Memorandum Findings of Fact and Opinion

FAY, Judge: The Commissioner determined deficiencies in petitioners' income tax as follows:

Findings of Fact

Some of the facts have been stipulated, and the stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference.

Petitioners Sam Goldstein (hereinafter referred to as petitioner) and Fay Goldstein are husband and wife residing in Jericho, New York. They filed their joint Federal income tax returns for the years in issue with the district director of internal revenue, Brooklyn, New York. Petitioners filed their tax returns on the basis of the calendar year using the cash receipts and disbursements method of accounting.

During the years 1956 to approximately July 1959, inclusive, petitioner was employed as president of Local Union 239, International Brotherhood of Teamsters (hereinafter sometimes called Local 239). On June 18, 1956, petitioner, Max Chester (hereinafter referred to as Chester), 1965 Tax Ct. Memo LEXIS 107">*109 and John Dioguardia (hereinafter referred to as Dioguardi) were indicted together on one count of conspiracy and three counts of bribery of labor representatives under sections 580 and 380 of the Penal Law of the State of New York. On or about July 1, 1957, the three codefendants were tried together before the Court of General Sessions, County and State of New York, on the four counts set forth in the indictment. On or about July 25, 1957, a jury returned verdicts against each defendant, finding petitioner guilty of counts 1 (conspiracy), 2, and 3 (bribery); Dioguard guilty of counts 1 (conspiracy) and 2 (bribery); and Chester guilty of counts 1 (conspiracy), 2, 3, and 4 (bribery). On September 5, 1957, petitioner was sentenced on count 1 to be imprisoned in the penitentiary of the city of New York for a term of one year. On count 2, petitioner received the same sentence, which was to run consecutively to the sentence imposed under count 1. On count 3, he received the same sentence, which was to run concurrently with the sentence imposed under count 2 and consecutively to the sentence imposed under count 1. Additionally, petitioner was fined $500 on each of counts 1, 2, and 3. On or1965 Tax Ct. Memo LEXIS 107">*110 about September 10, 1957, petitioner filed a notice of appeal to the Appellate Division, First Department, State of New York, from the judgment of conviction of counts 1, 2, and 3 which had been entered against him by the Court of General Sessions, County and State of New York. By stipulation of the parties, i.e., petitioner and the District Attorney, New York County, dated February 20, 1959, the appeal was withdrawn and an order to that effect entered by the Appellate Division, First Department, State of New York, dated February 27, 1959. Petitioner served the sentences, subsequently modified by Court order, which were imposed upon his judgment of conviction for counts 1, 2, and 3. Chester and Dioguardi received similar sentences upon their respective judgments of conviction, filed a notice of appeal on or about September 16, 1957, and served their sentences in State prison.

Neither Chester nor Dioguardi were members of, or employees of, Local 239 during the years from October 1, 1955 to 1959, inclusive.

On March 5, 1957, petitioner was indicted under sections 530, 580, 850, and 851 of the Penal Law of the State of New York by a New York County Grand Jury for one count of conspiracy, 1965 Tax Ct. Memo LEXIS 107">*111 a second count of attempt to commit the crime of extortion, a third count of coercion, and fourth, fifth, sixth, and seventh counts of extortion. Upon arraignment on March 25, 1957, petitioner pleaded not guilty. On February 26, 1958, before trial of his case, petitioner pleaded guilty to the second count of the indictment, i.e., attempt to commit the crime of extortion. On February 13, 1959, he was sentenced to State prison for not less than three years, nor more than five years, with execution of the sentence suspended and petitioner placed on probation.

The executive board of Local 239 agreed that all legal expenses and fees incurred in defending petitioner would be borne by the Union. This decision was initially made on June 21, 1956. On September 10, 1957, the minutes of the executive board reflect the following:

Brother Stein reported on the present situation of our President, Samuel Goldstein and the continuous fight on the part of the Local and officers to completely vindicate and clear our President of all charges. He reported on the legal expenses incurred in line with the decision of the Executive Board on June 21st, 1956, and endorsed by the Steward Council meetings1965 Tax Ct. Memo LEXIS 107">*112 and the meetings of the Wage Policy Committee. He pointed out that without doubt the legal expenses involved in the appeal would also be considerable and indicated that at this time, the Executive Board should make decision on whether or not the Local should accept the financial responsibility for these expenses. Brother Morello took the floor and pointed out that if it had not been for the tireless energy and devotion displayed by Brother Goldstein, this Union would not have come into existence, nor would there have been any treasury from which to draw in times of stress such as this. Brother Amato took the floor expressing substantially the same words expressed by the previous speaker and added that it was his opinion that the Local Union had a moral responsibility for Brother Goldstein in this crisis. Brother Zapka then made a motion approving that all actions taken in the past by Brother Stein with regard to the disbursement of funds for Brother Goldstein's legal fees and moved further that the Executive Board instruct the Treasurer to pay all necessary legal fees in connection with the forthcoming appeal or on any other indictments facing Brother Goldstein. The motion was seconded1965 Tax Ct. Memo LEXIS 107">*113 by Morello and approved unanimously by the board. * * *

The books and records of Local 239 reflect that the following legal fees and expenses were paid during the years 1957, 1958, and 1959.

The following attorneys entered appearances on behalf of petitioner in the criminal action stemming out of the 1956 indictment:

Oscar A. Bloustein

Michael Direnzo

Jacob M. Mandelbaum

Although not entering appearances in the action, Hannibal Milano and Francis X. Mancuso also aided petitioner in his defense.

The following attorneys entered appearances on behalf of petitioner in the criminal action stemming from the 1957 indictment:

Oscar A. Bloustein

Hannibal Milano

Francis X. Mancuso

Michael Direnzo

Bloustein, Milano, and Direnzo, besides representing petitioner, also represented Local 239 in matters unrelated to the New York criminal actions involving petitioner. They all had occasion to represent the Union before a United States Senate Committee investigating certain labor unions and their practices. In addition, Milano represented a Pat Goldberg, named as a coconspirator with petitioner in the 1957 indictment. Bloustein had occasion to also represent the Union in a matter before the New York County District Attorney's office. He was also retained by the Union1965 Tax Ct. Memo LEXIS 107">*115 as its representative in the criminal trial involving petitioner, Chester, and Dioguardi.

Michael Direnzo's fee for his representation of petitioner was $2,000. This fee was paid in 1957 by Local 239. Hannibal Milano and Francis X. Mancuso's fee for representing petitioner was $5,000. This fee was paid in 1957 to Milano by Local 239. Bloustein's fee for representing petitioner was $1,000. This fee was paid in 1957 by Local 239 to Bloustein. All other fees paid by Local 239 to Direnzo, Milano, and Bloustein were not for legal or other services rendered to petitioner.

A representative of the Senate Committee investigating labor and union practices prepared a worksheet showing the legal fees paid by Local 239 for the period January 1, 1956, through and including May 31, 1959. This worksheet was prepared from information submitted to the Committee by Local 239, including the latter's books and records. The worksheet in all material aspects reflects the same total amount paid as is reflected in the schedule set forth supra. A revenue agent obtained the worksheet and transcript of testimony in 1960 from a special agent who in turn obtained it from the Committee. He examined the worksheet1965 Tax Ct. Memo LEXIS 107">*116 and read the testimony and arrived at a proposed deficiency in petitioner's income tax for the years in issue. The revenue agent determined that all of the fees paid by Local 239 were for the benefit of petitioner. The revenue agent based his determination on the worksheet and on testimony taken before the Committee, which reflected that most of the fees were for petitioner's criminal involvement. The revenue agent did not, prior to the issuance of the notice of deficiency, examine the books and records of Local 239, contact any official of Local 239, or make any attempts to contact the attorneys whose names appear on the worksheet as being the recipients of fees. The revenue agent was aware of petitioner's criminal matters which arose in 1956 and continued in 1957, 1958, and 1959. The revenue agent's proposed determination was discussed with petitioner's tax counsel. The revenue agent's proposed determination became the basis for the notice of deficiency in this case.

Opinion

Petitioner's principal contention is that the deficiency notice here involved is arbitrary and erroneous thereby removing the presumption of correctness which attaches to respondent's determination. If the1965 Tax Ct. Memo LEXIS 107">*117 notice is not arbitrary, then petitioner contends that the affirmative evidence is sufficient to show that most of the expenses paid by the Union were not on behalf of services rendered to petitioner.

Respondent, on the other hand, maintains that his notice is not arbitrary, that the presumption of correctness does attach, and that petitioner has failed in his burden of proof to overcome said presumption.

Petitioner, over the objection of respondent's counsel, introduced testimony of the revenue agent who examined petitioner's returns for the years in issue. The testimony reflects that the revenue agent obtained a schedule prepared by a Senate Committee setting forth all of the legal expenses paid by Local 239 during the three-year period here in issue. The revenue agent also had access to and read the testimony of witnesses appearing before said Committee pertaining to the legal expenses of Local 239. The revenue agent was also apprised of the criminal actions in which petitioner was involved, including the pertinent dates and the names of the attorneys representing petitioner. With this information, the revenue agent made the determination that is now in issue. Furthermore, petitioner1965 Tax Ct. Memo LEXIS 107">*118 did not offer any evidence that during conferences held with the revenue agent prior to the issuance of the notice that the agent refused to look at the Union's books and records, that the books and records were available, or that the agent was in any way unwilling to cooperate in a full investigation of the case. On this record we cannot say that respondent's determination is arbitrary and erroneous. Nor does the fact that respondent has conceded prior to trial that part of his determination is incorrect and excessive render the entire notice arbitrary. , affd. (C.A. 7, 1964), certiorari denied . Respondent's agent had sufficient information with which to justify his determination as being reasonable. The fact that he did not do all the things petitioner contends should have been done prior to the issuance of the notice of deficiency does not indicate that the available information was not sufficient to form the basis of a reasonable determination. Accordingly, we hold that the notice of deficiency here in issue was not arbitrary and that the presumption of correctness1965 Tax Ct. Memo LEXIS 107">*119 attaches thereto.

Respondent determined that petitioner received additional income during the years in issue. These amounts represent the total legal expenses paid by Local 239 with a few exceptions not here material. We have already found that respondent's determination is presumed correct and that petitioner has the burden of proof to overcome this presumption. Petitioner has met his burden to a limited extent. We have set forth in our Findings of Fact which amounts paid by Local 239 to Bloustein, Direnzo, and Milano were for services rendered to petitioner. These amounts represent income to petitioner during the years in which they were paid. . Since petitioner failed to offer any evidence regarding amounts paid by Local 239 to various other persons, we sustain respondent's determination on this issue except as noted above.

The remaining issue in this case concerns the proper medical deduction to which petitioners are entitled for the years 1958 and 1959. The resolution of this issue, contrary to respondent's argument, depends entirely upon our determination regarding the legal fees issue. Accordingly, the proper medical1965 Tax Ct. Memo LEXIS 107">*120 deduction will be computed under Rule 50 to conform to our determination regarding the second issue.

To reflect concessions of the parties,

Decision will be entered under Rule 50.