Cenedella v. C.I.R., 022862 FEDTAX, 73189

Docket Nº:73189, 73190, 74105.
Opinion Judge:DRENNEN, Judge:
Party Name:ALFRED B. CENEDELLA, ET AL.,[1] Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
Attorney:Thomas J. Carens, Esq., for the petitioners. Raymond T. Mahon, Esq., and Alexander L. Ross, Jr., Esq., for the respondent.
Case Date:February 28, 1962
Court:United States Tax Court
 
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21 T.C.M. (CCH) 209 (1962)

T.C. Memo. 1962-39

ALFRED B. CENEDELLA, ET AL.,[1] Petitioners,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 73189, 73190, 74105.

United States Tax Court.

February 28, 1962

1. Petitioner, Alfred B. Cenedella, was a practicing attorney and was elected district attorney for Worcester County, Massachusetts, in 1946. He recorded his salary and his fees received from his law practice in daily receipt records and reported his income for tax purposes from those records. He failed to record a number of legal fees received during the years 1948, 1949, and 1950 in his receipt record. Respondent reconstructed petitioner's income by use of the increase in net worth and nondeductible expenditures method for the years 1945 through 1951. Petitioner was tried and convicted of criminal tax for the years 1947, 1948, 1949, and 1950. Held, respondent has failed to prove that petitioner's returns for the years 1945, 1946, and 1951 were fraudulent. Assessment and collection of deficiencies for the years 1945 and 1946 are barred by the statute of limitations. Held, further, petitioner's returns for the years 1947, 1948, 1949, and 1950 were fraudulent with intent to evade tax.

2. Petitioner's correct income for the years 1947-1951 redetermined by the net worth and expenditures method.

3. Petitioners are not entitled to a deduction for legal and accounting fees paid in 1954 in unsuccessfully defending the criminal fraud charges.

Thomas J. Carens, Esq., for the petitioners.

Raymond T. Mahon, Esq., and Alexander L. Ross, Jr., Esq., for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION.

DRENNEN, Judge:

In these consolidated proceedings respondent determined the following deficiencies in income tax and additions to tax due from petitioners:

Docket Additions to tax, I.R.C. 1939

No. Year Deficiency Sec. 293(b) Sec. 294(d)(1)(A) Sec. 294(d)(2)

73189 1945 $ 997.58 $ 498.79 $ 97.35 $ 58.41

1946 2,636.17 1,318.09 213.34 128.00

73190 1947 5,349.77 2,674.89 543.64 326.18

1948 1,783.96 891.98 150.73 90.44

1949 3,337.74 1,668.87 350.97 210.58

1950 3,260.94 1,630.47 357.61 214.57

1951 582.68 291.34 101.13 60.68

74105 1954 1,015.69

The issues for decision are:

(1) Whether respondent correctly computed the income of petitioner Alfred B. Cenedella for the taxable years 1945 through 1951 by use of the increase in net worth plus nondeductible expenditures method. (2) Whether any part of the deficiencies for any of the taxable years 1945 through 1951 is due to fraud with intent to evade tax. (3) Whether assessment and collection of deficiencies for any of the taxable years 1945 through 1951 are barred by the statute of limitations. (4) Whether petitioner is entitled to deduct as a business expense in 1954 the amount of $3,000, representing attorney's and accountant's fees incurred by him in unsuccessfully defending a criminal charge of tax evasion for the taxable years 1947-1950 in the United States District Court for the District of Massachusetts. (5) Whether petitioners are liable for additions to tax under sections 294(d) (1)(A) and 294(d)(2), I.R.C. 1939, for the years 1945-1951.

FINDINGS OF FACT. Some of the facts have been stipulated and are found accordingly. During the period here involved, petitioners Alfred B. Cenedella and Florence H. Cenedella, hereinafter referred to as Alfred and Florence, respectively, were husband and wife, residing in Milford, Massachusetts. Alfred filed individual income tax returns for the taxable years 1945 and 1946 with the collector of internal revenue, Boston, Massachusetts. Alfred and Florence filed joint returns for the taxable years 1947-1951 with the collector of internal revenue, Boston, Massachusetts. Alfred filed an individual return for the taxable year 1954 with the district director of internal revenue, Boston, Massachusetts. Alfred (who will be referred to herein as petitioner) is an attorney engaged in the practice of law and has been so engaged since 1910. In 1930 he was appointed to the Industrial Accident Board of Massachusetts, from which he resigned in 1936 to become assistant district attorney for Worcester County, Massachusetts, a position he held until 1946 when he was elected district attorney. Petitioner was able to and did maintain a law practice during the time he was assistant district attorney and district attorney. As a record of receipts of his law practice for the years 1948, 1949, 1950, and 1951, petitioner kept diaries in which he recorded fees received as well as the net amount of his monthly salary from the Commonwealth of Massachusetts. He had one diary for each of the above years, but produced no record of his receipts for the years 1945, 1946, and 1947. Each diary contained pages at the top of which was printed ‘ Cash Account’ and the name of each month in the year. Petitioner recorded for each month some of the fees which he had received that month, the amounts and payors of the fees, the dates they were received, and his salary from the State. At the end of each month petitioner totaled the receipts recorded, and added the monthly total to the total for the year. Thus, petitioner recorded a running total for recorded receipts for the year to the end of each month. At the end of the year petitioner subtracted his total salary from the State from total recorded receipts. The difference he considered gross receipts from his law practice and so reported it on his income tax returns. For the year 1948 he recorded total receipts of $9,405, including net salary from the Commonwealth of Massachusetts in the amount of $6,388. He subtracted $6,388 from the total of $9,405 and reported, on his return for 1948, the difference of $3,017 as gross receipts from his business. However, for the years 1949 and 1950 he subtracted the amount of his gross salary from his total receipts and considered the difference as gross receipts from his practice. This resulted in an understatement of gross receipts from his law practice for 1949 and 1950 by the amount of income tax withheld from his salary. Petitioner apparently kept similar records for the years 1945, 1946, and 1947 but they had been lost or destroyed at the time of the tax investigation in 1952. It has been stipulated by the parties that during the years 1948, 1949, and 1950 petitioner received certain fees in his law practice which he did not record in his daily record of receipts and which were not included in his income reported for tax purposes. There were 14 of these unreported fees stipulated to have been received during the year 1948, totaling approximately $2,550; 14 received in 1949, totaling approximately $4,350; and 12 received in 1950, totaling approximately $1,500. These fees were generally received in one of the following ways: Petitioner would receive a check payable either to him and his client, or to him as attorney for the client whom he represented, in settlement of his client's claim. Petitioner would deposit the check in his own bank account, then write a check to the client for his share of the settlement, pay certain expenses, and then retain the balance of the amount received as his fee. Some of the checks received represented proceeds of loans obtained for clients or sales of property for clients, some of them represented assets distributed to his clients in settlement of estates, and some of them represented funds he received as attorney for the fiduciary of an estate. His accounting was done in much the same manner whatever the capacity in which he received the checks. Some of the checks were payable directly to petitioner in payment for services rendered. In addition to the unreported fees above, evidence introduced at the trial shows that petitioner also received fees in 1948, 1949, 1950, and one fee of $115 in 1951, all or a part of which he did not record in his daily receipts record or report on his returns. These were principally fees received as fiduciary of various estates, and the unreported part thereof totaled approximately $6,000 over the period. In September 1943 petitioner's daughter and son-in-law, Magruder, who had no children, came to live with petitioner and apparently remained with him throughout the year 1951. From time to time Magruder gave money to petitioner to help pay for their living expenses. We find these amounts to be $480 in 1948, and $1,000 in each of the years 1949, 1950, and 1951, and that these amounts were nontaxable income to petitioner. Magruder was living in California at the time of the trial and did not testify. Petitioner had an accumulation of cash on hand prior to 1945 which he had accumulated from various sources and kept in his safety deposit box. The amount of cash on hand at December 31, 1946, was $2,000; at December 31, 1947, was $1,500; at December 31, 1948, was $1,000; at December 31, 1949, was $500; and at December 31, 1950, and 1951, was zero. Petitioner was not indebted to his son for legal fees as of December 31 of any of the years 1945-1951. On January 14, 1954, the Federal grand jury for the district of Massachusetts returned an indictment, charging in counts 1, 2, 3, and 4 that petitioner did willfully and knowingly attempt to evade and defeat a large part of the income taxes due and owing by him and his wife for the taxable years 1947 to 1950, inclusive, respectively, by filing false and fraudulent joint income tax returns with the collector of internal revenue for the district of Massachusetts. On January 14, 1955, petitioner was found...

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