Rodney v. Comm'r of Internal Revenue

• Decision Date: 25 November 1969
• Docket Number: 102-68.,Docket Nos. 2788-64
• Citation: 53 T.C. 287
• Parties: HENRY M. RODNEY AND LUCILLE H. RODNEY, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

53 T.C. 287

HENRY M. RODNEY AND LUCILLE H. RODNEY, PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 2788-64

102-68.

Tax Court of the United States.

Filed November 25, 1969.

Myron E. Anderson, for the petitioners.

Gary C. Randall, for the respondent.

Held: 1. Because of his criminal conviction of willful attempt to evade income tax for the years 1959 through 1962, petitioner Henry M. Rodney is collaterally estopped to deny that the joint income tax returns that he filed with his wife for the years 1959 through 1962 were false and fraudulent or that a part of the underpayment, if any, in tax for those years is due to fraud with intent to evade tax. Therefore, the assessment and collection of any deficiency in tax for none of those years from Henry M. Rodney is barred by the statute of limitations and he is liable for the addition to tax for fraud for each of those years.

2. Petitioner Lucille H. Rodney, the wife of Henry M. Rodney, is not collaterally estopped to deny that the joint income tax returns which she filed with her husband for the years 1959 through 1962 were false and fraudulent or that a part of the underpayment in tax, if any, for those years was due to fraud because of the criminal conviction of her husband in an action to which she was not a party.

3. Respondent has failed to prove by clear and convincing evidence that that the Federal income tax returns filed by petitioners for any one of the years 1957 through 1963 were false and fraudulent with intent to evade tax or any part of the underpayment in tax, if any, for any one of these years is due to fraud with intent to evade tax.

4. The assessment or collection of any deficiency in tax against either petitioner is barred by the statute of limitations for the taxable years 1957 and 1958 and the assessment and collection of any deficiency in tax for the taxable years 1960 and 1963 is not barred against either petitioner since the notice of deficiencies for these years was mailed within the time provided by law without reference to fraud.

5. The assessment and collection of any deficiency in tax for the taxable years 1959, 1961, and 1962 against petitioner Lucille H. Rodney is barred by the statute of limitations and Lucille H. Rodney is not liable for any addition to tax for fraud in any of these years.

6. Neither petitioner is liable for any addition to tax for fraud for the taxable year 1963.

7. On the basis of the evidence the amounts properly includable in petitioners' income and the proper amounts of their deductions for the years 1959 through 1963 are determined.

SCOTT, Judge:

Respondent determined deficiencies in petitioners' income taxes and additions to taxes under section 6653(b), I.R.C. 1954,¹ for the years and in the amounts as follows:

The parties have disposed of a number of the issues raised by the pleadings, leaving the following for our consideration:

(1) Whether assessment of deficiencies against both or either of petitioners for the years 1957 through 1959 and 1961 through 1963 is barred by the statute of limitations. For all of these years except 1963 the determination of this issue is dependent upon whether the returns filed by petitioners were false and fraudulent with intent to evade tax.

(2) Whether any part of the underpayment, if any, of tax by petitioners for each of the years 1957 through 1962 is due to fraud.

(3) Whether petitioner Henry M. Rodney is estopped to deny fraud for the years 1959 through 1962 because of his conviction under section 7201 of willful attempt to evade income tax for each of those years.

(4) Whether petitioner Lucille H. Rodney is estopped to deny fraud for each of the years 1959 through 1962, because of her husband's conviction of willful attempt to evade income tax for each of those years, and if she is not so estopped does respondent have the burden to prove fraud for each of those years in order to sustain his determination of fraud against Lucille H. Rodney.

(5) What is the proper amount of petitioners' income from interest, sale of a piece of real property, rental received, and unexplained bank deposits for the years here in issue?

(6) Whether petitioners are entitled to deduct certain insurance premiums as business expenses and to deduct depreciation and other business expenses in an amount in excess of the amount of such expenses as computed by respondent for the years here in issue.

FINDINGS OF FACT

Some of the facts have been stipulated and are found accordingly.

Petitioners Henry M. Rodney and Lucille H. Rodney, husband and wife, whose residence at the time the petitions in these cases were filed was Spokane, Wash., filed their joint Federal income tax returns for each of the calendar years 1957 through 1963 with the district director of internal revenue for the district of Washington. The returns for the years 1957 through 1962 were filed on or about April 15, 1958 through 1963, respectively. The petitioners' return for the calendar year 1963 was filed on May 7, 1964. On March 1, 1967, petitioners signed a waiver extending the time for assessment of tax for the year 1963 to December 31, 1967. This waiver was accepted by respondent on March 20, 1969. Petitioners kept their books and records and filed their income tax returns on a cash receipts and disbursements basis, except that on certain interest and sales items they elected to use and did use other methods of accounting.

Petitioners' income tax returns for the years in issue were prepared by Melvin Workman (hereinafter referred to as Workman). Workman had 5 years of college training, 3 years work with a C.P.A., and 2 years experience in private accounting. Although he was not a C.P.A. he held himself out as a competent accountant experienced in the preparation of Federal income tax returns. Petitioners furnished Workman with all information requested by him, including for 1957 and 1958 information relating to income from the rental of space in buildings which Henry M. Rodney had constructed and the expense incurred in producing such rental income.

Henry M. Rodney (hereinafter referred to as petitioner) is a medical doctor who received his M.D. degree from Cornell University in 1945. Upon receipt of his medical degree he was drafted into the armed services. In 1946 he was discharged from the Armed Forces and began to practice as a physician in partnership with his mother, Mary Rodney, who is also an M.D. Petitioner continued in practice with his mother until 1953 when he was again called to active duty in the military service. Petitioner was discharged from the Army in 1955 and resumed his practice in association but not in partnership with his mother.

At the time of his return from military service in 1955 he had a substantial sum of money in cash which he had carried with him generally throughout his tour of military duty. When he was stationed at Ft. Sam Houston he had from time to time lent some of the cash to other medical doctors. Petitioner felt he needed a cash reserve against the unforeseen events which might arise while he was in the military service. During his tour of duty in the Army he had his wife and five children with him and desired some assurance of their security.

Shortly after returning from the military service petitioner decided to purchase property and build a building suitable for a medical clinic. In late 1955 or early 1956 he located a site which he considered appropriate for such a building and expended funds for preliminary steps in connection with erecting buildings thereon such as architect's sketches, cost estimates, and property options. The necessary zoning changes required to permit use of the piece of property petitioner had selected for a medical clinic were denied by the planning commission. Petitioner let his option lapse and lost the option payments. During 1956 petitioner expended approximately $5,600 in connection with plans to acquire the site which he did not acquire. Later in 1956 petitioner acquired a suitable piece of land for a medical clinic outside the jurisdiction of the planning commission for a purchase price of $8,500. He then purchased some building shells which he had moved on to the land and began the construction of his clinic buildings. Petitioner borrowed $44,000 from the Great Northwestern Life Insurance Co., $21,000 from his mother Mary Rodney and used $20,000 which he had in a bank account in Spokane in the construction of his medical clinic buildings. In addition petitioner used some of the remaining portion of the money which he had with him when he returned from his military service in the construction of the clinic building. During the time petitioner had the clinic buildings under construction he was engaged in the practice of medicine and was generating income through practice. He used some of his current income in the construction of the clinic buildings. When petitioner told Workman about his buildings he also told him that he planned to incorporate a business to own and handle the rentals of the buildings. For this reason Workman did not include any income or expenses of the rental operation of the buildings on petitioner's Federal income tax returns for 1957. He did compute a basis to petitioner of the buildings of $174,802, which was used on petitioner's return for 1959 and later years in computing depreciation. Workman was furnished with no receipts or other records of cost by petitioner, but computed the basis of the buildings from his knowledge of the funds available to petitioner for construction of the buildings and what he considered a reasonable cost for the floorspace included in the buildings. Workman determined the useful life of the buildings to be 30 years without consulting with petitioner. The stipulated useful life of the buildings is 20 years. Petitioner first began using the buildings and receiving rental income during 1957 but claimed no depreciation thereon until 1959 when he first reported...