Cohen v. Comm'r of Internal Revenue, Docket Nos. 12038
| Decision Date | 19 December 1947 |
| Docket Number | 12039.,Docket Nos. 12038 |
| Citation | 9 T.C. 1156 |
| Parties | MAX COHEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. Where a taxpayer received money from the illegal operation of various enterprises, such as night clubs where liquor was sold and gambling carried on, the operation of slot machines, and the operation of a ‘handbook‘ for the placing of bets on horse racing, and kept no accounts or records of his transactions, the Government was justified in determining his income by adding thereto an item designated ‘excess cash expenditures,‘ calculated by deducting all ascertainable cash receipts from the ascertainable cash expenditures.
2. A taxpayer's unexplained failure to testify gives rise to
a presumption that, had he testified and told the truth, his testimony would have been unfavorable to his cause.
3. Although the Government has the burden of proving fraud, this obligation relates to the penalty only and does not relieve the taxpayer of the burden of disproving the correctness of the deficiency. William H. Quealy, Esq., and H. C. Castor, Esq., for the petitioner.
Gene W. Reardon, Esq., and Harlow B. King, Esq., for the respondent.
The respondent determined deficiencies in income tax, income and victory tax, and penalties as follows:
+-----------------------------------------------------------+
¦Docket No.¦Year¦Tax ¦Deficiency¦Penalty ¦
+----------+----+----------------------+----------+---------¦
¦12038 ¦1936¦Income tax ¦$2,767.32 ¦$1,405.55¦
+----------+----+----------------------+----------+---------¦
¦ ¦1937¦----do ¦1,851.47 ¦1,105.73 ¦
+----------+----+----------------------+----------+---------¦
¦ ¦1938¦----do ¦770.59 ¦199.76 ¦
+----------+----+----------------------+----------+---------¦
¦ ¦1939¦----do ¦929.36 ¦464.68 ¦
+----------+----+----------------------+----------+---------¦
¦ ¦1940¦----do ¦252.22 ¦200.51 ¦
+----------+----+----------------------+----------+---------¦
¦ ¦1941¦----do ¦25,295.27 ¦12,647.63¦
+----------+----+----------------------+----------+---------¦
¦12039 ¦1942¦----do ¦43,057.62 ¦21,528.81¦
+----------+----+----------------------+----------+---------¦
¦ ¦1943¦Income and victory tax¦9,321.85 ¦6,777.86 ¦
+-----------------------------------------------------------+
The cases of this petitioner were consolidated for trial with the cases of Robert L. Carnahan, Docket Nos. 12040 and 12041.
Since the following cases arose in part from the same transactions and involve many of the same witnesses, it was also agreed that the records in the cases of G. A. Comeaux, Docket No. 12010; Fred D. Clemons, Docket No. 12096; and Ralph Leonard Polk, Docket No. 12097, so far as material and pertinent, may be considered in the instant case as though originally consolidated for trial.
The following questions are presented:
1. Did the Commissioner err in determining that the petitioner received additional taxable income which he failed to report in his income tax returns for the years 1936 to 1943, inclusive, as to which the Commissioner computed an aggregate sum of $148,080.11, on the basis of excess of petitioner's cash expenditures over his reported cash receipts?
2. Did the Commissioner err in determining that the petitioner received additional taxable income for the years 1941, 1942, and 1943 from one Ray Watson which the petitioner failed to report in his taxable income for such years?
3. Did the Commissioner err in determining that the income tax deficiencies for each of the years 1936 to 1943, inclusive, were due to fraud in an attempt to evade tax?
4. In the alternative, did the Commissioner err in determining that over 25 per cent of his gross income was omitted in petitioner's income tax return for the year 1942 and that consequently the five-year limitation period for assessment and collection is applicable for such year?
5. Did the Commissioner err in disallowing as an ordinary and necessary business expense a deduction of $2,000 claimed in 1941 as advertising?
The petitioner conceded an issue relating to the Commissioner's disallowance of an operating loss carry-over from the year 1939 to the year 1940. He also conceded an issue relating to the Commissioner's disallowance of depreciation for the years 1941 and 1942; the disallowance of depletion for the years 1941 and 1943; the disallowance of loss from abandonment of oil royalties for the years 1941, 1942, and 1943; and the nonallowance of deductions for oil royalties for the years 1941 and 1942.
The parties also agreed that in computing the net taxable income of the petitioner there shall be deducted on account of worthless mineral rights the following losses: For the taxable year ended December 31, 1941, the sum of $3,950; for the taxable year ended December 31, 1942, the sum of $700.
On April 7, 1937, pursuant to an extension duly granted, petitioner filed a Federal income tax return for the calendar year 1936 with the collector of internal revenue for the district of Kansas, showing a net taxable income of $16,549.59. In such return petitioner reported an ‘interest received‘ the sum of $18,974.90. The source of such income was reported to be:
After making certain adjustments, the respondent added to income as ‘Excess cash expenditures‘ $14,644.96 and determined the deficiency and penalty shown above.
On May 14, 1938, pursuant to an extension of time duly granted, the petitioner filed his Federal income tax return for 1937, showing a net taxable income of $4,182.64. In such return he reported as ‘interest received‘ the sum of $20,173.29, derived from the following sources:
+-----------------------------------+
¦1. Riverside Club ¦$6,217.78¦
+-------------------------+---------¦
¦2. Lawrence Commission Co¦4,516.71 ¦
+-------------------------+---------¦
¦3. Slot machines ¦9,438.80 ¦
+-----------------------------------+
After making certain adjustments, the Commissioner added to income as ‘Excess cash expenditures‘ the sum of $13,871.44 and determined the above deficiency and penalty.
On March 15, 1939, the petitioner filed his Federal income tax return for the calendar year 1938, showing a net taxable income of $7,400.88. In this return, under the designation ‘Outside business activities,‘ petitioner reported income in the amount of $35,770.33, derived from the following sources:
+------------------------------------+
¦1. Riverside Club ¦$19,042.72¦
+-------------------------+----------¦
¦2. Lawrence Commission Co¦13,189.44 ¦
+-------------------------+----------¦
¦3. Slot machines ¦3,538.17 ¦
+------------------------------------+
After certain adjustments the respondent added, as ‘Excess cash expenditures,‘ the sum of $11,967.10 and determined the above deficiency and penalty.
On March 14, 1940, the petitioner filed his Federal income tax return for the calendar year 1939, showing a net loss of $15,891.39, in which return, under the caption ‘Outside business activities,‘ he reported $8,639.10 received from the Lawrence Commission Co. An amended return was filed August 21, 1940, showing a net loss of $7,973.75, with the same amount of income derived from ‘Outside business activities.‘ The respondent added to income, as ‘Excess cash expenditures,‘ the sum of $22,401.74 and determined the deficiency and penalty shown above.
On May 15, 1941, pursuant to an extension duly granted, petitioner filed his Federal income tax return for the calendar year 1940, showing a net taxable income of $4,024.83. Under the designation ‘Outside business activities,‘ petitioner reported the amount of $21,942.15, derived from the following sources:
+-----------------------------------+
¦1. Lawrence Commission Co¦$9,020.48¦
+-------------------------+---------¦
¦2. Canyons Supper Club ¦6,406.81 ¦
+-------------------------+---------¦
¦3. Overflow Club ¦3,852.00 ¦
+-------------------------+---------¦
¦4. Slot machines ¦2,767.98 ¦
+-----------------------------------+
being a total of $22,047.27, from which was deducted the sum of $105.12 depreciation on slot machines, leaving the balance first above stated.
The respondent made certain adjustments, but added no sums to income as excess cash expenditures.
On May 15, 1942, pursuant to an extension duly granted, petitioner filed his Federal income tax return for the year 1941, showing a net taxable income of $31,828.14. Income was reported from ‘Outside business activities‘ in the sum of $58,002.56 as derived from the following sources:
+------------------------------------+
¦1. Lawrence Commission Co¦$21,918.98¦
+-------------------------+----------¦
¦2. Overflow Club ¦5,051.40 ¦
+-------------------------+----------¦
¦3. Canyons Supper Club ¦6,078.47 ¦
+-------------------------+----------¦
¦4. Slot machines ¦24,953.71 ¦
+------------------------------------+
Various sums were deducted, including the sum of $2,000 for advertising.
The respondent added to income the amount of $3,054.40 as sums received from Ray Watson, a slot machine operator, and also as ‘Excess cash expenditures‘ the sum of $36,916.26, and determined the above deficiency and penalty.
On July 1, 1943, pursuant to an extension of time granted, petitioner filed his Federal income tax return for the calendar year 1942, showing net taxable income of $36,325.09. Under the caption ‘Outside business activities‘ the petitioner reported the sum of $158,630.46, from which he made certain deductions. The source of such income was as follows:
+------------------------------------+
¦1. Lawrence Commission Co¦$24,178.49¦
+-------------------------+----------¦
¦2. Canyons Supper Club ¦21,633.44 ¦...To continue reading
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