Brodsky v. C.I.R., 043062 FEDTAX, 83468

Docket Nº:83468.
Opinion Judge:TRAIN, Judge:
Attorney:Arthur N. Nasser, Esq., and Kenneth B. Samuels, Esq., for the respondent.
Case Date:April 30, 1962
Court:United States Tax Court

21 T.C.M. (CCH) 578 (1962)

T.C. Memo. 1962-105




No. 83468.

United States Tax Court.

April 30, 1962

Arthur N. Nasser, Esq., and Kenneth B. Samuels, Esq., for the respondent.


TRAIN, Judge:

The respondent has determined deficiencies in income tax and additions to tax for the calendar years 1954 and 1955 as follows:

Additions to Tax
Deficiency Section 6653(b)
1954 $39,386.95 $19,693.48
1955 27,800.59 13,900.30

The respondent has conceded that the deficiency for 1955 was not due to fraud. This concession will be taken into account in a Rule 50 computation. The issues remaining for decision are: (1) Whether the assessment and collection of the deficiencies for the years 1954 and 1955 are barred by the three-year statute of limitations; and (2) Whether all or part of the deficiency for 1954 was due to fraud. FINDINGS OF FACT. For the taxable years 1954 and 1955, the petitioner, Harvey Brodsky, filed individual Federal income tax returns with the district director of internal revenue, Chicago Illinois. Petitioner's returns were filed under the name of Harvey Broad, a name he was also known by. On or about February 16, 1949, petitioner submitted a financial statement to the Internal Revenue Service in Chicago. This statement was submitted in connection with an offer in compromise of a prior income tax liability. At that time, the financial statement disclosed assets having a fair market value of $1,150 and liabilities of $3,000. For the taxable years 1949 through 1952 petitioner filed income tax returns in which he reported adjusted gross income and tax due as follows:

Year Reported Tax
1949 $4,011.72 $530.00
1950 4,410.08 625.00
1951 4,095.55 728.00
1952 2,981.45 533.08

The returns indicated that the sole source of the income reported was from the Hollywood Dance Studio (hereinafter referred to as the Studio). For the taxable year 1953, petitioner's return showed adjusted gross income of $4,650 and a tax due of $848. His income for that year consisted of his distributive share of the Studio's net income which amounted to $400, and long-term capital gain of $8,500 from the ‘ Sale of one half of partnership interest.’ For the taxable year 1954, petitioner reported a net loss of $1,903.91 computed as follows:

Sale of interest in Hollywood Dance Studio $ 3,529.86
Less expense of sale 250.00
$ 3,279.86
Less 50 percent capital gain 1,639.93
$ 1,639.93
Interest income 60.00
$ 1,699.93
Less net operating loss of Hollywood Dance Studio-
(2-6-53 to 1-31-54 $2,294.93)
(2-1-54 to 3-31-54 1,308.91) $(3,603.84)
Net loss reported $(1,903.91)

Prior to February 1953, petitioner and Vincent Fsadni operated the Studio as a partnership. In February 1953, petitioner entered into a partnership with Frank Padula (hereinafter referred to as Padula) to operate the Studio. Petitioner and Padula operated the Studio for a little over a year. About the end of March 1954, the Studio ceased to operate. The Studio was a dance hall which was open seven nights a week. Tickets were sold which entitled the purchaser to dance with girls located on the premises. Generally petitioner was at the Studio for a time every night. The Studio employed a cashier, Dorothy Webb (hereinafter referred to as Dorothy), to sell tickets. If Dorothy had to leave the office for a time, petitioner would replace her and sell tickets. Dorothy furnished the information as to the Studio's cash receipts to the accountant who made out the Federal income tax return. In 1954, seven savings accounts were opened in five Chicago savings and loan associations. The sum of $10,000 was deposited in each account. The following schedule shows the name of the savings and loan association and the name in which the account was opened:

Savings and Account Name Account
Loan Assoc. Opened Opened In
Home Federal 8-31-54 Jack Litts
Bell Savings 8-31-54 Emil Litts
Uptown Federal 9- 3-54 Jack Litts
Uptown Federal 9- 3-54 Jack Litts, Trustee for Sarah Litts
Northside Federal 9- 7-54 Emil Litts
Northside Federal 9- 7-54 Emil Litts, Trustee for Sarah Litts
North Avenue Federal 9- 9-54 Emil Litts

As of December 31, 1954, the total amount on deposit was $70,000.00: In 1955, three of the foregoing account names were changed. The dates and the changes are as follows:

Name Account Date Name
Savings and Loan Assoc. Opened Changed Changed to
Home Federal Jack Litts 2- 9-55 John Kane
Bell Savings Emil Litts 2- 9-55 John Kane
North Avenue Federal Emil Litts 2-10-55 John Brown

The signatures of Emil Litts, Jack Litts, John Kane, John Brown, John Williams, and Edward A. Herman were all in the handwriting of Harvey Brodsky. In 1955, petitioner was attempting to purchase a piece of property in Chicago known as the Division and Astor property. In connection with the purchase of this property, at petitioner's request, his attorney opened an escrow account in the name of John Williams. The funds from the aforementioned savings accounts were withdrawn. Each check was made out to the person in whose name the account was listed and endorsed with that name. Subsequently, the checks were again endorsed. The second endorser was John Williams. The $70,000 withdrawn from the savings accounts, together with an additional $48,000 was placed in the escrow account opened in the name of John Williams. In 1955, when the purchase of the Division and Astor property failed to materialize, the escrow money was refunded. Eleven checks in the amount of $10,000 each and one check for $8,000 were made out to John Williams. After the $118,000 was withdrawn from escrow, $10,000 was used as earnest money for the purchase of property located at Deming and Hampton Streets in Chicago. The following schedule shows the disposition of the remaining eleven checks:

Deposited Name of
Disposition or Taken Account Funds
Institution of Funds in Cash Deposited to
Exchange National Bank Deposit $53,000 John Williams
Harris Trust and Savings Deposit 10,000 John Williams
Cash 5,000
Home Federal Savings & Loan Deposit 5,000 Edward A. Herman
First National Bank Deposit 15,000 John Williams
Cash 10,000
Lincoln Park Savings & Loan Deposit 10,000 John Brown

The notice of deficiency was mailed to petitioner on June 30, 1959. No part of the deficiency for 1954 was due to fraud with intent to evade tax. OPINION. Issue 1. The petitioner did not appear at the trial of this case. The deficiencies for 1954 and 1955 must be sustained unless they are barred by the three-year statute of limitation.[1] The statute of limitations was tolled on June 30, 1959, when the respondent issued the statutory notice of deficiency. [2] As to the year 1954, petitioner filed his return on or before April 15, 1955. However, petitioner executed a form 872 for the year 1954, which extended the period of limitations to and including June 30, 1959. Since the statutory notice of deficiency was issued on June 30, 1959, we hold that the assessment and collection of the deficiency for 1954 is not barred by the statute of limitation. Although it appears that petitioner filed a Federal income tax return for 1955, it was not offered into evidence and there is no proof as to when it was filed. The burden is upon the petitioner to prove the facts necessary to show that the period provided in the statute had expired prior to the mailing of the deficiency notice. Refiners Production Co., 43 B.T.A. 481, 492 (1941); Edward M. Lawrence, 3 B. T. A. 40 (1925); L. J. Christopher, et al., 13 B.T.A. 729, 740 (1928); J. Freedman & Co., 16 B.T.A. 1119, 1122 (1929); Elnora C. Haag, 19 B.T.A. 982, 986 (1930); Lester L. Robison, 22 B.T.A. 395, 399 (1931); M. A. Nicholson, et al., 22 B.T.A. 744, 746 (1931). For lack of proof, we hold that the statute of limitation is not a bar to the assessment and collection of the deficiency for 1955. Respondent's determinations as to the deficiencies for 1954 and 1955 are sustained. Issue 2. The question remaining for decision is whether all or part of the deficiency for 1954 was due to fraud. The burden of proving fraud is on the respondent.[3] Fraud must be proven by clear and convincing evidence.[4] Respondent must prove that the petitioner understated his income and that all or part of such understatement was due to petitioner's fraudulent intent to evade taxes. Petitioner's failure to overcome the presumptive correctness of a deficiency cannot be regarded as proof of fraud.[5] Failure of proof cannot be used as a substitute for the evidence necessary to sustain respondent's burden. The elements of fraud must be affirmatively established.[6] Thus, both parties may fail through inadequate proof on their several issues and, in such case, the deficiency would be sustained and the fraud determination would be set aside.[7] Respondent contends that the money deposited in the seven savings accounts in 1954 was currently taxable income and petitioner's failure to report it was due to fraud. Respondent argues that the Studio was a likely source from which the $70,000 or some part of it could have come. As in many fraud cases, there is no direct evidence that petitioner had additional income which he did not report. In such cases, respondent has often resorted to such indirect means as the ‘ net worth’ and ‘ bank deposits' methods of...

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