Banks v. C.I.R., 082261 FEDTAX, 42724

Docket Nº42724.
Opinion JudgeFISHER, Judge:
AttorneyJoseph A. Maun, Esq., and William R. Busch, Esq., for the petitioner. T. A. Steele, Esq., and L. A. Hanns, Esq., for the respondent.
Case DateAugust 22, 1961
CourtUnited States Tax Court

20 T.C.M. (CCH) 1165 (1961)

T.C. Memo. 1961-237

THOMAS W. BANKS, Petitioner,



No. 42724.

United States Tax Court.

August 22, 1961

During the years ending December 31, 1936, through December 31, 1947, inclusive, petitioner owned an interest in various business ventures, including several gambling establishments. In addition, he made personal wagers on sporting events. A substantial amount of the gross income reported on his Federal income tax returns for each taxable year involved herein was derived from his gambling activities. No books or records relating to such activities were available for audit by respondent's agents. Using the net worth plus nondeductible expenditures method, respondent reconstructed petitioner's income for the taxable years involved.


1. That the deficiencies for the years 1937 through 1940, inclusive, are barred by the statute of limitations.

2. That there is a deficiency in income tax of petitioner for 1941, but respondent has failed to prove that any part of the deficiency for that year was due to fraud with intent to evade income tax. Amount of deficiency for 1941 determined.

3. That with respect to the deficiencies determined for the years 1942 through 1947, inclusive, petitioner has failed to meet the burden of establishing error on the part of respondent, except to the extent set forth in our Opinion. Adjustments and understatements determined.

4. That some part of the respective deficiencies for each of the taxable years 1942 through 1947, inclusive, was due to fraud with intent to evade taxes.

5. That any additions to tax under section 294(d) of the Code of 1939 for the year 1947 will be determined under Rule 50.

Joseph A. Maun, Esq., and William R. Busch, Esq., for the petitioner.

T. A. Steele, Esq., and L. A. Hanns, Esq., for the respondent.


FISHER, Judge: Respondent determined deficiencies in income tax and additions to tax as follows:

Sec. 293(b) Sec. 294(d)(2)
Addition Addition
Year Deficiency to Tax to Tax
1937 $ 645.94 $ 322.97 $
1938 780.28 432.93
1939 824.26 505.36
1940 780.43 408.21
1941 1,609.86 804.93
1942 24,447.02 12,223.51
1943 62,463.71 31,231.86 3,295.86
1944 55,670.02 27,835.01 2,821.45
1945 46,808.10 23,404.05 2,750.37
1946 11,813.81 5,906.91 864.13
1947 9,042.65 4,521.33 659.87
Totals $214,886.08 $107,597.07 $10,391.68
The figures for the year 1943 shown above represent the amounts alleged in a claim for increased deficiencies filed by respondent on June 30, 1959, and also alleged in the third amendment to answer filed by respondent by leave of Court granted on August 26, 1959. In the statutory notice, the deficiencies determined in income and victory tax and additions to tax under section 293(b) and section 294(d)(2), both supra, for the year 1943 were respectively $49,450.03, $24,725.02, and $2,515.04. Respondent concedes that the addition to tax provided by section 294(d)(2), supra, is not applicable to the calendar years 1943 to 1946, inclusive. The principal issues presented for our consideration are: (1) Whether and to what extent petitioner understated his net taxable income for the years 1937 through 1947, inclusive; (2) whether any part of the deficiency determined for each of the years in question was due to fraud with intent to evade tax; (3) whether the statute of limitations bars assessment and collection of any of the deficiencies determined for the years 1937 through 1940, inclusive, and 1942; and (4) whether the addition to tax provided under section 294(d)(2), supra, is applicable to petitioner for the taxable year 1947. FINDINGS OF FACT. Part of the facts are stipulated (orally and in writing) and are so found and incorporated by this reference. Background and General Facts Thomas W. Banks, hereinafter sometimes called petitioner or Thomas, is an individual residing at 3817 Drew Avenue South, Minneapolis, Minnesota. For each of the calendar years 1937 to 1947, inclusive, petitioner filed Federal income tax returns with the collector of internal revenue for the district of Minnesota. Petitioner did not file any Federal income tax returns for the years 1920 to 1933, inclusive. Records of the district director for the district of Minnesota (formerly collector of internal revenue) contain no indication that Reta Lee Banks, petitioner's wife, filed a Federal income tax return for any year prior to 1942, except that said records show that petitioner's origins return filed for the year 1940 was treated as a joint return of petitioner and his wife. Reta filed a separate Federal income tax return with the collector of internal revenue for the district of Minnesota for each of the years 1942 to 1947, inclusive. At the time of the trial petitioner was 64 years of age. Petitioner has been married to Reta since 1915. When petitioner first met his wife she was employed as a milliner. Thereafter, she quit her job and has never been employed since her marriage. Petitioner ran away from home at 13 years of age and went to Omaha, Nebraska, where he worked as a page boy at a hotel. He went into the military service in the spring of 1918 and was released in December 1918. After being released from the Army, petitioner worked in Kansas City, Kansas, as a bellboy. In 1919, he came to Minneapolis, Minnesota, and worked as head bellman at the Dyckman Hotel, and also sold whiskey to people in the hotel. After he stopped working at the Dyckman Hotel in July of 1920, petitioner hauled whiskey from Canada. He was engaged in this illicit activity to about 1924. During this period petitioner kept no records concerning his income and expenses. At the beginning of 1924, petitioner began hauling alcohol from Chicago. This operation continued until about 1929. About 1922, petitioner bought the National Cigar Store located in Minneapolis, Minnesota, and sold it about 1923. Around 1925, petitioner bought the Louana Apartment Hotel, Minneapolis, Minnesota, in partnership with another individual. About 1929 petitioner bought out the interest of the other partner. In 1931, petitioner sold the Louana Apartment Hotel and sustained a substantial loss in the sale thereof. Until the year 1931, petitioner's principal occupation was selling alcohol. However, as time went on, the profit from alcohol sales became less and less. For several years petitioner sustained a loss rather than a profit from alcohol sales. In conducting his alcohol activities in the years about 1927 through 1929, inclusive, petitioner's only records consisted of a little vest pocketbook in which he personally recorded his daily sales. Petitioner kept no record of the cost price to him of the alcohol. In 1930 or 1931, petitioner, in combination with other individuals, commenced ordering alcohol that would be shipped in box cars. Generally, there would be 80, 90, or 100 drums of alcohol to a box car. During this period petitioner maintained offices at the West Hotel for the purpose of conducting his alcohol business. While conducting his business at the West Hotel petitioner ‘ never’ kept records. Petitioner was never in a position to know and did not pay any attention to any amount of money that he might be making at any time in connection with his alcohol activities. Petitioner ceased the alcohol business in 1931. While conducting the alcohol business petitioner had heard of the Federal income tax laws that existed at that time. He knew that he was supposed to keep records of any income that he might have obtained from his alcohol activities. On November 14, 1929, petitioner pleaded guilty to a liquor conspiracy charge under Section 37 of the U.S. Criminal Code, in the United States District Court for the District of Minnesota, (3rd Div., St. Paul) and was fined $2,500, which he paid. From 1934 to 1940, petitioner worked as a commission salesman for Old Peoria Company, a liquor distributor. In 1934 a charge of conspiracy under Section 37, U.S. Criminal Code, to violate Sections 3258, 3296, and 3450, U.S. Revised Statutes, was made against various individuals in Minneapolis and St. Paul, including petitioner. The United States District Court for the District of Minnesota (4th Div., Minneapolis) accepted a plea of guilty from petitioner and fined him $2,000 which was paid by him. In January or February 1935, Robert Kimsoy, an accountant, advised petitioner that he should ‘ square himself with the Government.’ In this connection Kinsey was referring to years earlier than 1934. In 1934 an assessment was made a against petitioner and other individuals for an alcohol tax liability in the total amount of $33,589.92. On July 9, 1937, an offer in compromise was submitted on behalf of petitioner and others to compromise the alcohol tax liability. The terms of the offer were for a payment in the total amount of $5,000 to be paid as follows: $1,875 with submission of offer and $150 monthly until $5,000 had been paid. Said offer was subsequently accepted on October 7, 1937. In support of the offer in compromise, petitioner submitted to the Government a sworn affidavit dated July 2, 1937, pertaining to his financial condition. Said affidavit reads as follows: STATE OF MINNESOTA COUNTY OF HENNEPIN ss AFFIDAVIT I, Thomas William Banks, residing at 3817 Drew Avenue South, in the City of Minneapolis, County and State aforesaid, being duly sworn, depose and states as follows: That I am 42 years of age and am married, and that my wife's name is Reta Lee Banks. That my wife is not employed. That I am employed by the Old Peoria Liquor Company, 301 North Seventh St., Minneapolis. That my salary is $100 per week. That I have been employed by said company for approximately three years. That I also receive $25.00 per week for advertising purposes from the Seagrams Distilling Company, which I spend in...

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