Opinion
Docket Nos. 49197 52841 52842.
1958-03-24
ALBERT N. SHAHADI, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.ALBERT N. SHAHADI AND JOSEPHINE SHAHADI, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Robert M. Taylor, Esq., and George P. Walker, Esq., for the petitioners. Max J. Hamburger, Esq., for the respondent.
Robert M. Taylor, Esq., and George P. Walker, Esq., for the petitioners. Max J. Hamburger, Esq., for the respondent.
1. Held, respondent properly reconstructed petitioners' income by the use of the net worth method, and the deficiencies determined thereby are sustained. Held, further, a part of each of the deficiencies for 1944 through 1950 was due to fraud with intent to evade tax; the returns for the years 1944 through 1947 were false and fraudulent with intent to evade tax; and the assessment and collection of deficiencies for the years 1944 through 1947 are not barred by the statute of limitations.
2. For the years 1945 through 1950, petitioners substantially underestimated their estimated tax. Their total tax liability for 1951 was $3,837.20. As of January 15, 1952, petitioners had made estimated tax payments of $1,900. In addition, $937.20 had been withheld from Nicola's salary for that year. Held, respondent properly determined additions to tax under section 294(d)(2).
These consolidated proceedings involve deficiencies in income tax and additions thereto as follows:
+-----------------------------------------------------------------------------+ ¦ ¦ ¦ ¦ ¦Additions to tax ¦ +------+---------------------------+-------+-----------+----------------------¦ ¦Docket¦Petitioner ¦Year ¦Deficiency ¦ ¦ ¦ +------+---------------------------+-------+-----------+-----------+----------¦ ¦No. ¦ ¦ ¦ ¦Sec. 293 ¦Sec. ¦ ¦ ¦ ¦ ¦ ¦(b) ¦ ¦ +------+---------------------------+-------+-----------+-----------+----------¦ ¦ ¦ ¦ ¦ ¦ ¦294 (d) ¦ ¦ ¦ ¦ ¦ ¦ ¦(2) ¦ +------+---------------------------+-------+-----------+-----------+----------¦ ¦52841 ¦Albert N. Shahadi ¦1944 ¦$5,741.29 ¦$2,870.65 ¦ ¦ +------+---------------------------+-------+-----------+-----------+----------¦ ¦52841 ¦Albert N. Shahadi ¦1945 ¦12,009.36 ¦6,004.68 ¦$732.11 ¦ +------+---------------------------+-------+-----------+-----------+----------¦ ¦52841 ¦Albert N. Shahadi ¦1 ¦5,563.71 ¦2,781.86 ¦333.82 ¦ ¦ ¦ ¦1946 ¦ ¦ ¦ ¦ +------+---------------------------+-------+-----------+-----------+----------¦ ¦49197 ¦Albert N. Shahadi ¦1947 ¦7,025.42 ¦3,512.71 ¦351.55 ¦ +------+---------------------------+-------+-----------+-----------+----------¦ ¦52841 ¦Albert N. Shahadi ¦1948 ¦7,752.81 ¦3,876.41 ¦478.47 ¦ +------+---------------------------+-------+-----------+-----------+----------¦ ¦52841 ¦Albert N. Shahadi ¦1949 ¦17,084.53 ¦8,542.27 ¦1,067.53 ¦ +------+---------------------------+-------+-----------+-----------+----------¦ ¦52842 ¦Albert N. and Josephine ¦1950 ¦2,526.50 ¦1,263.25 ¦150.42 ¦ ¦ ¦Shahadi ¦ ¦ ¦ ¦ ¦ +------+---------------------------+-------+-----------+-----------+----------¦ ¦52842 ¦Albert N. and Josephine ¦1951 ¦2 ¦2 968.33 ¦119.04 ¦ ¦ ¦Shahadi ¦ ¦1,936.66 ¦ ¦ ¦ +------+---------------------------+-------+-----------+-----------+----------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+
NOTE: These cases were heard as a consolidated group by Judge Stephen E. Rice and briefs were duly filed. Upon his death on February 9, 1958, the cases, not having been disposed of, were reassigned to Judge Ernest H. Van Fossan and notice was given to the parties that any request for rehearing or reargument might be presented to him within 30 days. No such requests have been received.
The issues to be decided are: (1) Whether petitioners had unreported income for the years 1944 through 1950, as determined by respondent by the use of net worth and expenditures method; (2) if so, whether any part of the resulting deficiencies was due to fraud with intent to evade tax; (3) whether assessment of the deficiencies for the years 1944 through 1947 is barred by the applicable statute of limitations; and (4) whether petitioners are liable for additions to tax under section 294(d)(2) for the years 1945 through 1951.
Some of the facts were stipulated.
FINDINGS OF FACT.
The stipulated facts are so found and are incorporated herein by this reference.
Albert N. Shahadi (hereinafter referred to as the petitioner) resided in Atlantic City, New Jersey, during all the years in issue. For the years 1944 through 1949 he filed an individual Federal income tax return. For the years 1950 and 1951 he filed a joint return with his wife, Josephine Shahadi, whom he married during 1950. All returns were filed with the then collector of internal revenue for the first district of New Jersey.
Petitioner, the only child of Mary and Nicola Shahadi, was born in 1895, in Lebanon, then a part of Syria. In 1898 the Shahadi family emigrated to the United States. Upon their arrival in New York City, Mary and Nicola Shahadi began peddling imported linens and laces from house to house, securing their stock from relatives in New York City. After 2 or 3 years the Shahadis moved to Philadelphia, where they continued their door-to-door selling. The Shahadis spent the summer of 1905 at Atlantic City, New Jersey, upon advice that the air might be beneficial to Mary's failing health. They rented a small house for living quarters, and also a small store on the Boardwalk from which they continued to sell imported cloths. As a result of the improvement in Mary's health they settled permanently in Atlantic City in 1906. At that time Nicola rented a vacant lot adjacent to the Boardwalk upon which he constructed a 2-story building of corrugated metal. The first floor was used as a store from which the Shahadis sold their linens and related products. The upper floor was utilized for living quarters. After 3 or 4 years at that location the Shahadis removed their building from the property in order to make way for a group of row stores the owners were erecting thereon. After completion of the stores, one, at 519 Boardwalk, was rented to the Shahadis. It was approximately 20 feet wide and 75 feet deep, and was divided in half by the Shahadis. They conducted their business in the front portion of the structure and maintained their living quarters in the rear. They remained at the 519 Boardwalk location until about 1926.
When the Shahadi family first came to the United States they were accompanied by Mary's sister and brother-in-law and their family, Saseen by name. The Saseen family was composed of 2 adults and 6 children. After the Shahadis had been located in Atlantic City for a few years Saseen deserted his family, leaving them destitute. Thereupon, Mary Shahadi undertook the support of the 7 members of the Saseen family, which she continued at least through 1920. In 1914 Nicola returned to Europe for a visit where he was caught up in World War I and interned. He remained there until 1920, when he returned to the United States. During that period Mary supported Nicola by sending him money through the American Express Company and the Red Cross.
In 1916 petitioner entered Syracuse University in Syracuse, New York, where he remained approximately 1 1/2 years. Alfred Saseen petitioner's cousin, entered the University at the same time, remaining there approximately 2 years. Throughout this period Mary Shahadi paid all the expenses incurred by petitioner and her nephew, Alfred.
On May 11, 1923, Mary Shahadi purchased a house located at 113 N. Richmond Avenue in Atlantic City for an approximate purchase price of $10,000. At the time of its purchase the property was subject to a $4,000 mortgage, bearing interest at 6 per cent per annum, held by the Islanders Building and Loan Association of Atlantic City. Mary Shahadi undertook payment of that outstanding indebtedness in the following manner: She was required to pay for 20 shares of the Association's stock, costing $200 per share, at the rate of $1 per share per month. Those shares drew some dividends based on the Association's earnings. When the shares were paid for in full the mortgage was to be canceled. Until that time the mortgage drew interest at 6 per cent on the entire $4,000, or $20 per month, irrespective of the amount still due on the shares. In addition, a monthly premium of 10 cents per $100 of loan was charged, which amounted to a liability of $4 per month. Thus, the total Shahadi payment was $44 per month from the date of purchase until the mortgage was released on or about April 6, 1933.
At sometime in or about 1926 the Shahadis moved their shop from 519 Boardwalk to 831 Boardwalk. The new store structure was smaller than the shop maintained at the 519 Boardwalk location, being approximately 18 feet in width and 35 feet deep. The family remained here until after March 1927.
On July 17, 1926, Nicola Shahadi, as principal, and the petitioner, as surety, executed a replevin bond in favor of the sheriff of Atlantic County, New Jersey, in the principal amount of $1,800. That bond was executed to replevy certain goods in connection with an action brought by Nicola Shahadi against the States Avenue Realty Company. The goods covered by the bond were:
2 floor show cases, 5 tables, 2 counters, 1 glass door show wall case, 1 desk, 98 kimonas in back cases, 50 tapestry runners and mats, 50 kimonas in rack, about 30 shawls in case and on walls, about 50 sets table cloths, about 100 scarfs, 1 cash register, 25 pillows, about 200 lace doilies and baby clothes, 2 dozen table cloths, 4 dozen handkerchiefs, 8 dozen night gowns, 400 doilies, laces, etc., 500 pieces handkerchiefs, doilies, etc., and all other goods on premises, * * *
In 1926, under applicable New Jersey law, the sheriff was directed, before delivering any goods under a writ of replevin, to take in his own name from the plaintiff a bond in double the amount of the goods described in the writ.
Stipulated adjustments.
With respect to the foregoing net worth schedule, the petitioners reserved the right to submit evidence concerning the amount of cash on hand as of December 31, 1943, and throughout each of the years involved in this proceeding. They further reserved the right to submit evidence with respect to the item of ‘Jewelry and Furs' appearing in the schedule of assets, more particularly with respect to the value of such assets, the source of the amounts expended during the taxable years for such assets, and the effect of such expenditures on their income.
When contacted by internal revenue agents in 1951, petitioner claimed he had a cash hoard in a safe-deposit box which represented savings of many years, but did not disclose the amount. In December 1952 he stated to revenue agents that at a time prior to February 29, 1940, he had as much as $40,000 in a safe-deposit box at the Bankers Trust Company. On August 1, 1952, petitioner's safe-deposit box was inventoried and no cash was found therein.
Petitioner was indicted on March 8, 1954, for Federal income tax evasion for the years 1947, 1948, and 1949. Trial was held in the United States District Court for the District of New Jersey in about January 1955. A jury verdict of ‘acquittal’ was returned on all counts. In the course of that trial, petitioner claimed receipt of two gifts from his parents— one of $30,000 from his mother and one of $20,000 from his father.
From the time of his mother's death, in 1927, until 1944 petitioner held title to the 113 N. Richmond Avenue property. The tax records of Atlantic City disclose that he was delinquent in the payment of local realty taxes during 1928, 1930, 1931, 1932, and 1935 through 1937. In August 1937 petitioner acquired certain property located at the corner of Grant and Arkansas Avenues, Atlantic City. At the time of its acquisition, the property was tax delinquent for the years 1930 through 1936. Because of that delinquency it had been transferred to the Tax Title Lien Register by the Atlantic City Tax Collector. After acquiring the property the petitioner became delinquent in the payment of taxes for the years 1937 through 1940, and these years were also transferred to the lien register. Commencing in 1937 and continuing through August 1941, petitioner made small payments of principal and interest until the delinquencies for 1930 through 1936 had been satisfied. On August 18, 1941, petitioner discharged in full the delinquency for the years 1937 through 1940.
On January 17, 1944, petitioner purchased bonds and stock of the Atlantic City Racing Association in the amount of $5,500. To make up the purchase price be borrowed $3,500 from the Guarantee Bank and Trust Company on January 17, 1944. The balance of $2,000 he drew from his own account. He issued his check in the amount of $5,500, payable that same day. In February 1944 petitioner redeemed all his outstanding United States savings bonds, receiving $4,001.75. He used this money to pay off the $3,500 loan. One of the bonds redeemed, in the face amount of $1,000, had been issued in July 1943.
On November 24, 1948, petitioner purchased a home located at 131 S. Delancey Place, Atlantic City, jointly with Josephine Carson, with whom he contemplated marriage, for a total purchase price of $28,000. A portion of that sum was paid by check, a portion paid in cash, and the balance satisfied by a $15,000 mortgage.
Petitioners' tax liability for 1951 was $3,837.20.
Set forth below are the amounts petitioners paid on their tax liabilities for the years indicated, by way of estimated tax payments and withholding:
Decisions will be entered under Rule 50. N.J. Stat. Ann. sec. 2A: 59-5 (1951). 2. SEC. 294. ADDITIONS TO THE TAX IN CASE OF NONPAYMENT.(d) ESTIMATED TAX.—(2) SUBSTANTIAL UNDERESTIMATE OF ESTIMATED TAX.— If 80 per centum of the tax (determined without regard to the credits under sections 32 and 35), in the case of individuals other than farmers exercising an election under section 60(a), * * * exceeds the estimated tax (increased by such credits), there shall be added to the tax an amount equal to such excess, or equal to 6 per centum of the amount by which such tax so determined exceeds the estimated tax so increased, whichever is the lesser. * * * -------- Notes:
Deficiency and additions to tax increased by amended answer.
On February 28, 1927, petitioner, in order to secure a loan of $5,000, mortgaged certain property to the Chelsea Safe Deposit and Trust Company. The property consisted of certain unimproved lots located in the Venice Park area of Atlantic City, which he acquired free of encumbrances on March 4, 1925. By its terms the mortgage drew interest at 6 per cent per annum, and matured in 4 months. On March 19, 1929, the mortgage was assigned to the Bankers Trust Company, which held it until November 25, 1933, when it was assigned to petitioner. On December 20, 1927, the Venice Park property was sold to John C. Herrman, a local investor in delinquent tax property, for the sum of $71. That figure represented unpaid 1926 taxes in the amount of $61.50, interest of $6.50, and costs of $3. Petitioner redeemed the property from Herrman on February 27, 1928, upon payment of $91.95.
On March 13, 1927, Mary Shahadi died. The petition for probate and letters testamentary, filed on behalf of her estate by the petitioner as executor, disclosed she died possessed of personal property in the amount of $300, and real property valued at $4,000. By will dated June 15, 1925, after directing her debts and funeral expenses first be satisfied, she devised and bequeathed the residue of her estate to the petitioner. At the time of her death petitioner acquired title to the 113 N. Richmond property, where he and Nicola continued to maintain their home.
Sometime after Mary's death Nicola moved his shop from 831 Boardwalk to the Hotel Traymore. On or about April 6, 1929, Nicola Shahadi borrowed the full cash surrender value of $725 on a $5,000 life insurance policy which he owned. At sometime prior to April 15, 1929, Nicola also borrowed $1,800 from the Boardwalk National Bank on a note due April 22, 1929, on which petitioner's name appeared as an endorser. On April 15, 1929, Nicola Shahadi filed a petition in bankruptcy in the United States District Court for the District of New Jersey. The aforementioned $1,800 note appeared as a liability in the petition filed by him. As of April 15, 1929, he listed cash assets of $2.39 in the Chelsea Safe Deposit and Trust Company, and $22.43 in the Boardwalk National Bank. Unsecured debts were listed at $27,542.21 and appraised value of stock in trade $564.05.
After his discharge from bankruptcy in or about August 1929, Nicola rented a shop located about 2233 Boardwalk, where he continued the same type of business. From there he moved his store to the 3100 block of the Boardwalk. In September 1931, the adjoining shop caught fire; the fire spread and partially consumed the Shahadi store. Because of the damage to his shop, Nicola received fire insurance proceeds in the amount of $4,700, which he deposited in his account with the Guaranty Trust Company. As a result of financial difficulties, Guaranty Trust issued its stock to Nicola Shahadi representing the moneys in his account. This stock was ultimately endorsed over to the petitioner in 1940. At the end of 1931 Nicola Shahadi went out of business. Thereafter, he lived with the petitioner until his death. In each of the years 1937 through 1947 petitioner claimed Nicola as a dependent on his income tax returns.
Nicola Shahadi died on November 8, 1947. Sometime thereafter petitioner, as a beneficiary of certain life insurance on his father's life, received insurance proceeds of about $5,100. Petitioner, as executor, filed a resident return on behalf of Nicola's estate with the Transfer Inheritance Tax Bureau of the New Jersey Department of Taxation and Finance. In that document, in response to an inquiry as to whether the decedent had made any transfers of a material part of his estate more than 2 years prior to death without full consideration, the petitioner answered ‘No.’ Nicola Shahadi's estate was declared ‘untaxable.’
A search of the files of the office of the district director of internal revenue at Camden, New Jersey, revealed no record of income tax returns having been filed by Mary Shahadi for the years 1913 through 1927, nor by Nicola Shahadi for any year during the period 1913 through 1927, the year 1929, and the years 1931 through 1947.
Petitioner is an attorney at law, duly licensed to practice in the State of New Jersey. After graduating from law school in 1922 he served a brief clerkship with a law firm, as required by State law. He passed the State bar examination in 1923, and entered the law offices of Joseph Perskie at a salary of $25 to $50 per week. He remained in that office until about 1928, when he entered practice for himself.
From the outset of his career in 1922 petitioner was interested in politics. In 1937 he was appointed a probate clerk in the office of the Surrogate of Atlantic County, a position in which he served for approximately 1 year. In 1938 he became Recorder, or Municipal Court judge, of Atlantic City. He held that office until 1944, when he was elected a city commissioner of Atlantic City. In 1950 he was appointed to the position of County Solicitor, Atlantic County, New Jersey, an office which he held through the latter years in issue. Set forth below are the earnings petitioner received in each of the aforementioned positions:
+----------------------------------------+ ¦Year¦Position ¦Earnings ¦ +----+-------------------------+---------¦ ¦1938¦Recorder ¦$2,080.00¦ +----+-------------------------+---------¦ ¦1939¦Recorder ¦4,260.00 ¦ +----+-------------------------+---------¦ ¦1940¦Recorder ¦4,500.00 ¦ +----+-------------------------+---------¦ ¦1941¦Recorder ¦4,500.00 ¦ +----+-------------------------+---------¦ ¦1942¦Recorder ¦4,574.88 ¦ +----+-------------------------+---------¦ ¦1943¦Recorder ¦4,699.84 ¦ +----+-------------------------+---------¦ ¦1944¦Recorder and Commissioner¦5,006.19 ¦ +----+-------------------------+---------¦ ¦1945¦Commissioner ¦5,250.00 ¦ +----+-------------------------+---------¦ ¦1946¦Commissioner ¦5,250.00 ¦ +----+-------------------------+---------¦ ¦1947¦Commissioner ¦5,250.00 ¦ +----+-------------------------+---------¦ ¦1948¦Commissioner ¦5,250.00 ¦ +----+-------------------------+---------¦ ¦1949¦Commissioner ¦5,250.00 ¦ +----+-------------------------+---------¦ ¦1950¦Commissioner ¦1,312.50 ¦ +----+-------------------------+---------¦ ¦1950¦County Solicitor ¦5,312.50 ¦ +----+-------------------------+---------¦ ¦1951¦County Solicitor ¦7,900.00 ¦ +----------------------------------------+
During the years in issue, while holding the public offices indicated, petitioner was permitted to and did conduct his own law practice in privately maintained offices. Throughout this period he was associated with an attorney named Harry Miller. It was agreed that Miller would do the trial work for petitioner in consideration for which he would receive a portion of petitioner's fee. Upon receipt of a particular fee petitioner would pay Miller his share and would then record in his books and report as income only the retained net fee.
When first contacted by internal revenue agents in August 1951, petitioner had no books or records with respect to income realized and expenditures made in the years 1944 through 1948, except certain retained checks for the year 1948. He personally destroyed all such records at a time prior to 1951, assigning as a reason that he thought he would have no more use for them. For the years 1949 and 1950 petitioner had retained certain ledger sheets which he contended contained a complete record of all his income and expense items for those years.
A preliminary examination of petitioner's books and records for the years 1949 and 1950 by revenue agents disclosed that they failed to reflect substantial cash expenditures made during that period. Further verification of petitioner's income for those years was attempted through the use of his subsidiary files, but they were found to be incomplete. An analysis of petitioner's bank deposits for the years 1946 through 1948 revealed deposits exceeded reported gross income. When confronted with that information petitioner explained that perhaps his forwarding fee arrangement with Miller might account for the discrepancy. Miller was contacted, but his records shed no light on the amount of income he had received from petitioner. As a result, the net worth and expenditures method of reconstructing income was resorted to by respondent's agents.
Subject to the exceptions and reservations hereinafter noted, the parties, as a part of the trial of these cases, entered into a stipulation with respect to petitioners' assets, liabilities, living expenses, net worth, and annual increase in net worth plus living expenses, as of December 31, 1943, and as of December 31 of each of the taxable years 1944 through 1950. Respondent found $506.33 as cash on hand as of December 31, 1943. The following schedule reflects a condensation of the stipulation, plus the amounts of adjusted gross income petitioners reported on their returns for the years 1944 through 1950, and the total unreported income as determined by respondent for those years:
+-------------------------------------------------------------------------------------------------------+ ¦YEAR ENDED DECEMBER 31 ¦ +-------------------------------------------------------------------------------------------------------¦ ¦ ¦1943 ¦1944 ¦1945 ¦1946 ¦1947 ¦1948 ¦1949 ¦1950 ¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦Net worth at ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦end of year ¦$28,067.12¦$35,986.95¦$54,210.13¦$64,757.89¦$66,756.06¦$79,752.38¦$111,871.24¦$122,755.65¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦Net worth at ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦beginning of ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦year ¦ ¦28,067.12 ¦35,986.95 ¦54,210.13 ¦64,757.89 ¦66,756.06 ¦79,752.38 ¦111,871.24 ¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦Increase in ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦net ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦Worth ¦ ¦7,919.83 ¦18,223.18 ¦10,547.76 ¦1,998.17 ¦12,996.32 ¦32,118.86 ¦10,884.41 ¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦Add: Personal¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦expenditures ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦less ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦allowable ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦deductions ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦and non- ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦taxable ¦ ¦10,040.90 ¦10,684.87 ¦21,920.29 ¦17,745.90 ¦9,715.21 ¦11,111.24 ¦11,499.95 ¦ ¦income ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦Increase in ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦net ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦worth plus ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦personal ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦expenditures:¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦Reconstructed¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦adjusted ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦gross ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦income ¦ ¦17,960.73 ¦28,908.05 ¦32,468.05 ¦19,744.07 ¦22,711.53 ¦43,230.10 ¦22,384.36 ¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦Reported ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦adjusted ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦gross ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦income ¦ ¦7,197.08 ¦10,790.54 ¦19,863.93 ¦7,646.65 ¦8,489.80 ¦13,607.56 ¦17,382.85 ¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦Total ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦unreported ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦income ¦ ¦10,763.65 ¦18,117.51 ¦12,604.12 ¦12,097.42 ¦14,221.73 ¦29,622.54 ¦5,001.51 ¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦ ¦ ¦ ¦ ¦1 77.40 ¦ ¦1 ¦1 ¦1 88.41 ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦(151.02) ¦(165.53) ¦ ¦ +-------------+----------+----------+----------+----------+----------+----------+-----------+-----------¦ ¦ ¦ ¦ ¦ ¦12,681.52 ¦ ¦14,070.71 ¦29,457.01 ¦5,089.92 ¦ +-------------------------------------------------------------------------------------------------------+
+--------------------------------------------------------------+ ¦ ¦ ¦ ¦Estimated tax ¦ ¦ +------+------------------+-----+---------------+--------------¦ ¦Year ¦ ¦ ¦payments ¦Tax withheld ¦ +------+------------------+-----+---------------+--------------¦ ¦1945 ¦ ¦ ¦$1,504.00 ¦$996.00 ¦ +------+------------------+-----+---------------+--------------¦ ¦1946 ¦ ¦ ¦1,864.50 ¦828.00 ¦ +------+------------------+-----+---------------+--------------¦ ¦1947 ¦ ¦ ¦1,672.00 ¦828.00 ¦ +------+------------------+-----+---------------+--------------¦ ¦1948 ¦ ¦ ¦505.80 ¦724.00 ¦ +------+------------------+-----+---------------+--------------¦ ¦1949 ¦ ¦ ¦1,276.00 ¦672.00 ¦ +------+------------------+-----+---------------+--------------¦ ¦1950 ¦ ¦ ¦2,000.00 ¦703.40 ¦ +------+------------------+-----+---------------+--------------¦ ¦ ¦April 2, 1951 ¦$475 ¦ ¦ ¦ +------+------------------+-----+---------------+--------------¦ ¦ ¦June 22, 1951 ¦475 ¦ ¦ ¦ +------+------------------+-----+---------------+--------------¦ ¦ ¦September 20, 1951¦475 ¦ ¦ ¦ +------+------------------+-----+---------------+--------------¦ ¦ ¦January 10, 1952 ¦475 ¦ ¦ ¦ +------+------------------+-----+---------------+--------------¦ ¦ ¦February 15, 1952 ¦1,000¦ ¦ ¦ +------+------------------+-----+---------------+--------------¦ ¦1951 ¦ ¦ ¦2,900.00 ¦937.20 ¦ +--------------------------------------------------------------+
The notice of deficiency covering the calendar years 1944, 1945, and 1946 was mailed to petitioner on February 11, 1954. Petitioner's income tax returns for those years were filed more than 5 years prior to that date.
The notice of deficiency covering the calendar year 1947 was mailed to petitioner on March 13, 1953. The return for that year was due for filing more than 3, but less than 5, years prior to that date.
On December 11, 1952, petitioner and respondent entered into an agreement extending the period of limitation for the assessment of income tax for the calendar years 1948 and 1949 to June 30, 1954. The notice of deficiency covering those years was mailed to petitioner on February 11, 1954.
The petitioner never received a gift of $30,000 from his mother nor of $20,000 from his father, and he had no cash hoard of $70,000 or of any amount in excess of that determined by respondent on hand at the beginning of the taxable period.
Petitioner understated his income in the separate returns which he filed for the taxable years 1944 to 1949, inclusive, and in the return which he filed jointly with his wife for the year 1950, such understatements being in the amounts as determined by respondent through the use of the net worth method. A part of the deficiencies determined for each of such years was due to fraud with intent to evade the payment of taxes. The returns for the years 1944 through 1947 being false or fraudulent with intent to evade tax, the statute of limitations does not bar assessment and collection of the tax due.
Petitioner Albert N. Shahadi substantially underestimated his estimated tax for each of the taxable years 1945 to 1949, inclusive. Petitioners Albert N. Shahadi and Josephine Shahadi substantially underestimated their estimated tax for each of the taxable years 1950 and 1951.
OPINION.
VAN FOSSAN, Judge:
Respondent determined, on the basis of a net worth computation, that petitioners failed to report a total of $102,277.74 during the years 1944 to 1950, inclusive. Petitioners have accepted the correctness of all items appearing in that computation with the exception of cash on hand as of December 31, 1943, and the item of ‘Jewelry and Furs.’ They also challenge respondent's right to resort to the net worth and expenditures method of reconstructing their income, claiming the books and records which they maintained during the years in issue were adequate. In addition, they contend respondent's failure to show the source of such disputed income precludes a finding that it is taxable. Finally, they claim the years 1944 to 1947, inclusive, are barred by the statute of limitations.
Petitioner personally destroyed his books and records for the years 1944 to 1948, inclusive, prior to his first interview with respondent's agents. Moreover, an examination of the records maintained for the years 1949 through 1950 disclosed that they failed to reflect substantial cash expenditures made during that period. It is well settled that, under circumstances such as these, respondent is justified in resorting to the net worth method of reconstructing income. Sec. 41, I.R.C. 1939; Holland v. United States, 348 U.S. 121 (1954); United States v. Johnson, 319 U.S. 503 (1943); Harry Gleis, 24 T.C. 941 (1955), affd. 245 F.2d 237 (C.A. 6, 1957); Morris Lipsitz, 21 T.C. 917 (1954), affd. 220 F.2d 871 (C.A. 4, 1955), certiorari denied 350 U.S. 845 (1955); Louis Halle, 7 T.C. 245 (1946), affd. 175 F.2d 500 (C.A. 2, 1949), certiorari denied 338 U.S. 949 (1950).
Petitioners next argue that the net worth computation and the deficiencies determined thereby are incorrect because the computation fails to take into account accumulated cash on hand as of December 31, 1943, in the amount of $70,000. They claim that as of that date, the starting point of respondent's net worth computation, petitioner had $70,000 cash in a safe-deposit box, which sum was derived from the following sources: A cash gift of $30,000 from his mother, made in either December 1924 or January 1925; a cash gift of $20,000 from his father, made in late 1931; and $20,000 accumulated in cash from earnings, gifts, and inheritances over a period of years prior to 1944.
Because of the nature of petitioners' claim we have made detailed findings of fact with respect to the financial histories of both the petitioner and his parents. In the light of these findings the claim of a $70,000 cash accumulation is utterly incredible. We do not deem it necessary to lengthen our discussion by a review of those findings; rather, we shall limit ourselves to a brief summary of a few of the reasons underlying our disbelief in and rejection of petitioners' story.
1167
At the outset, we note out disbelief in the claim that Nicola and Mary Shahadi were able to accumulate the cash hoard of $50,000 which is attributed to them. Be it remembered that Mary never filed a tax return and that Nicola, prior to 1931, filed for only 3 years, the amount of tax returned being negligible. The first gift of $30,000 was allegedly made by Mary 18 years after the Shahadis had progressed from the status of door-to-door peddlers to that of small shopkeepers. It was during that 18-year period that Mary Shahadi, the alleged donor, suddenly found herself the sole support of the 7 members of the Saseen family and the 3 members of her own family. For 6 of those years she supported her husband, who was interned in Europe. She also paid the expenses in college of the petitioner and his cousin. Not until 1920, only 4 years prior to her alleged gift, was part of that burden lifted from her shoulders. Yet further, in 1923, approximately 1 year before the crucial date, she found it necessary to incur a complicated financial liability involving the payment of monthly installments of $44 in order to assume a mortgage of $4,000. Such facts are inconsistent with the possession of a $30,000 cash hoard as of December 1924. The probate record upon Mary's death in 1927 is entirely confirmatory of this conclusion, the executor's report showing $300 in personal property and $4,000 in realty. Nicola's situation is no better. In early 1929 his financial difficulties had progressed to the point where he found it necessary to borrow the full cash surrender value of his life insurance, to incur a $1,800 loan on a personal note, and finally, in April of that year, to file a petition in bankruptcy wherein he listed cash assets of $24.82. To find that but 2 years later, in the midst of one of the greatest economic crises our country has experienced, with attendant shortage of money, Nicola could have accumulated and assumed the role of donor with respect to $20,000 cash is beyond belief.
Petitioner's actions were equally inconsistent with a cash possession of any such magnitude. His tax delinquencies with respect to local real estate, the continuing monthly installments of $44 on the Richmond Avenue proper y through 1933, and the redemption of all his savings bonds and the related borrowing of $3,500 in order to purchase an interest in the Racing Association— all these are certainly not the acts of a man with large accumulations of cash. Further, we note that petitioner's evidence as to this item consists almost solely of his uncorroborated self-serving testimony. The further claim that, prior to 1943, $20,000 was accumulated by petitioner from gifts, inheritances, and savings finds no support in this record. Suffice it to say, we have found as a fact that petitioner never received a gift of $30,000 from his mother nor of $20,000 from his father, and that he did not possess an accumulated cash hoard, as of December 31, 1943, of $70,000 nor did he have cash on hand as of that date in excess of that found by respondent in his computation.
Petitioners next contest the item of ‘Jewelry and Furs' as it appears in the net worth computation, contending that those assets were received during the net worth period as gifts from the mother of Josephine Shahadi. Respondent, on the other hand, claims the individual pieces of jewelry and furs which made their appearance during the years in issue were derived from income sources and are properly includible in the computation. To support their claim petitioners submitted the affidavit of Josephine Shahadi, wherein she listed gifts of furs and jewelry allegedly received from her mother during 1944, 1947, 1950, and 1951. In addition, Josephine Shahadi testified generally with respect to that affidavit. The greater portion of her testimony was concerned with the attempted correction of what was termed the mistaken inclusion of two items in that affidavit. The remainder of her testimony was vague and inconclusive. We are of the opinion that petitioners have not carried their burden of proof with respect to this item, and we therefore sustain respondent's determination that it was includible in the net worth schedule.
No prolonged discussion is necessary with respect to petitioners' argument that respondent's failure to show a source of the disputed income precludes a finding that it is taxable. Increases in net worth determined on the basis of a net worth computation are evidence of income derived by the taxpayer during the net worth period. Morris Lipsitz, supra. The resulting deficiencies are presumptively correct, the burden of disproving them falling upon the taxpayer. In many instances it may be impossible for the Commissioner to ascertain the source of unreported income so determined, but the showing of such source is not always a necessary prerequisite to sustaining a deficiency determined under section 41 of the Code. United States v. Massei, 355 U.S. 595 (1958); Goe v. Commissioner, 198 F.2d 851 (C.A. 3, 1952), certiorari denied 344 U.S. 897 (1952), affirming a Memorandum Opinion of this Court dated April 4, 1951; Joseph Calafato, 42 B.T.A. 881 (1940), affd. 124 F.2d 187 (C.A. 3, 1941).
In the instant case the respondent has successfully negatived as possible sources of the unreported increases in net worth all those nontaxable sources indicated by the petitioners. We have sustained him in this matter, holding that the record establishes that petitioner did not receive gifts or inheritances which could account for the unreported increases. We are therefore of the opinion that respondent has carried the burden required of him by the law as stated in Massei, supra. In any event, as stated in Holland, supra, ‘the Government is not required to negate every possible source of nontaxable income, a matter peculiarly within the knowledge of the defendant.’ Moreover, when confronted with the fact that his bank deposits for the years 1946 through 1948 exceeded his gross income as returned for those years, petitioner's initial response was that his fee-splitting arrangement with Miller, wherein he recorded on his books only the net fees which he retained after paying Miller probably would account for the discrepancy. At the least, this indicates to us that petitioner considered his practice of law as a possible source of unreported income during those years. Furthermore, petitioner destroyed his records for the years 1944 through 1948 and had inadequate records for 1949 and 1950. He is in no position to profit by his own dereliction as to records.
Consequently, we have found as a fact that petitioners understated their income for the years and in the amounts as determined by respondent through the use of the net worth computation, and accordingly sustain respondent's determination of deficiencies based on such understatements.
The additions to tax under section 293(b) for fraud must also be sustained, since the evidence is clear and convincing that a part of the deficiencies for each of the years 1944 through 1950 was due to fraud with the intent to evade tax. Understanding fully that respondent must carry the burden of proof with respect to fraud, and even assuming that petitioners correctly challenged the items of cash on hand and jewelry and furs as they appear in the net worth computation, we are still faced with a conceded understatement of $19,452.74 for the 7-year period as a result of the stipulated increases in net worth. Of itself, this is strong evidence of fraud. M. Rea Gano, 19 B.T.A. 518 (1930); Abraham Galant, 26 T.C. 354 (1956). As indicated above, petitioners have failed in their challenge of the two items referred to and we have held on the record that petitioners' net worth increases were properly computed by respondent. Therefore, we are confronted with a total understatement of $102,277.74, or annual understatements approximating the following percentages of reported income:
+------------------+ ¦Year ¦Per cent ¦ +------+-----------¦ ¦1944 ¦150 ¦ +------+-----------¦ ¦1945 ¦168 ¦ +------+-----------¦ ¦1946 ¦64 ¦ +------+-----------¦ ¦1947 ¦158 ¦ +------+-----------¦ ¦1948 ¦166 ¦ +------+-----------¦ ¦1949 ¦216 ¦ +------+-----------¦ ¦1950 ¦29 ¦ +------------------+
It is well settled that such large unexplained discrepancies between actual net income and reported income over a number of years are evidence of fraud. Rogers v. Commissioner, 111 F.2d 987 (C.A. 6, 1940), affirming 38 B.T.A. 16 (1938); Louis Halle, supra. Especially is that true in a case such as this, where the petitioner occupied a responsible position in his community, was versed in the law, and knew what was expected of him by his Government. In the light of the record as a whole, we are convinced, and have found as a fact, based on clear and convincing evidence, that a part of the deficiencies for each of the years 1944 through 1950 was due to fraud with intent to evade tax.
Since we have found that the returns for the years 1944 through 1947 were false or fraudulent with the intent to evade tax, the statute of limitations is not a bar to the assessment and collection of the deficiencies determined for those years.
Finally, we turn to the additions to tax under section 294(d)(2)
with respect to each of the years 1945 through 1951 for substantial underestimation of estimated tax. When we consider the payments made by petitioners on their estimated tax liabilities in each of those years, increased by the amount of tax withheld at the source, in relation to their actual tax liabilities, it is abundantly clear that the additions to the tax under 294(d)(2) were properly determined for the years 1945 through 1950.
Eliminated by stipulation.
As to the year 1951, the parties have stipulated that there is no deficiency. Respondent argues that as of January 15, 1952, the last day for filing their 1951 estimate, the petitioners had made estimated tax payments of $1,900 which, when increased by the $937.20 withheld during that year, was less than 80 per cent of their total tax liability of $3,837.20, as finally returned for 1951. Respondents' calculations are correct, and therefore the addition to tax under section 294(d)(2) for the year 1951 is sustained.