Barnhill v. Comm'r of Internal Revenue (In re Estate of Temple)

• Decision Date: 08 November 1976
• Docket Number: Docket Nos. 727—72,728—72.
• Parties: ESTATE OF HOLLIS R. TEMPLE, DECEASED, BARBARA BARNHILL, EXECUTRIX, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

67 T.C. 143

ESTATE OF HOLLIS R. TEMPLE, DECEASED, BARBARA BARNHILL, EXECUTRIX, PETITIONER
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 727—72

728—72.

United States Tax Court

Filed November 8, 1976.

The taxpayer's conduct was intimately entwined with the inaccurate and incomplete recording of his business income, and the resulting substantial understatements of income on his 1964, 1965, and 1966 Federal income tax returns. Held, the taxpayer's returns for 1964, 1965, and 1966 were false and fraudulent with the intent to evade taxes, thereby lifting the bar on the assessment and collection of the deficiencies for those years. Held, further, the additions to tax under sec. 6653(b), I.R.C. 1954, are applicable. Held, further, respondent's determinations of the amount of the deficiencies sustained.

[67 T.C. 143]

Roland J. Mestayer, Jr., for the petitioner.

Frederick T. Carney and Robert W. West, for the respondent.

[67 T.C. 144]

BRUCE, Judge:

Respondent determined deficiencies in Federal income taxes and additions to tax for fraud under section 6653(b), I.R.C. 1954,¹ against the taxpayer, Hollis R. Temple, in these consolidated cases² as follows:

+--------------------------------------------------+
                ¦ ¦ ¦Addition to tax ¦
                +-------------------+------------+-----------------¦
                ¦Calendar year ¦Deficiency ¦sec. 6653(b) ¦
                +-------------------+------------+-----------------¦
                ¦Docket No. 728-72 ¦ ¦ ¦
                +-------------------+------------+-----------------¦
                ¦1964 ¦$25,814.73 ¦$12,907.37 ¦
                +-------------------+------------+-----------------¦
                ¦1965 ¦7,188.13 ¦3,594.07 ¦
                +--------------------------------------------------+
                

Docket No. 727-72
                1966 17,152.11 8,576.06
                

Notices of the deficiencies were mailed to the taxpayer on November 2, 1971, and the petitions herein were filed on January 31, 1972.³ Since the notices of deficiencies were not mailed to the taxpayer within 3 years from the dates his returns were filed, the assessment and collection of the deficiencies are barred by limitations, sec. 6501(a), unless it is established that the returns were false or fraudulent with the intent to evade tax, sec. 6501(c) (1). Petitioner has conceded that the taxpayer substantially understated on the returns filed by him for 1964, 1965, and 1966 the amounts of income he received from his business operations. With only a few minor exceptions, petitioner does not contest the specific adjustments resulting in the respondent's deficiency determinations, but relies primarily upon the statute of limitations to bar the assessment and collection of the deficiencies.

Accordingly, the principal issues for our decision are whether the taxpayer's returns for 1964, 1965, and 1966 were false or fraudulent within the meaning of section 6501(c)(1), and closely related thereto, whether any part of the underpayments

[67 T.C. 145]

in tax for each year was due to fraud such that the additions to tax under section 6653(b) are applicable. In addition we have reassessed the admissibility into evidence of an affidavit secured by respondent ex parte from the deceased accountant who prepared the taxpayer's returns for each of the years in issue.

FINDINGS OF FACT

Some of the facts have been stipulated by the parties, and they are so found. In addition the authenticity of various documents was stipulated at trial. The exhibits so stipulated are incorporated herein by this reference.

Hollis R. Temple (referred to herein as taxpayer or Hollis) was a resident of Gautier, Miss., at the time the petitions were filed herein and at the times his Federal income tax returns for the years 1964, 1965, and 1966 were filed with the District Director of Internal Revenue at Jackson, Miss. In 1964 and 1965, Hollis and his then wife, Ruby Temple, filed joint returns. The 1966 return was also filed as a joint return, but the purported signature of Ruby Temple was a forgery.

Hollis and Ruby Temple experienced marital difficulties during 1965 and subsequently, in March 1968, obtained a divorce. The record does not indicate the time at which they ceased to cohabit. Ruby Temple died in December 1972, and Hollis died, at the age of 63 years, in September 1973. Both deaths preceded the trial of this case.

As a result of Hollis' demise, his estate has been substituted as the party petitioner. Rule 63(a), Tax Court Rules of Practice and Procedure. The estate will hereinafter be referred to as the petitioner.

Throughout the time period involved herein, Hollis reported income derived solely from the operation of Temple Construction Co. (referred to hereinafter as Temple or the company), a sole proprietorship engaged primarily in the installation and repair of underground pipe and sewer lines. He reported his income utilizing the cash basis method of accounting. The taxable income Hollis reported and the understatements determined by respondent are as follows:

+--------------------------------------------------------+
                ¦ ¦Taxable income ¦Taxable income ¦Understatements ¦
                +----+----------------+----------------+-----------------¦
                ¦ ¦reported on ¦determined by ¦determined by ¦
                +----+----------------+----------------+-----------------¦
                ¦ ¦returns ¦respondent ¦respondent ¦
                +----+----------------+----------------+-----------------¦
                ¦1964¦$27,435.25 ¦$91,332.52 ¦$63,897.27 ¦
                +----+----------------+----------------+-----------------¦
                ¦1965¦6,534.24 ¦31,049.99 ¦24,515.75 ¦
                +----+----------------+----------------+-----------------¦
                ¦1966¦1,493.46 ¦40,816.72 ¦39,323.26 ¦
                +--------------------------------------------------------+
                

[67 T.C. 146]

As will shortly be seen, the majority of the understatements stemmed from income omitted from Temple's cash receipts and disbursements journal and from journal entries erroneously recorded. Perhaps due in part to the lapse of time, much of the testimony at trial with regard to the transactions in question was extremely vague. We have been left to draw our conclusions largely from the documentary evidence and reasonable inferences arising therefrom.

Temple regularly employed approximately eight construction workers (the exact number would vary according to the number of ongoing jobs) and a general office employee whose function included maintenance of the company's books and records on a daily basis. Four such bookkeepers were employed by Temple during the time period with which we are concerned:

+----------------------------------------------+
                ¦Bookkeepers ¦Date employed ¦
                +---------------+------------------------------¦
                ¦Jean Prassenos ¦1958 to September 1965 ¦
                +---------------+------------------------------¦
                ¦Anna Burnham ¦September 1965 to January 1966¦
                +---------------+------------------------------¦
                ¦Imogene Farnham¦January 1966 to October 1966 ¦
                +---------------+------------------------------¦
                ¦Gloria Fetzik ¦October 1966 to 1967 ¦
                +----------------------------------------------+
                

In addition W. W. Kerr, a public accountant, was retained to assist the bookkeepers with any accounting problems that should arise and to prepare the taxpayer's Federal income tax returns for each of the years 1964, 1965, and 1966.

Hollis regularly checked on jobs in the field but he did not perform actual construction labor. He did all the ordering of materials and supplies and also the bidding for contracts. Although taxpayer never completed the fourth grade of formal education, in the words of one of his bookkeepers, ‘(Mr. Temple) was very smart in his business.’ The company did very little followup billing of customers because Hollis was always aware of who his debtors were.

Temple's bookkeeping system was set up in 1962 or 1963 by a Mr. Anderson, and prior to the retention of W. W. Kerr to prepare Hollis' 1964 return, his Federal income tax returns

[67 T.C. 147]

were prepared by a Mr. Dye. When Kerr became employed to perform Temple's accounting services, he continued with the existing bookkeeping method.

Temple's books and records consisted of a cash receipts and disbursements journal (hereinafter journal), a general ledger, bank deposit slips, bank statements, check stubs, and incoming and outgoing invoices maintained as records of accounts payable and accounts receivable, respectively. Hollis utilized a single checking account at Merchants & Marine Bank (M & M Bank) in Pascagoula, Miss., for both his private and business affairs. Temple's journal was keyed to the deposits and withdrawals at the M & M Bank account. Consequently, the journal contains information relating to both private and business transactions.

Each bookkeeper testified as to the office practice of maintaining records at the time of her employment, and it remained essentially the same throughout the years with which we are concerned. Receipts were recorded in the journal from bank deposit slips prepared either by Hollis or the bookkeeper. Incoming checks would arrive by mail or be picked up personally by Hollis. When Hollis took receipt of incoming checks, he would endorse them with the company name and his own signature. When a bookkeeper handled the transaction, she would endorse the check with a rubber stamper bearing the company name and the restrictive endorsement ‘for deposit only.’ The source of the funds was usually listed on the face of the deposit slip from which the bookkeeper made journal entries. Sometimes the bookkeeper would endorse a check and make out the deposit slip, but Hollis would go to the bank to make the actual deposit. The significance of this office practice is that journal entries were customarily posted from the deposit slips only after a deposit had been made. Thus when Hollis made a deposit, it was incumbent upon him to return the deposit slip to the bookkeeper in order for a journal entry to be recorded. ⁴

[67 T.C. 148]

The integrity of the journal is the focal point of our interest because it was the primary source used to prepare taxpayer's Federal income tax returns. Both the journal and the returns for the years in issue report the following gross receipts:

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