to the year 1953 in which petitioners do not plead the statute of limitations petitioners have the burden of proof to overcome the presumption of correctness of the Commissioner's determination of deficiencies. Respondent has the burden of proof to show fraud for that year. As we have already stated, there are other amounts claimed by respondent to be unreported income other than the amounts obtained by Adame in the illegal manner detailed in our Findings of Fact. The respondent asserts *218 that in 1948 petitioners had an unreported long-term capital gain of $ 1,200 from the sale of a house and lot. Petitioners failed to report this in 1948 but the testimony conclusively established that the cost of the improvements equaled or exceeded the alleged gain. The sale of the house was not reported because, as Consuelo testified, Adame told her "We didn't make any money on it." There was no income to petitioners resulting from this transaction. Petitioners concede that the sum of $ 160 was not reported by them in 1952 but contend that this was an inadvertent error. Respondent asserts that there was an additional sum of $ 52 received by petitioners and not reported in 1952. However, the evidence convinces us that this amount was a reimbursement to Adame for the cost of a scholastic school census roll. We believe that there is sufficient evidence to conclude that the $ 52 was a reimbursement and, therefore, did not represent income to Adame. Also, there is an amount of $ 1,498.04 disallowed by respondent for 1952 to Adame for office and travel expenses. Adame received $ 1,960 in 1952 for office and travel expenses, and, of this, the Commissioner disallowed $ 1,498.04. Adame *219 was allowed by the school district $ 90 per month for office and travel expenses or a total of $ 1,080 per year. The evidence supports the finding that Adame's expenditures exceeded $ 90 per month on the average. It has also been shown that of the total amount received by Adame in 1952, $ 360 was for travel and office expenses for 1951 not previously drawn by Adame and $ 520 was an advance for 1953. Because the school year commenced in September and differed from the school fiscal year, Adame was not in the habit of drawing his office and travel allowance money monthly but frequently took advances or waited and collected accumulated sums previously due him. *814 In light of the foregoing circumstances, we cannot find any evidence of fraud as to these items. We certainly would not find that the joint returns were false and fraudulent because of the alleged omission of the items which we have just named. There was income to Adame as to the $ 160 additional salary which Adame received in 1952 and we are convinced that this was inadvertently omitted from the joint return in 1952 and was not an intentional omission. In addition to the $ 1,080 paid him in 1952 for office and travel expenses, *220 Adame received a total of $ 360 in 1952 for 1951 travel and office expenses not previously drawn by him. The $ 360 constitutes a reimbursement to petitioner and should be excluded from taxable income. Adame used his own funds in 1951 for these expenses and when this amount was repaid to him in 1952, it did not constitute income to him. The amount was, in effect, an advancement by petitioner to his employer, Henry F. Cochrane, 23 B.T.A. 202 (1931). The sum of $ 520 which Adame drew in 1952 as an advance for his 1953 office and travel expenses, however, should be included in Adame's taxable income for 1952. Petitioner has not shown that his expenses for 1952 were greater than $ 1,080 and the $ 520 was not shown to have been utilized in that year for this purpose. Adame, of course, would be entitled to a deduction in 1953 for these expenses if he incurred and paid them, but as to 1952, the $ 520 represents taxable income to him in 1952. We hold, however, that it was not fraudulently omitted from the 1952 joint return which was filed by petitioners. But the omission of the income which Adame received in each of the taxable years in the illegal manner which we have detailed in our Findings *221 of Fact and for which he was twice convicted of theft, presents an entirely different question from the comparatively small items mentioned above. These illegal amounts have been stipulated and are not in doubt. As we understand the contention of petitioners in their briefs which we have carefully studied and considered, it is about like this: The Supreme Court in the recent case of James v. United States, 366 U.S. 213 (1961), expressly overruled Commissioner v. Wilcox, 327 U.S. 404 (1946). Therefore, petitioners concede that all the funds illegally taken by Adame in the manner discussed in our Findings of Fact constitute taxable income to Adame and would have to be included in the taxable income of petitioners provided that the years are still open. However, petitioners contend that the statute of limitations has run against all the years in question except the year 1953. The reason advanced by petitioners in their contention that the statute of limitations has run against all the years except 1953 is that the statute of limitations as to these years would only be arrested by the filing of a "false or fraudulent return with intent to evade tax" *815 as provided in section 276 of the *222 1939 Code. Petitioners contend that while the James case expressly overruled the Wilcox case, nevertheless under the doctrine of the Supreme Court in the James case, the above section of the 1939 Code could not be applicable because Adame embezzled said funds from the Duval County school districts and at the time these funds were embezzled, under the Wilcox case, the embezzled funds did not constitute taxable income. There might be merit to petitioners' argument as to these taxable years, 1948 to 1952, inclusive, if the moneys illegally taken by Adame from the school districts of Duval County were, in fact, taken by embezzlement. But Adame was not found guilty of embezzlement. He was found guilty of theft and in our Findings of Fact we have stated the findings of the juries and the judgments of the courts. While it is true that the Supreme Court in the Wilcox case uses the words theft and embezzlement as if they meant the same thing, what the Court really decided was that money taken by Wilcox as an embezzler did not constitute taxable income to him. Wilcox had been indicted for embezzlement and he had been convicted as an embezzler. In the instant case Adame was never convicted *223 as an embezzler -- he was convicted of theft by false pretext. We do not think it can reasonably be claimed under Commissioner v. Wilcox, supra, that these illegal sums obtained by Adame were obtained by embezzlement and that he was an embezzler and that the sums did not represent taxable income to him. We do not think that the recent decision of the Supreme Court in the James case is controlling in the instant case. As was said by the Supreme Court in Rutkin v. United States, 343 U.S. 130 (1952): We do not reach in this case the factual situation involved in Commissioner of Internal Revenue v. Wilcox, 327 U.S. 404, 66 S. Ct. 546, 90 L.Ed. 752. We limit that case to its facts. There embezzled funds were held not to constitute taxable income to the embezzler under sec. 22(a). The issue here is whether money extorted from a victim with his consent induced solely by harassing demands and threats of violence is included in the definition of gross income under sec. 22(a). We think the power of Congress to tax these receipts as income under the Sixteenth Amendment is unquestionable. The broad language of sec. 22(a) supports the declarations of this Court that Congress in enacting that *224 section exercised its full power to tax income. [n11] We therefore conclude that sec. 22(a) reaches these receipts. [Footnote omitted.] It is true that there were some dissenters in the Rutkin case but it is the majority opinion that we must heed and not the opinion of the dissenting Justices. Therefore, in harmony with what we conceive to be the interpretation of section 22, I.R.C. 1939, by the Supreme Court in the Rutkin case, we hold that the illegal funds taken by Adame from the Duval County school districts by theft represented taxable income to him at *816 the time they were taken and should have been reported as income received on the joint returns filed by Adame and Consuelo. Cf. Henry C. Boucher, 18 T.C. 710 (1952). Now the next question is whether the omissions from the returns in each of the years 1948 to 1952, inclusive, "were false or fraudulent with intent to evade tax." Respondent concedes that if they were not so, then the statute of limitations for each of the years 1948 to 1952, inclusive, bars the deficiencies and respondent also concedes that the burden of proof is upon him to prove that the returns were false or fraudulent. Has respondent met this burden of proof? *225 We think he has. In the case of Henry C. Boucher, supra, we said: On the fraud issue we are also compelled to sustain the determination. Petitioner was concededly in receipt of large sums which he failed to report as income without any satisfactory explanation. Although the burden is upon respondent on this aspect of the case, we conclude that it has been sustained. Arlette Coat Co., 14 T.C. 751; Harry Sherin, 13 T.C. 221; Aaron Hirschman, 12 T.C. 1223. Where joint returns are filed by a husband and wife, the liability for taxes and additions to tax for fraud are joint and several. Myrna S. Howell, 10 T.C. 859 (1948), affd. 175 F. 2d 240 (C.A. 6, 1949). As we have already stated, petitioners concede that the statute of limitations has not run for the year 1953. A waiver for that year was filed. Therefore, petitioners concede that because of the recent James case in which the Supreme Court overruled the Wilcox case, the $ 8,506.51 which Adame received in 1953 from the Duval County school constitutes unreported taxable income. But petitioners contend that under the doctrine announced by the Supreme Court in the James case the additions to tax for fraud should not be sustained. *226 For reasons which we have already stated petitioners are not sustained in that contention. We hold that the addition to tax for 1953 for fraud under section 293(b) was correctly imposed. Petitioners are liable for additions to tax under section 294(d)(1)(A) for the years 1948 to 1953, inclusive. No evidence has been introduced to the contrary. The amounts thereof will, of course, be recomputed under Rule 50. But petitioners are not liable for additions to tax under section 294(d)(2); respondent concedes that his additions to tax under this section were error. Decision will be entered under Rule 50. Footnotes 1. Internal Revenue Code of 1939. SEC. 276. SAME -- EXCEPTIONS. (a) False Return or no Return. -- In the case of a false or fraudulent return with intent to evade tax or of a failure to file a return the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time.↩ 2. Internal Revenue Code of 1939. SEC. 1112. BURDEN OF PROOF IN FRAUD CASES. In any proceeding involving the issue whether the petitioner has been guilty of fraud with intent to evade tax, the burden of proof in respect of such issue shall be upon the Commissioner.↩