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DONALD PEPPERS AND BARBARA JEAN PEPPERS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentPeppers v. CommissionerDocket No. 9157-78.
United States Tax Court T.C. Memo 1981-728; 1981 Tax Ct. Memo LEXIS 8; 43 T.C.M. 160; T.C.M. (RIA) 81728;December 28, 1981. Carl J. Character , for the petitioners.John P. Graham , for the respondent.EKMANMEMORANDUM FINDINGS OF FACT AND OPINION
EKMAN,
Judge : Respondent determined deficiencies in petitioners' income tax and additions to tax for the years and in the amounts as follows:
1981 Tax Ct. Memo LEXIS 8">*8Additions to Tax Taxable Year Deficiencies in Under Sec. 6653(b) Ending Income Tax for Donald Peppers 1 December 31, 1971 $ 3,491.30 $ 2,038.15 December 31, 1972 23,141.55 12,537.01 December 31, 1973 44,904.29 22,884.15 The issues for our decision are (1) whether petitioners understated their taxable income and underpaid their income tax liabilities for taxable years 1971, 1972 and 1973 and (2) whether any part of the underpayment of income tax for taxable years 1971, 1972 and 1973 was due to fraud.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts, the first supplemental stipulation of facts, and attached exhibits are incorporated herein by this reference.
Donald Peppers and Barbara Jean Peppers, petitioners, resided in Beachwood, Ohio at the time they filed their petition herein. They filed their joint Federal income tax return for taxable year 1971 on October 3, 1973, for taxable year 1972 on September 25, 1974, and for taxable year 1973 on October 2, 1974.
Donald Peppers was a practicing attorney during years 1971 through 1973 specializing in criminal law. During September 1971, Mr. Peppers organized the Quincy Avenue Money Exchange, Inc. (hereinafter Quincy Money Exchange), an Ohio corporation which engaged in a check cashing1981 Tax Ct. Memo LEXIS 8">*9 business, the sale of food stamps under the Federal Food Stamp program, and other related activities. Mr. Peppers was president and manager of Quincy Money Exchange from its formation through 1973 and owned approximately 35 percent of its outstanding stock. 2
Petitioners' business ventures during the taxable years involved herein also included the owning and racing of horses. During years 1970 through 1973 petitioners owned horses with a cost basis to them on December 31 of each year as follows:
1981 Tax Ct. Memo LEXIS 8">*10Horse 12/31/70 12/31/71 12/31/72 12/31/73 Happy Beau $ 3,000 $ 3,333 $ 3,333 $ 3,333 Banquet Lady 2,350 2,683 2,683 2,683 Staunch Ruler 6,000 6,333 6,333 6,333 Angenora (Hy Relic) 5,000 5,000 5,000 King Gable 3 5,000 Emulsion 2,500 2,500 Prince Stone 10,000 10,000 Money Exchange 3,700 3,700 Ma Ma Ruth 3,700 3,700 Jim's Reject 4,200 4,200 B.J.'s Don Don 2,800 2,800 Staunch Beauty 7,000 7,000 Handsome Saint 3,500 Happy Angel 1,500 Petares Scamp 3,500 Sal's Sweet Sally 3,000 Band Note 1,200 Miss Molly Magoo 3,000 Miss Tenderoni 1,700 Impressive Pet 3,000 Beaverstone 7,500 $ 11,350 $ 22,349 $ 51,249 $ 79,149 During September 1972 petitioners purchased farm property known as Maple Lakes Farm apparently in connection with their horse owning and racing activities. Petitioners made improvements to Maple Lakes Farm during 1972 and 1973 with a cost basis to them of said improvements on December 31 of each year as follows:
12/31/72 12/31/73 Horse barn and track $ 41,332.00 $ 98,549.64 Barnbars, stall gates, angle iron, and aluminum tubing 1,361.49 Concrete 5,227.65 Lumber 733.46 1,850.34 Electric 4,880.50 Sand and gravel 12,346.40 Trenching and track grading 550.00 8,381.25 Asphalt paving 1,900.00 2,550.00 Labor and materials 1,146.00 3,346.00 $ 45,661.46 $ 138,493.27 During the taxable years involved herein petitioners also owned numerous rental properties. Petitioners acquired property at 1524 E. 123 Street, Cleveland, Ohio, on November 14, 1968, property at Quincy Avenue, Cleveland, Ohio, during 1970, property at Superior Avenue during 1970, and property at 1622 Holyrood, Cleveland, Ohio during 1972. 4 On their 1971 Federal income tax1981 Tax Ct. Memo LEXIS 8">*11 return petitioners reported rents received and deducted expenses for depreciation and "other expenses" with respect to the properties at Quincy Avenue, 1524 E. 123 Street, and Superior Avenue. On their 1972 and 1973 Federal income tax returns petitioners reported rents received and deducted expenses for depreciation and "other expenses" with respect to the properties at Quincy Avenue, 1524 E. 123 Street, Superior Avenue and 1622 Holyrood. On July 13, 1977 a deed was filed with the Cuyahoga County Records recording petitioner's transfer of the Holyrood property to Nathaniel and Elizabeth Green and on November 22, 1977 a deed was filed with the Cuyahoga County Records recording petitioners' transfer of the Quincy Avenue property to GBG, Inc.5
1981 Tax Ct. Memo LEXIS 8">*12 During the taxable years involved herein one Robert Stone made sizeable loans to Quincy Money Exchange. Notes to Mr. Stone were signed by Mr. Peppers and Ms. Green as officers of Quincy Money Exchange. The loans were substantially repaid with funds from Quincy Money Exchange.
Petitioners purchased a dishwasher for $ 249.99 from Americo Wholesale Plumbing during 1972. The dishwasher was delivered to their personal residence and paid for to the extent of $ 200 by a personal check drawn by Mr. Peppers.
Special agent Olcott Abbott of the Intelligence Division of the Internal Revenue Service was initially the agent assigned to petitioners' case. His first contact with petitioners occurred in late October 1974. Subsequently, Robert Milliken, a special agent for the Criminal Investigation Divison of the Internal Revenue Service who had been investigating Quincy Money Exchange, was assigned to petitioners' case. Special agent Milliken determined by means of tracing that funds were being diverted from Quincy Money Exchange to petitioners and petitioners did not report those amounts on their joint returns. Mr. Milliken also learned that petitioners had unreported gambling winnings1981 Tax Ct. Memo LEXIS 8">*13 related to horse racing wagers in the amount of $ 5,000 each year for years 1971, 1972 and 1973. 6
Petitioners reported a loss for 1971, adjusted gross income of $ 12,182.46 and taxable income of $ 7,335.09 for 1972, and a loss for 1973. In view of petitioners' inadequate books and records, respondent computed petitioners' tax liability for taxable years 1971, 1972 and 1973 using the net worth method of reconstructing income and determined that petitioners understated their adjusted gross income in the amount of $ 34,263.05 for taxable year 1971, $ 80,452.45 for taxable year 1972 and $ 125,999.87 for taxable year 1973 and their taxable income in the amount of $ 17,596.79 for taxable year 1971, in the amount of $ 80,279.82 for taxable year 1972 and in the amount of $ 108,867.55 for the taxable year 1973. The following is a summary of the net worth computations as determined by respondent:
1981 Tax Ct. Memo LEXIS 8">*14Assets Dec. 31, 1970 Dec. 31, 1971 Cash On Hand $ 200.00 $ 2,000.00 Cash in Banks 7 1,271.42 905.29 Account Receivable (John Carswell) Automobiles 8 22,963.60 19,258.75 Farm Equipment Real Estate and Improvements 9 107,115.33 106,900.65 Horses 11,350.00 22,349.00 TOTAL $ 142,900.35 $ 151,413.69 Assets Dec. 31, 1972 Dec. 31, 1973 Cash On Hand $ 200.00 Cash in Banks 3,315.82 $ 688.77 Account Receivable (John Carswell) 2,000.00 Automobiles 25,023.15 25,023.15 Farm Equipment 5,000.00 8,654.78 Real Estate and Improvements 245,445.04 337,620.29 Horses 51,249.00 79,149.00 TOTAL $ 330,233.01 $ 453,135.99 1981 Tax Ct. Memo LEXIS 8">*15
Liabilities Dec. 31, 1970 Dec. 31, 1971 Accounts Payable 10 $ 2,968.72 $ 3,197.38 Notes Payable 11 14,446.00 15,423.30 Mortgages Payable 12 63,785.03 58,816.17 Accumulated Depreciation 13 5,788.00 17,823.00 TOTAL $ 86,987.75 $ 95,259.85 Liabilities Dec. 31, 1972 Dec. 31, 1973 Accounts Payable $ 17,524.45 $ 24,303.57 Notes Payable 11,692.16 11,585.53 Mortgages Payable 140,771.48 138,709.94 Accumulated Depreciation 22,305.00 46,415.00 TOTAL $ 192,293.09 $ 221,014.04 Increase in Net Worth Dec. 31, 1970 Dec. 31, 1971 Assets $ 142,900.35 $ 151,413.69 Liabilities 86,987.75 95,259.85 Net Worth 55,912.60 56,153.84 Net Worth at Beginning of Year 55,912.60 Increase in Net Worth 241.24 Increase in Net Worth Dec. 31, 1972 Dec. 31, 1973 Assets $ 330,233.01 $ 453,135.99 Liabilities 192,293.09 221,014.04 Net Worth 137,939.92 232,121.95 Net Worth at Beginning of Year 56,153.84 137,939.92 Increase in Net Worth 81,786.08 94,182.03 Understatement of Adjusted Gross Income Dec. 31, 1971 Dec. 31, 1972 Dec. 31, 1973 Increase in Net Worth $ 241.24 $ 81,786.08 $ 94,182.03 Adjustment to Increase in Net Worth 14 21,555.55 10,848.83 19,685.52 Adjusted Gross Income as Corrected 21,796.79 92,634.91 113,867.55 Adjusted Gross Income Per Return (12,466.26) 12,182.46 (12,132.32) Understatement of Adjusted Gross Income $ 34,263.05 $ 80,452.45 $ 125,999.87 1981 Tax Ct. Memo LEXIS 8">*17 The parties by their stipulation have agreed to most of these amounts. During taxable years 1971, 1972, and 1973 petitioners did not receive any gifts, inheritances, legacies, or devises. Petitioners' two sons, Michael and Stephen, were minors under Ohio law for the taxable years involved herein.
OPINION
I. Understatement of Income. In view of petitioners' inadequate books and records, respondent computed petitioners' tax liability for taxable years 1971, 1972, and 1973 using the net worth method of reconstructing income and determined that petitioners understated their adjusted gross income in the amounts of $ 34,263.05 for taxable year 1971, $ 80,452.45 for taxable year 1972 and $ 125,999.87 for taxable year 1973. Petitioners do not contest respondent's right to use the net worth method as evidence of unreported income, see
Lipsitz v. Commissioner , 21 T.C. 917">21 T.C. 917220 F.2d 871">220 F.2d 871 (4th Cir. 1955), cert. denied350 U.S. 845">350 U.S. 845 (1955), but challenge the accuracy of portions of respondent's calculations. SeeHolland v. United States , 348 U.S. 121">348 U.S. 121Welch v. Helvering , 290 U.S. 111">290 U.S. 111Rule 142(a), Tax Court Rules of Practice and Procedure. After the parties entered into a stipulation, petitioners filed a motion to the relieved from parts of the stipulation of facts and the first supplemental stipulation of facts. Inasmuch as petitioners did not favor us with briefs, it is from that motion, in conjunction with evidence presented at trial, that we glean from petitioners their objections to respondent's net worth computations. 15
A. Bank Accounts. Petitioners first contend that respondent erroneously included the funds from account number 28713, Quincy Savings and Loan, and account number X8714, 1981 Tax Ct. Memo LEXIS 8">*19 Quincy Savings and Loan, see footnote 7,
supra , in the net worth computatons for the taxable years involved herein. Petitioners contend that those bank accounts were owned by their two sons, Michael and Stephen.Based upon the record, we find that petitioners have sustained their burden of proving that respondent improperly included these two small accounts in the net worth of petitioners. Mr. Peppers testified without contradiction that those accounts were trust accounts for the benefit of their two minor children. We need not rely solely on the testimony of Mr. Peppers to make such a finding, however. These accounts, containing identical amounts during the years in question, were categorized as "fiduciary accounts" on the Quincy Savings and Loan account form. Furthermore, account number 28713 was in the name of Michael Peppers and account number X8714 was in the name of Stephen Peppers, the names of the sons were placed on the signature cards in the areas designated for "Name of Beneficiary" and the address of the Peppers residence was placed in the areas on the signature cards designated for "Address of Fiduciary who will hold Passbook." The funds from these accounts1981 Tax Ct. Memo LEXIS 8">*20 were not assets of petitioners to be included in their opening and closing net worths for taxable years 1970 through 1973. It is true that since Mrs. Peppers signed the signature cards she could withdraw funds from the account, but such a withdrawal would be as a fiduciary and not as the owner of the funds. Accordingly, we find that it was improper for respondent to include the funds from these fiduciary accounts in the net worth of petitioners for the taxable years involved. 16
Petitioners next contend that respondent erroneously included in the net worth computations account number XXX-XX4995, Continental Bank, see footnote 7,
supra . It is petitioners' position that this account was a trust account with Mr. Peppers acting only in a fiduciary capacity and the true owner of the funds was a client of Mr. Peppers.Again, we find petitioners have satisfied their burden. The name of the account was "Donald Peppers - (Trust Account)". Respondent's own computations listed this account as "Trust a/c". Although the record is unclear at best as to the origin1981 Tax Ct. Memo LEXIS 8">*21 and purpose of this account, Mr. Peppers at trial made it clear that he never "received any benefit" from this account, which he referred to as the "attorney trust account".
We note that all three accounts in dispute contained relatively small amounts for the years in queston and that petitioners do not dispute respondent's determination as to the inclusion of the eight other bank accounts in the net worth computation, or respondent's determination as to the amounts in any of the 11 accounts. Petitioners have offered logical explanations as to why these relatively minor three bank accounts were separately maintained and accordingly why these accounts should not be included in the net worth computations. In view of all the foregoing, we find that respondent's determination is to be adjusted to exclude from the net worth computations bank account numbers XXXXX, X8714, and XXX-XX4995.
B. John Carswell - Account Receivable, Account Payable. Petitioners contend that the account receivable of John Carswell listed in respondent's determination for $ 2,000 as of December 31, 1973, was an account receivable due to Quincy Money Exchange and not to petitioners and therefore should be1981 Tax Ct. Memo LEXIS 8">*22 excluded from the net worth computation. Petitioners also contend that the account payable to John Carswell listed in respondent's determination for $ 3,000 as of December 31, 1972, was an obligation due from Quincy Money Exchange and not from petitioners.
Although at first glance a finding in petitioners' favor would appear to require a simple decrease and increase with a result that would not be beneficial to petitioners, the computations show that that is not necessarily the case. The resulting adjustment for the account receivable would simply be a lower closing net worth as of December 31, 1973, than that determined by respondent and therefore a lower increase in net worth for 1973. The resulting adjustment for the account payable would be a greater closing net worth as of December 31, 1972, than that determined by respondent and therefore a greater increase in net worth for 1972, but correspondingly, a greater beginning net worth for 1973 and therefore a lower increase in net worth for 1973 than that determined by respondent.
In any event, we find that petitioners have not sustained their burden of proving that the account receivable and the account payable belonged to1981 Tax Ct. Memo LEXIS 8">*23 Quincy Money Exchange. Petitioners did not submit any evidence in support of their contention; the account receivable was only briefly referred to at trial, and the account payable not referred to at all. 17 Accordingly, it was not improper for respondent to include the account receivable and the account payable of John Carswell in the net worth computation.
C. Quincy Avenue Property. Petitioners contend that they were not the owners of the Quincy Avenue property during the taxable years 1971 through 1973 and therefore it should not be included in the net worth computation for those years. It is their position that the property was acquired by them during 1970 at a purchase cost of $ 35,000 but was subsequently transferred to Quincy Money Exchange as a contribution to capital. We assume petiioners are contending that they transferred the property upon the formation of Quincy Money Exchange during 1971 and therefore closing net worth for taxable years 1971, 1972, and 1973 are to be affected.
1981 Tax Ct. Memo LEXIS 8">*24 Initially we note that if indeed such a transfer occurred, instead of a cost basis in Quincy Avenue property of $ 35,000 in their net worth, petitioners would have a cost basis in Quincy Money Exchange of $ 35,000 in their net worth after the transfer (disregarding for the moment the impact of the mortgage and the tax escrow funds). See section 358, also see our discussion,
infra , as to the mortgage on the property. Beside the initial adjustment to assets in the net worth computations, see footnote 9,supra , if petitioners did not own the Quincy Avenue property at the end of years 1971 through 1973, adjustments to respondent's computations would include a decrease in closing net worth for the tax escrow funds for the proprty, see footnote 9,supra , and increases in closing net worth for the mortgage payable, see footnote 12,supra , for the note payable for improvements to the property, see footnote 11,supra , and for accumulated depreciation, see footnote 13,supra .In any event petitioners have not sustained their burden of proving that the Quincy Avenue property was improperly included by respondent in the net worth computation. Again, petitioners offered1981 Tax Ct. Memo LEXIS 8">*25 no evidence in support of their position besides their testimony. The transfer which petitioners contend occurred during 1971 was never recorded in the Cuyahoga County Records. On their Federal tax returns for years 1971, 1972, and 1973 petitioners specifically listed, and reported rents received and deducted expenses for depreciation and "other expenses" with respect to, the Quincy Avenue property. The original escrow fund and the mortgage were in the names of petitioners and the loan records through 1973 continued to reflect petitioners as the obligors of the loan. 18 Furthermore, on November 22, 1977 a deed was filed with the Cuyahoga County Records office recording the transfer of the Quincy Avenue property to GBG, Inc. by petitioners, and not Quincy Money Exchange. In view of the foregoing, we find that petitioners have not sustained their burden of showing that it was improper for respondent to include the Quincy Avenue property as an asset of petitioners during taxable years 1971 through 1973.
1981 Tax Ct. Memo LEXIS 8">*26 D. 1622 Holyrood Property.
Petitioners contend that they were not the owners of the Holyrood property during taxable years 1972 and 1973 and therefore it should not be included in the net worth computations. Petitioners contend, in contrast to their position with respect to the Quincy Avenue property, that they never were the owners of the Holyrood property. Although the property was acquired in their names without any further notation, they insist that they acted only as agents for the true purchaser, Quincy Money Exchange.
We find that petitioners again have failed to sustain their burden. Once again, petitioners offered no evidence in support of their position besides their testimony. The property was purchased in their names and there is no notation on the deed, or elsewhere in the record other than their testimony, that they were acting only as agents. Both the first and second mortgages for the property were executed in their names. 19 The mortgage loan account records continually reflected petitioners as the owners of the property for 1972 and 1973. On their Federal income tax returns for years 1972 and 1973 petitioners specifically listed, and reported rents1981 Tax Ct. Memo LEXIS 8">*27 received and deducted expenses for depreciation and "other expenses" with respect to, the Holyrood property. Furthermore, on July 13, 1977 a deed was filed with the Cuyahoga County Records recording petitioners', and not Quincy Money Exchange's, transfer of the Holyrood property to Nathaniel Green and Elizabeth Green. In view of the foregoing, we find that petitioners have not sustained their burden of showing that it was improper for respondent to include the Holyrood property as an asset of petitioners during taxable years 1972 and 1973.
E. Loans from Robert Stone. Petitioners contend that during the taxable years involved herein they received numerous sizeable loans from one Robert Stone. They contend that their stock was collateral for the loans and that1981 Tax Ct. Memo LEXIS 8">*28 Phyllis Green signed the notes only upon the insistence of Mr. Stone's lawyer. Four notes were referred to at trial - two for $ 25,000 each, another for $ 50,000, and one for $ 20,000.
We find that these loans were in fact to Quincy Money Exchange. The notes were not signed by Mr. Peppers in a personal capacity but rather as president of Quincy Money Exchange. Similarly, Phyllis Green signed the notes as an officer of Quincy Money Exchange and not as any type of guarantor; nor did she sign, as petitioners vaguely contend, as some kind of assurance that if payment were not made on the notes the stock of Quincy Money Exchange would be transferred to Mr. Stone. Amounts repaid on the loans were repaid with funds from Quincy Money Exchange. There was no written evidence of any type of collateral agreement for the loans. Furthermore, Mr. Peppers consistently represented to both special agents of respondent that these loans were loans to the corporation and were not personal in any way. Accordingly, petitioners have not sustained their burden of proving that they were the recipients of sizeable loans from Robert Stone during the years in question.
F. Other contentions. Petitioners1981 Tax Ct. Memo LEXIS 8">*29 contend that they are entitled to a deduction for an amount, $ 249.99, paid to Americo Wholesale Plumbing, Inc., because, they contend, it was an expense incurred "in connection with the income property". The documents entered into evidence show that the expense involved petitioners' personal purchase of a dishwasher, that the dishwasher was delivered to their personal residence and that it was paid for, to the extent of $ 200, by a personal check drawn by Mr. Peppers. Petitioners offered no evidence as to why they are entitled to this deduction and accordingly, it is denied. Section 262.
Petitioners contend that they are entitled to itemize deductions. However, petitioners did not claim itemized deductions on the Federal income tax returns filed for the years involved herein and they offered no evidence as to itemized deductions. Respondent's determination that petitioners were entitled to a standard deduction in lieu of itemized deductions, accordingly, has not been shown by petitioners to be erroneous. 20
1981 Tax Ct. Memo LEXIS 8">*30 Finally, at trial petitioners attempted to discredit the tracing of funds by special agent Milliken. Petitioners' attempts in this regard were no more than attacks on isolated transactions. We have examined all the checks received in evidence and conclude that respondent properly determined by the tracing method that funds were diverted from Quincy Money Exchange to petitioners during the taxable years involved herein. 21
II. Fraud. 1981 Tax Ct. Memo LEXIS 8">*31 The final issue is whether part of the underpayments in each year for taxable years 1971, 1972, and 1973 was due to fraud within the meaning of section 6653(b). Respondent has the burden of proving fraud by clear and convincing evidence. Section 7454(a);
Rule 142(b), Tax Court Rules of Practice and Procedure ;Baumgardner v. Commissioner , 251 F.2d 311">251 F.2d 311Miller v. Commissioner , 51 T.C. 915">51 T.C. 915The existence of fraud is a question of fact to be resolved by an examination of all the facts and circumstances.
Estate of Pittard v. Commissioner , 69 T.C. 391">69 T.C. 391Stratton v. Commissioner , 54 T.C. 255">54 T.C. 255Otsuki v. Commissioner , 53 T.C. 96">53 T.C. 96Mitchell v. Commissioner , 118 F.2d 308">118 F.2d 30853 T.C. 96"> However, because direct evidence of fraud is seldom available, respondent's burden may be sustained with circumstantial evidence.Otsuki v. Commissioner ,supra .Spies v. United States , 317 U.S. 492">317 U.S. 492The mere failure to report income is not enough to establish fraud.
Merritt v. Commissioner , 301 F.2d 484">301 F.2d 48453 T.C. 96"> However, the consistent and substantial understatement of income is evidence of fraud.Otsuki v. Commissioner ,supra .Gromacki v. Commissioner , 361 F.2d 727">361 F.2d 727301 F.2d 484"> ;Merritt v. Commissioner ,supra Lollis v. Commissioner , 595 F.2d 1189">595 F.2d 1189Arlette Coat Co. v. Commissioner , 14 T.C. 751">14 T.C. 751After careful examination of the entire record we find that respondent has sustained his burden of proving that part of the underpayments for each of the taxable years 1971, 1972, and 1973 was due to fraud.
During the taxable years1981 Tax Ct. Memo LEXIS 8">*33 involved herein petitioners consistently and substantially understated their income. A finding in favor of petitioners as to their numerous objections to respondent's net worth computations, with the exception of the alleged loans from Robert Stone, would only cause minor adjustments in the overall figures as determined by respondent and substantial understatements of income for each year would still exist. Petitioners understated their taxable income by over $ 15,000 for 1971, over $ 75,000 for 1972 and over $ 100,000 for 1973, substantial understatements especially in view of the amounts reported on their returns. See
Logan v. Commissioner , 595 F.2d 365">595 F.2d 365361 F.2d 727"> Gromacki v. Commissioner ,supra .During 1971, 1972, and 1973 Mr. Peppers was a practicing attorney in Ohio. In1981 Tax Ct. Memo LEXIS 8">*34 addition to being involved in numerous business undertakings, he was president and manager of a business which handled substantial sums of money regularly. Petitioners did not keep adequate books and records. We are convinced, in light of his education, cf.
Iley v. Commissioner , 19 T.C. 631">19 T.C. 631Powell v. Granquist , 252 F.2d 56">252 F.2d 5653 T.C. 96"> Otsuki v. Commissioner ,supra .Notwithstanding petitioners' apparent cooperation with the Internal Revenue Service during most of the investigation of their income tax liability, 23 see
Lord v. Commissioner , 525 F.2d 741">525 F.2d 74160 T.C. 199">60 T.C. 199 (1973),252 F.2d 56"> , we find that respondent has clearly and convincingly shown that part of the underpayments for each year 1971, 1972, and 1973 was due to fraud. We make this finding in light of Mr. Peppers' educational background, 1981 Tax Ct. Memo LEXIS 8">*35 his obvious experience in business undertakings and knowledge of business affairs, the lack of adequate books and records, the consistent and substantial understatement of income, and petitioners' 11th hour contention that the source of the increase in net worth was an alleged loan from one Robert Stone and not the gambling winnings which Mr. Peppers admitted to special agent Milliken were unreported and the diverted funds from Quincy Money Exchange. SeePowell v. Granquist ,supra 348 U.S. 121"> ,Holland v. United States ,supra United States v. Massei , 355 U.S. 595">355 U.S. 595In view of the foregoing,
Decision will be entered under Rule 155 .Footnotes
1. Respondent does not seek to impose additions to tax under sec. 6653(b) for Barbara Jean Peppers.↩
2. Phyllis Green owned 50 percent and Dr. John Gresham owned approximately 15 percent. Ms. Green was also an officer of Quincy Money Exchange.↩
3. King Gable was sold August 1972 for $ 1,200 resulting in a business loss of $ 2,800.↩
4. A mortgage agreement was executed in the names of petitioners on the Quincy Avenue property with Quincy Avenue Savings & Loan. A first mortgage was executed in the names of petitioners on the Holyrood property with Quincy Savings & Loan and a second mortgage was executed in their names with Beachwood Mortgage Company. ↩
5. Phyllis Green signed the deed for the Quincy Avenue property for Donald Peppers under a power of attorney executed August 6, 1977.↩
6. The amounts reported in the joint returns relating to horse racing were amounts petitioners received as owners of winning horses, i.e., the purses, and not amounts received as winners of wagers.↩
7.
Dec. 31, 1970 Dec. 31, 1971 Continental Bank, Acct. # XXX-X9530 $ 535.11 $ 707.60 Continental Bank, Acct. # X2238 Quincy Savings & Loan, Acct. # X3986 233.10 3.92 Quincy Savings & Loan, Acct. # X8713 52.12 54.74 Quincy Savings & Loan, Acct. # X6851 38.39 40.31 Quincy Savings & Loan, Acct. # X8714 52.12 54.74 Quincy Savings & Loan, Acct. # X5417 3.49 3.49 Continental Bank, Trust Account, XXX-XX4995 27.00 Society National Bank, Acct. # XXX-2233 2.54 Central National Bank, Acct. # X1814 356.55 15.49 Central National Bank, Acct. # X0693 (2) (2) TOTAL $ 1,271.42 $ 905.29 ↩ Dec. 31, 1972 Dec. 31, 1973 Continental Bank, Acct. # XXX-X9530 $ 159.35 $ 90.63 Continental Bank, Acct. # X2238 180.75 12.71 Quincy Savings & Loan, Acct. # X3986 3.92 3.92 Quincy Savings & Loan, Acct. # X8713 56.09 56.09 Quincy Savings & Loan, Acct. # X6851 41.31 41.31 Quincy Savings & Loan, Acct. # X8714 56.09 56.09 Quincy Savings & Loan, Acct. # X5417 3.49 3.49 Continental Bank, Trust Account, XXX-XX4995 160.10 424.53 Society National Bank, Acct. # 1XX-2233 Central National Bank, Acct. # X1814 2,656.72 Central National Bank, Acct. # X0693 (2) TOTAL $ 3,315.82 $ 688.77 8.
1968 Cadillac - Date $ 7,280.00 Acquired Feb. 29, 1968 1967 Lambroghini, Nov. 6, 1969 15,683.60 1971 Cadillac, May 10, 1971 8,800.15 1970 Mangusta-Detomaso, May 2, 1971 10,458.60 1971 Lambroghini, April 1, 1972 TOTAL $ 22,963.60 $ 19,258.75 ↩ 1968 Cadillac - Date Acquired Feb. 29, 1968 1967 Lambroghini, Nov. 6, 1969 1971 Cadillac, May 10, 1971 8,800.15 8,800.15 1970 Mangusta-Detomaso, May 2, 1971 1971 Lambroghini, April 1, 1972 16,223.00 16,223.00 TOTAL $ 25,023.15 $ 25,023.15 9.
Beacon Drive-Residence $ 29,900.00 $ 29,900.00 1524 E. 123 Street 3,700.00 3,700.00 Quincy Avenue property 35,000.00 35,000.00 Tax Escrow Reserve 1,282.20 1,067.52 Superior Avenue property 37,233.13 37,233.13 1622 Holyrood Tax Escrow Reserve Maple Lakes Farm Tax Escrow Reserve Improvements to Maple Lakes Farm TOTAL $ 107,115.33 $ 106,900.65 ↩ Beacon Drive-Residence $ 29,900.00 $ 29,900.00 1524 E. 123 Street 3,700.00 3,700.00 Quincy Avenue property 35,000.00 35,000.00 Tax Escrow Reserve 1,275.65 709.37 Superior Avenue property 37,233.13 37,233.13 1622 Holyrood 6,200.00 6,200.00 Tax Escrow Reserve 181.60 188.92 Maple Lakes Farm 86,000.00 86,000.00 Tax Escrow Reserve 293.20 195.60 Improvements to Maple Lakes Farm 45,661.46 138,493.27 TOTAL $ 245,445.04 $ 337,620.29 10.
Dec. 31, 1970 Dec. 31, 1971 Society National Bank (Master Charge) $ 449.10 $ 381.97 Continental Bank (Master Charge) 293.42 723.27 Central National Bank (Master Charge) 1,699.39 1,102.03 Cleveland Trust Bank (Bank Americard) 301.81 855.11 Ohio State University 225.00 135.00 Richard Ryan John Carswell Ralph Coleman Law-Barker Scan O Vision Brookpark Builders TOTAL $ 2,968.72 $ 3,197.38 ↩ Dec. 31, 1972 Dec. 31, 1973 Society National Bank (Master Charge) $ 148.54 $ 506.84 Continental Bank (Master Charge) 484.71 1,318.84 Central National Bank (Master Charge) 1,105.14 1,167.93 Cleveland Trust Bank (Bank Americard) 541.67 985.84 Ohio State University 44.39 Richard Ryan 2,200.00 600.00 John Carswell 3,000.00 Ralph Coleman 10,000.00 10,000.00 Law-Barker 3,500.00 Scan O Vision 648.78 Brookpark Builders 5,575.34 TOTAL $ 17,524.45 $ 24,303.57 11.
Dec. 31, 1970 Dec. 31, 1971 Prudential Ins. Co. (policy loan) $ 676.00 Prudential Ins. Co. (policy loan) 932.00 Joseph Fader (personal loan) 2,500.00 Quincy Savings & Loan (property improvements) 4,576.20 3,504.80 Less Deferred Interest (1,094.90) (838.60) Quincy Savings & Loan (improvements) 1,203.75 Less Deferred Interest (78.75) Quincy Savings & Loan (improvements) 2,674.92 Less Deferred Interest (174.92) Quincy Savings & Loan (improvements) 535.00 Less Deferred Interest (35.00) Quincy Savings & Loan (personal loan) Less Deferred Interest Continental Bank (loan for taxes) 893.85 Less Deferred Interest (58.41) Continental Bank 3,611.79 Less Deferred Interest (611.78) Prudential Finance (1971 Cadillac) 3,951.25 Less Deferred Interest (652.33) National City Bank (1970) Mangusta) 5,233.92 Less Deferred Interest (1,012.00) National City Bank (1971 Lambroghini) Less Deferred Interest National City Bank (1967 Lambroghini) 3,015.45 Less Deferred Interest (496.19) Union Commerce Bank 1,485.00 128.25 TOTAL $ 14,446.00 $ 15,423.30 ↩ Dec. 31, 1972 Dec. 31, 1973 Prudential Ins. Co. (policy loan) $ 676.00 $ 676.00 Prudential Ins. Co. (policy loan) 932.00 932.00 Joseph Fader (personal loan) Quincy Savings & Loan (property improvements) 2,238.60 1,069.80 Less Deferred Interest (535.70) (256.10) Quincy Savings & Loan (improvements) Less Deferred Interest Quincy Savings & Loan (improvements) Less Deferred Interest Quincy Savings & Loan (improvements) Less Deferred Interest Quincy Savings & Loan (personal loan) 6,107.74 Less Deferred Interest (566.04) Continental Bank (loan for taxes) Less Deferred Interest Continental Bank 2,006.55 401.31 Less Deferred Interest (339.86) (67.94) Prudential Finance (1971 Cadillac) 2,316.25 681.25 Less Deferred Interest (390.61) (128.89) National City Bank (1970) Mangusta) Less Deferred Interest National City Bank (1971 Lambroghini) 5,937.12 3,392.64 Less Deferred Interest (1,148.19) (656.19) National City Bank (1967 Lambroghini) Less Deferred Interest Union Commerce Bank TOTAL $ 11,692.16 $ 11,585.53 [sic] 12.
Dec. 31, 1970 Dec. 31, 1971 Prudential Ins. Co. (residence) $ 18,720.86 $ 17,880.15 Quincy Savings & Loan (Quincy Ave. prop.) 21,102.71 20,199.49 Euclid National Bank (Superior Ave. prop.) 23,961.46 20,736.53 Quincy Savings & Loan (Holyrood prop.) Quincy Savings & Loan (Maple Lakes Farm) Beachwood Mortgage Co. (2nd mortgage-Holyrood and Beacon Dr. prop.) Less Deferred Interest Northern Ohio Bank (Maple Lakes Farm purchase) TOTAL $ 63,785.03 $ 58,816.17 ↩ Dec. 31, 1972 Dec. 31, 1973 Prudential Ins. Co. (residence) $ 17,067.98 $ 16,134.09 Quincy Savings & Loan (Quincy Ave. prop.) 17,904.57 16,192.84 Euclid National Bank (Superior Ave. prop.) 17,371.19 13,670.06 Quincy Savings & Loan (Holyrood prop.) 3,563.61 2,789.56 Quincy Savings & Loan (Maple Lakes Farm) 46,864.13 45,267.09 Beachwood Mortgage Co. (2nd mortgage-Holyrood 7,720.02 and Beacon Dr. prop.) Less Deferred Interest (1,063.72) Northern Ohio Bank (Maple Lakes Farm purchase) 38,000.00 38,000.00 TOTAL $ 140,771.48 $ 138,709.94 13.
Dec. 31, 1970 Dec. 31, 1971 Automobiles $ 2,297.00 $ 7,535.00 Farm Equipment Real Estate & Improvements 2,356.00 5,784.00 Horses 1,135.00 4,504.00 TOTAL $ 5,788.00 $ 17,823.00 ↩ Dec. 31, 1972 Dec. 31, 1973 Automobiles $ 1,508.00 $ 3,016.00 Farm Equipment 200.00 1,065.00 Real Estate & Improvements 9,732.00 18,428.00 Horses 10,865.00 23,906.00 TOTAL $ 22,305.00 $ 46,415.00 14.
Dec. 31, 1971 Personal Living Expenses $ 12,517.00 Income Taxes Paid 4,165.19 Nondeductible Loss on Sale of Personal Auto 3,980.00 Nondeductible Loss on Trade-In of Auto (10 percent personal portion) 893.36 Nondeductible Loss on Trade-In of Auto (10 percent personal portion) TOTAL $ 21,555.55 ↩ Dec. 31, 1972 Dec. 31, 1973 Personal Living Expenses $ 10,112.97 $ 13,484.85 Income Taxes Paid 300.00 6,200.67 Nondeductible Loss on Sale of Personal Auto Nondeductible Loss on Trade-In of Auto (10 percent personal portion) Nondeductible Loss on Trade-In of Auto (10 percent personal portion) 435.86 TOTAL $ 10,848.83 $ 19,685.52 15. The parties have apparently agreed to replace those parts of the stipulaton of facts and first supplemental stipulation of facts which petitioners found objectionable with a stipulation that certain documents, including those attached to respondent's objection to petitioners' motion, are what they purport to be and, accordingly, are to be entered as exhibits in the record. In view of this agreement, petitioners' motion is deemed granted.↩
16. Sec. 6901 is available to respondent to reach assets transferred to a trust if certain requirements are met.↩
17. Petitioners failed even to submit any records of Quincy Money Exchange indicating that it was the owner of the account receivable and the obligor of the account payable.↩
18. Again, it is possible petitioners transferred the property without being relieved of the mortgage obligation but, as evidenced by their motion, petitioners contend only that they transferred the property and the loan obligation during 1971.↩
19. Petitioners stated at trial that they put the mortgage in their names because Quincy Money Exchange was a relatively new corporation at the time of the purchase of the Holyrood property. They contend, however, as evidenced by their motion, that the mortgages were obligations also of Quincy Money Exchange although there is no notation on the mortgage agreement or on any document in the record to that effect.↩
20. On their income tax return filed for 1971 petitioners simply listed certain expenses, i.e., medical, State tax, and interest, the sum of which appears to exceed the standard deduction. Those expenses were never added up or placed in the proper areas of the return to indicate they wished to itemize deductions and no evidence as to those expenses was presented anywhere in the record. On their 1972 return petitioners claimed $ 1,827.37 (15 percent of reproted adjusted gross income) as a standard deduction and respondent's computations allowed a $ 2,000 standard deduction.↩
21. Furthermore, in view of our determination that petitioners increased their net worth each year in taxable years 1971, 1972, and 1973 and that petitioners lack an adequate explanation as to the source of that increase in conjunction with respondent's reasonable explanation of the source, i.e., diverted funds from Quincy Money Exchange and horse race gambling winnings, we find that respondent's determination that the source of petitioner's increase in net worth was taxable income is not erroneous. See
Holland v. United States , 348 U.S. 121">348 U.S. 121United States v. Massei , 355 U.S. 595">355 U.S. 595Kramer v. Commissioner , 389 F.2d 236">389 F.2d 236↩22. If we accept petitioner's figures for 1971, technically there would be a small decrease in net worth for that year but that is more than compensated for by the nondeductible expenditures.↩
23. We note that it was during this cooperative period that Mr. Peppers consistently represented to both special agent Abbott and special agent Milliken that the loans from Robert Stone were to Quincy Money Exchange and not personal.↩
Document Info
Docket Number： Docket No. 9157-78.
Citation Numbers： 43 T.C.M. 160, 1981 Tax Ct. Memo LEXIS 8, 1981 T.C. Memo. 728
Filed Date： 12/28/1981
Precedential Status： Non-Precedential
Modified Date： 11/21/2020