Clayton v. Comm'r of Internal Revenue
Decision Date | 18 April 1994 |
Docket Number | Nos. 9566–91,12929–91 and 12978–91.,s. 9566–91 |
Citation | 102 T.C. 632,102 T.C. No. 25 |
Parties | David G. CLAYTON and Barbara A. Clayton, et al.,1 Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
David G. Clayton and Barbara A. Clayton, pro se.
Dale A. Zusi, Milpitas, CA, and Steven A. Wilson, for respondent.
1. Police raided Ps' residence and that of a confederate in a bookmaking operation, and seized various wagering paraphernalia and records of bets handled by P on two National Football League Conference championship games played on a single day in January, 1990. R's agent applied a 4.5 percent profit factor to the total bets, and extrapolated P's wagering income for two years from these figures. P's actual profit from the bets he took on the two games was approximately 10 percent of the amount arrived at by the profit-factor method. R's agent made an alternative computation of Ps' unreported income for the 2 years by using the bank deposit analysis method.
Held: On the facts of this case, R's application of the profit-factor method was not reasonable. DiMauro v. United States, 706 F.2d 882 (8th Cir.1983), applied. Held, further, R's alternative computation of Ps' unreported income by the bank deposit analysis method was reasonable. Held, further, R's determination of the addition to tax for fraud sustained for 1989.
2. R made a termination assessment against Ps for 1990 on the authority of sec. 6851(a), I.R.C., immediately following the raid on their premises in January, 1991. Ps filed successive applications on Forms 4868 and 2688 for extensions of time within which to file their 1990 return. On the first application Ps estimated their 1990 income tax liability to be zero. After the original due date of Ps' 1990 return, R made substituted returns for Ps as married individuals filing separately under the authority of sec. 6020(b), I.R.C. Shortly thereafter R mailed deficiency notices to Ps based upon the substituted returns, to which Ps responded by filing Tax Court petitions. Ps thereafter filed a 1990 joint return within the time putatively extended by the Forms 4868 and 2688. Held: Ps automatic extension of time application on Form 4868 was invalid because Ps did not make a bona fide and reasonable estimate of their tax liability. Crocker v. Commissioner, 92 T.C. 899 (1989). Held, further, R's determination under sec. 6651(f), I.R.C., that Ps' failure to file their 1990 return was fraudulent on the part of P husband, sustained. In applying sec. 6651(f), I.R.C. to determine whether there has been a fraudulent failure to file, the same elements are considered as when imposition of the fraud penalty under former sec. 6653(b) and sec. 6663(a), I.R.C., is considered.
3. Held: P husband received unreported interest income in 1990 in the amount of $3,016.
4. R's determination of additions to tax under sec. 6654(a), I.R.C., for failure to pay sufficient estimated tax for 1990 sustained.
In these consolidated cases respondent determined income tax deficiencies and additions to tax as follows:
+---------------------------------------------------+ ¦Taxable Year 1989 ¦ +---------------------------------------------------¦ ¦ ¦ ¦Addition to Tax ¦ +--------------------+------------+-----------------¦ ¦Petitioners ¦Deficiency ¦Sec. 6663(a) ¦ +--------------------+------------+-----------------¦ ¦ ¦ ¦ ¦ +--------------------+------------+-----------------¦ ¦David G. Clayton and¦$32,598 ¦$24,449 ¦ +--------------------+------------+-----------------¦ ¦Barbara A. Clayton ¦ ¦ ¦ +---------------------------------------------------+
(Except as otherwise noted, all section references are to sections of the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.)
For 1989, respondent's Answer asserts, in the alternative to the addition to tax under section 6663(a), a 20–percent addition to tax under section 6662.
As to David G. Clayton (petitioner) for 1990, respondent's answer asserts, in the alternative to the addition to tax under section 6651(f), a 25–percent addition to tax under section 6651(a), and, in the alternative to the addition to tax under section 6651(f) or section 6651(a), a 75–percent addition to tax under section 6663.
As to Barbara A. Clayton (Mrs. Clayton) for 1990, respondent's Answer asserts, in the alternative to the addition to tax under section 6651(f), a 25–percent addition to tax under section 6651(a), and, in the alternative to the addition to tax under section 6651(f) or section 6651(a), a 75–percent addition to tax under section 6663.
As to both petitioners, respondent also asserts in the alternative to the foregoing additions to tax under section 6662(b)(1) and (2).
At trial, respondent made a concession as to the amount of the deficiency for both petitioners for 1990 based upon a “wagering season” of 24 weeks rather than 26 weeks. Respondent also conceded the fraud issue as to Mrs. Clayton.
The issues for decision are:
(1) Whether petitioners received unreported taxable income in 1989;
(2) whether petitioners received unreported taxable income in 1990;
(3) whether petitioner received unreported interest income in 1990 in the amount of $3,016;
(4) whether petitioner fraudulently and with intent to evade tax failed to report taxable income received from bookmaking activities in 1989;
(5) in the alternative whether, for purposes of section 6662(b)(1), petitioners' underpayment of tax for 1989 is attributable to negligence or disregard of rules and regulations, or, for purposes of section 6662(b)(2), constitutes a substantial understatement of income tax.
(6) whether, for purposes of section 6651(f), petitioner fraudulently failed to file an income tax return for 1990;
(7) in the alternative to section 6651(f) for 1990, whether, for purposes of section 6651(a), petitioners' failure to file a timely return for 1990 was due to willful neglect;
(8) in the alternative to sections 6651(f) and 6651(a), whether for 1990 petitioner, for purposes of section 6663, fraudulently and with intent to evade tax failed to report taxable income received from bookmaking activities; (9) in the alternative to section 6651(f), 6651(a), and section 6663(a) for 1990, whether, for purposes of section 6662(b)(1), petitioners' underpayment of tax for 1990 is attributable to negligence or disregard of rules or regulations, or, for purposes of section 6662(b)(2), constitutes a substantial understatement of income tax;
(10) whether petitioners are liable for the addition to tax pursuant to section 6654 for failing to make sufficient estimated tax payments for 1990.
Mrs. Clayton concedes that she received unreported interest income in 1990 in the amount of $50.
Petitioners resided at 5114 Montecito Drive, Bakersfield, California (petitioners' residence) when they filed their petitions in this case. Their 1989 joint return was timely filed.
On January 27, 1991, petitioners' residence was raided by officers of the Bakersfield, California, Police Department and the Criminal Investigation Division of the Internal Revenue Service. Simultaneously, the Bakersfield police also raided the residence of Michael Martini, Sr. (Martini) at 4213 McKelvey Court in Bakersfield (the Martini residence).
At both premises the police officers discovered and seized miscellaneous bookmaking paraphernalia and wagering records. These included “pay and collect” sheets, a “proposition bets” sheet, a “top sheet”, $4,845 in cash, several books relating to bookmaking, and miscellaneous other items. At petitioners' residence the police discovered four telephones in close proximity to each other.
One of the Bakersfield police officers searching petitioners' residence found evidence that calls from petitioners' telephones were capable of being forwarded to a telephone at the Martini residence. Next to one of the telephones the police officer found an envelope with a phone number belonging to petitioner written on it. Also written on the envelope was a note stating that petitioner's phone number was “on”, with a small arrow drawn to a second phone number, which belonged to Martini.
At the Martini residence the officers found various items relating to bookmaking in a room that appeared to be an office. One of the telephones in the “office” at the Martini residence had a speed dialing feature with the ability to store several numbers. Petitioner's initials, “DC”, were marked in red ink on one of those numbers. Out of approximately 14 numbers on the speed dial phone, only two were marked in red.
One of the Bakersfield police officers who was searching the Martini residence pressed the number marked “DC” and made telephonic contact with a police officer who was at petitioners' residence. A police officer seized 11 audio cassette tapes at the Martini residence containing the voices of Martini and petitioner accepting wagers over the telephone.
By going through bank records seized at petitioners' residence, the police discovered that petitioners held two safe deposit boxes in Bakersfield, California, and one in Salinas, California. The police seized $31,080 in U.S. Currency from petitioners' safe deposit box number 645 at First Interstate Bank, 456 South Main Street, Salinas, California, and $12,800 in U.S. Currency, and cashier's checks and money orders totaling $11,815 from petitioners' safe deposit box 434 at California Republic Bank, 3743 Columbus Street, Bakersfield,...
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