54 T.C. 1121">*1121 Respondent determined the following Federal income tax deficiencies and additions to tax against the petitioners:
Additions to tax, | ||
Sec. 6653(b), | ||
Year | Deficiency | I.R.C. 1954 |
1957 | $ 14,112.79 | $ 7,056.40 |
1958 | 10,675.66 | 5,337.83 |
1959 | 23,470.26 | 11,735.13 |
1960 | 8,844.15 | 4,422.08 |
The issues presented for decision in this case are (1) whether respondent's use of bank deposits and estimated expenditures to determine income was arbitrary, capricious, and unreasonable so as to shift to the respondent the burden of proving the amounts of the deficiencies; (2) whether statements made by petitioner Constance Harper to revenue agents in the initial stages of the audit investigation are inadmissible because of the failure of the agents to advise petitioner of her constitutional rights under the
FINDINGS OF FACT
Some of the facts have been stipulated and are found accordingly.
John and Constance Harper (herein called petitioners) are husband and wife, who were legal residents of New York, N.Y., at the time they filed their petition herein. They filed their joint Federal income tax returns for the years 1957, 1958, 1959, and 1960 with the district director of internal revenue for the Manhattan District, New York.
Constance Harper (herein referred to individually as petitioner) was born in Jamaica sometime around 1910. Although she was instructed in the English language, her formal schooling is 1970 U.S. Tax Ct. LEXIS 132">*135 limited, and consequently she had some difficulty explaining herself and understanding others.
Petitioner later moved to the United States. She became a citizen in 1943. Since that time she has had considerable financial success renting apartments and roominghouses in New York City. By 1957 the petitioners jointly owned real properties located at Nos. 12, 20, 22, 28, 38, 42, and 44 West 130th Street, in New York City. In addition, petitioners leased property at Nos. 16 and 18 West 130th Street. All of these properties were operated by petitioners as rooming houses. Petitioners also jointly owned and operated an apartment house at 243 West 135th Street, in New York City.
On November 16, 1959, petitioners contracted to sell the properties at 20 and 22 West 130th Street. They received $ 15,000 for each property; $ 1,500 when the contract was signed, $ 2,500 with the delivery of the deed, and an $ 11,000 mortgage at 5-percent interest. The closing was held December 28, 1959, at which time petitioners received $ 2,500 for each property. Petitioners received mortgage payments of $ 116.68 per month for each property, beginning January 28, 1960.
Petitioners did not report the sale of 1970 U.S. Tax Ct. LEXIS 132">*136 the two properties or the income therefrom on their 1959 or 1960 Federal income tax returns. However, they did claim depreciation deductions for them on their 1960 return. The amount of $ 8,000 received in 1959 was never deposited in petitioner's U.S. bank accounts. Neither petitioner's bank statements nor deposit slips reflect that the monthly checks of $ 116.68 were ever deposited in her U.S. bank accounts during 1960. In February and March of 1960 petitioner made four deposits of $ 116.32 and one deposit of $ 232.64 to her Manufacturers Hanover Trust savings account. But the amounts do not match the amount of mortgage receipts, they were deposited at weekly intervals, and they are not designated as having 54 T.C. 1121">*1123 been checks. Thus the amounts received from the realty sales represent unreported income not included in bank deposits calculations.
The 20 West 130th Street property had been purchased for $ 10,807.65 on March 26, 1948. Petitioners allocated $ 7,000 of the purchase price to the building and depreciated it at 4 percent per year. Through 1956 petitioners had been allowed depreciation of $ 2,454. The parties have stipulated for the years 1957 through 1960 that 60 percent 1970 U.S. Tax Ct. LEXIS 132">*137 of the price is allocable to the building, and depreciation is 4 percent per year. Thus $ 6,484.60 is allocable to the building, and petitioners are entitled to depreciation of $ 259.40 per year in 1957, 1958, and 1959. Petitioner's basis in the building at the end of 1959 was $ 3,252.40; her basis in the land was $ 4,323.05. Her gain on the sale of the property for $ 15,000 was $ 7,424.55.
The 22 West 130th Street property was purchased for $ 11,200 on April 20, 1938. Petitioners allocated $ 8,000 to the building and depreciated it at 4 percent per year. Through 1956 petitioner had been allowed depreciation of $ 5,982.20. The parties have stipulated that 60 percent of the price is allocable to the building and that depreciation of 4 percent per year is proper. Thus, $ 6,720 is allocable to the building, and petitioners are entitled to depreciation of $ 268.80 in 1957 and 1958. Depreciation of $ 200.20 in 1959 reduces petitioners' basis in the building to zero. With a basis of $ 4,480 in the land, the 1959 gain from the $ 15,000 sale price is $ 10,520.
During the years 1957 through 1960 petitioner had a checking account at the Manufacturers Hanover Trust Co. in New York City.
During 1970 U.S. Tax Ct. LEXIS 132">*138 the years 1957 through 1960 petitioner had savings bank accounts in New York City as follows: Manufacturers Hanover Trust Co., Carver Federal Savings & Loan Association, Harlem Savings Bank, Empire Savings Bank, New York Savings Bank.
During the years 1957 through 1960 the petitioner made deposits to her several bank accounts as follows:
1957 | 1958 | |
Manufacturers Hanover Trust checking account | $ 28,896.75 | $ 30,399.54 |
Savings accounts: | ||
Manufacturers Hanover | 12,257.60 | 11,621.42 |
New York Savings Bank | 6,000.00 | |
Carver Savings and Loan | ||
Harlem Savings Bank | 1,195.00 | |
Total | 47,154.35 | 43,215.96 |
1959 | 1960 | |
Manufacturers Hanover Trust checking account | $ 28,772.34 | $ 25,524.38 |
Savings accounts: | ||
Manufacturers Hanover | 26,831.32 | 10,773.73 |
New York Savings Bank | ||
Carver Savings and Loan | 3,153.00 | |
Harlem Savings Bank | ||
Total | 58,756.66 | 36,298.11 |
The following deposits to the Manufacturers Hanover Trust Co. checking account were corrections, redeposits, or transfers from savings accounts:
Date | Amount |
1/2/57 | $ 800.00 |
5/20/57 | 4,000.00 |
4/7/58 | 1,473.55 |
4/29/58 | 2,000.00 |
11/12/58 | 1,000.00 |
5/22/59 | 1,000.00 |
7/6/59 | 250.00 |
12/30/59 | 500.00 |
4/26/60 | 800.00 |
1/11/60 | 500.00 |
11/1/60 | 1,500.00 |
12/29/60 | 356.00 |
54 T.C. 1121">*1124 On May 29, 1957, petitioner purchased 186 shares of 1970 U.S. Tax Ct. LEXIS 132">*139 Mutual Investment Fund, Inc., for $ 1,999.50. Petitioner paid by a check drawn on her account at Manufacturers Hanover Trust. On August 14, 1957, petitioner purchased an additional 296 shares of Mutual Investment Fund, Inc., for $ 3,134.64. Although petitioner paid the amount by check, no such amount can be found in the transactions of her Manufacturers Hanover Trust account.
Petitioners' gross income from their rental properties, reconstructed from bank deposits and known expenditures not reflected in her banking records, is as follows:
1957 | 1958 | 1959 | 1960 | |
Deposits | $ 47,154.35 | $ 43,215.96 | $ 58,756.66 | $ 36,298.11 |
Purchase | ||||
Mutual funds | 3,134.64 | |||
Total | 50,288.99 | 43,215.96 | 58,756.66 | 36,298.11 |
Less Transfers | 4,800.00 | 4,473.55 | 1,750.00 | 3,156.00 |
Gross rental income | 45,488.99 | 38,742.41 | 57,006.66 | 33,142.11 |
On their Federal income tax returns for the years in issue the petitioners reported the following amounts of gross rental income:
Year | Amount |
1957 | $ 31,650 |
1958 | 32,175 |
1959 | 32,200 |
1960 | 32,200 |
They reported no other sources of income.
Petitioners' expenses with regard to their rental properties were as follows:
1957 | 1958 | 1959 | 1960 | |
Rent | $ 3,491.40 | $ 3,491.40 | $ 3,491.40 | $ 3,491.40 |
Fuel | 4,539.95 | 4,539.95 | 4,539.95 | 4,539.95 |
Taxes, water | 4,435.00 | 4,400.00 | 4,600.00 | 4,600.00 |
Utilities | 3,800.00 | 3,800.00 | 3,800.00 | 3,800.00 |
Insurance | 575.00 | 525.00 | 537.00 | 537.00 |
Telephone | 72.00 | 72.00 | 72.00 | 72.00 |
Laundry | 1,362.50 | 1,377.50 | 1,400.00 | 980.00 |
Repairs | 609.00 | 627.00 | 677.00 | 400.00 |
Labor | 416.00 | 416.00 | 416.00 | 416.00 |
Payroll tax | 32.00 | 32.00 | 32.00 | 32.00 |
Permits | 70.00 | 70.00 | 70.00 | 70.00 |
Accountant | 50.00 | 50.00 | 50.00 | 50.00 |
Building depreciation | 2,448.00 | 2,448.00 | 2,379.80 | 1,920.00 |
Furniture depreciation | 525.00 | 525.00 | 525.00 | 525.00 |
Oil burner | 100.00 | 100.00 | 100.00 | 100.00 |
Legal expense | 250.00 | |||
Totals | 22,525.85 | 22,473.85 | 22,940.15 | 21,533.35 |
The 1970 U.S. Tax Ct. LEXIS 132">*140 reconstructed net income from petitioners' rental properties for each of the years in issue is as follows: 54 T.C. 1121">*1125
1957 | 1958 | 1959 | 1960 | |
Gross rental income | $ 45,488.99 | $ 38,742.41 | $ 57,006.66 | $ 33,142.11 |
Expenses | 22,525.85 | 22,473.85 | 22,940.15 | 21,533.35 |
Net rental income | 22,963.14 | 16,268.56 | 34,006.51 | 11,608.76 |
The reported net income from petitioners' rental properties was:
Year | Amount |
1957 | $ 3,336.50 |
1958 | 2,838.50 |
1959 | 3,339.28 |
1960 | 3,496.28 |
During the years 1957 through 1960 petitioner withdrew from her various U.S. accounts the following amounts:
1957 | 1958 | 1959 | 1960 | |
Manufacturers Trust (checking) | $ 30,419 | $ 29,355 | $ 29,040 | $ 25,413 |
Manufacturers Trust (savings) | 17,828 | 12,000 | 18,500 | 18,287 |
New York Savings Bank | 7,150 | 497 | 600 | |
Harlem Savings Bank | 2,000 | |||
Carver Savings & Loan | 8,500 | 1,170 | ||
Empire Savings Bank | 500 | 5,000 | ||
55,397 | 41,355 | 57,037 | 52,470 |
During the year 1957 through 1960 petitioner withdrew the following amounts from her U.S. savings accounts and transferred them to accounts in Jamaica:
Year | Amount |
1957 | $ 20,150.06 |
1958 | 9,000.00 |
1959 | 9,000.00 |
1960 | 0 |
Known disposition of the withdrawn funds is as follows:
1957 | 1958 | 1959 | 1960 | |
Jamaica | $ 20,150.06 | $ 9,000.00 | $ 9,000.00 | |
Business expenses | 22,525.85 | 22,473.85 | 22,940.15 | $ 21,533.35 |
Transfers | 4,800.00 | 4,473.55 | 1,500.00 | 3,156.00 |
Purchase stock mutual funds | 1,999.50 | 15,000.00 | ||
49,475.41 | 35,947.40 | 48,440.15 | 24,689.35 |
1970 U.S. Tax Ct. LEXIS 132">*141 After subtracting known dispositions from withdrawals, petitioners had the following funds available for their living expenses:
Year | Amount |
1957 | $ 5,922 |
1958 | 5,408 |
1959 | 8,597 |
1960 | 27,781 |
54 T.C. 1121">*1126 During the years 1957 through 1960 petitioner had unreported interest income in the following amounts:
1957 | 1958 | 1959 | 1960 | |
Manufacturers Hanover Trust | $ 36.22 | $ 106.14 | $ 115.48 | $ 29.07 |
New York Savings Bank | 335.15 | 331.62 | 336.66 | 378.12 |
Harlem Savings Bank | 247.16 | 280.69 | 320.42 | 336.42 |
Carver Federal Savings & Loan | 399.65 | 274.45 | 129.69 | 176.00 |
Empire Savings Bank | 289.18 | 310.93 | 327.44 | 267.19 |
Total | 1,307.36 | 1,303.83 | 1,229.69 | 1,186.80 |
Petitioner had the following unreported dividend income:
1957 | 1958 | 1959 | 1960 | |
First Investors Corp | $ 148.74 | $ 269.92 | $ 269.92 | $ 172.55 |
Fundamental | ||||
Investors | 165.40 | 227.19 | ||
Jamaica Tel. Co | 839.25 | 1,678.50 | ||
148.74 | 269.92 | 1,274.57 | 2,078.24 |
There is no evidence that these amounts were ever deposited in petitioner's bank accounts.
Petitioner did not receive U.S. Information Returns (Form 1099) informing her of the requirement to report dividend and interest income in the years 1957 through 1960. The requirements of section 6042(c) and section 6049(c) were added by the Revenue Act of 1962.
Petitioner received capital gains from mutual funds of $ 1970 U.S. Tax Ct. LEXIS 132">*142 94.77 in 1959 and $ 107.02 in 1960. These amounts were not reported on her Federal income tax returns for those years.
Petitioner's brother, Lionel James Cushnie, died October 11, 1950, in Jamaica. He left to petitioner his home "and all my other belongings," which were valued at 22,000 pounds. The house was sold for about 10,000 pounds ($ 28,000). The other belongings included some cash. None of this inheritance was transferred to petitioner's New York bank accounts during the years 1957 through 1960.
Petitioner kept incomplete business records. She had no books, some copies of rent receipts, bills, canceled checks, and bank statements.
Revenue Agent Tryforos first tried to contact petitioner by letter on January 9, 1961, with regard to the year 1959. Petitioner was away at the time and did not reply until April 25, 1961. Tryforos made an appointment for Friday, April 28, 1961. Petitioner appeared on Thursday, April 27. Since Tryforos was not present, Agents Windwehr and Woulfowitz conducted a short interview. Petitioner had no records with her at the time, other than her income tax return for 1959. On June 28, 1961, Agents Tryforos and Woulfowitz interviewed petitioner again. 1970 U.S. Tax Ct. LEXIS 132">*143 Again she had no records other than a statement showing the income from the 135th Street property. It was not established at trial that she had been requested to bring records to either interview.
54 T.C. 1121">*1127 At the interview on June 28, 1961, Tryforos and Woulfowitz did not advise petitioner of her rights under the
Tryforos was not a special agent, but he was a member of a fraud squad at the Manhattan District office. A sign on or near 1970 U.S. Tax Ct. LEXIS 132">*144 the door of his office indicated that fact. Following the interview of June 28, 1961, Tryforos referred the case to the Intelligence Division for criminal fraud investigation.
Shortly after the June 28, 1961, interview, petitioner retained Isidore R. Tucker as her attorney to represent her with respect to her Federal income tax matters. Tryforos, accompanied by a special agent, met with Tucker at his office on July 27, 1961. Tucker showed them a number of checks for 1959, and indicated that two rental properties had been sold in 1959. Tryforos was unable to obtain any additional records or information from Tucker or petitioner until May 27, 1965, when he notified Tucker that the special agent had withdrawn from the case and that there was no threat of criminal prosecution for the years 1959 and 1960. After such assurance, Tucker supplied Tryforos with 111 of 147 checks written in 1959 by petitioner on her Manufacturers Hanover Trust account. He also produced papers purporting to summarize petitioner's rental income and expenses for the years 1957 through 1960. Records of petitioner's Jamaican banking activity were promised but not delivered.
On September 12, 1964, petitioner's 1970 U.S. Tax Ct. LEXIS 132">*145 apartment at 44 West 130th Street was firebombed by her niece's husband. The fire caused considerable damage, destroying some of petitioner's records. Petitioner never mentioned the fire or loss of records to respondent's agents.
In 1959 and 1960 John Harper was over 65 years of age. Petitioners claimed only one exemption for John Harper on their income tax returns for each of those years.
From 1957 through 1960 petitioner provided a home for her niece, Joy Cushnie, a minor, and her elderly aunt, Maude Curlew. Neither of them had any income of their own. Petitioner provided more than 54 T.C. 1121">*1128 half their total support during each of the years 1957 through 1960. In 1962 Maude Curlew returned to Jamaica, residing in petitioner's house there. Joy Cushnie graduated from college in 1964, and thereafter moved away to take a teaching job.
During the period 1957 through 1960 petitioner owned and operated a lodge in Mamakating, N.Y. Petitioner used "Harper's Lodge" primarily for weekends and summer vacations for herself and her relatives. Her receipts from paying guests did not exceed $ 400 for any of these years. The lodge operated at a loss until 1964, and was sold sometime thereafter. Petitioner 1970 U.S. Tax Ct. LEXIS 132">*146 failed to show with any reasonable reliability the amount of her expenses at the lodge or any basis for allocating them between personal and business use.
ULTIMATE FINDINGS
1. Petitioners' records were incomplete and inadequate for the years 1957 through 1960.
2. Respondent was justified in using the bank deposits and expenditures method of reconstructing petitioners' net income for the years 1957 through 1960.
3. Petitioners failed to report substantial amounts of rental, interest, and dividend income in each of the years 1957 through 1960.
4. For each of the years 1957 through 1960 a part of the underpayment of tax by the petitioners was due to fraud with intent to evade tax, and each of their Federal income tax returns for those years was a false and fraudulent return with intent to evade tax.
5. Assessment of the income tax deficiency against the petitioners for the year 1957 is not barred by the statute of limitations.
6. Petitioners are entitled to additional dependency exemption deductions for John Harper in each of the years 1959 and 1960.
7. Petitioners provided over half of the total support of Joy Cushnie and Maude Curlew in each of the years 1957 through 1960 and are entitled to 1970 U.S. Tax Ct. LEXIS 132">*147 dependency exemptions deduction for them in those years.
8. Petitioners have not made a valid election to report the sales in 1959 of properties located at 20 and 22 West 130th Street in New York City on the installment method.
OPINION
Petitioners contend that respondent's use of the bank deposits-expenditures method of reconstructing their taxable income was arbitrary and unreasonable, and thus shifts to respondent the burden of proving the correct amount of the deficiencies for the years in question.
54 T.C. 1121">*1129 It is clear that petitioners' records were incomplete and inadequate, and that they kept no books of account. In the absence of adequate records, an examination conducted by respondent's agents disclosed that petitioners had sources of income and that they made substantial bank deposits during the years 1957 through 1960. In our opinion respondent was justified in determining petitioners' taxable income by using the bank-deposits method. Where a taxpayer has made numerous deposits in bank accounts, the sources or nature of which are not accounted for or recorded in books and records maintained by him, determinations 1970 U.S. Tax Ct. LEXIS 132">*148 made by the Commissioner of income subject to tax on the basis of such deposits have been approved in many instances; and it has been repeatedly held that a presumption of correctness attaches to such determinations and that the taxpayer has the burden of overcoming such presumption. See
Several memorandum opinions of this Court which are cited in petitioners' brief are not in point. Each is distinguishable on its facts.
Although respondent made some errors in applying the bank deposits-expenditures method, his determination was far from arbitrary. "The fact that the Commissioner's determination was not completely correct does not invalidate the method employed."
During her interview with Revenue 1970 U.S. Tax Ct. LEXIS 132">*150 Agents Tryforos and Woulfowitz on June 28, 1961, Constance Harper stated that she had no dividend income, that she had received no inheritances, and that she had no sources of income other than her rental properties. She now urges us, on the authority of
We have found that petitioner's statements were made voluntarily in response to the agents' questions, and that she appeared neither frightened nor confused during the interview. We have also found that Tryforos was a member of the Manhattan "fraud squad" and that he contemplated 1970 U.S. Tax Ct. LEXIS 132">*151 the possibility of criminal fraud proceedings at the time of the interview. Thus we reject respondent's argument that Tryforos "was not investigating her for fraud." The nature of the questions posed at the interview indicate that Tryforos had previously investigated petitioner's bank deposits, and that he sought some explanation of them. When, as might be expected, no satisfactory explanation was given by the petitioner, Tryforos recommended that the case be referred to the Intelligence Division. In these circumstances it is not significant that Tryforos was a revenue agent rather than a special agent. See
In
More specifically, we deal with the admissibility of statements obtained from an individual who is subjected to custodial police interrogation and the necessity for procedures which assure that the individual is accorded his privilege under the
* * * *
Our holding will be spelled out with some specificity in the pages which follow but briefly stated it is this: the prosecution may not use statements, whether exculpatory or inculpatory, stemming from custodial interrogation of the defendant unless it demonstrates the use of procedural safeguards effective to secure the privilege against self-incrimination. By custodial interrogation, we mean questioning initiated by law enforcement officers after a person has been taken into custody or otherwise deprived of his freedom of action in any 1970 U.S. Tax Ct. LEXIS 132">*153 significant way
* * * *
The constitutional issue we decide in each of these cases is the admissibility of statements obtained from a defendant questioned while in custody or otherwise deprived of his freedom of action in any significant way. * * * [
* * * *
The question in these cases is whether the privilege is fully applicable during a period of custodial interrogation. * * * [
We are satisfied that all the principles embodied in the privilege apply to informal compulsion exerted by law-enforcement officers during in-custody questioning. An individual swept from familiar surroundings into police custody, surrounded by antagonistic forces, and subjected to the techniques of persuasion described above cannot be otherwise than under compulsion to speak. As a practical matter, the compulsion to speak in the isolated setting of the police station may well be greater than in courts or other official investigations, where there are often impartial observers to guard against intimidation or trickery. [n30] [
* * * *
Today, then, there can be no doubt that the
* * * *
To summarize, we hold that when an individual is taken into custody or otherwise deprived of his freedom by the authorities in any significant way and is subjected to questioning, the privilege against self-incrimination is jeopardized. Procedural safeguards must be employed to protect the privilege and unless other fully effective means are adopted to notify the person of his right of silence and to assure that the exercise of the right will be scrupulously honored, the following measures are required. He must be warned prior to any questioning that he has the right to remain silent, that anything he says can be used against him in a court of law, that he has the right to the presence of an attorney, 1970 U.S. Tax Ct. LEXIS 132">*155 and that if he cannot afford an attorney one will be appointed for him prior to any questioning if he so desires. Opportunity to exercise these rights must be afforded to him throughout the interrogation. After such warnings have been given, and such opportunity afforded him, the individual may knowingly and intelligently waive these rights and agree to answer questions or make a statement. But unless and until such warnings and waiver are demonstrated by the prosecution at trial, no evidence obtained as a result of interrogation can be used against him. [n43] [
[Footnote omitted.]
It is noteworthy that in both
In
Before the
Several Courts of Appeals have been confronted with the question as to whether statements of a taxpayer under investigation by revenue agents or special agents of the Internal Revenue Service may be received in evidence when the taxpayer has not been given the so-called
54 T.C. 1121">*1134 We have considered several cases which have approved suppression of evidence because internal revenue agents failed to give the taxpayers Miranda-type warnings. In two cases suppression was based on the agent's failure to follow Internal Revenue Service rules regarding 1970 U.S. Tax Ct. LEXIS 132">*163 warnings. See
Arguments for extending
The reasoning of the
We understand the teaching of
* * * *
Incriminating statements elicited in 1970 U.S. Tax Ct. LEXIS 132">*165 reliance upon the taxpayer's misapprehension as to the nature of the inquiry, his obligation to respond, and the possible consequences of doing so must be regarded as equally violative of constitutional protections as a custodial confession extracted without proper warnings. [
The opinion was also based on sources expressing doubt that any taxpayer "really felt free to walk out on investigators from the Internal Revenue Service" and the thought that the average citizen thinks "that the government prosecutes only the recalcitrant, uncooperative individual who is unwilling to pay what he owes."
Notwithstanding the views of the Court of Appeals for the Seventh Circuit, we are not persuaded by its rationale or application of the
We are not persuaded by the argument that a noncustodial interview takes unfair advantage of the taxpayer's lack of legal advice. See note,
We can see no good reason for requiring government agents to 1970 U.S. Tax Ct. LEXIS 132">*167 give
Absent coercion or the substantial risk of it, there can be no violation of
Administration of the Federal tax laws depends heavily upon taxpayer cooperation and disclosure. Indeed, certain information is likely to come to light only through taxpayer cooperation. We will not erect an unnecessary barrier to voluntary disclosure and admissions by requiring warnings of constitutional rights where noncoerced statements are given to Treasury agents.
In applying the safeguards of the
In our judgment the
The
An alternative reason for treating petitioner's statements at the June 28, 1961, 1970 U.S. Tax Ct. LEXIS 132">*171 interview as competent evidence in this case is that the absence of
Where there is no threat of criminal prosecution, a person may not claim the privilege, even if testifying may cause him to lose his job, 54 T.C. 1121">*1138
In this case the threat of criminal prosecution has been removed. Even if it had not been, the cases declining to compel testimony because of the possibility of prosecution are not applicable. Here the statements have already been made, and a decision to admit them does not compel testimony, nor does it require their admission or exclusion in a criminal case.
One case appears to allow the claim of privilege in a civil proceeding where there was no threat of further criminal prosecution.
A civil tax fraud case is not "a criminal case" or the adjunct of one. The civil aspects of Federal tax controversies should not be confused with separate criminal penalties.
The remedial character of sanctions imposing additions to a tax has been made clear by this Court in passing upon similar legislation. They are provided primarily as a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and loss resulting from the taxpayer's fraud. * * *
54 T.C. 1121">*1139 In its remedial nature, an addition to tax for fraud resembles the treble damages provision for enforcement of the Emergency Price Control Act of 1942. See
"'Penalty' is a term of varying and uncertain meaning."
It is clear from our findings of fact that the petitioners failed to report substantial amounts of rental income during the years 1957 through 1960. It is now well established that in a civil tax fraud case "consistent failure to report substantial amounts of income over a number of years, standing alone, is effective evidence of fraudulent intent."
Petitioners failed to report any of their income from interest and dividends. Although we recognize the mitigating factors that Forms 1099 were not then required to be sent to petitioner and that 1970 U.S. Tax Ct. LEXIS 132">*176 her education was limited, the consistent omission of these substantial amounts of income each year is, we think, indicative of fraud.
In addition, we have found that petitioners' expenses were far less than the amounts claimed on their income tax returns. The disparity generally results from their failure to meet their burden of proof because most of their records were unavailable. The amounts we have allowed for rent, fuel, taxes, water, utilities, insurance, and telephone are those which were substantiated and allowed by respondent. Petitioners have not proved any greater amounts. All of the amounts we have found for other expenses are derived from Constance Harper's sketchy testimony and scanty records. Depreciation on the buildings was calculated at 4 percent per year, allocating 60 percent of the cost 54 T.C. 1121">*1140 to the buildings, as agreed by the respondent. Of course, petitioners' failure of proof on these expense items for deficiency purposes does not relieve respondent of the ultimate burden of proving fraud by clear and convincing evidence. To do otherwise would be piling inference on inference. See
But two expense items in particular should be mentioned. First, petitioners claimed rental expense of $ 4,080 in each year for the properties at 16 and 18 West 130th Street. The lease provided for rent of $ 3,491.40 per year. Petitioner testified that she was required to pay an additional $ 120 per quarter for unexplained reasons. No such provision appears in the lease. We find her testimony unreliable. Secondly, petitioners' reported income and expenses remained virtually the same in 1959 and 1960, even though they had sold in December 1959 2 of the 10 rental properties they operated. Even by their own reckoning this means the loss of 24 rooms, income of $ 174.91 per month, and the expenses incident to these properties. Respondent has obscured the force of these facts by his willingness to allow expenses uniform in amount over all 4 years, but nonetheless this is evidence that petitioners' income tax 1970 U.S. Tax Ct. LEXIS 132">*178 return for 1960, at least, did not reflect their actual circumstances. We think these two items suggest that petitioners were padding their expenses in all 4 years, and that their strikingly similar returns in 1959 and 1960 did not reflect their actual income and expenses, but were designed with the hope that through consistency they might escape audit and pay less tax. Cf.
When bank deposits calculations disclosed that petitioners had understated their gross income from rentals, they attempted to show a nontaxable source for this unreported income. Constance Harper testified that her brother, Lionel Cushnie, died in Jamaica in 1950, leaving her property valued at 22,000 pounds. She said this property was converted to cash and left in joint savings accounts with her cousin, Coralee Williams. She further testified that she was unable to get the money out of Jamaica until the late 1950's, when she and her family began bringing it up a "thousand pounds at a time." We find such testimony unworthy of belief. From 1957 through 1960, when petitioner supposedly was bringing thousands of pounds from Jamaica to New York, she was in fact transferring $ 1970 U.S. Tax Ct. LEXIS 132">*179 38,000 from New York to Jamaican bank accounts. Respondent introduced the checks which were deposited to her Jamaican accounts. Also, when interviewed by 54 T.C. 1121">*1141 Agents Tryforos and Woulfowitz about the source of her bank deposits, petitioner stated that she had received no inheritances, which suggests that the 1950 inheritance has no bearing on the years in controversy.
Petitioner also introduced calculations intended to show that her rental income did not exceed the amount reported. This, of course, raises the source problem. Using maximum legal rent figures, excluding basement rooms, and assuming 75-percent occupancy in her buildings, petitioner's figures do correspond with her returns. Respondent did not attack this statement directly, by determining whether petitioner did indeed charge the legal rent, or whether she rented basement rooms, or whether her occupancy exceeded 75 percent. Instead, respondent chose to rely on petitioner's statements to its agents. Petitioner stated that she had no source of income other than her rental properties. Having already determined that this statement is both admissible and reliable, we find that respondent has succeeded in negating nontaxable 1970 U.S. Tax Ct. LEXIS 132">*180 sources for petitioner's unreported income. See
Petitioners sold their properties at 20 and 22 West 130th Street in December 1959. They did not report these sales in either 1959 or 1960. Constance Harper's explanation was that she thought that she must first recover her basis before recognizing and reporting the gain. We cannot accept her explanation for failure to report the sales. Petitioners purchased the building at 22 West 130th Street on April 20, 1938, for $ 11,200. They allocated $ 8,000 to the building and depreciated it at 4 percent per year. By the time of sale their basis would have been reduced by depreciation of $ 6,922.20 to $ 4,277.80. They received $ 4,000 by closing, and $ 116.68 per month on the mortgage, beginning January 28, 1960. By the first half of 1960, petitioners' receipts exceeded their basis. Yet they did not disclose the sale, or any income from it, in 1960. Under the circumstances we think they deliberately concealed these sales with the intent of evading the payment of taxes on money received from the properties in 1959 and 1960.
Petitioners were under a duty to keep adequate books and records.
All in all, we 1970 U.S. Tax Ct. LEXIS 132">*182 conclude on this record that petitioners' failure to maintain accurate and complete records, their failure to report as income substantial receipts from their rental business as well as interest and dividends, their overstatement of particular business expenses, their concealment of real property sales, and Constance's inconsistent, unreliable, and misleading statements to the revenue agents, were part and parcel of a conscious and deliberate attempt to evade the payment of their tax liabilities for each of the years 1957 through 1960. Accordingly, we hold that respondent has met his burden of proving fraud by clear and convincing evidence. We also sustain respondent's determination of the deficiencies subject to the modifications contained in our Findings of Fact. Cf.
Having determined that a part of the underpayment of tax for the year 1957 was due to fraud with intent to evade tax, it follows that the assessment of the deficiency for that year, and for all of the years before us, is not barred by the statute of limitations. See
We are satisfied that in each of the years 1957 through 1960 the petitioners provided over half of the total support of Joy Cushnie, a niece, and Maude Curlew, an aunt. See secs. 151(e) and 152(a). Accordingly, petitioners should be allowed dependency exemption deductions for both of them for those years. And since John Harper had attained the age of 65 before the end of 1959, petitioners are entitled to an additional exemption of $ 600 for him in each of the years 1959 and 1960. Petitioners failed to claim any additional exemption for John on their Federal income tax returns for 1959 and 1960.
Petitioners did not report on their income tax returns for either 1959 or 1960 the sales or any income from the sales of their real property 54 T.C. 1121">*1143 at 20 and 22 West 130th Street. The sales were made on December 28, 1959, and petitioners received $ 4,000 for each property in 1959, or a total of $ 8,000. In 1960 they received $ 1,400.16 in mortgage payments on each property, or a total of $ 2,800.32. For the first time at the trial of this case petitioners' counsel stated that they elect 1970 U.S. Tax Ct. LEXIS 132">*184 to report these real property sales on the installment method pursuant to the provisions of
(b) Sales of real property and casual sales of personal property. (1) A taxpayer who sells or otherwise disposes of real property, or who makes a casual sale or other casual disposition of personal property, and who elects to report the income therefrom on the installment method must set forth in his income tax return (or in a statement attached thereto) for the year of the sale or other disposition the computation of the gross profit on the sale or other disposition under the installment method. In any taxable year in which the taxpayer receives 54 T.C. 1121">*1144 payments attributable to such sale or other disposition, he must also show in his income tax return the 1970 U.S. Tax Ct. LEXIS 132">*187 computation of the amount of income which is being reported in that year on such sale or other disposition.
This regulation was held valid and reasonable in
Prior to the promulgation of the regulations under
In the
It is, of course, necessary for the taxpayer to report his income for tax purposes. Normally, this obligation is met by taxpayers who report all transactions that result in taxable income. To the extent that one fails to do this he is immediately faced with the obligation of accounting for such failure. If due to negligence or fraud moderate to heavy sanctions are imposed. If resulting from honest error, as here, all that is required is that the omission be rectified, if not voluntarily by the taxpayer, then upon deficiency notice from the Commissioner. Here the government seeks to invoke a heavy sanction 1970 U.S. Tax Ct. LEXIS 132">*189 in the case of a non-negligent good faith omission that the statute does not expressly authorize.
In the
54 T.C. 1121">*1145 The Commissioner here placed great significance upon the fact that in the
In the subsequently court reviewed opinion in
In 1965 the Internal Revenue Service modified its position in
if,
1. Those cases where the sale took place in a taxable year ended before December 18, 1958, if the election was made in the return for the year the first payment from the sale was received. December 18, 1958, is the date the present regulations were effective.
2. Those cases where election of the installment method was made on
3. Those cases where the election was made on a delinquent return for the year of sale.
[Emphasis added.]
It is obvious that paragraphs 1 and 3 of the above-quoted revenue ruling are inapplicable to the situation facing us in this case. The question is whether paragraph 2 applies. We think it does not apply for three reasons: (1) The petitioners did not
Here, petitioners made
To be sharply distinguished is the case of
We also find the
Accordingly, we hold that since the petitioners have failed to make a valid election to report their sales of real property on the installment method, they are not entitled to return the income and profit on the sales under the provisions of
54 T.C. 1121">*1147 Scott,
Tannenwald,
Nevertheless, I do not believe that petitioners' filing of a fraudulent return, within the meaning of
From our analysis of the statute, correlative regulations, and cases, we now conclude that the controlling legal principle is as stated in the
We are not dealing with a statute which in express terms requires an
It rejected the view that "the failure to give the facts touching on the sale [excusable in this case] somehow should be penalized."
In
The majority herein states that a requisite for use of the installment method of reporting gain on sales is good faith disclosure of the sale on the taxpayer's original or amended return or in a statement attached thereto. I think
I 1970 U.S. Tax Ct. LEXIS 132">*200 would hold that imposition of the addition to tax for fraud is the exclusive penalty applicable in this case. 2
1. All statutory references herein are to the Internal Revenue Code of 1954 unless otherwise indicated.↩
2. The
"No person * * * shall be compelled in any criminal case to be a witness against himself, * * *"↩
3. The
"In all criminal prosecutions, the accused shall enjoy the right * * * to have the Assistance of Counsel for his defence."↩
4. Reading these decisions broadly, in terms of their "potential for expansion," the dissenters called them "another major step in the direction of the goal which the Court seemingly has in mind -- to bar from evidence all admissions obtained from an individual suspected of crime, whether involuntarily made or not." (White,
5. In the rare situation where the taxpayer is actually in custody during an interview with Treasury agents, he must be given constitutional warnings of his rights under the
6.
7.
8.
(a) Dealers in Personal Property. -- (1) In general. -- Under regulations prescribed by the Secretary or his delegate, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the gross profit, realized or to be realized when payment is completed, bears to the total contract price. (2) Total contract price. -- For purposes of paragraph (1), the total contract price of all sales of personal property on the installment plan includes the amount of carrying charges or interest which is determined with respect to such sales and is added on the books of account of the seller to the established cash selling price of such property. This paragraph shall not apply with respect to sales of personal property under a revolving credit type plan or with respect to sales or other dispositions of property the income from which is, under subsection (b), returned on the basis and in the manner prescribed in paragraph (1).
(b) Sales of Realty and Casual Sales of Personality. -- (1) General Rule. -- Income from -- (A) a sale or other disposition of real property, or (B) a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year) for a price exceeding $ 1,000, may (under regulations prescribed by the Secretary or his delegate) be returned on the basis and in the manner prescribed in subsection (a). (2) Limitation. -- Paragraph (1) shall apply -- (A) In the case of a sale or other disposition during a taxable year beginning after December 31, 1953 (whether or not such taxable year ends after the date of enactment of this title), only if in the taxable year of the sale or other disposition -- (i) there are no payments, or (ii) the payments (exclusive of evidences of indebtedness of the purchaser) do not exceed 30 per cent of the selling price. (B) In the case of a sale or other disposition during a taxable year beginning before January 1, 1954, only if the income was (by reason of
1. Compare
2. I note that, in view of the finding of fraud for the first year and consents extending the period of limitations for the subsequent years, there is no possibility herein that giving the petitioners the right to elect the installment method will cause any of the profit to escape taxation. Compare also sec. 1311