Hague v. Commissioner , 45 B.T.A. 104 ( 1941 )

ESTATE OF ROBERT LYONS HAGUE, CITY BANK FARMERS TRUST COMPANY AND WALTER E. GODFREY, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

MARY LEWIS HAGUE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Hague v. Commissioner

Docket Nos. 103352, 103355.

United States Board of Tax Appeals

45 B.T.A. 104; 1941 BTA LEXIS 1181;

September 12, 1941, Promulgated

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Robert Lyons Hague and Mary Lewis Hague, husband and wife, filed a joint income tax return for 1936. Hague died in March 1939. The deficiency resulted from the inclusion as income of substantial unexplained deposits in two bank accounts belonging to Hague. Hague kept no books of account, his only records being check stubs, canceled checks, and bank statements. Separate petitions were filed by Mary Lewis Hague and by the estate of Robert Lyons Hague. No part of the sums reflected by the unexplained deposits in her husband's bank accounts belonged to Mary Lewis Hague. Held, that as to the estate of Robert Lyons Hague the respondent is justified in treating as income the bank deposits to the extent not shown to be of a character other than income, but as to Mary Lewis Hague none of the deposits in question constituted income and as to her there is no deficiency.

Fred B. Angevine, Esq., Richard O. Merrick, Esq., Aaron H. Harx, Esq., and Joseph B. Uniacke, Esq., for the petitioners.

Allen T. Akin, Esq., for the respondent.

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TURNER

The respondent determined a deficiency in income tax for 1936 in the amount of $208,104.25. In the deficiency notice addressed to Robert L. Hague and Mary Lewis Hague, husband and wife, the respondent increased the reported income by the amount of $343,192.61, with the explanation that an analysis of bank accounts maintained by Robert L. Hague disclosed unexplained deposits in that amount and that the said amount had been added to income in determining the deficiency herein. Petitioners allege that the respondent erred in determining that the said $343,192.61 constituted income to them, either jointly or severally.

FINDINGS OF FACT.

Robert Lyons Hague died on March 8, 1939. The petitioners in Docket No. 103352 are the executors of his estate. Petitioner Mary Lewis Hague is an individual residing in New York City and during the year 1936 was the wife of Robert Lyons Hague. During that year Hague and his wife resided together at the Ritz Tower Hotel, New York City. They filed a joint income tax return for 1936 with the collector of internal revenue for the third district of New York.

During the year 1936 Hague was employed as manager of the Marine Shipping Department of the Standard Oil Co. of New Jersey, 30 Rockefeller Plaza, New York City, drawing an annual salary of $45,454.56. Of that amount $39,391.92 was paid to Hague in monthly checks of $3,282.66 each, which were deposited in his personal checking account at the National City Bank. The remainder of his salary in the amount of $6,062.64 was withheld by the company and deposited in the "Employees Thrift Fund."

During the year 1936 the Standard Oil Co. paid to Hague the additional sum of $61,000 described on the company records as "Strike Expense." Of that amount $60,000 was in the form of eight checks for $7,500 each, while the remaining $1,000 was in cash from the company's petty cash fund. The eight checks were deposited by Hague in his account with the National City Bank. Hague made no accounting to the Standard Oil Co. to show how these funds were used or disbursed and there is nothing to indicate that any accounting was required or expected.

During the year 1936 the Standard Oil Co. paid to Hague as advances or reimbursement for traveling expenses in its behalf a total sum of $36,874.40. Included therein was the cost of two trips to Europe. Of the above sum $7,500 was received by Hague in cash on May 1, 1936, as an advance on traveling expenses, which amount was subsequently accounted for by him. On the same date, May 1, Hague made a cash deposit of $7,500 in his personal account at the National City Bank. Except for the $7,500 mentioned, there is nothing to indicate that any part of the above total of $36,874.40 was deposited by Hague in his personal account at the National City Bank or any other bank. A major portion of the amounts received with respect to European travel was received by Hague or his traveling associates while in Europe and expended by them there. With respect to the first trip to Europe, between January 3 and February 18, 1936, Hague refunded to the Standard Oil Co. the amount of $2,525 on August 10, 1936, by check drawn on his account with the National City Bank. With respect to the trip to Europe in July and August of 1936, Hague refunded to the Standard Oil Co. by check the amount of $2,500 on February 9, 1937. During 1936 the Standard Oil Co. also paid to Hague in addition to the above total the amount of $3,838.32 to reimburse him for expenditures made on behalf of the company. There is nothing in the record to show that any part of the $3,838.32 so received was deposited by Hague in his personal bank account.

From time to time during the year 1936 Hague borrowed various sums, ranging from $4,500 to $7,500, in the total amount of $67,000 from the National City Bank, which sums, less discount, were credited to his account with the bank. The total of the sums so credited to his account during the year 1936 was $66,877.41.

On February 20, 1936, Hague sold 163 shares of Standard Oil Co. stock for $9,510.70, which amount was credited to his account with the National City Bank.

In addition to the bank account maintained at the National City Bank, Hague opened a similar account on May 1, 1936, with the Chase National Bank. The opening deposit was $7,500 and was in the form of a check drawn on the Guaranty Trust Co.

During the year 1936 Mary Lewis Hague maintained two bank accounts with the Guaranty Trust Co., one of which was designated as her regular account and the other as her special account. Each month she received from Hague $1,000 in cash for household expenses, which amounts were deposited in her regular account. She was the beneficiary of a trust fund and the income therefrom was deposited in her special account.

From time to time during 1936 Hague asked for and received from Mary Lewis checks drawn on her regular account with the Guaranty Trust Co. for amounts ranging from $2,500 to $7,500. The checks so received, except one dated May 1 and another dated June 26, were all deposited by Hague in his account at the National City Bank. The check dated May 1 was for $7,500 and constituted the opening deposit by Hague in his account with the chase National Bank; the check dated June 26 was in the amount of $2,500 and was endorsed by Hague to Dr. E. A. Lindsey. During 1936 Hague received seven such checks from Mary Lewis, aggregating $35,250. At or about the time the above checks were deposited in his accounts at the National City Bank and the Chase National Bank, Hague deposited or caused to be deposited similar amounts to the regular account of Mary Lewis at the Guaranty Trust Co. The deposits so made in her account during 1936 totaled $35,737.

From time to time during 1936 Hague in the same manner requested checks from his brother, Cuthbert Hague. These checks, six in number, ranged from $5,000 to $8,000 and were drawn by Cuthbert Hague on his account at the Corn Exchange Bank. As in the case of checks received from Mary Lewis, Hague deposited these checks in his account at the National City Bank and on the same day or shortly thereafter made deposits in the account of Cuthbert Hague at the Corn Exchange Bank of amounts corresponding to those represented by the checks received. During 1936 Hague received in this manner from his brother a total of $39,000 and made aggregate deposits to his brother's account at the Corn Exchange Bank in the same total amount.

During the year 1936 Hague deposited or caused to be deposited in his accounts at the National City Bank and the Chase National Bank the total amounts of $502,992.83 and $26,887.62, respectively, or an aggregate amount from all sources of $529,880.45. Of the total deposits during the year, $255,730 was deposited in cash. Checks were drawn and charges were made against the two accounts during 1936 in the total amount $522,874.92. At January 1, 1936, the balance at the National City Bank, according to the bank records, was $1,509.98. There were outstanding on that date, however, checks totaling $4,498.35. At December 31, 1936, the bank records disclosed balances in Hague's accounts at the National City Bank and the Chase National Bank of $19,153.55 and $453.86, respectively. Against the account at National City Bank, however, there were outstanding on that date checks in the total amount of $15,590.25. Taking into consideration checks outstanding against the account but not yet paid by the bank, the combined balances in the two bank accounts reflected overdrafts for approximately 200 days of the year 1936. On the same basis the average combined balances for the days when the accounts reflected credit balances were approximately $5,000, and the largest combined daily balance of the year was $15,599.75, on December 28, 1936. On the basis of the balances disclosed by the bank records, however, the account at the Chase National Bank was not overdrawn on any day during the year, and the account at the National City Bank was overdrawn on approximately 50 days during the year. According to the bank statement for the account at National City Bank, the greatest balance on any day was that of $19,153.55 at December 31, 1936. The daily balances for the days when the bank records showed credit balances were much more frequently less than $5,000 than above that amount. The largest balance in the account at the Chase National Bank on any one day was the opening deposit on May 1, in the amount of $7,500.

The only records kept by Hague were his check book stubs, canceled checks, and bank statements. The checks or charges covering $309,450.23 of the total withdrawals for 1936 were in favor of known or designated payees, while the checks covering the remaining $213,424.69 withdrawn were made payable to cash. Notations appearing on the check stubs indicate that the greater portion of the $309,450.23 covered by the checks or charges in favor of designated payees were expenditures of a personal character, such as loans and investments, notes, living expenses, family assistance, etc. In some instances the notations indicate that the expenditures may have been for business purposes, while in other instances the check stubs carried no notations other than the names of the payees.

Hague usually carried substantial amounts of cash in his pockets. When he received checks he usually cashed them immediately. Upon coming home at night it was not uncommon for him to give his butler varied amounts of cash up to $10,000 to be held until the following morning. He paid some of his obligations in cash. Among those so paid was the butler's salary, and there were times when he gave cash to the butler to be paid toward apartment rent and other charges by the hotel. These latter payments were sometimes for as much as two to four thousand dollars. It was a common occurrence for Hague to give several thousand dollars to his chauffeur to be deposited in the Corn Exchange Bank or the National City Bank. The money would be in an envelope with the amount written on the outside of the envelope.

Hague and his wife, Mary Lewis Hague, were not partners or joint adventurers in any business enterprise, either in 1936 or at any other time; nor was there any estate by the entirety, joint estate, or estate in common existing between them in respect of any property, real or personal. Mary Lewis Hague took no part in the preparation or execution of the 1936 joint income tax return other than to furnish or cause to be furnished to Hague the information concerning her income and expenses. She had no interest or ownership in the bank accounts of her husband and none of the amounts deposited therein were her income.

In the joint income tax return filed by Hague and his wife for the year 1936 they reported gross income of $45,335.79, deductions of $20,742.10 and net income of $24,593.69. The income was allocated on the return as follows:

	Hague	Mary Lewis
Salary, Standard Oil Co	$45,454.56
Stock acquired from Standard Oil Co	2,271.00
Dividends	3.60
Gain on sale of stock	2,700.26
Income from profession (singing)		$5,000.00
Less expenses		(17,346.09)
		(12,346.09)
Interest		339.90
Income from trust		6,912.56
	50,429.42	(5,093.63)

In the notice of deficiency, addressed to "Mr. Robert L. Hague and Mrs. Mary Lewis Hague, Husband and Wife," the respondent increased the reported income by the sum of $343,192.61, with the following explanation:

(c) Analysis of your accounts at the Chase National Bank and the National City Bank discloses deposits in the amount of $343,192.61. Inasmuch as you have failed to satisfactorily explain these deposits, the amount of $343,192.61 has been added to your reported income.

Mary Lewis Hague and the executors acting for the estate of Robert Lyons Hague filed separate petitions alleging that the respondent erred in determining that the said sum of $343,192.61 constituted income to them, either jointly or severally.

In the Federal estate tax return filed by the executors for Robert Lyons Hague there was reported a gross estate of $363,914.84. This return shows that Hague carried life insurance in the aggregate face amount of $327,000, against which he had borrowed approximately $70,000. The return shows debts due Hague from about 90 individuals in a total amount of approximately $260,000, which debts were reported as having a total value of slightly over $50,000. The return showed debts of the decedent in the amount of $783,254.73, of which $693,967.52 had been disallowed or contested by the executors. The debts referred to included State and Federal income taxes claimed for the years 1936, 1937, and 1938 in the approximate amount of $584,000.

OPINION.

TURNER: Respondent's determination that Hague received taxable income in the amount of $343,192.61 not reported by him in his return was based on the discovery of large deposits in his bank accounts from unexplained sources. One argument by counsel for the estate seems to be that under the circumstances here, Hague now being dead, the respondent was not justified and had no authority to determine income on the basis of bank deposits and that his determination of the deficiency herein is entitled therefore to no presumption of correctness. There is ample authority for the respondent's action in using Hague's deposits as a starting point in determining his income. ; ; ; ; affd., ; and . Those cases hold that deficiencies determined by the respondent on the basis of such information are prima facie correct and that the burden is on the taxpayers to show that they are wrong. By design the statute contemplates the keeping by a taxpayer of accounts and records from which his correct income can be determined, and in the absence of such books of account the respondent must determine or verify his income from the records or sources that are available. In the instant case Hague kept no books of account and the respondent has used as the starting point for his determination the only records kept by Hague from which information could be had, namely, his check stubs, canceled checks, and bank statements. The record also indicates that the respondent has made reasonable efforts to verify his conclusions from outside sources. The fact that Hague is now dead does not change the situation; it does not detract from or add to the respondent's powers and duties; neither does it change the force and effect of his determination.

Counsel for the estate also argue that, except for some minor items not here in issue, Hague had no income over and above that reported by him on the joint return and that the deposits on which the respondent based his determination resulted from redeposits, loans, and the "kiting of checks." It is argued that such a conclusion is borne out by the fact that Hague was shown to be eccentric with respect to money items, that he withdrew and carried substantial sums of money on his person, and that these amounts were frequently redeposited in his bank accounts; that the respondent has failed to show or indicate the source or sources of such additional income; and, further, that there is no showing of any accumulation of wealth.

The accumulation of wealth during the taxable year, like the possession and use of unexplained cash, is merely evidential, and, where a taxpayer fails to keep proper books of account and is unable to explain the source of accumulated property, such accumulations may be the basis for the determination of income, but the failure to accumulate wealth during the taxable year does not negative the realization or receipt of income, particularly where it is shown as in this case that a taxpayer has expended large sums of money during the taxable year for personal uses and there is a failure on his part to show that the amounts so expended were of a character other than income earned or realized during the year.

In the instant case the facts show that Hague received during 1936 sums of money far in excess of his salary. They further show that some of the amounts so received were not income to him, but, after the sums so identified plus Hague's salary and other small items reported in the joint return have been eliminated, only approximately one-half of the amounts deposited by Hague during the year have been accounted for or explained. During 1936 Hague deposited or caused to be deposited in his accounts at the National City Bank and the Chase National Bank a total of $529,880.45. Of the amounts so deposited, the record shows that $39,391.92 represented salary, all of which was reported in the joint return; $1,035.94 represented a loan from the New England Mutual Life Insurance Co.; $9,510.70 represented proceeds from the sale of stock; $32,750 represented checks drawn in favor of Hague by Mary Lewis Hague on her account at the Guaranty Trust Co.; $39,000 represented checks similarly drawn in favor of Hague by his brother, Cuthbert Ahgue, on his account at the Corn Exchange Bank; $60,000 represented amounts received from the Standard Oil Co. and was described on its books as "Strike Expense"; $66,877.41 represented the proceeds of loans to Hague by the National City Bank less discounts; and $7,500 represented an advance on traveling expenses by the Standard Oil Co. to Hague on May 1, 1936. On brief respondent concedes that of the total deposits, $49,023.37 classified as income reported on the joint return, $67,913.35 as amounts received from loans, and $60,000 as "strike expenses" received from the Standard Oil Co. should be eliminated from income in computing the deficiency herein. The $67,913.35 described as loans and the $60,000 described as "Strike Expense" received from the Standard Oil Co. are verified as to character and amount by the facts of record, while of the $49,023.37 classified as income reported on the joint return we have been able to identify among the deposits only $39,391.92 representing salary and possibly $2,700.25 representing gain from the sale of stock. The respondent, however, has apparently satisfied himself as to the correctness of the amounts so conceded and the three items in question will be excluded from income in the amounts stated. In addition to these items there should also be excluded $32,750 covered by the checks from Mary Lewis Hague, $39,000 covered by the checks from Cuthbert Hague, $7,500 representing traveling expenses advanced by the Standard Oil Co., and $6,810.45 of the proceeds from the sale of Standard Oil Co. stock. With respect to the item last mentioned, it is to be noted that the total proceeds from the sale of such stock deposited by Hague in his account at the National City Bank was $9,510.70. In his return, however, he reported $2,700.25 as gain from the sale of stock, and, inasmuch as we find no other indication of a sale of stock by Hague during the taxable year, we assume that the gain so reported represented portion of the total proceeds of $9,510.70, leaving only $6,810.45 not excluded elsewhere. After the exclusion of the items set forth in the preceding paragraph, there remains as unidentified and unexplained bank deposits a total amount of $266,883.28.

The possession of unexplained or unidentified sums of money by an individual does not, of course, establish affirmatively or conclusively that those sums represent income. It could be possible that such sums represented loans, gifts, property or money held in a fiduciary capacity, or money or the proceeds of property acquired in prior years. In the instant case, however, there is no claim, and if there had been there is nothing in the record to substantiate a claim, that the unexplained deposits represented gifts, property or money held in trust, or money or the proceeds of property acquired in prior years, and, with respect to borrowings as a possible source of money on hand, it is to be noted that we have previously excluded all amounts shown to have been deposited in Hague's accounts as the result of loans and the same is true of amounts received for the use of the Standard Oil Co. The record also fails to substantiate the contention that the cash deposits represented the redeposit of amounts previously withdrawn. $309,450.23 of the checks drawn and the charges made against the accounts were in favor of payees other than Hague, and there is certainly no basis for saying that any part of those withdrawals was redeposited. The cash withdrawals amounted to $213,424.69, some $42,000 less than the total cash deposits of $255,730. Furthermore, comparison of the dates and amounts of cash withdrawals, the dates and amounts of cash deposits, and regard for other facts concerning Hague's cash disbursements negative any claim that the cash withdrawn from the two accounts was redeposited in any appreciable amount. The record contains testimony to the effect that Hague paid many of his obligations in cash, including such items as his butler's salary and from $2,000 to $4,000 from time to time toward apartment rent and hotel charges. The deposits made by him in the accounts of Mary Lewis Hague at the Guaranty Trust Co. and of Cuthbert Hague at the Corn Exchange Bank, totaling $74,737, to cover checks received from them were, in so far as this record shows, from the cash withdrawn from the two bank accounts or represented additional funds acquired by Hague during the year from other sources also unexplained. The same thing may be said with respect to his expenditure of most if not all of the $67,500 received by him from the Standard Oil Co. as advance traveling expenses and "Strike Expense." Clearly the theory that the unexplained deposits may be classified as redeposits is not supported by the record.

Not only do we have no explanation of the source and character of $266,883.28 of the total deposits nor any showing that the said moneys were not income, but, to the contrary and in addition to the fact that Hague did receive and disburse the amounts in question, the record does show that amounts far in excess of his salary and the amounts from other known sources were used by him as his own and for his personal enjoyment, use, and benefit. We know, for instance, that he made substantial cash payments on his obligations; that he made personal loans which totaled an amount not far below his salary for the year; and that, in addition to the amounts paid in cash to the hotel in which his apartment was located, he made further disbursements by checks to the extent of some nineteen thousand dollars. These sums were in addition to the household expense allowance of $12,000 to his wife, Mary Lewis Hague. The facts of record further indicate that some twenty-five to thirty thousand dollars were expended for the support, maintenance or benefit of various individuals, including his mother, a divorced wife, and other relatives. We also know that he expended some twenty thousand dollars to cover insurance premiums. There were further disbursements, amounting to several thousand dollars, to his personal attorney, physicians, dentists and opticians. Substantial sums were also disbursed for telephone and telegraph, flowers, automobiles, food, clubs, entertaining, gifts, and liquor. Check stubs covering numerous disbursements carry no explanation, and we are not otherwise advised as to their purpose. Some of the items described may have been, and probably were, for the benefit and use of the Standard Oil Co., but the record here is not susceptible of any conclusion that the disbursements made by Hague for his own personal pleasure, use, and benefit were less in amount than the unexplained receipts. , cited and relied on by counsel for the Hague estate, is accordingly not in point, and, to the extent of the amounts received by Hague during the year 1936 and not shown herein or conceded by the respondent to have been other than income, the respondent's determination is sustained.

The final issue has to do with the liability of petitioner Mary Lewis Hague. The respondent contends that inasmuch as a joint return was filed the liability thereunder is joint and several and that the deficiency should be determined against her in the same manner as it is determined against the estate of Robert Lyons Hague. The return was executed by Robert L. Hague, and Mary Lewis Hague took no part in its preparation except to furnish information in respect of her income and expenses. The record discloses that none of the amounts herein involved belonged to Mary Lewis Hague and that she had no ownership or interest in the bank accounts of Robert Lyons Hague, which formed the basis for the respondent's determination. None of the amounts in question was income to her and as to her there is no deficiency. ; ; and . For a contrary view, see .

Decision will be entered under Docket No. 103352 under Rule 50. Decision will be entered under Docket No. 103355 for the petitioner.