Compton v. Commissioner
| Decision Date | 17 October 1983 |
| Docket Number | Docket No. 11673-79,9970-80. |
| Citation | 1983 TC Memo 642,47 TCM (CCH) 124 |
| Parties | Woodrow W. Compton and Jeanette Compton v. Commissioner. |
| Court | U.S. Tax Court |
Joe C. Luker, Jr., 1550 Tower Bldg., Little Rock, Ark. and Charles J. Lincoln, for the petitioners. William P. Hardeman, for the respondent.
Memorandum Findings of Fact and Opinion
Using the net worth plus nondeductible expenditures method to reconstruct income, respondent determined the following deficiencies in petitioners' Federal income taxes and additions to tax:
Addition to
Tax Section
Docket No. Year Deficiency 6653(b)1
9970-80 1968 .... $ 3,372.92 $1,686.46
9970-80 1969 .... 2,658.44 1,576.74
9970-80 1970 .... 7,063.86 3,531.93
9970-80 1971 .... 4,480.00 2,240.00
11673-79 1972 .... 10,519.61 5,259.81
The issue for decision in these consolidated cases is whether assessment of any deficiencies that may exist is barred by the statute of limitations.
Petitioners Woodrow W. Compton ("Woodrow") and Jeanette Compton ("Jeanette") are husband and wife. At the time they filed their petitions in these cases they resided in West Memphis, Arkansas. Petitioners timely filed Federal income tax returns for the taxable years 1968 through 1972 with the Internal Revenue Service Center in Austin, Texas.2
In November 1964 Woodrow was convicted by the United States District Court for the Western District of Tennessee of traveling in interstate commerce with intent to carry on an unlawful gambling establishment. See 18 U.S.C. sec. 1952 (1964). He was fined $5,000 and sentenced to five years in prison. Later that month he paid the fine and appealed his conviction. In May 1966 the Court of Appeals affirmed the District Court. In June 1966 Woodrow was incarcerated in the Federal penitentiary at Terre Haute, Indiana. He was released in May 1968 and placed on probation for the remainder of his original sentence.
Shortly after he was incarcerated, Woodrow requested his attorney to attempt to have his sentence suspended or reduced. A $25,000 fee, contingent upon the attorney's success, was agreed upon. Cash in that amount was delivered to the attorney by Henry Compton ("Henry"), Woodrow's younger brother. In July 1966 a petition for reduction of sentence was filed with the District Court. However, the petition was denied. Shortly thereafter the attorney returned the cash to Henry.
Henry was able to deliver cash to his brother's attorney because Woodrow had entrusted him with approximately $40,000 in cash prior to the time he was indicted. Woodrow had accumulated this sum over a period of years. He asked Henry to hold the cash for him because he thought no one would suspect his brother (unlike himself) of possessing such a large amount of money. Woodrow customarily kept large amounts of cash on hand, in part to finance his gambling activities and in part because he was generally suspicious of banks and other financial institutions. He only had a third-grade education and did not even know how to write a check.
After an attempted burglary of Henry's house in 1967, Henry transferred his brother's cash to Valley Clark, Woodrow's sister. She kept the cash for the rest of the time Woodrow was in prison. During this period she never used any of her brother's cash.
Henry also never used any of his brother's cash except to pay for travel expenses incurred in transporting family members to visit Woodrow in prison. When Woodrow returned home in May 1968, approximately $35,000 remained from the amount originally entrusted to Henry.
Shortly before he was sent to prison, Woodrow sold his house on Maratavia Drive in Memphis, Tennessee and purchased another house in Memphis on Slumber Lane, close to where Henry lived. Woodrow did this because he wanted his wife and child to live in his brother's neighborhood while he was in prison. Because he was not employed at the time, Woodrow was unable to qualify for a loan. Henry, on the other hand, was employed. Accordingly, the house was purchased in Henry's name. However, the $5,000 downpayment and all of the monthly payments were made by Woodrow or Jeanette.
While Woodrow was in prison, Jeanette lived frugally in the house on Slumber Lane with her child. During this period she was not employed. However, she was not without financial resources. For example, approximately $8,250 had been realized from the sale of the Maratavia Drive property in 1966. Earlier that year nearly $35,000 had been realized from the sale of an establishment known as the Aristocrat Club in Millington, Tennessee. And shortly after Woodrow was sent to prison, $4,000 was realized from the sale of two automobiles. In addition, a $10,000 cash appearance bond was refunded by the District Court in June 1966. Jeanette successfully supported herself and her child by drawing on these funds. In fact, when Woodrow returned from prison, a substantial part of these funds remained untouched.
Woodrow was released from prison in May 1968. He had been without any income for two years. However, he had available the surplus funds referred to in the preceding paragraph as well as the previously-described $35,000 in cash. Woodrow used these amounts during the years in issue to support his family and to acquire new assets.
In 1968 Woodrow sold his house on Slumber Lane, recouped his original investment, and moved to Pine Bluff, Arkansas. He purchased the Yellow Cab Company in Pine Bluff for $30,000. He paid $5,000 down and $5,000 in 1969. In July 1970 he sold the company to his brother Billy Gene Compton for $30,000, his original purchase price. Woodrow also purchased three automobiles in 1968: a Jeep, a 1968 Mustang, and a 1969 Oldsmobile. In each case he made a cash downpayment and financed the balance of the purchase price.
In 1969 Woodrow purchased a house on West 34th Street in Pine Bluff, Arkansas. He borrowed $4,000 from a local business associate to apply towards his $15,000 downpayment. Woodrow borrowed that sum in order to avoid the inconvenience of a trip to Memphis to obtain the necessary cash. He satisfied the loan within a week or ten days. Woodrow also purchased a Ford Bronco in 1969 by trading in his Jeep.
Late in 1970 Woodrow moved to Texarkana, Arkansas. Earlier that year he purchased a part interest in a number of businesses there for $75,000. These businesses included a cab company, a rent-a-car company, and a finance company. He paid $15,000 down and $10,000 in each of the following two years. Woodrow also purchased a Buick in 1970 for $4,900.
In 1971 Woodrow purchased a house on Downing Street in Texarkana by making an $18,000 downpayment. He had previously sold his house on West 34th Street in Pine Bluff. He also purchased a 1972 Oldsmobile for cash in the amount of approximately $5,400 and a 1970 Ford Bronco by assuming the seller's existing note.
In 1972 Woodrow purchased a 1973 Buick Regal for $4,300. He also arranged for a builder to construct a house for him on Cambridge Street in Texarkana. However, he did not make the downpayment nor pay any part of the purchase price until 1973.
During the years in issue Woodrow gambled at dice.
In the fall of 1973 respondent began to investigate Woodrow for possible criminal tax violations. Although Woodrow was subsequently indicted, the United States dismissed the indictment prior to trial.
At the direction of his attorney, Woodrow did not cooperate with the special agent during the agent's investigation. Also at the direction of his attorney, Woodrow retrieved a financial statement which he had submitted to a bank. The financial statement related to a mortgage loan which was made in 1973. Woodrow subsequently destroyed the document.
On June 6, 1979, respondent mailed the notice of deficiency for 1972. On May 14, 1980, he mailed the notice for 1968 through 1971. Respondent determined deficiencies for all five years by reconstructing petitioners' income using the net worth plus nondeductible expenditures method.3
Respondent failed to prove by clear and convincing evidence any underpayment of tax for any of the years in issue.
Respondent failed to prove fraud by clear and convincing evidence.
OpinionRespondent sent petitioners the notices of deficiency for 1968 through 1972 more than three years after they filed their Federal income tax returns for those years. Petitioners contend that assessment of any deficiencies that may exist is therefore barred by the general 3-year statute of limitations. Section 6501(a).4 Respondent, on the other hand, contends that the deficiencies may be assessed at any time because petitioners filed false and fraudulent returns with intent to evade tax. Section 6501(c)(1).5 In the alternative, respondent contends that the deficiency for 1972 may be assessed pursuant to the 6-year statute of limitations because petitioners omitted from their return for that year gross income in excess of 25 percent of reported gross income and because the statutory notice was sent within 6-years after the return was filed. Section 6501(e)(1)(A).6 For the reasons which follow, we agree with petitioners.
Under the false return exception to the general 3-year statute of limitations, the Commissioner may assess a deficiency at any time if the taxpayer filed a false or fraudulent return with intent to evade tax. Section 6501(c)(1); section 301.6501(c)1(a), Proced. & Admin. Regs. As with any exception to section 6501(a), the Commissioner bears the burden of pleading and proving that the exception is applicable. Bonwit Teller & Co.v. Commissioner Dec. 3688, 10 B.T.A. 1300 (1928); Farmers Feed Co.v. Commissioner Dec. 3626, 10 B.T.A. 1069 (1928).
In his answers respondent alleges that petitioners' failure to report...
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