Gordon v. Comm'r of Internal Revenue
| Decision Date | 31 October 1974 |
| Docket Number | Docket No. 2830-71. |
| Citation | 63 T.C. 51 |
| Parties | *HARRY AND GERALDINE GORDON, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Bruce I. Hochman and Harvey D. Tack, for the petitioners.
Randall G. Dick, for the respondent.
Petitioner was a partner with his son-in-law in a legal Nevada gambling establishment. A raid pursuant to a search warrant disclosed ‘skimming’ activities, i.e., unrecorded bets on which neither Federal wagering nor income taxes were paid. Income tax deficiencies were asserted. Held, the search warrant was valid and not overbroad, and the search party acted within its authority. Held, further: The fifth amendment privilege against self-incrimination did not preclude the respondent's use at trial of partnership records seized in the raid. Bellis v. United States, 417 U.S. 85 (1974), applies even though the partnership was a two-man family partnership. Held, further, petitioner was not prevented from having counsel present during the raid. Held, further: Respondent's computation of the partnership's and petitioner's unreported 1967 income upheld, with modifications, even though based on extrapolation to full year of results of 1 day's operation up to the 2:06 p.m. time of the raid. Petitioner's periodic destruction of business records precluded greater exactitude, a respondent's method of income reconstruction was not so arbitrary or unreasonable as to shift the burden of proof to respondent. Held, further, fraud penalty is not adequately supported by clear and convincing evidence. Held, further, 1967 gambling income from the partnership ineligible for income averaging under sec. 1302.
Respondent determined a $177,472.60 deficiency plus an $88,736.30 fraud penalty under section 6653(b)1 in petitioners' 1967 Federal income tax return.
At the call of the calendar petitioners filed a ‘Motion to Suppress, Strike Affirmative Allegations in Respondent's Answer and for an Order that the Burden of Going Forward is on Respondent.’ The parties agreed to proceed with the trial, and that on brief any evidence developed during the trial could be used in considering the motion.
The issues presented are:
(1) Whether the statutory assessment herein is based upon evidence which should have been suppressed because one or more of petitioner husband's constitutional rights were violated when his gambling records were seized.
(2) Whether the respondent's method of determining additional partnership income of $273;782 was without foundation in fact, arbitrary, capricious, and excessive so as to shift the burden of proof to the respondent.
(3) Whether the underpayment of tax, if any, was due to fraud.
(4) Whether the additional income in 1967, if any, is wagering income not subject to averaging under section 1302(b)(3).
Some of the facts have been stipulated and are so found.
Petitioners husband and wife resided in Las Vegas, Nev., when they filed their petition herein. They timely filed their joint 1967 Federal income tax return with the district director of internal revenue at Reno, Nev. Hereinafter ‘petitioner’ refers only to the husband, Harry Gordon.
During 1967, petitioner was an 80-percent partner in a partnership which operated a race and sports book wagering business licensed by the State of Nevada under the name of ‘Derby Turf Club’ (hereinafter Derby), located at 113 South First Street, Las Vegas, Nev. Prior to January 25, 1967, petitioner operated the business as a sole proprietorship. On January 25, 1967, petitioner transferred a 20-percent interest in the Derby to his son-in-law, James Shoughro (hereinafter Shoughro), and thereafter the race and sports book business was operated as a partnership.
The business of the Derby during 1967 was to accept wagers on horseraces and sporting events which were taking place in various parts of the United States. A customer was generally supplied with a racing form listing all the race tracks or sporting events for which the Derby was to take bets on a particular day. The customer would offer to place his bet with a ticket writer who would write the wager on a printed ticket form consisting of an original and a duplicate. After the wager was written, the ticket was usually stamped on a machine which consecutively printed 6-digit serial numbers, time, and date. The sports book was open 7 days a week and the race book was closed only on Sunday.
During late 1966, petitioner leased some property across the street from the Dunes Hotel in Las Vegas. He had intended to open a race book in this general area; known as the ‘Strip,‘ and the only way that he could find a suitable location was to take a master lease on a large shopping center. He took an active part in developing the shopping center, and within the center constructed and opened a bookmaking business. The plans for the shopping center were drawn in December 1966, and construction began immediately. Much of petitioner's time between January and June of 1967 was devoted to developing the shopping center and the bookmaking business located there, subsequently known as the ‘Churchill.’ However, such activity did not prevent petitioner from looking after his other businesses, including the Derby.
The Churchill opened for business in June 1967, and petitioner and the bookkeeper moved their offices from the Derby, where they were previously located, to the Churchill. These offices handled the business affairs of both the Derby and the Churchill. Petitioner took full charge of operating the Churchill. In addition, petitioner went to the Derby daily, usually getting there by 7:30 a.m., picked up the mail, deposits, and wagering tickets, and returned to the Churchill. Petitioner went back to the Derby during the day from time to time.
During 1967, the sports book at the Derby was operated as a separate department. It was located in a room behind the race book. Mr. John Quinn (hereinafter Quinn) managed the sports book from February 1965 through January 1971.
Before Quinn went to work for the Derby, petitioner was having problems with the sports book. The performance of two previous people who had operated the sports book as lessees had been unsatisfactory. About 6 months to a year prior to Quinn's employment, the licensee of the sports book became insolvent and could not pay off the wagers. As a result of this the Derby received bad publicity because the public did not realize that the Derby did not own the sports book. The Nevada gaming commissioner then imposed a condition that the Derby could not lease out the sports book.
The sports book was an asset to a race book because sports players also bet on horses when they were on the premises and created a good deal of activity which attracted customers to the race book. When entering through the front door, the customer had to pass through the race book to get to the sports book. The sports book was operated as an accommodation to the Derby customers.
During 1967 the race book was managed by Shoughro. Petitioner set the policy for the management of both the sports and race books.
The Derby was on an accrual method of accounting during 1967, as it had been in prior years.
The daily ‘recap reports for the race book were prepared by Shoughro and Philip Miller (hereinafter Miller), assistant manager of the race book. The recap reports for the sports book were prepared by Quinn and were done on a weekly or semi-monthly basis. Shoughro delivered all of the race and sports reports to the bookkeeper.
During the period January 1 through October 27, 1967, wagers were accepted on the Derby premises which were not reported in the Derby's books. These wagers in the sports book were accepted by Quinn, who destroyed the wagering tickets. In the case of the race book, Shoughro and Miller accepted such wagers. Miller would account to Shoughro for the unreported wagers which he received, and Shoughro would destroy all the wagering tickets. These unreported bets were not submitted to the bookkeeper and were not reflected in the records of the Derby. Such wagers were accepted both via telephone and in person.
During the period January 1 through October 27, 1967, the Derby had three types of bets: (1) Those on which the Federal wagering excise tax was collected from the customer and paid by the Derby to the Internal Revenue Service; (2) those known as ‘service refund’ bets on which the Federal wagering excise tax was collected from the customer but returned if the customer lost, in which case the Derby itself paid the tax to the Internal Revenue Service; and (3) those on which no excise tax was collected or paid and which were not reflected in the books and records of the Derby.
During the period January 1 through October 27, 1967, there were six stamping machines at the Derby on which bets were placed in the race book, and five ticket writers. The sixth machine was used to record the bets which were not reported in the records of the Derby, and was turned back to zero each day. This machine was used by Shoughro and Miller.
During 1967 the Derby was subject to regulations of the Nevada Gaming Commission. Pursuant to its regulatory authority, in 1961 the Nevada Gaming Commission issued regulation 5.020, which reads as follows:
5.020 Race horse books and sports pools.
1. The commission and the board deem that race horse betting and sports pools are forms of gaming materially different from other types of gaming, and that the public health, safety, morals, good order and general welfare of the inhabitants of the State of Nevada require especially stringent control and regulation of such activities. Accordingly; licensees operating race horse books or sports pools will be required to comply with the following regulations in addition to those applicable to licensees in general.
2. Race horse book or sports pool operations shall be conducted only in a building wherein no other types of games are operated or...
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