Dastague v. Commissioner

F. P. DASTAGUE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Dastague v. Commissioner Docket No. 33974. United States Board of Tax Appeals 19 B.T.A. 1324; 1930 BTA LEXIS 2240; May 29, 1930, Promulgated *2240 1. The Board will not decide an issue not raised by the pleadings. 2. Petitioner's rental income determined. Henry Jacobs, Esq., for the petitioner. R. W. Wilson, Esq., for the respondent. LOVE *1324 This is a proceeding for the redetermination of deficiencies in income tax for the years 1917 to 1925, inclusive. The respondent has also proposed penalties for each of the years involved. The amounts of such deficiencies and penalties are shown as follows: Year Deficiency Penalty — 1917 — $86.53 $43.26 — 1918 — 208.86 52.21 — 1919 — 222.67 55.67 — 1920 — 240.50 60.12 — 1921 — 125.62 31.40 — 1922 — $152.10 $38.02 — 1923 — 119.99 29.99 — 1924 — 48.83 12.20 — 1925 — 19.76 4.94 The errors alleged are overstatement of rental income and failure to allow deductions of expenses incident to the rental properties. FINDINGS OF FACT. The petitioner is a resident of New Orleans, La., where he has been engaged in business as a meat vendor for 55 years. He is 75 years of age. The petitioner made no return for any of the years involved, because he was advised by a notary that his income was not great enough in amount to require*2241 that returns be made. Sometime prior to October, 1927, the deputy collector at New Orleans prepared and filed delinquent returns for the petitioner for the years 1917 to 1926, inclusive, under section 3176, Revised Statutes. A protest was filed and a field examination ordered. Two revenue agents conducted this examination, and upon their recommendation the returns prepared for the petitioner by the deputy collector were approved by the respondent, except as to the year 1926, for which year it has been determined no tax was due. The petitioner is a man of extremely limited education. He kept no books nor was he able to keep them. He did not appreciate the importance of retaining receipts and records and, except as to the year 1926, he was unable to furnish the examining agents with any written evidence respecting his income. *1325 The petitioner's net income from his business was determined by the percentage method, using gross bank deposits as a basis, and considering net income from the business to be 8 per cent of gross income from that source. It was also determined that the petitioner had an income of $400 per month as rentals from certain properties he held. *2242 The revenue agents' report indicates that for the year 1917 the petitioner's income was determined as follows: SCHEDULE I Net income Net income as disclosed by books return None. As corrected $5,130.71 Net adjustment 5,130.71 Business income(a) $330.71 Rents 4,800.00 Total 5,130.71 Net adjustment as above 5,130.71 SCHEDULE I-a * * *(a) Gross bank deposits $8,933.87 Less: Rents 4,800.00 4,133.87 Percentage of profit 8% Business income $330.71 Other income rents estimated(b) at $400 per month or for year 4,800.00 For each of the other years involved net income was determined in the same manner, in each year the petitioner being charged with receipt of $4,800 as rental income. When the field examination was made the petitioner informed the examining agents that he had rental income which he estimated in various amounts, one of these estimates being that it amounted to $400 per month. The agents allowed the petitioner three or four weeks to produce evidence of expenditures in connection with his real properties, but, except as to the year 1926, he had no records and was*2243 unable to establish the amounts of such expenditures. During the years 1917 to 1926, inclusive, the petitioner owned three pieces of real property, all in New Orleans. One of these was a building at 3139-3141 Esplanade, occupied by the petitioner as a butcher shop and residence. Another of the petitioner's properties was an old broken-down double residence at 1404-1406 Mystery, from which the petitioner received rentals of $9 per month per side, a total of $18 per month *1326 during the years 1917 to 1924, inclusive. During 1925 petitioner rebuilt this property and thereafter he received from it rentals of $30 or $35 per month per side, a total of $60 or $70 per month. The third property held by the petitioner was a double residence at 3146-3148 Maurepas. Prior to the war the petitioner received rentals of $16 per month per side from this property, a total of $32 per month. From 1917 until 1925, inclusive, the petitioner received rentals of $30 per month per side from this property, a total of $60 per month. The three properties above described were held by the petitioner subject to mortgages or other liens in amounts as follows: 3139-3141 Esplanade, $7,000; *2244 1404-1406 Mystery, $4,500; 3146-3148 Maurepas, $5,500. The mortgages above mentioned were held by the Peoples Homestead, of New Orleans. The petitioner also paid certain other charges on his real properties, including taxes, insurance, repairs, etc., the amounts paid not appearing. The respondent has made no allowance for interest, taxes, or other expenses paid by the petitioner in connection with his real property holdings, except that, in the computation by the percentage method of the petitioner's income from his business, expenses incident to such of the real property as was used in the business are necessarily reflected. The petitioner's father-in-law lived with him for a five-year period falling within the taxable years involved. During this time the petitioner sold Liberty bonds for his father-in-law, deposited the proceeds in his own account and checked such proceeds out to their owner from time to time. The amount of the Liberty bonds involved was $8,000. The year or years in which the bonds were sold does not appear. During all of the taxable years involved, except the year 1925, petitioner's household consisted of his wife, himself and a servant. A son of*2245 the petitioner lived with him for various periods. Since 1925 a son and daughter-in-law have lived in the petitioner's household. All meats used in the household were supplied by the petitioner's butcher shop. OPINION. LOVE: The petitioner in this proceeding, a man 75 years of age, has been engaged in business as a meat vendor at New Orleans for 55 years. He is a man of limited education, unable to keep books personally and not appreciating their value as records of his income. On the advice of a notary the petitioner made no income-tax returns for the years 1917 to 1926, inclusive. When returns were prepared and filed for him during 1927 by a deputy collector and a field *1327 examination of his income was later conducted by two revenue agents, the petitioner had no record evidence of his income or expenses for any of the years mentioned, except for the year 1926, which was the year immediately preceding the examination. It was determined that petitioner was not liable for any tax for that year. In the absence of other records of his income for the years 1917 to 1925, inclusive, the petitioner's gross income was determined for each year as the total amount of*2246 his bank deposits for such year. The petitioner owned certain rental properties and when the examining agents questioned him he made various estimates of his rental income, one of these estimates being $400 per month, a total of $4,800 per year. He was unable to produce evidence of his expenditures for taxes, insurance and carrying charges on these properties, and consequently, the amount of $4,800 was included in his net income for each of the years involved, without allowance of any deduction for such expenses, although he had actually paid them. To determine the petitioner's net income from his business the amount of $4,800, representing rental income, was deducted from his total bank deposits for each year, and the balance was regarded as his gross business income. Net income from the business was computed as 8 per cent of gross income from that source. The petitioner does not assert error in the respondent's adoption of the percentage method of computing net business income, although on hearing petitioner's counsel has protested that the method is improper. Such a protest is futile, the Board having repeatedly held that it will not decide issues not raised by the pleadings. *2247 ; ; ; ; . Furthermore, in analogous cases, the Board has approved the respondent's computation of net income by the percentage method. ; affd., ; ; ; affd., C.C.A., 5th Cir., March 25, 1930; . The two errors alleged in the petitioner relate to the petitioner's rental income. They are, first, that the rental income has been overstated, and, second, that the respondent has failed to allow deductions for taxes, insurance, carrying charges, etc., paid by the petitioner in relation to his rental properties. Evidence of payment of charges of the natures mentioned are commonly easily available. Taxes paid are matters of public record, while interest and insurance payments are usually susceptible of establishment*2248 from sources controlled by the payees, even if the payor has no adequate records. Personally, the *1328 petitioner had no appreciation of the importance of producing competent and exact evidence of the payments he had made, but in view of the fact that such evidence was, in our opinion, readily procurable, we can find no satisfactory excuse for it not having been offered us. We think that a proper regard for the interests of the petitioner would have resulted in the production of such evidence. The petitioner was able, however, to offer evidence of his rental income, which is, in our opinion, sufficient to establish error in the respondent's determination and to permit us to afford the petitioner some measure of the relief to which he so patently is entitled. We have found that instead of having a rental income of $400 per month, the petitioner actually received rental income as follows: from 1404-1406 Mystery, $18 per month, or $216 per year for the years 1917 to 1924, inclusive, and $70 per month, or $840 per year, for the year 1925; 3146-3148 Maurepas, $60 per month, for the years 1917 to 1925, inclusive. Readjustment of the petitioner's net income should be made*2249 in accordance with the above. The petitioner does not allege error in the respondent's assertion of penalties for each of the years involved and we, therefore, make no determination respecting such penalties. They will of necessity be recomputed in determining the petitioner's liability, if any, in accordance with this opinion. Judgment will be entered under Rule 50.