Opinion
Docket Nos. 12038 12039.
1947-12-19
MAX COHEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
William H. Quealy, Esq., and H. C. Castor, Esq., for the petitioner. Gene W. Reardon, Esq., and Harlow B. King, Esq., for the respondent.
1. Where a taxpayer received money from the illegal operation of various enterprises, such as night clubs where liquor was sold and gambling carried on, the operation of slot machines, and the operation of a ‘handbook‘ for the placing of bets on horse racing, and kept no accounts or records of his transactions, the Government was justified in determining his income by adding thereto an item designated ‘excess cash expenditures,‘ calculated by deducting all ascertainable cash receipts from the ascertainable cash expenditures.
2. A taxpayer's unexplained failure to testify gives rise to
a presumption that, had he testified and told the truth, his testimony would have been unfavorable to his cause.
3. Although the Government has the burden of proving fraud, this obligation relates to the penalty only and does not relieve the taxpayer of the burden of disproving the correctness of the deficiency. William H. Quealy, Esq., and H. C. Castor, Esq., for the petitioner. Gene W. Reardon, Esq., and Harlow B. King, Esq., for the respondent.
The respondent determined deficiencies in income tax, income and victory tax, and penalties as follows:
+-----------------------------------------------------------+ ¦Docket No.¦Year¦Tax ¦Deficiency¦Penalty ¦ +----------+----+----------------------+----------+---------¦ ¦12038 ¦1936¦Income tax ¦$2,767.32 ¦$1,405.55¦ +----------+----+----------------------+----------+---------¦ ¦ ¦1937¦----do ¦1,851.47 ¦1,105.73 ¦ +----------+----+----------------------+----------+---------¦ ¦ ¦1938¦----do ¦770.59 ¦199.76 ¦ +----------+----+----------------------+----------+---------¦ ¦ ¦1939¦----do ¦929.36 ¦464.68 ¦ +----------+----+----------------------+----------+---------¦ ¦ ¦1940¦----do ¦252.22 ¦200.51 ¦ +----------+----+----------------------+----------+---------¦ ¦ ¦1941¦----do ¦25,295.27 ¦12,647.63¦ +----------+----+----------------------+----------+---------¦ ¦12039 ¦1942¦----do ¦43,057.62 ¦21,528.81¦ +----------+----+----------------------+----------+---------¦ ¦ ¦1943¦Income and victory tax¦9,321.85 ¦6,777.86 ¦ +-----------------------------------------------------------+
The cases of this petitioner were consolidated for trial with the cases of Robert L. Carnahan, Docket Nos. 12040 and 12041.
Since the following cases arose in part from the same transactions and involve many of the same witnesses, it was also agreed that the records in the cases of G. A. Comeaux, Docket No. 12010; Fred D. Clemons, Docket No. 12096; and Ralph Leonard Polk, Docket No. 12097, so far as material and pertinent, may be considered in the instant case as though originally consolidated for trial.
The following questions are presented:
1. Did the Commissioner err in determining that the petitioner received additional taxable income which he failed to report in his income tax returns for the years 1936 to 1943, inclusive, as to which the Commissioner computed an aggregate sum of $148,080.11, on the basis of excess of petitioner's cash expenditures over his reported cash receipts?
2. Did the Commissioner err in determining that the petitioner received additional taxable income for the years 1941, 1942, and 1943 from one Ray Watson which the petitioner failed to report in his taxable income for such years?
3. Did the Commissioner err in determining that the income tax deficiencies for each of the years 1936 to 1943, inclusive, were due to fraud in an attempt to evade tax?
4. In the alternative, did the Commissioner err in determining that over 25 per cent of his gross income was omitted in petitioner's income tax return for the year 1942 and that consequently the five-year limitation period for assessment and collection is applicable for such year?
5. Did the Commissioner err in disallowing as an ordinary and necessary business expense a deduction of $2,000 claimed in 1941 as advertising?
The petitioner conceded an issue relating to the Commissioner's disallowance of an operating loss carry-over from the year 1939 to the year 1940. He also conceded an issue relating to the Commissioner's disallowance of depreciation for the years 1941 and 1942; the disallowance of depletion for the years 1941 and 1943; the disallowance of loss from abandonment of oil royalties for the years 1941, 1942, and 1943; and the nonallowance of deductions for oil royalties for the years 1941 and 1942.
The parties also agreed that in computing the net taxable income of the petitioner there shall be deducted on account of worthless mineral rights the following losses: For the taxable year ended December 31, 1941, the sum of $3,950; for the taxable year ended December 31, 1942, the sum of $700.
FINDINGS OF FACT.
On April 7, 1937, pursuant to an extension duly granted, petitioner filed a Federal income tax return for the calendar year 1936 with the collector of internal revenue for the district of Kansas, showing a net taxable income of $16,549.59. In such return petitioner reported an ‘interest received‘ the sum of $18,974.90. The source of such income was reported to be: ‘1. Log Cabin In, $13,046.53; and 2. R. D. Davis Commission Co., $5,928.37.‘
After making certain adjustments, the respondent added to income as ‘Excess cash expenditures‘ $14,644.96 and determined the deficiency and penalty shown above.
On May 14, 1938, pursuant to an extension of time duly granted, the petitioner filed his Federal income tax return for 1937, showing a net taxable income of $4,182.64. In such return he reported as ‘interest received‘ the sum of $20,173.29, derived from the following sources:
+-----------------------------------+ ¦1. Riverside Club ¦$6,217.78¦ +-------------------------+---------¦ ¦2. Lawrence Commission Co¦4,516.71 ¦ +-------------------------+---------¦ ¦3. Slot machines ¦9,438.80 ¦ +-----------------------------------+
After making certain adjustments, the Commissioner added to income as ‘Excess cash expenditures‘ the sum of $13,871.44 and determined the above deficiency and penalty.
On March 15, 1939, the petitioner filed his Federal income tax return for the calendar year 1938, showing a net taxable income of $7,400.88. In this return, under the designation ‘Outside business activities,‘ petitioner reported income in the amount of $35,770.33, derived from the following sources:
+------------------------------------+ ¦1. Riverside Club ¦$19,042.72¦ +-------------------------+----------¦ ¦2. Lawrence Commission Co¦13,189.44 ¦ +-------------------------+----------¦ ¦3. Slot machines ¦3,538.17 ¦ +------------------------------------+
After certain adjustments the respondent added, as ‘Excess cash expenditures,‘ the sum of $11,967.10 and determined the above deficiency and penalty.
On March 14, 1940, the petitioner filed his Federal income tax return for the calendar year 1939, showing a net loss of $15,891.39, in which return, under the caption ‘Outside business activities,‘ he reported $8,639.10 received from the Lawrence Commission Co. An amended return was filed August 21, 1940, showing a net loss of $7,973.75, with the same amount of income derived from ‘Outside business activities.‘ The respondent added to income, as ‘Excess cash expenditures,‘ the sum of $22,401.74 and determined the deficiency and penalty shown above.
On May 15, 1941, pursuant to an extension duly granted, petitioner filed his Federal income tax return for the calendar year 1940, showing a net taxable income of $4,024.83. Under the designation ‘Outside business activities,‘ petitioner reported the amount of $21,942.15, derived from the following sources:
+-----------------------------------+ ¦1. Lawrence Commission Co¦$9,020.48¦ +-------------------------+---------¦ ¦2. Canyons Supper Club ¦6,406.81 ¦ +-------------------------+---------¦ ¦3. Overflow Club ¦3,852.00 ¦ +-------------------------+---------¦ ¦4. Slot machines ¦2,767.98 ¦ +-----------------------------------+
being a total of $22,047.27, from which was deducted the sum of $105.12 depreciation on slot machines, leaving the balance first above stated.
The respondent made certain adjustments, but added no sums to income as excess cash expenditures.
On May 15, 1942, pursuant to an extension duly granted, petitioner filed his Federal income tax return for the year 1941, showing a net taxable income of $31,828.14. Income was reported from ‘Outside business activities‘ in the sum of $58,002.56 as derived from the following sources:
+------------------------------------+ ¦1. Lawrence Commission Co¦$21,918.98¦ +-------------------------+----------¦ ¦2. Overflow Club ¦5,051.40 ¦ +-------------------------+----------¦ ¦3. Canyons Supper Club ¦6,078.47 ¦ +-------------------------+----------¦ ¦4. Slot machines ¦24,953.71 ¦ +------------------------------------+
Various sums were deducted, including the sum of $2,000 for advertising.
The respondent added to income the amount of $3,054.40 as sums received from Ray Watson, a slot machine operator, and also as ‘Excess cash expenditures‘ the sum of $36,916.26, and determined the above deficiency and penalty.
On July 1, 1943, pursuant to an extension of time granted, petitioner filed his Federal income tax return for the calendar year 1942, showing net taxable income of $36,325.09. Under the caption ‘Outside business activities‘ the petitioner reported the sum of $158,630.46, from which he made certain deductions. The source of such income was as follows:
+------------------------------------+ ¦1. Lawrence Commission Co¦$24,178.49¦ +-------------------------+----------¦ ¦2. Canyons Supper Club ¦21,633.44 ¦ +-------------------------+----------¦ ¦3. Overflow Club ¦17,482.95 ¦ +-------------------------+----------¦ ¦4. Little River Inn ¦385.05 ¦ +-------------------------+----------¦ ¦5. Kala Club ¦9,790.02 ¦ +-------------------------+----------¦ ¦6. Swing Club ¦6,999.71 ¦ +-------------------------+----------¦ ¦7. Slot machines ¦78,160.80 ¦ +------------------------------------+
The respondent made certain adjustments and added to income the sum of $6,021.62 received from Ray Watson, a slot machine operator, and as ‘Excess cash expenditures‘ the sum of $42,827.39 and determined the deficiency and penalty shown above.
On April 15, 1944, pursuant to an extension duly granted, petitioner filed his Federal income tax return for 1943, showing a net taxable income of $51,457.47 and victory tax net income of $50,597.22. On the basis of this he claimed an overpayment of $3,967.75. In this return he reported income in the amount of $95,179.78 under the designation ‘Outside business activities‘ and from the following sources:
+------------------------------------+ ¦1. Lawrence Commission Co¦$16,531.93¦ +-------------------------+----------¦ ¦2. Canyons Supper Club ¦20,547.20 ¦ +-------------------------+----------¦ ¦3. Overflow Club ¦6,279.45 ¦ +-------------------------+----------¦ ¦4. Kala Club ¦6,723.00 ¦ +-------------------------+----------¦ ¦5. Swing Club ¦8,040.57 ¦ +-------------------------+----------¦ ¦6. Slot machines ¦37,057.63 ¦ +------------------------------------+
From the above total the petitioner deducted a claimed loss of $1,732.56.
The respondent made various adjustments and added to income the sum of $531.95 as sums received from Ray Watson, a slot machine operator, and $5,451.22 as ‘Excess cash expenditures‘ and determined the above deficiency and penalty.
In computing the excess cash expenditures the respondent started with the conclusion, or assumption that petitioner had no cash on hand on January 1, 1936. He then aggregated from such records as were available, and other sources, all money received by petitioner in the year 1936. The sum so arrived at was deducted from the aggregate paid out by the petitioner in his various enterprises and the result was denominated ‘Excess cash expenditures.‘ Substantially the same procedure was followed for all succeeding years, with the exception that when there was cash on hand at the beginning of the year the respondent started with the amount of such cash as a basis.
During the year 1936 petitioner became engaged in the oil business as a sole proprietor. In January 1937 books were set up for the oil business and transactions were recorded as of the time the business was started in 1936. Since that time a complete set of records has been maintained by the petitioner to reflect his various oil transactions from 1936 to date.
In February 1937 petitioner opened a checking account at the Southwest National Bank, Wichita, Kansas, and all of his oil business and some of his personal transactions were handled through that account.
During each of the taxable years 1936 to 1943, inclusive, petitioner sustained substantial losses, for income tax purposes, in his oil business activities.
In 1942 petitioner borrowed from one Charles McGee the sum of $25,000 in cash.
During the calendar years 1936 to 1943, inclusive, the petitioner resided in the city of Wichita, Sedgwick County, Kansas. During all of said years petitioner derived income from various illegal activities conducted in Sedgwick County outside the corporate limits of Wichita, including the operation of mechanical gambling devices, commonly known as slot machines, the operation of night clubs where liquor was sold and gambling conducted, and the operation of an establishment where wagers were accepted on horse racing, commonly known as ‘handbook.‘ All of these activities were conducted in violation of the laws of Kansas.
During the taxable years petitioner was associated in the above activities, and otherwise, with one Robert L. Carnahan. The petitioner and Carnahan shared the income received by either from the several activities on an equal basis, with the exception that income received by the petitioner from the Lawrence Commission Co., a horse race betting business, was divided on a varying percentage basis.
In some instances the petitioner and Carnahan furnished the ‘bank roll,‘ or operating fund, to the operators of the gambling houses. In consideration for furnishing such fund petitioner and Carnahan demanded and received a percentage of earnings, which varied from 20 per cent to 75 per cent.
The petitioner and Carnahan represented to various owners and operators of the illegal liquor and gambling businesses in Sedgwick County, Kansas, that they could afford them protection against raids and arrests by law enforcement officials of Sedgwick County and the State of Kansas. During the taxable years petitioner and Carnahan undertook to afford certain of the owners and operators of such illegal liquor and gambling businesses protection against raids or arrests by the law enforcement officials. In consideration therefor the owners and operators of such illegal businesses made payments to petitioner or to Carnahan, generally on the basis of a percentage of their profits.
Some of the owners and operators of the liquor and gambling establishments in Sedgwick County made a pretense of keeping books and records, but most of the smaller operators of such businesses kept no books or records whatsoever. Neither petitioner nor Carnahan kept any books or records showing the receipt of payments from the operators of such illegal businesses or enterprises.
The petitioner was indicted in the United States District Court for the District of Kansas for income tax evasion for the calendar years 1941 and 1942 and charged with ‘filing false and fraudulent income tax returns by attempting to conceal the true and correct gross and net incomes received by him during the said calendar years and the sources thereof.‘ The petitioner entered a plea of nolo contendere and was found guilty by the District Court, which, on January 16, 1946, entered the following sentence:
ORDERED AND ADJUDGED that the defendant having been found guilty of said offenses, is hereby committed to the custody of the Attorney General or his authorized representative for imprisonment for the period of one (1) year and to pay a fine of $5,000.00 on Count 1 of the indictment; imprisonment for the period of one (1) year and to pay a fine of $10,000.00 on Count 2 of the indictment, execution of the periods of imprisonment are hereby suspended and the defendant placed upon probation for the period of four (4) years; and to pay the costs of this action.
IT IS FURTHER ORDERED that as a condition of said period of probation the defendant shall pay the total fines of $15,000.00 and costs within ten (10) days from this date, and as a further condition that said defendant adjust his income tax after the matter is finally determined by the Bureau of Internal Revenue unless he shows conclusively to the Court that he is financially unable to pay same, and shall obey all laws of the State and the United States.
The petitioner filed false and fraudulent income tax returns for each of the years 1936 to 1939, inclusive, and for 1941 and 1942, with intent to evade tax. The statutory period of limitation on assessment and collection had not expired for any of the years 1936 to 1943, inclusive, when the Commissioner issued his notices of deficiency.
OPINION.
VAN FOSSAN, Judge:
In these cases we are dealing with the tax liability of a taxpayer whose income admittedly was derived from his connection with illegal business activites. The night clubs where liquor was sold and gambling carried on, the operation of slot machines, and the operation of a ‘handbook‘ for the placing of bets on horse racing were all in violation of laws of the State of Kansas. Most of the witnesses came from this lawless fringe of society where arrests and the serving of time for law violations are common occurrences. The crimes of which, various of the witnesses had been convicted ranged all the way from bootlegging to cattle rustling. In this situation it is to be expected that the testimony will present sharp conflicts and irreconcilable differences.
A record such as is here before us requires a careful weighing of the self-interests of the witnesses and the consideration of the inherent probabilities of truth or falsity. A record may be judged also by the absence of testimony as well as by its presence. Here, although present in the court room during the hearing, the taxpayer, for his own reasons, elected not to take the stand as a witness. Theoretically, the taxpayer should, in a case such as this, be h is own best witness. His unexplained failure to testify gives rise to a presumption that had he testified and told the truth his testimony would have been unfavorable to his cause. Wichita Terminal Elevator Co., 6 T.C. 1158, 1165.
Since the taxpayer kept no records from which his income could be determined (excepting only as to the oil business in which he sustained losses) the respondent was obliged to resort to other methods to determine such income. The Commissioner elected the method which he denominated ‘excess cash expenditures.‘ In this method he started with the cash on hand at the beginning of the year, if any, and to this added all ascertainable cash receipts. He then aggregated all cash expenditures and from the figure so obtained deducted the figure of cash on hand and ascertained cash receipts. The difference between the two figures he denominated ‘Excess cash expenditures,‘ which sum he added to the petitioner's reported income and determined the consequent deficiency. The respondent also determined that petitioner had filed a false and fraudulent return with intent to evade tax for each of the years and added penalties of 50 per cent of the tax. What was said by the Circuit Court of Appeals in Gleckman v. United States, 80 Fed. (2d) 394, is precisely pertinent here as a part of the background for considering the case:
It is apparent that when a taxpayer * * * engaged in such a multiplicity of financial transactions in any year, * * * and received so many large and small items of money, running up to a hundred and twenty-five or a hundred and fifty thousand dollars, as indicated by his bank accounts, and the testimony which he offered, and if he keeps no account whatever and avails himself of his right not to answer questions; it would not be possible for any complete account of his business to be made up for the government by any kind of skilled accountancy. More especially, where the business transactions may be of illegal nature. * * * Taxation is a practical matter and taxpayers do not terminate all duty to pay income tax by willfully failing to keep account of their income. * * *
The petitioner does not seriously question either the method employed by respondent or the aggregate amount ($148,080.11) determined by respondent as excess cash expenditures. See Kenney v. Commissioner, 111 Fed.(2d) 374. He does challenge the accuracy of the cash receipts, contending that various items are not correctly accounted for in respondent's computation and that a loan of $35,000 in 1941 and one of $25,000 in 1942 was not considered by respondent as cash received. He also claims there is no proof of fraud in any year.
The petitioner erroneously assumes, and states in his argument, that the respondent has the burden of proof as to the years 1936 to 1939, inclusive. The respondent has the burden of proving fraud as to all years, and as to the years 1936 to 1939, unless fraud be found, the statute of limitations bars the assessment and collection of any deficiencies. But, although the respondent has the burden of proving fraud, this obligation relates to the penalty only and does not relieve the petitioner of the burden of disproving the correctness of the deficiency. The burden still remains on the taxpayer to overcome the presumption of correctness attaching to the Commissioner's finding of the amount of tax due. Snell Isle, Inc. v. Commissioner, 90 Fed.(2d) 481; Leonard B. Willits, 36 B.T.A. 294, 300; Kenney v. Commissioner, supra.
As to the years 1936 to 1939, inclusive, the record does not afford any basis for a conclusion that respondent's determination is erroneous. Excepting the finding of fraud, the excess cash expenditures are the only issue presented for these years. No attempt was made to show that petitioner had any cash on hand on January 1, 1936. The evidence of a large sum claimed to be on hand in November 1936 is not related back to the beginning of the year and is not, in itself, impressive of its accuracy. As to the miscellaneous items, the proof is so confused and unconvincing as to require us to disregard it.
There is credible evidence that during these years petitioner received large sums of money as payment for protection or night club operators and as percentage of receipts from various illegal enterprises which were not reported as income. Certain it is also that he has not proven respondent's determination of excess cash expenditures to be erroneous. We therefore approve the finding of the deficiencies.
As above observed, assessment and collection of the deficiencies for the years 1936 to 1939, inclusive, are barred unless fraud is found for such years. We said in M. Rea Gano, 19 B.T.A. 518, 533:
A failure to report for taxation income unquestionably received, such action being predicated on a patently lame and untenable excuse, would seem to permit of no difference of opinion. It evidences a fraudulent purpose.
We have no doubt, on the record, that petitioner received large sums of income which he failed to report for taxation. He did not take the stand to explain his transactions or to account for his failure to report all his income. The proof is clear and convincing that some part of the deficiency for each of the years 1936 to 1939, inclusive, was due to fraud with intent to evade tax. The assessment and collection of the taxes due and the penalties are not barred by the statute of limitations.
For the year 1940 the respondent determined no amount as excess cash expenditures. He added to income two items: One of $2,725.30 which was not put in issue, and the second of $2,552.27 claimed as a net loss carry-over. At the outset of the hearing, counsel for petitioner, in effect, abandoned any contention of error, except as to fraud, for the year 1940. No proof was introduced specifically referring to the above item. Consequently, the record is barren of proof of error in respect of the deficiency. There was likewise no proof of fraud as to 1940. We approve the deficiency and disapprove the penalty for fraud.
In respect of the deficiency for the year 1941, numerous errors were alleged, of which three remained at issue: The sum of $2,000 claimed as business expense for advertising; the item of $3,054.40 added to income as additional income received from Ray Watson, a slot machine operator; and the sum of $36,916.26 excess cash expenditures.
The record is vary sparse as to the item of advertising. Petitioner spent the sum of $2,000 for advertising space in local newspapers at the solicitation of the papers. It is not established to which of petitioner's business activities this alleged advertising was related, nor is it shown to be an ordinary and necessary expense of any such business. Respondent's action is approved.
In explanation of his action in adding $3,054.40 to petitioner's income the respondent stated:
* * * Your income is increased $3,054.40 for additional income realized from the Ray Watson slot machine route. You reported the amount of $6,108.80 being 25 percent of the total income, whereas you should have reported the amount of $9,163.20 which is 37 1/2 percent of the total income from such route.
Petitioner contends that the unreported percentage of profits was a payment on account of the purchase of the slot machines by Watson from petitioner and that, accordingly, he correctly reported all income received from Watson. We are satisfied that this explanation delineates the true posture of the parties in 1941 and that respondent erroneously charged this item to petitioner's income.
The third item in excess cash expenditures determined by the respondent to be $36,916.26. Petitioner contends that in accounting for cash receipts and expenditures he failed to take into cash receipts a loan of $35,000 procured in 1941 from his mother-in-law, Myrtie Hale, and repaid in par in 1944. The loan was said to have been used in petitioner's oil business.
We have given special care to the evidence as to this loan and have come to the conclusion that petitioner never actually borrowed from his mother-in-law the alleged sum of $35,000 in cash in 1941. This conclusion requires us to reject as false a considerable lot of testimony calculated to support the fact that a loan had been made. Among the considerations leading us to this conclusion are the facts that, although petitioner had a complete set of books and records for his oil business, and, albeit no reason was shown why a record should not be made on such books, no record was made as to this loan. So far as known, no record of any kind was ever made of a loan. No note was given and the money never went through petitioner's bank account dealing with the oil business. No revelation of the fact of the loan was ever made to any representative of the Government during all the months of investigation, nor does it appear that any such fact was adduced at the criminal proceedings involving this taxpayer's tax liability for the same year. The concealing or absence of any such fact as to the alleged loan is in sharp contrast to the treatment of another alleged loan for $25,000 made in 1942, the same having gone through petitioner's bank account and the evidence of the same having been fully revealed to the Government investigators and in connection with the criminal proceedings. The first mention of the alleged loan of $35,000 was at the hearing before this Court. The further fact that the amount of the claimed loan of $35,000 was almost exactly the amount of the excess cash expenditures ($36,916.26) determined for the year 1941 is, at the least, striking. We do not deem it necessary to quote the testimony to indicate all the queries that arise therefrom. We again refer to the fact that petitioner, who should know most about the matter, did not take the stand to testify.
With our conclusion that no loan was made, petitioner's chief attack on the excess cash expenditures fails. Except as indicated above, as to the Watson item, petitioner has not successfully shown respondent's determination of a deficiency to be in error.
The deficiency for 1942 arose from numerous adjustments by the respondent, of which two remain in issue, i.e., the addition to income of $6,021.62 from the Ray Watson slot machine route and excess cash expenditures in the amount of $42,827.39. The Watson item arose from the same situation as the item for 1941, but it involves different considerations. The respondent disallowed for the same reason stated above for 1941. The proof, however, differs. Petitioner claims the arrangement was that after the slot machines were paid for Watson was to get 50 per cent of the divisible profits and petitioner 25 per cent, the remaining 25 per cent going to Carnahan. Apparently the profits for 1941 paid for the machines. Petitioner admits that he received 50 per cent of the profits in 1942 and still retains the same, including approximately $12,000 which he contends he still owes to Watson. It will be remembered that petitioner did not testify and thus did not admit in person that he owed Watson this sum. The claim of petitioner that he was acting as an agent for Watson when he collected 50 per cent of the profits instead of the 25 per cent due him and that he still owed Watson $12,000 overtaxes our credulity. We can not give credence to the claim or the testimony tending to support it. We affirm the respondent's action in adding $6,021.62 to petitioner's income on account of this item.
Petitioner's chief contention as to the excess cash expenditures of $42,827.39 is that he should have credit, as cash received, for a loan of $25,000 borrowed from one Charles McGee during 1942. The evidence is convincing that petitioner actually borrowed the $25,000 in cash. This conclusion is fully supported by the evidence. A note was given and the money was placed in the petitioner's bank account. The facts surrounding the loan were divulged to the Government representatives at the time of the criminal trial and at other times. Petitioner has established by satisfactory evidence the fact of the loan and he should be credited with thus sum in computing cash coming into his hands. the proof as to the other items by which petitioner sought to reduce the excess cash expenditures is unconvincing and we are unable to find for petitioner on any of such items.
Section 6(a) of the Current Tax Payment Act of 1943, providing for relief from double payments in 1943, provided in part that ‘This subsection shall not apply in any case in which the taxpayer is convicted of any criminal offense in respect to the tax for the taxable year 1942 or in which additions to the tax for such taxable year are applicable by reason of fraud.‘
Following a plea of nole contendere, taxpayer was found guilty of filing false and fraudulent income tax returns for the years 1941 and 1942 and sentenced, as appears in the findings of fact. Petitioner's counsel conceded that a plea of nole contendere is effective as making applicable the above quoted provision of section 6(a). (United States ex rel Bruno v. Reimer, 98 Fed.(2d) 92.) Therefore, respondent is not barred from assessment and collection of any deficiency.
There is further reason why respondent is not barred. We have found as a fact that the petitioner filed false and fraudulent income tax returns for the years 1941 and 1942. The considerations leading to this conclusion in part appear above. Other considerations difficult to itemize or characterize, but eminently persuasive, are to be found throughout the record. As to these two years, we find ourselves persuaded beyond any doubt that petitioner was guilty of fraud.
For the year 1943, respondent made various adjustments, of which two are disputed: An item of $531.62 from Ray Watson, and excess cash expenditures of $5,451.22. The Watson item is part and parcel of a similar item for 1942 and we make similar disposition. The record does not establish that respondent was in error with respect of this item, nor can we find that petitioner has shown respondent's action in adding $5,451.22 to income as excess cash expenditures to be erroneous. We approve this item for failure of proof of error.
Respecting the fraud penalty for 1943, we are not convinced that petitioner was guilty of fraud in filing his tax return for that year. His total income tax net income as reported by him was $51,457.47. The total personal cash received, as found by respondent, was $116,169.80. The total personal cash paid out was $121,621.02, leaving $5,451.22 as a balance of excess cash expenditures. Without further elaboration we merely state that the record does not substantiate the charge of fraud in the filing of petitioner's income tax return for the year 1943.
Decisions will be entered under Rule 50.