Opinion
Docket No. 44816.
1958-02-17
ALEX RUBINSTEIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Herbert L. Zuckerman, Esq., and David Zuckerman, C.P.A., for the petitioner. Henry L. Glenn, Esq., for the respondent.
Herbert L. Zuckerman, Esq., and David Zuckerman, C.P.A., for the petitioner. Henry L. Glenn, Esq., for the respondent.
Proof of contents of returns claimed to be fraudulent, held, necessary to sustain respondent's burden of proving inapplicability of statute of limitations on ground that returns filed were false or fraudulent, with intent to evade tax under section 276(a), I.R.C. 1939.
Respondent determined the following deficiencies in income tax and additions to tax of petitioner:
+-----------------------------------------------+ ¦ ¦ ¦Additions to tax ¦ +----+------------+-----------------------------¦ ¦Year¦Deficiency ¦ ¦ +----+------------+-----------------------------¦ ¦ ¦ ¦Sec. 293 (b)¦Sec. 294 (d) (2)¦ +----+------------+------------+----------------¦ ¦1942¦$1,600.05 ¦$800.03 ¦ ¦ +----+------------+------------+----------------¦ ¦1943¦1 4,711.45¦2,277.54 ¦ ¦ +----+------------+------------+----------------¦ ¦1944¦7,596.98 ¦3,798.49 ¦ ¦ +----+------------+------------+----------------¦ ¦1945¦7,209.83 ¦3,637.82 ¦$443.32 ¦ +----+------------+------------+----------------¦ ¦1946¦42,811.20 ¦21,405.60 ¦2,568.90 ¦ +-----------------------------------------------+
The remaining issues are (1) whether the returns filed for 1942 and 1944 were false or fraudulent with intent to evade tax, and if so, (2) whether petitioner understated his income for each of those 2 years, and (3) whether a part of any deficiencies for each of those years was due to fraud. Petitioner concedes all deficiencies in tax and additions to tax for 1943, 1945, and 1946.
FINDINGS OF FACT.
Certain facts are stipulated and are hereby found.
Petitioner filed individual income tax returns with the collector of internal revenue at Newark, New Jersey, for 1942 and 1944 on or before March 15 of the following years, respectively. Respondent destroyed those returns prior to the trial.
Petitioner engaged in the business of gambling from 1942 through 1950, and had no other business. He maintained no books of account or records of his gambling activities during those years.
On May 20, 1952, respondent made jeopardy assessments of taxes and additions to tax in the amounts determined in the statutory notice of deficiency issued on July 17, 1952.
It is stipulated that petitioner's net worth increased during 1942 and 1944, as follows:
+--------------------------------------------------------------------------+ ¦ ¦1942 ¦1944 ¦ +----------------------------------------------------+----------+----------¦ ¦Net assets, January 1 ¦$22,362.96¦$32,171.39¦ +----------------------------------------------------+----------+----------¦ ¦Net assets, December 31 ¦24,149.56 ¦55,519.50 ¦ +----------------------------------------------------+---------------------¦ ¦ ¦ ¦ +----------------------------------------------------+---------------------¦ ¦Annual increment ¦1,786.80 ¦23,348.11 ¦ +----------------------------------------------------+----------+----------¦ ¦Estimated cost of living ¦7,800.00 ¦7,800.00 ¦ +----------------------------------------------------+----------+----------¦ ¦Federal taxes paid ¦507.53 ¦954.21 ¦ +----------------------------------------------------+---------------------¦ ¦ ¦ ¦ +----------------------------------------------------+---------------------¦ ¦Increase in net worth and nondeductible expenditures¦10,094.13 ¦32,102.32 ¦ +--------------------------------------------------------------------------+
It is further stipulated that petitioner had no cash on hand on January 1, 1942, and that none of the increases in net worth or non-deductible expenditures for any of the years represent capital items received from loans, bequests, inheritances, or other capital sources. Petitioner's wife had no income or deductible expenses in any of the years.
Petitioner's net worth and nondeductible expenditures increased and his net income was unreported during the following years, in the following amounts:
+--------------------------+ ¦Year¦Increase ¦Unreported¦ +----+----------+----------¦ ¦ ¦ ¦income ¦ +----+----------+----------¦ ¦1943¦$16,447.32¦$11,794.78¦ +----+----------+----------¦ ¦1945¦21,858.92 ¦17,036.72 ¦ +----+----------+----------¦ ¦1946¦76,179.56 ¦70,565.42 ¦ +--------------------------+
Petitioner customarily cashed checks received in payment of wagers won by him over the counter at his bank without passing them through his bank accounts.
Petitioner's 1942 income tax return showed tax due of $625.49. The income tax computed on the increase in net worth and personal and living expenses would total $1,438.95.
Petitioner's 1944 income tax return disclosed tax due of $633. The tax computed on the increase in net worth and personal and living expenses would total $14,218.51.
The stipulated net worth statement includes no depreciable property owned by petitioner at the end of 1942 or 1944 and no debt or account receivable as of the end of 1941 or 1943 which might be the subject of a deduction for a bad debt.
Respondent has not shown that income tax returns filed by petitioner for 1942 and 1944 were false or fraudulent with intent to evade tax.
OPINION.
OPPER, Judge:
BRUCE, J., concurs in the result.
RAUM, Jr., dissenting: My difficulty with the prevailing opinion is that I don't know what it holds. Certainly it doesn't purport to hold that proof of the contents of a return by secondary evidence is necessarily insufficient in establishing fraud. But here there was evidence as to the amount of tax due that was shown on the return, and that fact could furnish the basis for determining the maximum amount of taxable net income appearing on the return. This is particularly true where petitioner's exemptions are known, and where, through information supplied by the net worth statement, such items as capital gains or losses, depreciation, and the like are susceptible of reasonable determination.
The tax is imposed upon net income, and it might well be immaterial in a particular case whether the Government can show what items of gross income or deduction were reported on the return. Where it shows that the net income was substantially understated, that fact together with other facts of record may be convincing evidence that the return was a fraudulent one. If the majority opinion is to be construed as laying down an inflexible rule that fraud cannot be proved without producing the return or reconstructing all the components of net income appearing on the return, I think it is wrong. It should be sufficient to show by cogent evidence that net income was substantially understated on the return and that, in conjunction with other facts of record, such understatement was false or fraudulent.