Bilsky v. Comm'r of Internal Revenue

• Citation: 31 T.C. 35
• Decision Date: 10 October 1958
• Docket Number: Docket No. 63317.
• Parties: NATHAN BILSKY AND SARAH BILSKY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: United States Tax Court

31 T.C. 35

NATHAN BILSKY AND SARAH BILSKY, PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 63317.

Tax Court of the United States.

Filed October 10, 1958.

[31 T.C. 35]

William J. Costello, Esq., for the petitioners.

Ray H. Garrison, Esq., and H. Tracy Huston, Esq., for the respondent.

1. Deficiencies determined by means of new worth and expenditures method, held, approved except for respondent's concessions.

2. Some part of deficiencies for each year, held, on the facts, due to fraud.

3. Additions to tax under sections 294(d)(1)(A) and 294(d)(2), held, properly imposed.

Respondent determined deficiencies in income tax and additions to tax for the years 1949 through 1951 as follows:

+-----------------------------------------------------------------------------+
                ¦ ¦ ¦Additions to tax-I. R. C. ¦ ¦ ¦
                ¦ ¦ ¦1939 ¦ ¦ ¦
                +----+----------+-------------------------------------------------------------¦
                ¦Year¦Deficiency¦ ¦
                +----+----------+-------------------------------------------------------------¦
                ¦ ¦ ¦Sec. 293 (b) ¦Sec. 294 (d) (1) ¦Sec. 294 (d) ¦
                ¦ ¦ ¦ ¦(A) ¦(2) ¦
                +----+----------+---------------------------+------------------+--------------¦
                ¦1949¦$5,760.72 ¦$2,880.36 ¦ ¦ ¦
                +----+----------+---------------------------+------------------+--------------¦
                ¦1950¦9,136.00 ¦4,568.00 ¦$1,101.87 ¦$734.58 ¦
                +----+----------+---------------------------+------------------+--------------¦
                ¦1951¦11,814.71 ¦5,907.35 ¦ ¦ ¦
                +-----------------------------------------------------------------------------+
                

The deficiencies were computed by the net worth method. The issues are:

(1) Whether respondent correctly determined petitioners' income by the net worth and expenditures method.

(2) Whether any part of any deficiency is due to fraud with intent to evade tax.

(3) Whether petitioners are liable for additions to tax under sections 294(d) (1)(A) and 294 (d)(2).

FINDINGS OF FACT.

Some of the facts were stipulated and are hereby found.

Petitioners Nathan Bilsky and Sarah Bilsky are husband and wife residing in University City, Missouri. They filed joint income tax

[31 T.C. 36]

returns for the years in controversy, including an amended return for 1950, with the collector of internal revenue for the first district of Missouri. Petitioners executed timely waivers extending the time for assessment of their income tax for the years 1949, 1950, and 1951 until June 30, 1956. Respondent mailed the deficiency notice on May 18, 1956.

Petitioner Nathan Bilsky, sometimes hereafter referred to as petitioner or as Nathan, was born on September 30, 1898, in Poland and emigrated to the United States in 1906. He became a naturalized citizen in 1943. He married Sarah in 1920. Beatrice and Lester, their two children, were born in 1926 and 1935, respectively. Nathan graduated from the University of Missouri in 1922. In 1924 he received a degree of M.D. at the University of Oklahoma, and thereafter served his internship in Louisiana. From 1924 to 1943 he was a general practitioner in St. Louis, Missouri. During 1943 and 1944 he served as a captain in the United States Army Medical Corps. He was discharged in 1944 due to a dislocated disc and heart condition. After a 6 months' rehabilitation period he resumed his medical practice specializing in diseases of metabolism and endocrinology. He taught at St. Louis University, completed postgraduate work in endocrinology at Northwestern University, and attended numerous medical conventions and clinical conferences. During the years involved he was engaged in writing a book. He is a member of numerous professional, fraternal, and other organizations.

Nathan operated a one-doctor obesity clinic with approximately 80 per cent of his patients being obesity cases. He conducted about 99 per cent of his practice in the office and on some days had 100 or more patients. His office hours were from 9 a.m. to 6 p.m., 4 days per week.

Petitioners filed no income tax returns for any year prior to 1938 nor for the years 1941 and 1943. For 1939 petitioners filed a return showing no tax due. Their returns for 1940, 1942, and 1944 through 1948, together with audit adjustments thereto, indicate that petitioners' aggregate net income did not exceed $130,000.

In 1949 respondent examined petitioners' returns for the years 1946 through 1948 and found understatements of adjusted gross income in the amounts of $7,673.21, $11,382.24, and $20,238.96, respectively. On July 1, 1949, petitioners agreed to a $13,606.47 assessment for these years consisting of deficiencies, negligence penalties, and interest, and paid this amount on July 27, 1949, $13,307.75 coming from the redemption of United States Series E. bonds.

Prior to August 1949 Nathan maintained no books of account or patient record cards. Respondent's agents, on July 1, 1949, advised Nathan that his records were inadequate and his bank deposits exceeded

[31 T.C. 37]

income reported on the returns. As a result he hired one Spilker, a former deputy collector of internal revenue, who set up his first formal system of bookkeeping.

The procedure created by Spilker, and in force from August 1949 through 1951, consisted of maintaining patient record cards and a cash receipts book for recording the name of the patient, fee charged, and fee collected. From August 1, 1949, through August 1950, he maintained a duplicate cash receipts book. Having no accounts receivable ledger, unpaid accounts were recorded on the patient's record card with a metal clip attached thereto. His customary fee for services from 1949 through 1951 was $3. Some patients paid more if they received drugs or extra treatment and a few were charged only $2. Ninety per cent of the fees was paid in currency and kept in a cash box in his private office. He personally collected all fees and opened all mail. He sometimes entered the fee charged or collected on the patient record card which the receptionist filed. Absent such an entry the receptionist assumed a $3 fee and marked it accordingly. The receptionist posted in the cash receipts book the amounts reflected on the patient record cards. During the receptionist's absences, Nathan made postings in the cash receipts book.

Upon Spilker's death in August 1950, Nathan employed one Hollenbach, Spilker's son-in-law. Hollenbach, who was 23 years old, was inexperienced. Both accountants totaled the medical receipts as recorded in the cash receipts book, and entered the amount thereof for each day in the book. They also recorded his disbursements by cash and check for medical items. Spilker went weekly to his office. Hollenbach at first went weekly but later reduced his visits to once a month. Spilker prepared petitioners' return for 1949. Hollenbach prepared original and amended returns for 1950. These returns were prepared from the cash receipts book and information orally supplied by Nathan. Petitioners did not give complete information to the accountants. Both Spilker and Hollenbach received $25 per month for their services.

Hollenbach did not reconcile actual cash received by Nathan against the medical receipts book. He suggested to Nathan the possibility that his bank account contained receipts not reflected on the cash receipts book and that his income was not being reported correctly. He questioned the 1950 sale of securities without a gain or loss, but did not check Nathan's statement with his broker. He did not know that Sarah received dividend checks...