Willits v. Commissioner

LEONARD B. WILLITS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Willits v. Commissioner Docket No. 69300. United States Board of Tax Appeals 36 B.T.A. 294; 1937 BTA LEXIS 737; July 13, 1937, Promulgated *737 Petitioner, an internal revenue agent, prepared income tax returns for certain taxpayers. In his own income tax returns for the same years, he reported no income for the services rendered. Upon investigation by a special agent for the Bureau of Internal Revenue it was discovered that the taxpayers for whom petitioner had rendered service had made large payments of money directly to petitioner and to petitioner's mother-in-law, which were deposited in an account in the name of the mother-in-law and quickly withdrawn in favor of petitioner. Faced with these facts, petitioner resigned his position. At the hearing, petitioner offered no evidence except his income tax returns and his testimony that they correctly revealed his income. Held: (1) Petitioner received undisclosed income upon which he was liable for tax. (2) Respondent properly used the bank deposits as a means of determining petitioner's income. (3) The facts established fraud upon the part of petitioner and require the imposition of 50% additional taxes. (4) The bar of the statute of limitations was waived as to three of the years in dispute and failed to apply as to the fourth because a false and fraudulent*738 return was made with intent to evade tax. (5) The fact that the burden is upon respondent to prove fraud as a means of avoiding the bar of the statute of limitations does not shift the burden from petitioner to overcome the presumption of correctness of the Commissioner's findings as to a deficiency. Alfred T. Glenn, Esq., for the petitioner. John D. Kiley, Esq., for the respondent. MILLER *294 Respondent determined deficiencies in petitioner's income tax, for the years and amounts set out below, on account of items of income which he claimed petitioner received in the several years but failed to disclose in his returns, with intent to evade taxes. On this account the following 50 percent additional tax was added for each year. Year Tax 50% additional tax [1925] $1,276.20 $650.92 [1926] 308.60 154.30 [1927] 1,447.97 723.98 [1928] 239.63 119.82 FINDINGS OF FACT. Petitioner was United States internal revenue agent at Newark, New Jersey, from 1918 to 1921, and from the latter year until July 28, 1928, when he resigned, was agent in charge of that office. *295 In his returns for the years 1925 to 1928, *739 inclusive, petitioner reported income and deductions as follows: [1928] Income: Salary $4,600.00 $4,580.00 $4,600.00 $3,065.00 Rents 3,781.19 3,474.16 2,895.70 2,080.34 Interest 191.59 188.08 253.78 444.51 Commissions, fees, etc 2,356.63 2,710.00 2,850.00 5,900.00 Profit from sales, etc 5,000.00 3,000.00 3,679.86 Dividends 100.00 350.00 300.00 300.00 Total 16,029.41 14,302.24 14,579.34 11,789.85 Deductions: Interest 863.93 1,509.92 506.46 242.83 Other deductions 1,300.00 Taxes 707.84 762.60 928.36 Total 1,571.77 2,272.52 1,488.82 1,542.83 Net income 14,457.64 12,029.72 13,090.52 10,247.02 Respondent redetermined petitioner's taxable net income on the basis of his bank deposits and found the following amounts as net income: [1925] $27,342.92 [1926] 16,777.57 [1927] 28,032.53 [1928] 14,766.41 These computations of net income resulted from respondent's inclusion of the following amounts as undisclosed income: 1925 (bank deposits less other income returned) $12,885.28 1926 (bank deposits less other income returned) 4,747.85 1927 (bank deposits $15,792.01; plus check from C. R. Myers; less other income returned) 12,942.01 1928 (miscellaneous income less other income returned, plus deductions) 4,519.39 *740 While petitioner was employed as revenue agent he carried on the business of selling real estate, and earned certain commissions in this way, which were paid him by realty brokers, among others, by one Emmet J. Dugan. He personally prepared for one Charles R. Myers the latter's returns of income for Federal tax purposes for the years 1925 to 1927, inclusive, from figures given him by Myers' secretary. Myers was a friend of petitioner's family and owned "The Breakers", an Atlantic City hotel worth over one and a half million dollars in 1924. Petitioner also prepared Federal income tax returns for the years 1926 and 1927 of one Harold A. Brand, who was an auctioneer with his place of business on the boardwalk of Atlantic City. In his income tax returns for those years petitioner reported no income for his services in preparing Myers' and Brand's returns. Petitioner stated at the hearing that his returns correctly reflected his income. *296 During the years 1928 and 1929 an examination of petitioner's returns for 1925 to 1928 was made by special agents in the Intelligence Unit of the Bureau of Internal Revenue, and when petitioner was confronted with the evidence discovered*741 by these agents, he resigned his office as revenue agent. A. M. Smith was petitioner's mother-in-law and G. C. Willits his wife. An account was maintained by the petitioner at the Atlantic City National Bank in the name of "A. M. Smith, G. C. Willits, Trustee." Petitioner's wife alone had a power of attorney to draw upon the account; both petitioner and his wife made deposits in the account. Petitioner claimed that all deposits in the account over $500 were made by Charles R. Myers as presents to A. M. Smith. The account of "A. M. Smith, G. C. Willits, Trustee", showed deposits of $10,000 on August 24, 1925; $500 on November 4, 1925; $1,500 on November 10, 1925; $1,000 on August 13, 1927; $2,000 on February 27, 1928; and $2,000 on March 26, 1928. Withdrawals from this account were made in the amount of $3,500 on August 24, 1925, to "Len Willits" for the payment of a mortgage on his property, and to "Len Willits" on the same day in the amount of $5,000. This latter withdrawal was held in petitioner's safe deposit box for a year and a half, so as to avoid having to apply it to a note held by a bank. On August 13, 1927, a withdrawal of $500 was made which was applied on petitioner's*742 note at the Atlantic City National Bank; and on March 26, 1928, another withdrawal of $2,000 was applied to the same purpose. Many of these entries of deposits and withdrawals were in petitioner's handwriting. Charles R. Myers also presented an automobile to the taxpayer. The latter claimed that this was a gift to his mother-in-law, but admitted that the title thereto was taken in his name. A check for $2,000 was deposited to the account of "A. M. Smith, G. C. Willits, Trustee" in February 1928, drawn by Harold A. Brand on the Atlantic County Trust Co. This check was received by petitioner in payment for preparing Brand's returns and for making an inventory of Brand's stock. No return was made by petitioner, for income tax purposes, covering the automobile or the various amounts received by him from Myers and Brand. A part of the deficiencies for the years 1925, 1926, 1927, and 1928 was due to fraud with intent to evade taxes. OPINION. MILLER: (1) The first question presented is whether additional income was received which was not disclosed by the taxpayer. Upon this issue the determination of the respondent is prima facie correct. *743 ; ; *297 ; ; ; ; . The burden was upon the petitioner to overcome the presumption of correctness. This he failed to do. The only evidence submitted in his behalf to support his contention was his income tax returns for the years in dispute and his affirmative answer to his counsel's question: "Do all of these returns show correctly your income, your bank account?" This is obviously insufficient. . On cross-examination petitioner admitted that he prepared income tax returns for C. R. Myers for the years 1920 to 1927, inclusive, and that he prepared income tax returns for Harold A. Brand for the years 1926 and 1927. The undisputed testimony of special agent Lucas shows that petitioner admitted*744 receiving $2,000 from Brand in 1928 in payment for preparing Brand's returns and for making an inventory of Brand's stock. The undisputed testimony of witness Lucas also established that large amounts of money and an automobile were given by Myers, during the years in dispute, ostensibly as gifts to petitioner's mother-in-law. Title to the automobile was taken in the name of petitioner. The payments of money were deposited in the Atlantic City National Bank in the account of "A. M. Smith, G. C. Willits, Trustee." G. C. Willits was petitioner's wife, and she alone had a power of attorney to draw upon the account. These large deposits were, in practically every instance, followed by large withdrawals in favor of petitioner. The entries of deposits and withdrawals of these large amounts in the check book of the account were in many instances made in the handwriting of the petitioner. Petitioner offered no explanation of these alleged gifts, other than that Myers was a friend of the family. The evidence is sufficient to sustain the respondent's contention that petitioner received undisclosed income during the years in dispute, even apart from the presumption which is indulged*745 in favor of his determination. The statute provides that gross income includes income derived from salaries, wages, or compensation for personal service "of whatever kind and in whatever form paid." Revenue Act of 1926, sec. 213(a); Revenue Act of 1928, sec. 22(a). It is obvious that income was received by petitioner for services rendered and that the device of an account in the name of his mother-in-law, in which he made deposits and from which he quickly withdrew the same, can not be allowed to defeat his obligation to pay taxes thereon. (2) Under the circumstances it was proper for respondent to use petitioner's bank deposits as a means of determining his income. *298 In the case of , we sustained the reasonableness of such action, in the absence of other available sources of information. See also , and . (3) Since proof of fraud will automatically carry with it imposition of the 50 percent additional tax, 1 and since it is claimed by the respondent for every year in controversy, the next question is whether petitioner*746 had an intent to evade the payment of income tax for each of the years involved. Upon this point respondent has the burden of proof. Sec. 601, Revenue Act of 1928, amending sec. 907(a), Revenue Act of 1924; . Fraud, as petitioner contends, is not lightly to be found. ; ; affd., ; . We said in the Gano case, at p. 532; To establish fraud by direct proof of intention is seldom possible. Usually it must be gleaned from the several transactions in question and the conduct of the taxpayer relative thereto. Moreover, in assaying evidence to determine the presence or absence of fraud, the scales of justice must dip more heavily than in the ordinary civil case - a mere preponderance is not enough, the evidence of fraud must be clear and convincing. On the other hand, where the facts reveal a situation unmistakably implying fraudulent intent, it is our duty to find accordingly. *747 We said further in the Gano case, at p. 533; A failure to report for taxation income unquestionably received, such action being predicated on a patently lame and untenable excuse, would seem to permit of no difference of opinion. It evidences a fraudulent purpose. And we said in : * * * No one reading this record could reasonably escape the belief that the petitioner's president and its secretary were astute and intelligent business men who were fully aware of the facts and implications of their business and reasonably cognizant of the general effect upon the corporation's tax liability of its acts and transactions. There is no room for an extenuating plea of ignorance or inadvertence. What was done was done deliberately and knowingly. * * * See, also, . Here the petitioner is in no position to plead ignorance of the revenue law or of his duty to make a full return of all his income, for he was internal revenue agent in charge at Newark, New Jersey, from 1921 to 1928, and for three years preceding had been in the Federal revenue service. (Contrast *748 .) Nor does he offer a single reason which would extenuate or palliate the offense. *299 It is not necessary to review the evidence again. Much of the evidence which was most convincing of fraudulent intent came in the form of admissions by the taxpayer himself, made to special agent Herbert E. Lucas. Lucas testified at the hearing in the presence of the petitioner, without contradiction, rebuttal, or even crossexamination. In several instances it appeared that the taxpayer had at first denied facts indicative of fraudulent intent, but, upon being confronted by evidence accumulated by the special agents, broke down and admitted such facts. The only reasonable conclusion to be drawn from the uncontroverted facts is that petitioner used his mother-in-law, and the bank account in her name, as a mere blind to conceal the receipt of money paid him by Myers and by Brand for his services in preparing their returns. He admitted to the witness Lucas, on being pressed, that a payment of $2,000 made to him by Brand in February 1928 was for this purpose. Between August 24, 1925, and March 26, 1928, a total of $17,000 was paid into*749 this account by Myers, not all of which, it is true, has been traced directly to petitioner's individual uses, but enough of it has been so traced to show the general fraudulent intent of petitioner, during all the years involved, to evade the payment of additional income taxes. The petitioner admitted to Lucas that the greater part of the deposits in Mrs. Smith's account was withdrawn for the benefit of himself, his wife, or his family. No deposit in Mrs. Smith's account appears for the year 1926, nor any withdrawal in that year identified as for petitioner's personal benefit, but, since petitioner was employed by Myers and Brand throughout the entire period, we are of the opinion that that year likewise was affected by the same fraudulent purpose. There is nothing in the evidence to explain why Myers would have made gifts in this large amount to Mrs. Smith, or to suggest that such payments to her account were bona fide. The witness Lucas testified that petitioner told him that Mrs. Smith was considered by him "as one of the members of the family" and that she was claimed by him on his return as a dependent. The petitioner's returns for all the years in question show that he*750 claimed a deduction for three dependents, but do not show, because not then required, the names or relationships of such dependents. Upon the available evidence, the conclusion that Mrs. Smith was only a screen to mislead the tax authorities is inescapable. The determination of fraud is made in each instance on the peculiar facts of the individual situation. After a full consideration of all the circumstances here attendant, we have no doubt that petitioner had a fraudulent intent to evade payment of income tax in all the years in question, and that his returns in each year reflected that intent by failing to disclose income received. *300 (4) Petitioner contends further that the Commissioner's determination of deficiencies is barred by the statute of limitations. The deficiency notice was mailed on November 18, 1932. Under this Board's order of October 19, 1936, respondent's motion, to reopen and to file consents to waive the statute, was granted. These consents, duly signed by the petitioner and the Commissioner on November 27, 1931, waive the statute for the years 1926, 1927, and 1928 until December 31, 1932. Sec. 278(a), Revenue Act of 1926; sec. 506(a), Revenue*751 Act of 1928. Petitioner challenged the validity of the waivers in his petition as "obtained under duress and/or misrepresentation", but, since this allegation was denied by respondent and no evidence was introduced in support of it at the hearing, we must conclude that the waivers are valid, as they appear to be on their face. As regards respondent's determination of a deficiency for the year 1925, no waiver was filed, and, except for the filing of a false and fraudulent return with intent to evade tax, the statute of limitations would have run as to that year. Where, however, such a return is filed, and such an intent is present, the statute of limitations does not run. Sec. 278(a), Revenue Act of 1926. We have held that respondent has fully sustained his burden of proving fraud. Consequently, the statute was not tolled as to the year 1925, the determination of deficiency was properly made, and the 50 percent additional tax was properly assessed. (5) Petitioner contends that as respondent has the burdent of proving fraud - in order to prevent the tolling of the statute of limitations as to the year 1925, and in order to justify the imposition of the 50 percent additional*752 tax as to each year - the burden is shifted so as to require him to prove that deficiencies in tax existed. This contention is without merit. While respondent has the burden of proof of fraud, if he is successful in establishing that fact the presumption of correctness of his determination of deficiencies thereupon immediately revives and must be overcome by positive evidence on the part of the petitioner. The statute of limitations does not shift the burden of proof; it merely raises a bar to the assertion by the respondent of any claim for a deficiency in tax; and, once that bar has been removed by proof of fraud, we are where we were before. Cf. It follows, therefore, for the same reasons given as to the later years, that respondent's determination of the 1925 deficiency is also correct and will be sustained, together with the additional tax of 50 percent assessed on account of fraudulent failure to disclose income. Reviewed by the Board. Judgment will be entered under Rule 50. Footnotes 1. Revenue Act of 1926, sec. 275(b); Revenue Act of 1928, sec. 293(b). ↩