Guinan v. Commissioner, Docket No. 18387-85.

Decision Date29 April 1991
Docket NumberDocket No. 18387-85.
Citation61 T.C.M. 2507
PartiesMichael J. Guinan v. Commissioner.
CourtU.S. Tax Court

Michael J. Guinan, pro se. Steven Blanc and Steedly Young, for the respondent.

Memorandum Findings of Fact and Opinion

WRIGHT, Judge:

By notice of deficiency dated March 15, 1985, respondent determined the following deficiencies in and additions to petitioner's Federal income tax:

                Additions to Tax
                                                                       ------------------------------------------------
                Year                                      Deficiency   Sec. 6653(b)1 Sec. 6653(b)(1)  Sec. 6653(b)(2)
                1977 ..................................   $34,420.11      $17,210.05         n/a               n/a
                1978 ..................................    32,686.19       16,343.10         n/a               n/a
                1979 ..................................    32,992.95       18,511.48         n/a               n/a
                1980 ..................................    40,087.84       22,047.42         n/a               n/a
                1981 ..................................    11,832.00        7,539.05         n/a               n/a
                1982 ..................................     7,912.40          n/a          $6,021.20            *
                * 50 percent of the interest due on $7,912.40
                

By an Amendment to Answer filed on December 16, 1987, respondent claimed an increase in the deficiencies in Federal income tax for the years 1977 and 1980 in the amounts of $31,646.89 and $14,811.16, respectively, and an increase in the additions to tax pursuant to section 6653(b) for the years 1977 and 1980 in the amounts of $15,833.94 and $7,385.59, respectively.

After concessions by respondent, the issues for decision are: (1) Whether the statutory notice of deficiency was arbitrary and capricious so that the burden of going forward with the evidence is placed on respondent; (2) whether petitioner omitted taxable income in the amounts of $120,267, $31,867, $41,887, and $92,816 from his legal practice for the taxable years 1977 through 1980, respectively, as determined by respondent through the expenditures method of reconstruction of income; (3) whether petitioner omitted taxable interest income in the amounts of $29,577 and $20,011 for the taxable years 1981 and 1982, respectively, as determined by respondent through the specific items method of reconstruction of income; (4) whether petitioner is liable for the addition to tax for fraud for each of the taxable years 1977 through 1982; and (5) whether the statute of limitations bars assessment and collection of deficiencies and additions to tax for taxable years 1977 through 1980.

Findings of Fact

Some of the facts have been stipulated. The stipulation of facts, first supplemental stipulation of facts, second supplemental stipulation of facts, and attached exhibits are incorporated herein by this reference.

General

Petitioner resided in Chicago, Illinois, at the time he filed his petition. Petitioner was licensed to practice law in Illinois for each of the years in issue. Petitioner married Else Guinan in 1961 and remained married to her until their divorce in 1982. Petitioner met Loretta Guinan (Lori) in June 1976, and married her in January 1984. Beginning in 1976, petitioner was involved in an extramarital relationship with Lori. From June 1976 throughout 1982, petitioner completely supported Lori with the exception of $1,200 in modeling income and $600 in income as a temporary secretary which she earned from 1979 through 1982. Petitioner provided Lori with an allowance of $175 to $250 per week from 1977 through 1982. The allowance was generally paid in cash. Lori used the allowance on items such as lunch and clothing. Lori did not file Federal income tax returns or have substantial banking activity during the years 1977 through 1982.

Petitioner's legal practice consisted primarily of the representation of clients charged with criminal violations. Petitioner received a portion of his legal fees in the form of checks which were entered in a ledger and deposited in the bank. However, the majority of his fees were in cash. Petitioner also received jewelry and two automobiles as compensation for legal services. His customary fee for representing a client in Federal court was $15,000, while his customary fee for State court was $6,000 to $10,000.

Petitioner's secretaries maintained detailed records of all expense items relating to his law practice. They also assisted petitioner in preparing the expense portions, but not the income portions, of petitioner's Federal income tax returns. Petitioner never instructed his secretaries on procedures for keeping records of cash received from clients.

Petitioner maintained a record of income earned from his practice on legal-sized sheets of paper and on the back of used phone message slips which he kept hidden in his office. In September 1978, petitioner destroyed every criminal client's legal-sized sheet of paper, eliminating the only record of cash payments of legal fees. Also in September 1978, petitioner destroyed bank records, receipts, and cancelled checks. In addition, petitioner erased the income which was recorded on used phone message slips. After a client made a cash payment of legal fees at petitioner's office, he immediately went to a bank and placed it in a safe deposit box. Early in 1982, petitioner informed his secretary that he was destroying evidence of his income and that respondent would never "catch him." In addition, petitioner told Lori that he knew "how to get around the Internal Revenue Service."

Petitioner used various aliases during each of the years at issue, including Ray Berg, Alphonse Gonzales, Clark Kent, Clara Knudsen, Samuel Matyas, Ray Pladick, Robert Redford, George Reicher, George Weber, David J. Griffin, Marie Weber, Frutan Buildings, GBG Enterprises, Mikkelrev Enterprises, Milor Enterprises, Moonraker Enterprises, Clayton Industries, and Platon Industries. Petitioner forged many signatures, including those of individuals who actually existed. Petitioner would at times become confused as to which identity he was using.

On September 20, 1985, petitioner was convicted of six counts of willfully filing false Federal income tax returns, knowing and believing that his adjusted gross income was substantially greater than the amount he reported, in violation of section 7206(1) for the taxable years 1977 through 1982. Petitioner was also convicted of knowingly failing to appear for trial and of falsely representing Social Security numbers with intent to deceive.

Petitioner's Federal income tax returns were filed on the following dates:

                Taxable Year                             Date Filed
                   1977 ..............................   04-15-78
                   1978 ..............................   05-21-79
                   1979 ..............................   06-15-80
                   1980 ..............................   06-15-82
                   1981 ..............................   10-01-82
                   1982 ..............................   04-01-84
                

Reconstruction of Income for Taxable Years 1977 Through 1980

In reconstructing petitioner's income for taxable years 1977 through 1980, respondent began his computation with petitioner's total known expenditures for the year. To this figure was added the increase in petitioner's bank account balance over the year. Respondent then subtracted all nontaxable sources of funds to arrive at the net expenditures for the year. After subtracting miscellaneous adjustments, respondent arrived at petitioner's adjusted gross income for the year, from which he subtracted the adjusted gross income per petitioner's Federal income tax return to arrive at the omitted income for that year. Respondent analyzed all of petitioner's bank accounts for the years 1977 through 1980, and determined that petitioner had $3,000 cash on hand on January 1, 1977. Respondent then thoroughly searched for any nontaxable items of income received by petitioner during each year. The amounts of omitted income for the years 1977 through 1980 are $120,267, $31,867, $41,887, and $92,816, respectively. 1977

Petitioner's total balance of all of his bank accounts increased $91,067 from December 31, 1976, to December 31, 1977. Petitioner made the following expenditures in taxable year 1977:

                Expenditure                                Amount
                 1. Purchase of condominium at 155
                      Harbor Drive, Unit 3805 .........   $ 54,383
                 2. Maintenance fee for Unit 3805 .....        104
                 3. Utilities at 709 E. 3rd Street ....        560
                 4. Purchase of boat (Mikkelrev II) ...     31,500
                 5. Insurance expense for boat ........        608
                 6. Repairs to Mikkelrev II ...........      1,324
                 7. Charge cards ......................      2,244
                 8. Income tax returns ................      7,899
                 9. Loans .............................      7,316
                10. Purchase of 200 shares White Motor
                      Company .........................      1,678
                11. Purchase of 1977 Cadillac auto ....      6,800
                12. Insurance payments to Allstate
                      Insurance .......................      1,299
                13. Lori (cash allowance) .............      9,100
                14. Misc. expenses ....................      6,780
                                                          ________
                                                          $131,595
                                                          ========
                

Petitioner purchased unit 3805 because Lori needed a place to live and he needed "to hide some cash." Petitioner purchased the condominium in the name of a friend, Samuel Matyas. Lori paid no rent or assessments for use of the condominium. Title to unit 3805 was later transferred to a corporate shell.

Petitioner received the following nontaxable items of income in taxable year 1977:

                Nontaxable Item                      Amount
                Cash .............................    $3,000
                Estate distribution from Elizabeth
                  Guinan (mother) ................    21,522
                Loan proceeds ....................       279
                Insurance proceeds ...............    51,796
...

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