Alvarez v. Commissioner
| Decision Date | 24 August 1995 |
| Docket Number | Docket No. 22719-93.,Docket No. 2849-91. |
| Citation | 70 T.C.M. 518 |
| Parties | Jose A. Alvarez and Wanda Alvarez v. Commissioner. Jose A. Alvarez v. Commissioner. |
| Court | U.S. Tax Court |
Howard B. Brownstein, for the petitioners. Robert A. Fee, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Two dockets are consolidated herein: (1) Jose A. Alvarez and Wanda Alvarez, docket No. 2849-91, and (2) Jose A. Alvarez, docket No. 22719-93.1 See Rule 141(a).2 Petitioners petitioned the Court to redetermine respondent's determinations with respect to their 1982 through 1984 taxable years. Mr. Alvarez petitioned the Court to redetermine respondent's determinations with respect to his 1985 through 1987 and 1989 taxable years. Respondent determined the following income tax deficiencies and additions to tax:
Jose A. and Wanda Alvarez, Docket No. 2849-91
Additions to Tax
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Year Deficiency Sec. 6653(b)(1) Sec. 6653(b)(2) Sec. 6661
1982 ................................. $ 27,519 $ 13,760 1 $ 6,880
1983 ................................. 92,663 46,332 2 23,166
1984 ................................. 395,696 197,848 3 98,924
1 50 percent of the interest due on $27,519
2 50 percent of the interest due on $92,663
3 50 percent of the interest due on $395,696
Jose A. Alvarez, Docket No. 22719-93
Following concessions, we must decide:
1. Whether respondent arbitrarily and capriciously issued the notices of deficiency. We hold she did not.
2. Whether petitioners are liable for additions to their 1982 through 1984 taxes for fraud, see sec. 6653(b)(1) and (2), and whether Mr. Alvarez is liable for the same addition to his 1985 tax. We hold they are, and he is.
3. Whether petitioners are liable for additions to their 1982 through 1984 taxes for substantial understatement, see sec. 6661, and whether Mr. Alvarez is liable for the same addition to his 1985 and 1986 taxes.3 We hold they are, and he is.
4. Whether Mr. Alvarez is liable for additions to his 1986, 1987, and 1989 taxes for untimely filing of tax returns. See sec. 6651(a)(1). We hold he is.
5. Whether Mr. Alvarez is liable for additions to his 1986, 1987, and 1989 taxes for negligence. See sec. 6653(a)(1)(A) and (B) for 1986 and 1987; sec. 6662(a) and (b)(1) for 1989. We hold he is.
6. Whether petitioners are liable for self-employment taxes, see sec. 1401, for their 1982 through 1984 taxable years, and whether Mr. Alvarez is liable for the same tax for his 1985 through 1987 and 1989 taxable years. We hold they are, and he is.
7. Whether Mrs. Alvarez is an innocent spouse, see sec. 6013(e), for her 1982 through 1984 taxable years. We hold she is not.
Petitioners resided in Bayville, New Jersey, when they petitioned the Court in docket No. 2849-91. Mr. Alvarez resided in Coral Gables, Florida, when he petitioned the Court in docket No. 22719-93. For each of their 1982 through 1984 taxable years, petitioners timely filed a Form 1040, U.S. Individual Income Tax Return, using the status of "Married filing joint return". For each of his 1985 through 1987 and 1989 taxable years, Mr. Alvarez untimely filed a Form 1040 using the status of "Married filing separate return".
Mr. Alvarez was the subject of a criminal investigation conducted by a multiagency task force (Task Force). The Task Force's investigation culminated on October 3, 1985, with the arrest of Mr. Alvarez, Adolph V. Carbone, and approximately 66 other suspects. Mr. Alvarez was charged with conspiracy to distribute cocaine. Mr. Alvarez was later acquitted of these charges.
Mr. Carbone was Mr. Alvarez' client. During the 2-month period ending on August 31, 1985, Mr. Carbone purchased 3 or 4 kilograms of high-quality cocaine from Mr. Alvarez at a cost ranging from $40,000 to $43,000 per kilo. Mr. Alvarez "fronted" (consigned) the kilos to Mr. Carbone, and Mr. Alvarez received cash payments for each front shortly afterwards. On one occasion, Mr. Carbone paid $43,000 to Mr. Alvarez at his residence in Bayville, New Jersey. Mrs. Alvarez was present at the residence when the cash payment was made.
Mr. Alvarez was arrested at his residence. A search of his residence at that time uncovered loaded weapons with at least nine rounds of ammunition, approximately 1 ounce of marijuana, an envelope containing $4,000 in cash, another envelope containing two safe deposit box keys, and a notebook ledger. The ledger contained numerous handwritten entries indicating that the aggregate value of assets held by petitioners in accounts, investments, and cash was $1,052,166.
On October 4, 1985, law enforcement authorities used the keys found at Mr. Alvarez' residence to search the two safe deposit boxes. In the boxes, the authorities found: (1) $551,000 in cash and (2) bank passbooks and certificates of deposit totaling $92,772. On the same day, Mrs. Alvarez removed the contents from three safe deposit boxes of petitioners,5 one in Newark, New Jersey, and the other two in Jersey City, New Jersey. In order to gain entry to the third box, Mrs. Alvarez made misrepresentations to bank officials, who drilled the box open at her request. When Government officials later searched the three boxes, the boxes were empty.
On April 13, 1989, a Federal grand jury indicted Mr. Alvarez on three counts of fraud under section 7206(1), for willfully making false statements in connection with petitioners' 1982 through 1984 joint income tax returns. On November 22, 1989, Mr. Alvarez pleaded guilty to one count of making a false statement on the 1982 joint return in violation of section 7207.
Petitioners failed to maintain adequate books and records during the years in issue. Respondent reconstructed Mr. Alvarez' 1985 through 1987 and 1989 taxable income through the bank deposits method. She reconstructed petitioners' 1982 through 1984 taxable income through the net-worth method.6 In determining petitioners' net worth for each of the relevant periods, respondent relied on the ledger seized from petitioners' residence during Mr. Alvarez' arrest. This ledger, which was prepared by Mr. Alvarez, is reproduced in the appendix. The left-hand column of the table shows Mr. Alvarez' handwritten entries in the ledger.7 The four columns to the right show corresponding accounts and balances.
During her examination, respondent traced each ledger entry to specific accounts and investments as of specific dates by using documents of petitioners that included bank statements, deposit tickets, and billing statements. Respondent concluded that the first two entries in the ledger, "271.0 CASA" and "313.0 MIMA", reflected cash on hand for the 1984 taxable year. Mr. Alvarez added those figures together with the other ledger entries in arriving at a personal net worth of $1,052,166. Respondent later traced $580,000 of this $584,000 cash on hand ($271,000 CASA + $313,000 MIMA) to the $551,000 seized from safe deposit boxes after Mr. Alvarez' arrest, and $29,000 in cash deposits that petitioners made at various banks from February 8 to March 14, 1985.
OPINIONWe must first decide whether respondent's issuance of the notices of deficiency was arbitrary and capricious. Petitioners allege that it was. In so alleging, petitioners attack the presumption of correctness that generally attaches to every deficiency notice. Rule 142(a); United States v. Janis [76-2 USTC ¶ 16,229], 428 U.S. 433, 440-441 (1976); Welch v. Helvering [3 USTC ¶ 1164], 290 U.S. 111, 115 (1933); Baird v. Commissioner [70-2 USTC ¶ 9705], 438 F.2d 490, 492 (3d Cir. 1970), vacating [Dec. 29,525(M)] T.C. Memo. 1969-67. Generally, taxpayers bear the burden to produce evidence to rebut the presumption. United States v. Janis, supra at 441; Gerardo v. Commissioner [77-1 USTC ¶ 9322], 552 F.2d 549, 552 (3d Cir. 1977), affg. in part and revg. in part [Dec. 33,515(M)] T.C. Memo. 1975-341.
The Court will usually not go behind a notice of deficiency to examine the evidence that the Commissioner used to make her determination. Dellacroce v. Commissioner [Dec. 41,440], 83 T.C. 269, 280 (1984); Jackson v. Commissioner [Dec. 36,460], 73 T.C. 394, 400 (1979); Greenberg's Express, Inc. v. Commissioner [Dec. 32,640], 62...
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