1996 Tax Ct. Memo LEXIS 138">*138 Decision will be entered under Rule 155.
SUPPLEMENTAL MEMORANDUM OPINION
COLVIN,
The issues for decision on remand are:
1. Whether petitioners had any cash on hand on December 31, 1974. We hold that petitioners had $ 200,000 cash on hand on December 31, 1974, instead of zero as determined by respondent.
2. Whether petitioners are liable for the addition to tax for fraud. We hold that they are not.
3. Whether, if petitioners are not liable for the addition to tax for fraud, respondent is barred from assessing tax for the years in issue. We hold that respondent is barred from assessing tax for 1975, but not for 1976 and 1977.
References to petitioner are to Jeanette Spear. Section references are to the Internal Revenue Code in effect during the years1996 Tax Ct. Memo LEXIS 138">*139 in issue. Rule references are to the Tax Court Rules of Practice and Procedure.
A.
Jeanette and Leon Spear filed joint Federal income tax returns for 1975, 1976, and 1977. Respondent determined that petitioners are liable for deficiencies in income tax and additions to tax for fraud as follows:
Additions to Tax | ||
Year | Deficiency | Sec. 6653(b) |
1975 | $ 51,271.70 | $ 25,635.85 |
1976 | 157,706.46 | 78,853.23 |
1977 | 93,536.23 | 46,768.12 |
Using the net worth plus expenditures method, respondent determined that petitioners had unreported income in 1975, 1976, and 1977.
Petitioner did not comply with an order of this Court to testify at trial. As a result, we sanctioned petitioners by deeming that respondent made a prima facie showing of certain facts alleged by respondent in paragraph 7 of the amended answer (the deemed facts).
B.
Petitioners appealed our decision in docket No. 3276-87. The Court of Appeals vacated our decision and remanded the case with instructions that we decide it without treating respondent as having made a prima facie showing as to the deemed facts.
The Court of Appeals said: there are many other places in the opinion that make it appear that the tax court found sufficient evidence of net worth and of fraud without relying on the deemed facts. Nonetheless, because we are unsure whether the court relied on these facts and shifted the burden of proof, and because the consequences to the taxpayers are so significant, we must assume that the court
The Court of Appeals limited its discussion of the record mainly to the facts bearing on the sanctions issue. The [tax] court may, of course, elect1996 Tax Ct. Memo LEXIS 138">*141 to retry the case. In that event, it might be well advised to rely upon Jeanette's videotaped deposition in lieu of her testimony, although perhaps her emotional state is now better. On the other hand, the court may simply prefer to decide the case on the basis of the existing record, but absent the "deeming" and its consequences which we have declared invalid.
The Court of Appeals also said with respect to petitioner's videotaped deposition that "it is difficult to see how anything more would be forthcoming at a trial."
C.
1.
We did not consider the deemed facts in our prior opinion with respect to the deficiencies, the net worth method, or any issue other than fraud.
2.
a.
Respondent used the net worth plus expenditures method to determine that petitioners had unreported income in 1975, 1976, and 1977. As part of that determination, respondent concluded that petitioners had no cash on hand on December 31, 1974.
An essential condition in net worth cases is that the Commissioner establish with reasonable certainty an opening net worth to serve as a starting point from which to calculate future increases in the taxpayer's assets.
Where1996 Tax Ct. Memo LEXIS 138">*143 the Commissioner has determined a deficiency by using the net worth method, we may adjust a determination of opening net worth shown by the trial record to be unrealistic.
We may apply the
The Court of Appeals stated, "based on our viewing of the deposition, we find Jeanette's testimony as to the $ 380,000 cash hoard quite straightforward, and it seems to be credible."
Petitioner's testimony gives two possible sources of petitioners' cash on hand on December 31, 1974. One is a cash hoard from 1957; the other is their parking lot business they have conducted since 1956.
Petitioner testified in the deposition that she and her husband had a large cash hoard. She testified that one night in 1957 her husband came home with a bag of money which he said his father, Abe Spear, had given to him. Petitioner's husband's father died soon thereafter. She did not remember whether the bag was bigger or smaller than a grocery bag. She said that she helped him count the money, but he did most of the counting. She 1996 Tax Ct. Memo LEXIS 138">*145 testified that the next night he came home with a second bag of money. She said that, combined, both bags contained "About 360 or 380 or 3 something, that was it." She said that in less than 1 year they put some of the money in a safety deposit box. She said she did not remember how long the rest of the money was in their house.
Another possible source of petitioners' cash on hand on December 31, 1974, based on petitioner's deposition, is petitioners' parking lot and other businesses. Petitioner testified in her deposition that her husband, Leon Spear, routinely handled cash and received cash from petitioners' parking lot business, and used cash to pay for expenses such as parking lot maintenance and improvements. Petitioners began to operate parking lots in 1956.
Petitioner testified that she and her husband used1996 Tax Ct. Memo LEXIS 138">*146 cash from the cash hoard for their parking lot business. She said they used a lot of the cash to develop and expand their parking lot at 8th and Race Streets. She also said they used some of the cash for the parking lot petitioners created after they bought and demolished the Skipper Hotel and for the PennDOT lots that petitioners acquired in 1973. Petitioner also testified that they bought a few properties between 1957 and 1970.
Petitioner had no written records of how she and her husband used the cash. She testified that she only took money from, and never put money into, the cash hoard. She said that she had no idea how much of the cash was left at the beginning of 1975, but she said there was some money left. She testified that a rough guess was that the corporation owed petitioners a "couple of hundred thousand dollars" in 1975. She said the cash hoard was pretty well down by 1977.
The Court of Appeals limited its discussion of the record primarily to the facts bearing on the sanctions issue.
Abe Spear1996 Tax Ct. Memo LEXIS 138">*147 borrowed $ 1,000 from one of his daughters in March 1954 to give to another daughter to help her with a downpayment to buy a house.
Petitioner testified that petitioners applied for a mortgage and did not list cash as an asset. Petitioners first 1996 Tax Ct. Memo LEXIS 138">*148 claimed that they had a cash hoard in January 1983, several years after their first interview with respondent's agent in 1977.
Giving appropriate weight to the finding of the Court of Appeals that petitioner's testimony relating to the cash hoard was quite straightforward and appeared to be credible,
Petitioners argue that some of the money they received from their corporations during the years at issue are repayments of loans they made to the corporations before the years at issue. Petitioner testified in her deposition in this case that the loans existed; however, she testified in an earlier deposition in petitioners' lawsuit against their accountant, Gil Brown, that she did not recall any specific incidents of lending money to the corporation.
To show that funds received were loan repayments, petitioners must show that the loans were bona fide. This depends on all the facts and circumstances; generally no one fact is determinative.
We do not conclude that our finding that petitioners had $ 200,000 in cash on December 31, 1974, means that respondent's determination of petitioners' opening net worth failed to be made with the requisite "reasonable certainty".
D.
In our prior opinion, we considered the deemed facts and the entire record in holding that respondent clearly and convincingly proved that petitioners are liable for the addition to tax for fraud under section 6653(b) for 1975, 1976, and 1977.
1996 Tax Ct. Memo LEXIS 138">*154 In our prior opinion, several badges of fraud were present.
1.
In finding that petitioner's explanations were implausible or inconsistent, we stated that petitioner's testimony about the cash hoard was not believable.
2.
The discrepancies between petitioners' actual net income and the income they reported is1996 Tax Ct. Memo LEXIS 138">*155 reduced to the extent of their cash on hand on December 31, 1974. This badge of fraud is less compelling than before.
3.
4.
These two badges are not affected by removal of the deemed facts from our consideration.
5.
6.
Petitioner testified that her husband dealt extensively in cash as a matter of course in conducting their parking lot business. These two badges of fraud are less compelling without the deemed facts.
We conclude that without the deemed facts that are not otherwise supported by the record, and based on our reevaluation of petitioner's testimony and the entire record, fraud has not been proven by clear and convincing evidence. We hold that petitioners are not liable for the addition to tax for fraud under section 6653(b) for 1975, 1976, and 1977.
E.
1.
Petitioners timely filed joint Federal income tax returns for 1975, 1976, and 1977. Petitioners reported gross income of $ 48,893 for 1976 and $ 70,708 for 1977. Twenty-five percent of those amounts are $ 12,223 for 1976 and $ 17,6771996 Tax Ct. Memo LEXIS 138">*156 for 1977.
More than 3 but less than 6 years after petitioners' returns for 1976 and 1977 were due to be filed, petitioners signed Forms 872 (Consent To Extend Time To Assess Tax) for 1976 and 1977 which extended the time to assess tax to December 31, 1986. Petitioners did not consent to extend the time to assess tax for 1975. Respondent mailed a notice of deficiency for 1975, 1976, and 1977 on December 23, 1986. That date was more than 6 years after petitioners filed their 1975 return.
Generally, the Commissioner must assess tax within 3 years after the due date of a timely filed return.
2.
Respondent contends that no limit on the time to assess tax applies for 1975 because respondent proved fraud.
a.
Respondent contends that assessment and collection for 1976 and 1977 are timely because petitioners omitted a substantial amount of income. If the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 percent of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 6 years after the return was filed. * * *
Respondent bears the burden of proving that the 6-year limit on the time to assess tax applies.
b.
Less than 6 years after the due date for petitioner's 1976 and 1977 returns, petitioners signed Forms 872 to extend the time to assess tax to December 31, 1986. Respondent1996 Tax Ct. Memo LEXIS 138">*158 issued the notice of deficiency on December 23, 1986. Petitioners concede that respondent issued the notice of deficiency in time to qualify under
c.
Respondent must prove that petitioners omitted more than 25 percent of gross income from their 1976 and 1977 returns.
Petitioners contend that respondent does not meet the 25 percent requirement. Petitioners contend that respondent may not rely on the general presumption of correctness of a deficiency notice to meet this burden, and that the mere existence of bank deposits does not establish that the deposits were taxable.
We said above at par. A that respondent may use the net worth method in this case. If we find that the net worth method shows that petitioners omitted more than 25 percent from gross income, then respondent has met the burden of proving that
Petitioners argue that respondent may not establish that they omitted 25 percent of their gross income by1996 Tax Ct. Memo LEXIS 138">*160 the net worth method because it is arbitrary. Petitioners contend that respondent omitted cash on hand and loans receivable, and did not show that petitioners had a likely taxable source of income or negate all nontaxable sources of income. We decided this issue in our prior opinion without using the deemed facts. We now find that petitioners had $ 200,000 cash on hand on December 31, 1974. We adjust the net worth analysis to account for that fact.
To reflect the foregoing,
*. This opinion supplements Estate of Spear v. Commissioner, T.C. Memo. 1993-213, vacated and remanded 41 F.3d 103 (3d Cir. 1994).↩
1. Cases of the following petitioners were consolidated: Estate of Abe Spear, Deceased, Morris Spear, Executor, docket No. 21480-90; Estate of Leon Spear, Deceased, Jeanette Spear, Administrator, Robert Spear, Administrator, and Harvey Spear, Administrator, docket No. 21481-90.↩
1. Paragraphs k, l, o, p, r, s, t, u, v, w, y, aa, ab, ac, ad, and ae of paragraph 7 of respondent's amended answer provide: (k) Petitioners refused to make available to agents of the respondent any records concerning their individual income tax liabilities for the taxable years 1975, 1976 or 1977. (l) Petitioners furnished only incomplete records of their corporations Ezy Parks, Inc., Tumble Down, Inc. and Ezy Parks II, Inc. to agents of the respondent for the taxable years 1975, 1976 and 1977. * * * (o) Petitioners did not have available on December 31, 1974 any cash on hand which was not deposited in one of petitioners' bank accounts. (p) There is attached hereto as Exhibit A, which is incorporated herein by reference and made a part hereof, a statement summarizing petitioners [sic] net worth increases and non-deductible expenditures for each of the taxable years 1975, 1976 and 1977. * * * (r) Petitioners owned all of the stock and completely controlled Jay Faunce, Inc. (s) Jay Faunce, Inc. did not actively conduct any business activities at any time. (t) The sole function of Jay Faunce, Inc. was to acquire and hold title to real estate properties acquired by petitioners with unreported income. (u) Petitioners used unreported income to acquire eight real estate properties in their names or the name of a wholly owned nominee corporation. (v) During the taxable years 1976 and 1977, petitioners acquired at least six real estate properties which they concealed by holding title for these properties in the name of their nominee corporation Jay Faunce, Inc. (w) Petitioners deposited unreported income into 34 bank accounts in twelve different banks during the taxable years 1975, 1976 and 1977. * * * (y) Petitioners' adjusted gross income as determined by petitioners' net worth increases and non-deductible expenses was $ 127,762.80 for 1975, $ 322,213.21 for 1976, and $ 211,173.54 for 1977. (aa) Petitioners' correct taxable income was $ 121,494.80 for 1975, $ 314,232.21 for 1976, and $ 206,568.44 for 1977. (ab) Petitioners with fraudulent intent to evade tax substantially understated their income for the taxable years 1975, 1976 and 1977. (ac) Petitioners fraudulently with intent to evade tax failed to report $ 93,071.80 of taxable income for 1975, $ 276,309.21 of taxable income for 1976, and $ 148,035.54 of taxable income for 1977. (ad) Petitioners fraudulently with intent to evade tax understated their tax liabilities by $ 51,271.70 on their 1975 income tax return, by $ 157,706.46 on their 1976 income tax return, and by $ 93,536.23 on their 1977 income tax return. (ae) A part of the underpayment of tax required to be shown on the petitioners [sic] income tax returns for their 1975, 1976 and 1977 taxable years is due to fraud.↩
2. The following subparagraphs of paragraph seven are supported by the record and the findings of fact in our prior opinion: (a) Petitioners Leon Spear and Jeanette Spear were married individuals during the years 1975, 1976 and 1977. (b) During the years 1975, 1976 and 1977, petitioners owned and controlled two corporations known as Ezy Parks, Inc. and Tumble Down, Inc. (c) Ezy Parks, Inc. was incorporated in Pennsylvania on December 26, 1956 and at all times was wholly owned and controlled by petitioners. (d) Tumble Down, Inc. was incorporated in Pennsylvania on December 18, 1958 and was at all times wholly owned and controlled by petitioners. (e) During the years 1975, 1976 and 1977, Ezy Parks, Inc. and Tumble Down, Inc. each leased numerous parking lots which they in turn operated and managed [in] a business whereby cash fees were received from customers who parked their cars on the parking lots operated by Ezy Parks, Inc. and Tumble Down, Inc. (f) Ezy Parks II, Inc. was incorporated on November 13, 1975 in Pennsylvania and was at all times wholly owned and controlled by petitioners. (g) Ezy Parks II, Inc. was also engaged in the operation and management of parking lots and received cash fees from customers who parked their cars on these lots. (h) Petitioner Leon Spear supervised and managed the operations of Ezy Parks, Inc., Tumble Down, Inc. and Ezy Parks II, Inc. during the taxable years 1975, 1976 and 1977. (i) The parking lots operated and managed by petitioners through their wholly owned corporations were businesses in which receipts from customers were predominantly in cash. (j) Petitioner Jeannette Spear maintained the business records and handled the banking transactions for Ezy Parks, Inc, Tumble Down, Inc. and Ezy Parks II, Inc. during the taxable years 1975, 1976 and 1977. * * * (m) The three corporations, Ezy Parks, Inc., Tumble Down, Inc. and Ezy Parks II, Inc. which were owned and operated by petitioners generated substantial cash receipts for each of the years 1975, 1976 and 1977. (n) The respondent has determined the petitioners [sic] correct taxable income for the taxable years 1975, 1976 and 1977 on the basis of petitioners [sic] net worth increases and non-deductible expenditures during each of the years 1975, 1976 and 1977. * * * (q) On April 7, 1976, petitioners incorporated an entity known as Jay Faunce, Inc. * * * (x) Petitioners made investments and expenditures far in excess of the amounts of income they reported on their tax returns for the taxable years 1975, 1976 and 1977. (z) Petitioners reported on their respective income tax returns adjusted gross income of only $ 35,902.00 for 1975, $ 45,893.00 for 1976, and $ 206,568.44 for 1977.↩