Figueiredo v. Commissioner

Arthur Figueiredo and Patricia Figueiredo, Petitioners v. Commissioner of Internal Revenue, Respondent; George McMurrick and Sheri Ann McMurrick, Petitioners v. Commissioner of Internal Revenue, Respondent Figueiredo v. Commissioner Docket Nos. 2120-69, 2122-69 United States Tax Court 54 T.C. 1508; 1970 U.S. Tax Ct. LEXIS 95; July 16, 1970, Filed *95 Decisions will be entered for the respondent. Petitioners refused to produce their books and records for examination by a revenue agent who was attempting to ascertain the correctness of their income tax returns for 1965. On the basis of available information, respondent issued notices of deficiency disallowing certain deductions claimed by petitioners. They offered no evidence to support their allegation that the notices of deficiency were issued as a subterfuge to compel them to produce books and records protected by the self-incrimination provisions of the fifth amendment. Held, since petitioners failed to carry their burden of proof, the determined deficiencies are sustained; respondent was not required to obtain a court order under sec. 7604, I.R.C. 1954, compelling production of the withheld records as a condition to the determination of the disputed deficiencies. Arthur Figueiredo and George McMurrick, pro se. Harry Morton Asch and John Gigounas, for the respondent. Featherston, Judge. FEATHERSTON *1508 Respondent determined deficiencies in petitioners' *1509 Federal income tax for 1965 and additions thereto under section 6653(a)1 as follows: Docket No. Petitioners Deficiencies Sec. 6653(a) additions 2120-69 Arthur and Patricia Figueiredo $ 6,073.95 $ 303.70 2122-69 George and Sheri Ann McMurrick 1,028.63 51.43 *97 The only issue is whether respondent erred in determining (1) the disputed tax deficiencies and (2) the additions to the tax under section 6653(a). FINDINGS OF FACT Petitioners Arthur and Patricia Figueiredo, husband and wife, and George 2 and Sheri Ann McMurrick, also husband and wife, were legal residents of Eureka, Calif., at the time their petitions were filed. For 1965 both couples timely filed their respective joint income tax returns with the district director of internal revenue, San Francisco, Calif. The husbands are the principal figures in this controversy and will be referred to herein as Figueiredo and McMurrick. During 1965, Figueiredo and McMurrick were engaged in commercial fishing. They filed a partnership income tax return for that year in the name of "Fishing Vessel 'Dawn.'" The return reflects that the partnership realized ordinary income in the amount of $ 8,665.98, of which Figueiredo's share was $ 7,192.62 *98 and McMurrick's was $ 1,473.36, and that, in addition, a salary was paid to McMurrick in the amount of $ 3,789.70, bringing his total share of the partnership income to $ 5,236.06. These amounts were reflected in the respective joint individual income tax returns for 1965. Revenue Agent Larry Oddy was assigned to ascertain the correctness of the returns of the partnership and the petitioners. In March 1968, Oddy made contact with petitioners and asked for the partnership books and records. Petitioners responded that their records were in the hands of their bookkeeper and that he needed them for the preparation of returns for the preceding year. Thereafter Oddy contacted petitioners on 10 or 12 separate occasions in an effort to examine the records but they were not produced. In October 1968, Oddy issued administrative summonses to petitioners for the production of the records. Petitioners refused to respond to the summonses, explaining that a $ 4 witness fee had not been paid. Again, in November 1968, Oddy served administrative summonses on petitioners, and Figueiredo appeared and read the following statement: *1510 I am ARTHUR FIGUEIREDO, I live at 3525 NEVADA STREET, EUREKA*99 CALIFORNIA. I am here, myself, and I have with me all of my books and documentary records that I am aware of that are in my possession at the present time in accordance with the SUMMONS issued by you, LARRY ODDY, on October 18, 1968. I am of the information and belief that this audit is a fishing expedition into my affairs for other purposes than the one stated upon the said summons and I, therefore, refuse to show you the records I have with me or to give you any further testamony [sic] on the grounds that such information and testamony [sic] might tend to incriminate me. If and when the proper court orders my compliance with this said summons, I will follow the orders of the court. 3 Thereafter Oddy proceeded to examine petitioners' individual income tax returns and the partnership return in the light of *100 such information as he had available. He prepared a report which was the basis of the notices of deficiency issued to petitioners. In the notices of deficiency, dated February 4, 1969, respondent determined that the 1965 income of the partnership fishing vessel Dawn was $ 28,658.11 rather than $ 8,665.98, an increase of $ 19,992.13. The reason given for the determination was as follows: It has been determined that $ 19,992.13 of the expenses claimed on the partnership return is disallowed for lack of substantiation and further if these expenses were substantiated they would not qualify as ordinary and necessary business expenses. To each of the notices was attached a detailed statement which listed and set forth the amounts of the individual deductions which were adjusted. The notices also made certain other nonpartnership adjustments. The cases were included in a calendar of this Court which was called on April 13, 1970. At the call of the calendar the cases were scheduled for trial on April 23, 1970. A subpoena duces tecum was issued by the Court and was served on Figueiredo on April 17, 1970, commanding him to appear before the Court on April 23, 1970, and to bring with*101 him the following documents: All books, papers, and records which relate to gross receipts earned or derived from the partnership, Fishing Vessel "Dawn", and/or reported on line 1, page 1, form 1065, for the year 1965. All books, papers and records which relate to the cost of goods sold reported on line 2, page 1, form 1065, for the year 1965. All books, papers, and records which relate to the deductions claimed on lines 13 through 25, including all documents and work papers relating to the acquisition or basis of assets reflected on schedule I, page 3, form 1065, for the year 1965. The bank statements, cancelled checks and check stubs for any business bank account, and savings passbooks utilized in business which were used or in existence at any time during 1965. All personal bank statements, cancelled checks, check stubs, and savings passbooks used or in existence at any time in the year 1965. *1511 All divorce decrees in which you were involved as a party. A similar subpoena duces tecum was served on McMurrick on the same day. Both parties declined to produce the aforesaid records. OPINION The petitions in these proceedings do not allege specific errors in the notices of*102 deficiency. Instead, the Figueiredo petition alleges, among other things, that respondent determined "excessive and arbitrary" deficiencies as a subterfuge "to defeat the Petitioner's determination not to permit the Respondant [sic] to force them to co-operate by testifying to what they feel might tend to incriminate themselves in what the Petitioners allege to be a criminal investigation in the guise of a civil investigation." Following further allegations in the same vein, the petition concludes with a prayer "that this Court will hear this proceeding and determine that the deficiency notice is untimely, unrational, and arbitrarily found, and cannot be enforced at this time under the circumstances herein disclosed." Although cast in somewhat different language, the McMurrick petition is basically similar. The trial was handled pro se and petitioners' position has not been clearly articulated. However, petitioners apparently contend that the self-incrimination provisions of the fifth amendment to the United States Constitution justify their refusal to show their books and records to the revenue agent and that, since their records have not been examined by the revenue agents, respondent's*103 determinations are arbitrary and invalid. The statutory provisions requiring taxpayers to keep records and authorizing agents of the Internal Revenue Service to examine them are quite specific. Section 6001 provides that "Every person liable for any tax imposed by this title [which includes the income tax], or for the collection thereof, shall keep such records, render such statements, make such returns and comply with such rules and regulations as the Secretary or his delegate may from time to time prescribe." Pursuant to this statutory provision the following regulation has been issued: Sec. 1.6001-1 Records. (a) In general. * * * any person required to file a return of information with respect to income, shall keep such permanent books of account or records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return of such tax or information. Section 7602 provides, in part, as follows: For the purpose of ascertaining the correctness of any return, * * * determining the liability of any person for any internal revenue tax * * * or collecting any such liability, *104 the Secretary or his delegate is authorized -- *1512 (1) To examine any books, papers, records, or other data which may be relevant or material to such inquiry; We need not attempt here to define precisely the circumstances in which the fifth amendment provisions against self-incrimination qualify these statutory duties to file returns, to keep records substantiating the returns, and to permit agents to examine the records. See, e.g., Grosso v. United States, 390 U.S. 62 (1968); Marchetti v. United States, 390 U.S. 39 (1968); Shapiro v. United States, 335 U.S. 1 (1948); and United States v. Sullivan, 274 U.S. 259 (1927). It is sufficient to point out that at the time the revenue agent sought to examine petitioners' books and records, in late 1968, he was engaged only in the verification of petitioners' civil tax liability. Respondent's attorneys advised petitioners in open court that McMurrick never has been the subject of a criminal investigation and, further, that although Figueiredo's case was referred to a special agent for investigation*105 on August 8, 1969, after the notice of deficiency was issued, the investigation was closed on December 10, 1969, long before the date of the trial. Petitioners offered no evidence to the contrary. Nevertheless, even to the date of trial, they persisted in their refusal to produce their books and records or otherwise to cooperate with the revenue agent or attorneys for respondent in an effort to verify the correctness of their partnership and individual returns. Petitioners' apparently baseless claim of the protection of the self-incrimination provisions of the fifth amendment cannot stand in the way of a determination of their civil tax liability. Cf. United States v. First National Bank of Pikeville, 274 F. Supp. 283 (E.D. Ky. 1967), affirmed per curiam sub nom. Justice v. United States, 390 U.S. 199 (1968); Wild v. United States, 362 F. 2d 206 (C.A. 9, 1966). The cases must be decided on the basis of the burden of proof. 4Joseph A. Indelicato, 42 T.C. 686 (1964). The notices of deficiency are unmistakably clear in listing the deductions which*106 were disallowed in whole or in part. Respondent's determinations were prima facie correct and the burden of proof rested with petitioners. Rule 32 of the Rules of Practice of this Court; Welch v. Helvering, 290 U.S. 111 (1933). They offered no evidence whatever to show that the respondent erred; therefore, the deficiencies must be sustained. See, e.g., Helvering v. Taylor, 293 U.S. 507 (1935); Manuel D. Mayerson, 47 T.C. 340, 348-349*1513 (1966); Estate of Peter Finder, 37 T.C. 411, 423 (1961); Standard Oil Co., 43 B.T.A. 973, 998 (1941), affd. 129 F. 2d 363 (C.A. 7, 1942). *107 There is no merit in petitioners' contentions that the deficiency notices were arbitrary and capricious, because not based on an examination of their books and records, and that the burden of proof therefore rested with respondent. Since petitioners did not show that the determined deficiencies were excessive, the burden of proof remained with them. Helvering v. Taylor, supra;Rouss v. Bowers, 30 F. 2d 628 (C.A. 2, 1929), certiorari denied 279 U.S. 853 (1929). There is no evidence of any kind to support petitioners' allegation that the notices of deficiency were a "subterfuge" to compel them to disclose their records in violation of their constitutional rights. In any event, it has been observed that "The propriety of the motives of the Commissioner in giving the notice of deficiency is immaterial." Crowther v. Commissioner, 269 F. 2d 292, 293 (C.A. 9, 1959), affirming on this point 28 T.C. 1293 (1957); Philip F. Flynn, 40 T.C. 770 (1963). Nor do we know of any rule of law which requires the Internal*108 Revenue Service to seek a court order under section 76045 to compel the production of withheld records as a condition to the disallowance of claimed deductions for lack of substantiation. Moreover, we are not satisfied that petitioners' reason for withholding their records was to obtain court review of the propriety of the summonses served on them. It is true that Figueiredo repeatedly asserted that "if [the revenue agent] wanted to see my books and records he could have done so by obtaining a court order." The facts are, however, that subpoenas duces tecum of this Court were served on both petitioners and they persisted, nevertheless, in their refusal to comply. *109 If the determined deficiencies are excessive, it is the petitioners who prevented a more accurate determination. In these circumstances, they do not have a just ground for complaint. Marko Durovic, 54 T.C. 1364 (1970); see also Rouss v. Bowers, supra. We are compelled to sustain the deficiencies, as well as the additions to the tax. Decisions will be entered for the respondent. Footnotes 1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise noted.↩ 2. George McMurrick is sometimes referred to in the record as George McMurrick, Jr.↩ 3. Although this statement, referring to the October summons, is the one Figueiredo testified he read to Oddy, there is other testimony indicating that his statement actually referred to the November summons.↩ 4. Respondent's motion to dismiss for failure of petitioners to properly prosecute the petition is denied. Having decided the merits of the case on the foregoing basis, we express no opinion as to whether such a motion should be granted. We note, however, that where, as in this case, a taxpayer invokes the jurisdiction of a court, but refuses to produce books and records pertinent to the issues involved, there is a growing body of law indicating that such a motion will lie. Cf. Kisting v. Westchester Fire Insurance Co., 290 F. Supp. 141 (W.D. Wis. 1968); Wilson v.United States, an unreported case ( M.D. Tenn. 1965, 16 A.F.T.R. 2d 5608↩, 65-2U.S.T.C. par. 9636). 5. Sec. 7604(a) is as follows: (a) Jurisdiction of District Court. -- If any person is summoned under the internal revenue laws to appear, to testify, or to produce books, papers, records, or other data, the United States district court for the district in which such person resides or is found shall have jurisdiction by appropriate process to compel such attendance, testimony, or production of books, papers, records, or other data.↩