Hamilton v. Commissioner
| Citation | 1987 TC Memo 278,53 TCM (CCH) 996 |
| Decision Date | 08 June 1987 |
| Docket Number | Docket No. 17085-81. |
| Parties | Johnie Hamilton v. Commissioner. |
| Court | United States Tax Court |
Fred K. Persons, for the petitioner. Roberta M. Hamm, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in and additions to petitioner's Federal income tax as follows:
YearDeficiencySec. 6653(b)1 1972.................... $ 32,682 $ 16,341 1973.................... 202,958 101,479 1974.................... 205,410 102,705
The issues for decision are:
1. Whether petitioner understated his taxable income in the amounts of $72,023, $297,834, and $314,330, for the taxable years 1972, 1973, and 1974, respectively, as determined by respondent's net worth plus expenditures income reconstruction method;
2. Whether any part of the underpayment of tax each year was due to fraud; and
3. Whether the statute of limitations bars the assessment and collection of the deficiencies in and additions to income tax.
Some of the facts have been stipulated and are so found. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.
Petitioner Johnie Hamilton resided in Northville, Michigan at the time the petition was filed in this case. Petitioner filed his United States Individual Income Tax Returns (Forms 1040) for the calendar years 1972, 1973, and 1974 with the Internal Revenue Service Center in Cincinnati, Ohio.
Petitioner is a former Detroit police officer who retired from the force in 1968 for disability due to a leg injury. During the years before the Court, petitioner owned and operated bars and restaurants in the Detroit area called Country USA and Henry VIII. He also owned certain rental properties in that area. In 1973 he purchased another bar and restaurant in California called Henry VIII California and J & H Stables. In 1974 he also acquired another bar and restaurant in Detroit called Dos Gringos. Except for Dos Gringos, the businesses were reported on petitioner's various Schedule C's as sole proprietorships. Dos Gringos went into operation about Christmas Day in 1974, but was omitted from petitioner's 1974 tax return. Petitioner also had some interest in a bar called Dirty Harry's which was not included in any of his tax returns.
On his individual income tax returns for the calendar years 1972, 1973, and 1974, petitioner reported the following items of income, loss, and deduction:
Amount of Net Income
(Loss), (Deduction)
-------------------------------------
Item 1972 1973 1974
Sole Proprietorships
Country USA Bar & Restaurant ....................... ($5,570) $40,433 $78,303
Henry VIII Bar & Restaurant......................... (28,967) 51,830 83,856
Henry VIII of California Bar & Rest. ............... -- (12,030) (79,594)
J & H Stables ...................................... -- (14,336) (32,909)
Rental Properties
7057-79 Michigan ................................... 1,836 71 1,056
39759 Michigan Ave. ................................ -- -- 1,300
1715 Middlebelt..................................... -- -- (21,295)
Gambling Winnings — Las Vegas ........................ 41,000 -- --
Interest Income ...................................... -- 908 1,009
Other Income ......................................... -- -- 9,9592
_______ _______ _______
8,299 66,876 41,685
Nontaxable Portion of Disability Pension ............. (5,200)
Itemized Deductions .................................. (2,933) (7,027) (7,672)
Personal Exemptions .................................. (2,250) (2,250) (3,000)
_______ _______ _______
Taxable Income as Reported............................ $3,116 $57,599 $25,813
======= ======= =======
Michael Scott (Scott) was petitioner's tax accountant during the years in issue. Scott prepared petitioner's income tax returns for the calendar years 1972, 1973, and 1974. In addition to preparing petitioner's income tax returns, Scott also provided petitioner some ongoing accounting services throughout the years in issue, primarily preparing employment tax returns and monthly sales tax returns. Scott also visited petitioner's bars monthly to pick up the bars' daily cash sheets. These daily cash sheets, prepared by petitoner or his employees, contained a figure for each day's total receipts. Scott did not audit these daily cash sheets; he merely recapped the total amount shown on each daily sheet to get a total receipts figure for that particular month. Scott would then enter this monthly total into a journal he kept for petitioner's bars. At year end Scott would recap the monthly totals in the journals to arrive at a total for the year, and would use these yearly totals in preparing petitioner's income tax returns. Similarly, any other information or figures Scott utilized in preparing petitioner's income tax returns for the years in issue were provided to him by petitioner.
In the fall of 1975, Dennis Modzelewski, an internal revenue agent, conducted a field audit of petitioner's income tax returns for the calendar years 1972, 1973, and 1974. In the course of his examination of petitioner's books and records, Modzelewski found that there was a lot of missing data. He found that petitioner's bank statements were incomplete, checks were missing, and that a considerable portion of the books and records were either not available or were not made available to him. Modzelewski on several occasions provided petitioner's representative with document requests seeking these books and records, but he was never provided with a complete set of books and records. During the course of his audit, Modzelewski determined that there was an understatement of income on petitioner's income tax returns for all three years involved. At that time he discussed the understatements with petitioner, and petitioner told him that part of the understatements could be attributable to gambling winnings in 1973 that were not reported. Petitioner also told him that he could have had credit card sales at his bars which might not have been included on the daily sales sheets that were given to his accountant, Scott.
Internal Revenue Agent Earl Umstead was later assigned to petitioner's case. Due to the inadequacy of petitioner's books and records, Umstead reconstructed petitioner's income for the three years in issue using the net worth plus expenditures method. Umstead determined petitioner's net worth as of December 31 for each of the years 1971, 1972, 1973, and 1974. The determination showed that petitioner's net worth increased during each of the years 1972, 1973, and 1974 by $46,039.79, $182,200.60, and $135,716.94, respectively. The increase for each year was then adjusted for nondeductible personal expenditures and nontaxable income during that specific year.
Most of the items on respondent's net worth computation are undisputed. Respondent's computation of petitioner's net worth, as it appears in the statutory notice of deficiency, is summarized as follows:
Johnie Hamilton
Summary of Net Worth
12/31/71 12/31/72 12/31/73 12/31/74
Cash on Hand and in Banks ..... $ 6,376.93 $ 18,525.23 $ 37,549.99 $ 41,374.98
Business Assets and Real Estate 87,500.00 235,950.00 467,929.46 754,671.46
__________ ___________ ___________ ___________
Total Assets................... 93,876.93 254,475.23 505,479.45 796,046.44
Less: Depreciation ............ 1,083.00 9,783.00 29,052.50 55,665.38
__________ ___________ ___________ ___________
Assets Net of Depreciation .... 92,793.93 244,692.23 476,426.95 740,381.06
Less: Liabilities.............. 63,484.99 169,343.50 218,877.62 347,114.79
__________ ___________ ___________ ___________
Net Worth...................... $29,308.94 $ 75,348.73 $257,549.33 $393,266.27
==========
Less: Prior Year Net Worth ............... $ 29,308.94 $ 75,348.73 $257,549.33
___________ ___________ ___________
Increase in Net Worth .................... 46,039.79 182,200.60 135,716.94
Add: Personal Expenditures................ 15,820.00 27,721.93 21,455.00
Add: Net Gambling Losses as Expenditures 24,000.00 160,000.00 198,000.00
___________ ___________ ___________
Total Income ............................. 85,859.79 369,922.53 355,171.94
Less: Nontaxable Pension ................. 5,200.00 5,200.00 5,200.00
Less: Itemized Deductions ................ 3,270.81 7,039.70 6,819.00
Less: Personal Exemptions ................ 2,250.00 2,250.00 3,000.00
___________ ___________ ___________
Corrected Taxable Income ................ 75,138.98 355,432.83 340,142.94
Less: Taxable Income as Reported ........
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