Bishop v. Commissioner, Docket No. 80489-80491.
| Citation | 21 TCM (CCH) 760,1962 TC Memo 146 |
| Decision Date | 19 June 1962 |
| Docket Number | Docket No. 80489-80491. |
| Parties | Ruth N. Bishop v. Commissioner. Charles E. Bishop v. Commissioner. Charles E. Bishop and Ruth N. Bishop v. Commissioner. |
| Court | United States Tax Court |
Charles E. Bishop, pro se, Box 214, Newport, Wash. Norman H. McNeil, Esq., for the respondent.
Memorandum Findings of Fact and Opinion
These consolidated proceedings involve the determination of deficiencies in income taxes and additions to taxes against petitioners for the taxable years 1947 to 1955, inclusive, as follows:
The principal issues presented for our consideration are: (1) Whether respondent was justified in making use of the net worth plus expenditures method in reconstructing net income for the taxable years 1947 through 1954, inclusive; (2) whether and to what extent petitioners understated their net taxable income for the years 1947 through 1954; (3) whether any part of the deficiency determined against petitioners for each of the years 1947 to 1952, inclusive, was due to fraud with intent to evade tax within the meaning of section 293(b) of the 1939 Code; (4) with respect to petitioner, Charles E. Bishop, whether any part of the deficiency for each of the taxable years 1953 and 1954 was due to fraud with intent to evade tax within the purview of section 293(b), supra; and section 6653(b) of the 1954 Code; (5) whether petitioner, Ruth N. Bishop, is liable for additions to tax for the years 1953 and 1954 due to her failure to file a return for said years within the meaning of section 291(a) of the 1939 Code, and section 6651(a) of the 1954 Code; (6) for the purpose of computing gain on repossession of theaters for the taxable year 1955, whether the fair market value of said theaters at the date of repossession was less than the amount ($125,000) determined by respondent, and (7) whether petitioners sustained capital losses in subsequent years which may be carried back to taxable years presently before the Court.
Part of the facts are stipulated (orally and in writing) and are so found and incorporated herein by this reference.
Petitioners, Charles E. and Ruth N. Bishop, are husband and wife residing at Newport, Washington. They filed Federal joint returns for each of the years 1947 through 1952, inclusive, with the collector of internal revenue, and filed a joint return for the year 1955 with the district director of internal revenue, both at Tacoma, Washington. Charles E. Bishop (hereinafter sometimes called Charles) filed Federal individual returns for the years 1953 and 1954 with the district director of internal revenue at Tacoma, Washington. Ruth filed no Federal income tax returns for the years 1953 and 1954.
Prior to 1951, petitioners' principal source of income was the operation of theaters in Newport, Ione, Metaline Falls and Cusick, Washington, and Priest River, Idaho. In 1951 and later years, income was derived from the sale of assets, interest, repossession of property sold, and rent. By July 1954, the aforesaid theater operations had been suspended.
Petitioners' income tax returns showed Charles' principal activity as that of a movie theater operator. For the taxable years 1947 to 1952, inclusive, and for 1955 for which petitioners filed joint returns, and for the taxable years 1953 and 1954 for which Charles filed individual returns and Ruth filed no returns, adjusted gross income (loss) was reported as follows:
Year Income (loss)
1947 $ 3,552.89
1948 214.17
1949 3,124.84
1950 (1,552.04)
1951 5,792.48
1952 (2,233.19)
Charles ....... 1953 (1,927.22)
Charles ....... 1954 1,739.87
1955 4,162.30
__________
Total ............ $12,874.10
By executing consent forms (872), Charles E. Bishop extended the statute of limitations on the 1953 and 1954 returns to June 30, 1959. Both taxpayers declined to extend the statute of limitations on the 1955 return which expired on April 4, 1959. Respondent mailed his statutory notice of deficiencies for the taxable years in controversy on March 23, 1959.
All of petitioners' tax returns for the taxable years 1947 to 1954, inclusive, were prepared by an accountant based upon information supplied by Charles. The information was incomplete as hereinafter indicated.
On September 15, 1955, after the commencement of a civil lawsuit against them regarding their sale of income-producing property to the plaintiffs, Snyder and Adams, petitioners visited respondent's Intelligence Division and disclosed to a special agent that they had been understating gross income reported on their income tax returns from their theater business and concessions operated incidental thereto since the advent of television in late 1951.
About a week later petitioners returned to the Intelligence Division office and brought some records and copies of their income tax returns for the period 1947 to 1953, from which respondent's agent made a preliminary net worth survey indicating purchases of assets substantially in excess of reported gross income for the period and supporting petitioners' admission that income had been understated. A formal investigation was then initiated by the Internal Revenue Service.
The then pending civil suit against the Bishops1 concerned matters closely connected to their previous ownership and operation of two theaters and a laundromat sold in 1954 for $125,000 to the plaintiffs. Plaintiffs, among other things, alleged misrepresentation on the part of the Bishops with respect to past profits of the theaters and laundromat and sought recision of the sale.
By way of answer to the complaint, petitioners claimed that their business net income on a capital outlay and disbursements basis for the years 1951 to July 1954 (the date of sale) showed amounts of business net income sufficient to support all representations they had made to the plaintiffs as follows:
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1951 1952 1953 July 1954
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Capital Expenditures ............... $36,356.71 $28,311.08 $39,547.72 $28,002.52
Living Expenses .................... 4,122.24 4,395.29 6,689.66 10,711.84
__________ __________ __________ __________
Approximate Business Net Income .... $40,478.95 $32,706.37 $46,237.38 $38,714.36
Other Income ....................... 7,496.43 10,005.86 5,229.42
__________ __________ __________
Total Income and Gain ....................... $40,202.80 $56,243.24 $43,943.78
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Petitioners owned the aforesaid laundromat but never operated it as their own business. All the income from that business went to their son, Lloyd. Their son paid no rent for the use of the equipment or space.
Although Charles has no exact knowledge of the amounts, profits from the operation of his theaters occurred in each of the taxable years 1951, 1952, 1953 and the first six months of 1954. The net profit from theater operations for the first six months of 1954 was in excess of $5,000.
Apart from income (gain) on the sale of...
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