Carr v. Commissioner
| Decision Date | 11 October 1978 |
| Docket Number | Docket No. 5681-75. |
| Citation | 37 TCM (CCH) 1695,1978 TC Memo 408 |
| Parties | Charles V. Carr and Hortense Carr v. Commissioner. |
| Court | U.S. Tax Court |
James W. Head and John Kennedy Lynch, 1276 W. Third St., Cleveland, Ohio, for the petitioners. Larry L. Nameroff, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined the following deficiencies in income tax and additions to tax:
Addition to Tax
Year Deficiency Section 6653(b)1
1967 ............ $53,838.52 $26,919.26
1968 ............ 43,007.79 21,503.90
1969 ............ 32,903.75 16,451.88
1970 ............ 23,855.72 11,927.86
The issues remaining for decision are: (1) whether petitioners had unreported taxable income during the years in question; (2) if so, whether any portion of such understatement was due to fraud on the part of Charles V. Carr;2 and (3) whether the deficiencies are barred by the statute of limitations.
Some of the facts have been stipulated and are found accordingly. The stipulation of facts and the exhibits attached thereto are incorporated herein by reference.
Charles V. Carr (hereinafter Carr) and Hortense Carr are husband and wife whose residence was Cleveland, Ohio, at the time of the filing of the petition herein. They filed joint Federal income tax returns for the taxable years 1960 through 1970 with the district director of internal revenue, Cleveland, Ohio.
Petitioners have two children, Leah P. Carr (Leah) and Cathleen V. Carr (Cathleen), both of whom were under thirteen years of age during the taxable years at issue. In addition, Carr has two children from a previous marriage.
Carr has been a practicing attorney in Cleveland, Ohio, for approximately fifty years. His practice has been primarily in the area of criminal and real property law. Throughout this period, he has been active in local politics and for thirty years he was a member of the Cleveland City Council. In addition, he was an active member of his church and such civic associations as the Masonic Lodge, the NAACP, and the Urban League. At the time of trial, Carr was a trustee of the Regional Transit Authority. During the taxable years at issue, he was President of Quincy Savings and Loan Company (Quincy S&L) and a member of its Board of Directors.
In addition to income from his legal practice and from his positions at Quincy S&L, Carr had income during the taxable years at issue from dividends, interest, rents and gains realized from transactions in securities and real estate.
Shirley Brown was employed by Carr in 1964 to keep certain records, answer the telephone, and collect fees, and she continued to be so employed at least through 1969. In particular, she recorded the income from Carr's law practice either when the fees were paid to her or when Carr informed her that fees had been paid to him directly. Most of the payments recorded were made to her in Carr's office. Mrs. Brown was active in the management of Carr's real estate operations. Tenants would pay their rent to her, usually in cash, for which she would issue receipts. As with the legal fees, some rent payments were made directly to Carr, and Mrs. Brown recorded these payments when she was informed of them. In addition, she often arranged to have repairs made to the rental properties, and prepared checks used in payment of utility bills and the repairs. Although records of income and expenses were kept, formal accounting books were not maintained.
Petitioners' Federal income tax returns for the taxable years at issue were prepared by John E. Washington, who, during that period, was engaged in the private practice of law at the same location as Carr, although they were not partners. In preparing the returns, Washington used W-2 Forms as the basis for reported wages, 1099 Forms supplied by Carr as the basis for reported interest and dividends, and records prepared by Mrs. Brown as the basis for the reported income and expenses from Carr's legal practice and rental properties. The depreciation claimed with respect to the rental properties was based on the amounts claimed in the prior year's return. Capital gains and losses were calculated from the selling prices of sales which Carr reported to Washington. Washington did not inquire as to the existence of additional sales of securities.
Petitioners reported adjusted gross income on their U.S. Individual Income Tax Returns as follows:
Year Adjusted Gross Income
1967 ............ $44,868.40
1968 ............ 38,604.31
1969 ............ 44,779.86
1970 ............ 39,997.52
In these returns, petitioners reported items of gross income as follows:
________________________________________________________________________________________________________
Item of Gross Income 1967 1968 1969 1970
________________________________________________________________________________________________________
Wages ................................... $16,499.88 $16,800.04 $18,100.00 $22,099.92
Gross Dividends ......................... 5,636.26 6,139.46 6,312.11 9,235.86
Interest Income ......................... 2,877.70 4,124.43 10,467.75 3,067.59
Other Income ............................ 7,328.42 8,055.10 —0— —0—
Gross Receipts, Schedule C .............. 22,493.23 12,553.58 6,979.10 10,229.00
Gain from the Sale of Assets, Schedule D 6,128.62 5,010.57 30,952.32 —0—
Gross Receipts from Rent ................ 7,660.00 8,235.00 6,532.50 4,175.00
__________ __________ __________ __________
TOTAL ................................. $68,624.11 $60,918.18 $79,343.78 $48,807.37
________________________________________________________________________________________________________
Petitioners' bases in assets, liabilities, and net worth as of December 31 for each of the years listed are as follows:
__________________________________________________________________________________________________________________
1966 1967 1968 1969 1970
__________________________________________________________________________________________________________________
ASSETS
Cash on hand ................... $ 47,510.62 $ 59,241.87 $ 40,191.87 $ 36,316.87 $ 31,374.00
Checking and Savings
Accounts ..................... 17,523.33 22,722.91 58,926.36 64,911.81 25,744.33
Certificates of Deposit ........ 89,000.00 140,500.00 149,500.00 157,500.00 100,000.00
Stocks and Bonds1 ......... 118,008.46 155,957.60 165,338.81 228,732.89 356,552.23
Automobiles .................... 8,129.86 10,923.27 13,324.21 13,324.21 13,127.59
Real Estate .................... 60,822.30 51,996.32 51,996.32 55,702.20 58,202.20
Improvements to Real
Estate ....................... —0— 3,100.09 4,566.66 11,623.50 25,391.08
Other Assets ................... 12,924.15 13,131.61 12,832.38 11,264.06 11,264.06
___________ ___________ ___________ ___________ ___________
Total Assets ................ $353,918.72 $457,573.67 $496,676.61 $579,375.54 $621,655.49
=========== =========== =========== =========== ===========
LIABILITIES
Reserves for depreciation
Autos .......................... $ 1,280.00 $ 2,016.20 $ 1,289.88 $ 3,010.58 $ 473.59
Real Estate .................... 7,673.692 6,255.02 7,276.35 4,462.27 6,213.39
Deferred Profit Installment
Sale .......................... 1,358.89 1,232.29 1,158.38 —0— —0—
___________ ___________ ___________ ___________ ___________
Total Liabilities ............ $ 10,312.08 $ 9,503.51 $ 9,724.61 $ 7,472.85 $ 6,686.98
=========== =========== =========== =========== ===========
NET WORTH ........................ $343,606.64 $448,070.16 $486,952.00 $571,902.69 $614,968.51
=========== =========== =========== =========== ===========
Increase in Net Worth ............ $104,463.52 $ 38,881.84 $ 84,950.69 $ 43,065.82
__________________________________________________________________________________________________________________
Petitioners incurred personal living expenses and nondeductible losses during the taxable years at issue of at least the following amounts:
1967 ............. $22,474.84
1968 ............. 37,951.35
1969 ............. 29,762.24
1970 ............. 27,127.51
The computation of petitioners' adjusted gross income based upon their net worth as found herein is as follows:
_______________________________________________________________________________________________
Item 1967 1968 1969 1970
_______________________________________________________________________________________________
Increase in Net Worth ................. $104,463.52 $38,881.84 $84,950.69 $43,065.82
ADJUSTMENTS
Personal Living Expenses and
Non-Deductible Losses ............... 22,474.84 37,951.35 29,762.24 27,127.51
Nontaxable Portion of Capital Gains .. 23,071.49 2,257.65 13,263.00 —0—
Other Nontaxable
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