Conforte v. Comm'r of Internal Revenue , Docket No. 8217-78

CourtU.S. Tax Court
Writing for the CourtSTERRETT
PartiesSALLY CONFORTE, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENTJOSEPH CONFORTE, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
Decision Date08 September 1980
Docket NumberDocket No. 8217-78,8218-78.

74 T.C. 1160

SALLY CONFORTE, PETITIONER
v.
COMMISSIONER of INTERNAL REVENUE, RESPONDENTJOSEPH CONFORTE, PETITIONER
v.
COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 8217-78

8218-78.

United States Tax Court

Filed September 8, 1980.


Petitioners owned and operated a legal house of prostitution, Mustang Ranch Brothel, Nev. The only contemporaneously prepared document evidencing the income of the prostitution during the years in issue was a sheet showing earnings of each prostitute during a 24-hour period. Petitioners also owned the Starlight Ranch Brothel. For the calendar years 1973 through 1976, petitioners filed a “Sullivan” Form 1040. Held:

1. Gross income from the Mustang and Starlight brothels determined;

2. Business expenses determined;

3. Amount of deductible legal fees determined;

4. Applicability of sec. 170 and/or sec. 616 to the construction and dedication of a roadway determined;

5. Form 1040 filed by petitioners did not constitute a return for the purposes of secs. 1348 (maximum tax on earned income), 6501 (statute of limitations), and 6653(c) (definition of underpayment); and

6. Sec. 6653(b) addition to tax for fraudulent underpayment imposed for each of the years in issue.

[74 T.C. 1160]

Bruce I. Hochman, Harvey D. Tack, and Stanley H. Brown, for the petitioners.

S. Clay Freed and Gordon W. Cook, for the respondent.

STERRETT, Judge:

By statutory notice dated April 14, 1978, respondent determined a deficiency in Mr. Joseph Conforte's income taxes and additions to tax as follows:

+--------------------------------------+
                ¦ ¦ ¦Sec. 6653(b) ¦
                +------+-------------+-----------------¦
                ¦Year ¦Deficiency ¦addition to tax ¦
                +------+-------------+-----------------¦
                ¦ ¦ ¦ ¦
                +------+-------------+-----------------¦
                ¦1973 ¦$1,142,054.00¦$598,943.00 ¦
                +------+-------------+-----------------¦
                ¦1974 ¦1,189,391.00 ¦622,701.50 ¦
                +------+-------------+-----------------¦
                ¦1975 ¦1,228,480.20 ¦642,248.60 ¦
                +------+-------------+-----------------¦
                ¦1976 ¦1,207,831.00 ¦631,918.00 ¦
                +--------------------------------------+
                
On the same day, a similar statutory notice of deficiency was sent to Mrs. Conforte. The deficiency and additions to tax pertaining to Mrs. Conforte were slightly lower than those

[74 T.C. 1161]

stated above for the reason that self-employment tax was attributed only to Mr. Conforte.

These cases were consolidated for the purpose of trial, briefing, and opinion. After concessions by both parties, the remaining issues are as shown below:

(1) Whether the respondent's determination in each statutory notice of deficiency was arbitrary and excessive, and if so, on which issues does respondent have the burden of proof; (2) what is the correct net income of the Starlight Brothel for each year, and what portion of it is taxable to petitioners; (3) what is the correct net income of the Mustang Ranch Brothel for each year; (4) did the petitioners file “returns” sufficient to qualify as joint returns; (5) did the petitioners file “returns” sufficient to enable them to avail themselves of the maximum tax provisions of section 1348 of the Internal Revenue Code, and if so, are the petitioners entitled to the benefits of the maximum tax; (6) did either petitioner intentionally file a false return, subjecting either of them to the fraud penalty under section 6653(b), and if so, did they file “returns” sufficient to permit computation of the fraud penalty against the deficiency after credit for taxes reported on the returns. In the alternative, are the voluntary payments of tax to be deducted from the tax in computing the penalty; (7) is the assessment for the year 1973 barred by the statute of limitations under section 6501(a); and (8) are the taxpayers entitled to a business deduction under section 162 or 616(a) during the years 1974-76, or to a charitable deduction under section 170 during 1976 for the building and dedication of the road, bridge, and underpass to Storey County.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts and the supplemental stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.

Petitioners Sally Conforte's and Joseph Conforte's principal place of residence at the time of filing their petition herein was Sparks, Nev.

Petitioners, who were married to each other during the years 1973 through 1976, jointly executed a Form 1040, U.S. Individual Income Tax Return for each of those years. Each of the tax returns contained the taxpayers' names, address, social security

[74 T.C. 1162]

numbers, the filing status of “married, filing joint return,” exemptions, amount designated as taxable income and computations of income and self-employment tax. Each return further contained a statement, reciting in some detail that the taxpayers were informed and believed that they were under criminal investigation by various agencies, and that the tax returns would be scrutinized by such agencies with a view to securing information that would lead to prosecution. The taxpayers then respectfully asserted their Fifth Amendment privilege with respect to setting forth the details of income and expense which could be used against them, relying upon applicable case law recited in the statement. The statement concluded by noting that the taxpayers had furnished, on the return, their taxable income which they believed to be correct, from which they had computed their tax liability, and noted that, if the Internal Revenue Service determined through appropriate processes that they were obligated to pay additional tax, they would comply with that determination.

The tax returns for 1973, 1974, 1975, and 1976 were processed by the Ogden Service Center in the traditional manner. Each return was posted for filing, giving a document locator, and payment of taxes recorded in the following amounts:

+-----------------+
                ¦1973¦$111,664.00 ¦
                +----+------------¦
                ¦1974¦112,022.80 ¦
                +----+------------¦
                ¦1975¦112,033.90 ¦
                +----+------------¦
                ¦1976¦112,008.70 ¦
                +-----------------+
                
Payment of 1973 and 1974 taxes accompanied the returns; payments of the 1975 and 1976 taxes were made in installments. An estimated tax penalty was imposed for each year shortly after receiving the return, and interest was assessed on all eight payments. The 1973 and 1974 returns were selected for audit on December 10, 1974, and November 10, 1975, respectively.

The petitioners owned and operated, in varying degrees, the Mustang Ranch Brothel (sometimes Mustang Ranch or Mustang) located in Storey County, Nev. The brothel was a legal business in Storey County and was licensed by it.

Following a Federal grand jury investigation, petitioners were indicted, on April 5, 1977, in the U.S. District Court for the District of Nevada in a 10-count indictment charging a willful attempt to evade and defeat withholding and Federal Insurance

[74 T.C. 1163]

Contributions Act taxes, arising out of the operation of the Mustang Ranch Brothel. The 10 counts dealt with the first quarter of 1974 through the second quarter of 1976. Petitioners were acquitted on 6 counts, convicted on 4 counts, and sentenced on October 28, 1977.

The grand jury record was not used in the formation of the statutory notices herein; only the criminal trial record and fruits of respondent's agents' investigation were used for such purpose.

Ronald Wiggins, an experienced revenue agent, was assigned the task of examining petitioners' tax returns on November 10, 1977. He had earlier examined the 1967 through 1969 returns and made no adjustments with respect thereto. The purpose of his examination was to determine petitioners' tax liability. He was not advised at the time about the possibility of a jeopardy assessment, but 3 or 4 days later he was asked to make a computation based on the information available. At that time he had a sparse file, containing the Forms 1040, a copy of Exhibit 44 (hereinafter referred to as a “trick” sheet, which reflected the earnings of each prostitute for a given period of time) from the criminal employment tax case, and other various items.

Between November of 1977 and February of 1978, Agent Wiggins issued a summons to the electric power company, obtained the amount of license fees paid from the county sheriff's office, and went to the Storey County assessor to obtain property and real estate tax payment records. In January 1978, he received and read the transcript from the criminal employment tax case to determine allowable expenses. He called Stanley Brown, the general attorney for petitioners, to determine the amount of the legal fees paid. No expenses were allowed without substantiation of the nature of the services performed.

Agent Wiggins prepared a jeopardy assessment computation on or about February 17, 1978. The assessment relating to the Mustang Ranch Brothel was based primarily on the trick sheet from the criminal employment tax case. In that trial, the trick sheet was represented to be a one-page listing of 38 prostitutes and the gross receipts taken in by each during a 12-hour night shift. The total gross receipts from prostitutes was $4,961. In addition, the sheet reflected $70 of income from “check in,” $1,000 withdrawn during the evening by Mr. Conforte, and

[74 T.C. 1164]

expenses of $3,982. Agent Wiggins determined that the gross receipts for a 24-hour day should be computed by taking the receipts for the evening of $4,961, estimating that the day shift did 50 percent of the business of the night shift, or $2,480.50, with a resultant figure in daily gross receipts of $7,441.50. He then multiplied the daily receipts by 365 days, thereby determining that the annual gross receipts of the Mustang Ranch were $2,716,147.50 for each of the years 1973 through 1976.

The evidence discloses that there was a wide disparity in the earnings of prostitutes at the Mustang. The trick sheet shows that 2 of the 38 women had no earnings. The largest amount of gross...

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67 practice notes
  • Kluger v. Comm'r of Internal Revenue, Docket No. 26124-83.
    • United States
    • United States Tax Court
    • September 11, 1984
    ...1136 (7th Cir. 1983) and Conforte v. Commissioner, 692 F.2d 587 (9th Cir. 1982), affg. in part, revg. and remanding in part, [83 T.C. 317] 74 T.C. 1160 (1980), in support of his contention that this Court is without jurisdiction to review the present Rule 6(e) Order. Respondent's reliance u......
  • Roberts v. C.I.R., No. 96-8579
    • United States
    • U.S. Court of Appeals — Eleventh Circuit
    • May 4, 1999
    ...based on the merits of the case and not any previous record developed at the administrative level.' " (quoting Conforte v. Commissioner, 74 T.C. 1160, 1177, 1980 WL 4483 (1980))). We hold, therefore, that the filing of the Robertses' petition for redetermination commenced a judicial proceed......
  • Green v. Commissioner, Docket No. 1405-91.
    • United States
    • United States Tax Court
    • April 7, 1993
    ...be upheld. Conforte v. Commissioner [82-2 USTC ¶ 9659], 692 F.2d 587, 590 (9th Cir. 1982), affg. in part and revg. in part [Dec. 37,205] 74 T.C. 1160 The existence of fraud is a question of fact to be resolved upon consideration of the entire record. Parks v. Commissioner, supra at 660; Rec......
  • Conforte v. C.I.R., Nos. 81-7573
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • November 5, 1982
    ...tax deficiencies and penalties which had been assessed against them for the calendar years 1973 through 1976. Conforte v. Commissioner, 74 T.C. 1160 (1980). Jurisdiction is based on 26 U.S.C. Sec. 7482. They question the tax court's failure to limit their tax payments at the 50 percent maxi......
  • Request a trial to view additional results
67 cases
  • Kluger v. Comm'r of Internal Revenue, Docket No. 26124-83.
    • United States
    • United States Tax Court
    • September 11, 1984
    ...1136 (7th Cir. 1983) and Conforte v. Commissioner, 692 F.2d 587 (9th Cir. 1982), affg. in part, revg. and remanding in part, [83 T.C. 317] 74 T.C. 1160 (1980), in support of his contention that this Court is without jurisdiction to review the present Rule 6(e) Order. Respondent's reliance u......
  • Roberts v. C.I.R., No. 96-8579
    • United States
    • U.S. Court of Appeals — Eleventh Circuit
    • May 4, 1999
    ...based on the merits of the case and not any previous record developed at the administrative level.' " (quoting Conforte v. Commissioner, 74 T.C. 1160, 1177, 1980 WL 4483 (1980))). We hold, therefore, that the filing of the Robertses' petition for redetermination commenced a judicial proceed......
  • Green v. Commissioner, Docket No. 1405-91.
    • United States
    • United States Tax Court
    • April 7, 1993
    ...be upheld. Conforte v. Commissioner [82-2 USTC ¶ 9659], 692 F.2d 587, 590 (9th Cir. 1982), affg. in part and revg. in part [Dec. 37,205] 74 T.C. 1160 The existence of fraud is a question of fact to be resolved upon consideration of the entire record. Parks v. Commissioner, supra at 660; Rec......
  • Conforte v. C.I.R., Nos. 81-7573
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • November 5, 1982
    ...tax deficiencies and penalties which had been assessed against them for the calendar years 1973 through 1976. Conforte v. Commissioner, 74 T.C. 1160 (1980). Jurisdiction is based on 26 U.S.C. Sec. 7482. They question the tax court's failure to limit their tax payments at the 50 percent maxi......
  • Request a trial to view additional results

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