Nicholas v. Comm'r of Internal Revenue
| Decision Date | 26 September 1978 |
| Docket Number | Docket Nos. 8223-74,8224-74. |
| Citation | 70 T.C. 1057 |
| Parties | NICK B. NICHOLAS, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENTNICK B. NICHOLAS and CLEVONNE R. NICHOLAS, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Respondent determined deficiencies in petitioners' tax liability based on records seized in a drug raid. Held, such evidence was legally seized and properly before the Court. Held, further, respondent proved unreported income of at least the amounts determined in the statutory notices. Held, further, a part of the deficiencies for each year was due to fraud. Held, further, petitioner wife fails to qualify as an innocent spouse. Stanley E. Jennings, for the petitioners.
Gregory A. Robinson, for the respondent.
Respondent, by statutory notices dated September 9, 1974, determined deficiencies in petitioners' Federal income taxes as follows:
These cases were consolidated for purposes of trial, briefing, and decision. The questions presented for our consideration are as follows: (1) Whether the records used by respondent in his determination were illegally seized and, therefore, should be suppressed; (2) whether respondent correctly determined petitioners' tax liability for the years in issue; (3) whether any part of the deficiencies determined by respondent was due to fraud with the intent to evade taxes; and (4) whether Clevonne R. Nicholas qualifies as an innocent spouse for the taxable years 1972 and 1973. Respondent conceded on brief that Nick B. Nicholas was a resident alien during the years in issue.
Some of the facts have been stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.
Petitioners, Nick B. Nicholas (hereinafter Nick), and Clevonne R. Nicholas (hereinafter Clevonne), were married February 26, 1972, and were husband and wife at the time of filing the petitions herein. Nick filed an individual Federal income tax return for the calendar year 1971. Petitioners filed joint Federal income tax returns for the calendar years 1972 and 1973. Petitioners resided in Poway, Calif., at the time the petitions herein were filed.
Nick was previously married to Stella M. Nicholas. Five children resulted from that marriage. Nick separated from Stella M. Nicholas at the time he entered the United States. Their divorce was finalized on February 2, 1972. Both Nick's former wife and the five children resided in the Bahamas. Clevonne also had children by a prior marriage. Her two boys reside with petitioners. Nick and Clevonne have one child of their union, born in 1973.
From at least September 1967 until February of 1969 Nick worked for the Ford Motor Co. at the Dearborn engine plant. He started as a pin grinder and had progressed to a job setter by the time his employment therewith terminated. Nick also worked at the House of Leather, Inc., and for Northwestern Dodge, Inc., as a salesman during 1969. His earnings from such occupations in 1969 totaled $5,196.76.
During 1970 Nick continued employment with Northwestern Dodge, Inc., until the summer of that year. After terminating employment therewith he attempted some promotional work in the entertainment field. His only reported income for 1970 was from Northwestern Dodge, Inc., in the amount of $6,512.51.
Nick reported income of $10,000 in 1971 as amounts received from gambling. In 1972 he reported $20,000 from the same source plus interest income of $1,469. He reported no income for 1973. During both 1972 and 1973 petitioner was engaged in horseracing. However, in both years he reported deductions therefrom in excess of income.
Even before their marriage Clevonne and Nick comingled their assets. Clevonne worked for the Detroit Chamber of Commerce until mid-1971. Her annual salary fell between $5,000 and $6,000 per year.
In August of 1970 Nick purchased a residence in Detroit, Mich., for $20,700. The application for mortgage approval under F.H.A. financing for the total sales price reflected total assets of $12,050 and $0 liabilities as of August 12, 1970.
The August 12, 1970, financial statement reflected ownership by Nick of one car, a 1962 Ford, valued at $250. He had previously owned a number of cars. In 1965 he had purchased a Mustang on time. The Mustang was traded in on a Toronado in 1967. Nick made payments on the Toronado until it was traded in on the purchase of a 1968 Thunderbird. In turn the Thunderbird was traded in for a 1969 El Dorado Cadillac. The difference in price between the Thunderbird and Cadillac, approximately $1,500, was financed. The Cadillac was repossessed and auctioned off in 1969. Nick then purchased a Lincoln Mark III for $8,300 cash. This car was sold in 1971.
In January of 1971 Clevonne purchased a 1969 El Dorado Cadillac. A downpayment of $2,024.40 was made, all or part of which was derived from a trade-in. The balance, $3,404.59, was paid February 15, 1971. Clevonne acquired a 1972 El Dorado in September of 1971. At that time Nick acquired a Fleetwood Cadillac. Both cars were purchased for cash. The El Dorado was used as a trade-in on a 1971 Rolls Royce in August of 1972. The difference, approximately $13,200, was paid in cash. In 1973 Nick acquired another Rolls Royce partially in exchange for the 1970 Rolls which was damaged under warranty plus a difference of $1,114 cash.
The record discloses that Nick made numerous cash transactions during the years in issue. As they are relatively small in amount we will not list such dealings in detail. In addition to such transactions, on two or three occasions in the spring and summer of 1971 Nick visited each of two cashiers at Manufacturers National Bank in Detroit to exchange 5-, 10-, and 20-dollar bills for 100 dollar bills. The amount exchanged ranged from $3,000 to $10,000. On one occasion he exchanged $14,000.
On July 15, 1971, Nick purchased a residential lot in San Diego County, paying $14,000. The next day he obtained an initial estimate of $43,650 from McCorquodale Builders Inc. for the construction of a house on that lot. A pool was installed by McCorquodale Builders Inc. and the lot was landscaped. Apparently the total construction cost, including landscaping, was approximately $52,000. In addition an interior decorator was employed at a cost of $10,000.
Nick purchased the following horses for cash:
+-----------------------------+
¦Date ¦Horse ¦Amount ¦
+--------+-----------+--------¦
¦ ¦ ¦ ¦
+--------+-----------+--------¦
¦11/20/72¦Calico Cat ¦$5,500 ¦
+--------+-----------+--------¦
¦11/20/72¦Sappho ¦23,500 ¦
+--------+-----------+--------¦
¦11/21/72¦Night Jet ¦6,700 ¦
+-----------------------------+
He also made a cash deposit of $7,000 to Eagle Downs Racing Association in each of the taxable years 1972 and 1973 and one of $500 in 1972.
Nick reported income from gambling in the amounts of $10,000 and $20,000 for his taxable years 1971 and 1972, respectively. During 1971 he made three trips for the purpose of gambling and went to the horse races approximately 20 times. He had no method of recording wins and losses in that year.
During 1972 Nick placed his winnings in an account for purposes of keeping track of his gambling wins and losses. The account reflects only two deposits but withdrawals throughout 1972 and 1973. In 1972 he made three or four trips to Las Vegas. In March 1972 he won $50,000. He also bet on the horses. He reported a net profit of $20,000 from his 1972 gambling activities. Nick made one trip to Las Vegas in 1973 but did not gamble during that trip. He also made a few dollars playing golf, but did not make any large bets. He accumulated his gambling winnings at home.
On June 12, 1974, a search warrant was issued by the United States District Court for the Southern District of California. The warrant authorized a search of petitioners' premises for “heroin, cocaine, and other dangerous drugs, packaging materials, scales, business records, cash, and other physical and documentary items relating to the possession, distribution and sale of narcotics and dangerous drugs.” Pursuant to the warrant a search was conducted on June 21, 1974, by a special agent of the Drug Enforcement Administration of the Department of Justice. In addition to the illicit drugs and their accouterments the agents confiscated petitioners' financial records.
At that time the drug enforcement agent contacted a special agent with the Intelligence Division of the Internal Revenue Service. After the documents seized by the drug enforcement agents were reviewed copies were turned over to the Internal Revenue Service.
Nick admitted purchasing what he believed to be 1 pound of cocaine in 1974 for $9,000. He testified that he sold 15 tablespoons (approximately 3 ounces) for $2,700. He also personally used some of the cocaine. When Nick was arrested on June 21, 1974, the inventory reflected, among other items, possession of cocaine, plastic baggies, and spoons. The subsequent complaint reflects that the total amount of cocaine in his possession was approximately 1 pound.
Clevonne took a major role in the family bookkeeping. She signed a majority of the checks written by petitioners and kept the financial...
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