Crabtree v. Commissioner
| Decision Date | 27 August 1984 |
| Docket Number | Docket No. 7985-78. |
| Citation | 48 TCM (CCH) 948,1984 TC Memo 450 |
| Parties | George B. and Bernell L. Crabtree v. Commissioner. |
| Court | U.S. Tax Court |
George B. Crabtree, pro se, 234 Valley View Drive, Paradise, Calif. Theodore Garelis, for the respondent.
Memorandum Findings of Fact and Opinion
The Commissioner determined the following deficiencies in, and additions to, the petitioners' Federal income taxes:
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Additions to Tax
Sec. 6651(a) Sec. 6653(a) Sec. 6654
Petitioner Year Deficiency I.R.C. 19541 I.R.C. 1954 I.R.C. 1954
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Mr. and Mrs. 1973 $206,037.55 — $10,301.88 —
Crabtree ...... 1974 606,585.00 — 30,329.25 —
Mr. Crabtree ... 1975 169,838.00 $42,459.00 8,492.00 $7,334.00
Mrs. Crabtree .. 1975 169,594.00 42,399.00 8,479.00 7,323.00
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After concessions by the Commissioner, the issues for decision are: (1) Whether the petitioners had unreported income during 1973, 1974, and 1975 as determined by the Commissioner using the bank deposits method; (2) whether the petitioners are liable for the addition to tax for negligence under section 6653(a) for 1973, 1974, and 1975; (3) whether the petitioners are liable for the addition to tax for failure to timely file income tax returns under section 6651 (a) for 1975; and (4) whether the petitioners are liable for the addition to tax for failure to pay estimated tax under section 6654 for 1975.
Some of the facts have been stipulated, and those facts are so found.
The petitioners, George B. and Bernell L. Crabtree, are husband and wife, who maintained their legal residence in Paradise, Calif., when they filed their petition. They timely filed joint Federal income tax returns for the years 1973 and 1974 with the Internal Revenue Service Center, Fresno, Calif. They have not filed an income tax return for 1975. Mr. Crabtree will sometimes be referred to as the petitioner.
The petitioner and his family moved to Paradise in 1972, at which time he was an interior decorator. To increase his income, he became involved in selling silver. He also devised other silver investment transactions.
During the years in issue, the petitioner received money from his investors pursuant to several different types of silver investment agreements. At the trial, the parties introduced copies of 15 different contracts, 13 of which bore dates during the years in issue. Although the contracts vary in some particulars, the 13 relevant agreements are variants of 4 basic types.
The first type may be denominated the "future delivery" contract. Under such agreements, the petitioner received money on the contract date for a specified amount of silver to be delivered to the investor at the end of 1 year. The amount of money that the petitioner received was equal to the price of the silver on the contract date. At the end of the year, the investor could elect to receive the silver or its value at such time. The petitioner promised to make periodic payments during the year of a specified percentage of the amount that he had received. In other variants of the future delivery contract, the petitioner guaranteed a specified rate of silver appreciation during the year, or offered the investor the opportunity to participate in appreciation of the gold and silver mining stocks that the petitioner owned, in lieu of the periodic payments, or he granted the investor an option to buy more silver. A final variant consisted of a sale of silver by the petitioner to the investor immediately followed by the petitioner's renting the silver back from the investor for 1 year. In such case, the periodic payments were denominated "rent." In form, some of the future delivery contracts were loans from the investor to the petitioner, and others were purchases of silver by the investor. The future delivery contracts included the "Twelve Per Cent Silver Loan Agreement," "Silver Loan `Stock Profit' Agreement," "Eighteen-Plus Silver Program," "Silver Rental Agreement," "`High Return' Silver Program," "Silver Purchase Agreement," and "Silver Purchase Agreement 1% Per Month Program."
A second type of silver investment agreement was denominated the "Twelve-Plus Silver Program." Under such agreement, the petitioner received full payment for the silver, which he then delivered to the investor. However, the petitioner agreed to repurchase the silver after 1 year for the amount paid by the investor at the investor's election. Additionally, the petitioner agreed to make payments of 1 percent per month of the "purchase price."
A third type of silver investment agreement was called the "Silver Deposit Agreement." The agreement provided that, in return for a downpayment of 10 or 25 percent of the total purchase price, the petitioner agreed to store or "put on option" a specified amount of silver for 1 year. During the year, the investor could pay the balance of the contract price and take delivery of the silver. At the end of the year, the investor could request that the silver be sold and that the profits and deposit be paid to him, or the investor could purchase that portion of the silver represented by the downpayment, or the investor could extend the agreement for another year.
The fourth type of silver investment agreement was called the silver loan (or purchase) agreement with option. Under such agreements, the investor purchased a specified amount of silver from the petitioner or "loaned" the purchase price to the petitioner, keeping the silver as collateral. The investor could take delivery of the silver or store it with the petitioner. At any time during the year, the investor could purchase the silver, or an additional amount of silver at its price on the contract date. The investor could also have the silver sold, or he could keep it in full satisfaction of the "loan."
The petitioner used a variety of agreements during the years in issue because he found that certain agreements did not attract enough investors or because he was losing money on a particular type of contract. On one occasion, he invested money that he received from his investors with a coin dealer in Chicago, who subsequently went bankrupt. The petitioner experienced difficulty making the periodic payments called for by his contracts, and he used the proceeds from subsequent silver sales to pay the "interest" due on such contracts. The petitioner continued to sell silver during the years in issue.
On his income tax return for 1973, the petitioner reported gross receipts of $188,135.82, cost of goods sold of $159,615.54, and a net profit of $7,843.16, which profit he reported as income. On his income tax return for 1974, the petitioner reported gross receipts, less returns, of $202,126.00, cost of goods sold of $4,403.00, and expenses for "rentals-interest-profits" of $212,311.00. The return reported a net loss and showed no tax owed.
In his notices of deficiency, the Commissioner determined that the petitioner had unreported income for each of the years in issue. He reconstructed the petitioners' income using the bank deposits method. Based upon records and information supplied by the petitioner after the issuance of the notice of deficiency, the Commissioner revised the bank deposits analysis, substantially reducing the deficiencies for each year. The Commissioner also determined that the petitioner was liable for the addition to tax for negligence under section 6653(a), for each of the years in issue, as well as for the additions to tax for failure to timely file a return under section 6651(a), and for failure to pay estimated tax under section 6654, for 1975.
OpinionThe first issue for decision is whether the petitioner had unreported income during 1973, 1974, and 1975 as determined by the Commissioner using the bank deposits method. It is well established that the Commissioner may prove the existence and amount of unreported income by any method that will, in his opinion, clearly reflect the taxpayer's income. Sec. 446(b); Holland v. United States 54-2 USTC ¶ 9714, 348 U.S. 121, 130-132 (1954); Davis v. Commissioner 57-1 USTC ¶ 9245, 239 F. 2d 187, 189 (7th Cir. 1956), affg. a Memorandum Opinion of this Court Dec. 20,950(M); Harper v. Commissioner Dec. 30,129, 54 T.C. 1121 (1970). The use of bank deposits has long been an accepted method of proving income. Goe v. Commissioner 52-2 USTC ¶ 9420, 198 F. 2d 851 (3d Cir. 1952), affg. a Memorandum Opinion of this Court Dec. 18,231(M); Halle v. Commissioner 49-1 USTC ¶ 9295, 175 F. 2d 500 (2d Cir. 1949), affg. Dec. 15,243, 7 T.C. 245 (1946); Hague Estate v. Commissioner 43-1 USTC ¶ 9258, 132 F. 2d 775 (2d Cir. 1943), affg. Dec. 12,070, 45 B.T.A. 104 (1941); Mauch v. Commissioner 40-2 USTC ¶ 9566, 113 F. 2d 555 (3d Cir. 1940), affg. Dec. 9598, 35 B.T.A. 617 (1937); Nicholas v. Commissioner Dec. 35,439, 70 T.C. 1057 (1978); Estate of Mason v. Commissioner Dec. 33,349, 64 T.C. 651 (1975), affd. 78-1 USTC ¶ 9162 566 F. 2d 2 (6th Cir. 1977); Harper v. Commissioner, supra.
The petitioner does not specifically challenge the Commissioner's use of the bank deposits method. Rather, the petitioner argues that his bank deposits represent the proceeds of loans that his investors made to him rather than gross receipts from the sale of silver. The petitioner bears the burden of proving his contention. Rule 142(a), Tax Court Rules of Practice and Procedure2; Welch...
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