Harbin v. Comm'r of Internal Revenue

• Citation: 40 T.C. 373
• Decision Date: 20 May 1963
• Docket Number: Docket No. 93250.
• Parties: HAROLD E. HARBIN AND GRACE HARBIN, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

40 T.C. 373

HAROLD E. HARBIN AND GRACE HARBIN, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 93250.

Tax Court of the United States.

Filed May 20, 1963.

J. B. Fisher and Edward W. Hiserman, for the petitioners.

John J. Larkin, for the respondent.

Held, in view of petitioner's failure to keep any records of his wagering transactions, his failure to appear at the trial or to offer any evidence from which his net income might more accurately be determined, and the ineffectiveness of efforts of respondent's agents to discover other facts which might enable him to compute petitioner's net income by other recognized methods, respondent's determination of the deficiency herein, based upon testimony of the petitioner and findings of this Court in a proceeding involving the tax liability of the petitioner for prior years, was justified and appropriate, and petitioner has not established that such determination was arbitrary or unreasonable. Held, further, petitioners are liable for the additions to tax under section 6653(a) of the Internal Revenue Code of 1954.

BRUCE, Judge:

Respondent determined a deficiency in the income tax of petitioners for the year 1957 in the amount of $23,409.11, and an addition to tax under section 6653(a) of the Internal Revenue Code of 1954 for negligence or intentional disregard of rules and regulations in the amount of $1,170.46.

Petitioners have conceded certain adjustments made by respondent for additional interest income and for depreciation. The only issues presented are whether respondent's determination of additional wagering income for 1957 was arbitrary, and whether petitioners are liable for an addition to tax under section 6653(a).

FINDINGS OF FACT

Harold E. and Grace Harbin are husband and wife and reside in Charleston, W.Va. They filed a joint Federal income tax return for 1957 with the district director of internal revenue for the State of West Virginia. Grace Harbin is a party solely by reason of having filed a joint return. Accordingly, Harold E. Harbin will hereinafter be referred to as petitioner.

In his return for 1957 petitioner reported a small amount ($42.91) of net income from the operation of a restaurant, poolroom, and bar known as ‘The Jeep.’ He also reported under the heading ‘Other Income,‘ income in the amount of $16,044.38, of which $1,344.38 was described on page 3 of the return as income from a partnership or joint venture and the balance in the amount of $14,700 was described as ‘Gains from Wagering in business.’ No explanation, details, or schedules are shown on the return as to the method used in arriving at this total amount of $14,700 in wagering income.

On November 4, 1955, the district director of internal revenue at Parkersburg, W.Va., wrote petitioner the following letter:

Mr. HAROLD E. HARBIN,

1498 West Washington Street

Charleston, West Virginia.

DEAR MR. HARBIN: An internal revenue agent has submitted a report to this office to the effect that you are not maintaining sufficient records for the purpose of determining your correct liability for Federal income taxes. Each taxpayer is required by law to make a return of his true income. He must, therefore, maintain such accounting records as will enable him to do so.

Section 54 of the Internal Revenue Code provides in part as follows:

‘RECORDS AND SPECIAL RETURNS

‘(a) By Taxpayer.— Every person liable to any tax imposed by this chapter or for the collection thereof, shall keep such records, render under oath such statements, make such returns, and comply with such rules and regulations, as the Commissioner, with the approval of the Secretary, may from time to time prescribe.

‘(b) To Determine Liability to Tax.00Whenever in the judgment of the Commissioner necessary he may require any person, by notice served upon him, to make a return, render under oath such statements, or keep such records, as the Commissioner deems sufficient to show whether or not such person is liable to tax under this chapter.’

Section 145 of the Internal Revenue Code provides in part as follows:

‘(a) Any person required under this chapter to pay any estimated tax or tax, or required by law or regulations made under authority thereof to make a return, or declaration, keep any records, or supply any information, for the purposes of the computation, assessment, or collection of any estimated tax or tax imposed by this chapter, who willfully fails to pay such estimated tax or tax, make such return, or declaration, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, be fined not more than $10,000, or imprisoned for not more than one year, or both, together with the costs of prosecution.’

This is an official notice to you to keep complete records from which your tax liability may be properly determined. Continuing failure to keep such records may subject you to the penalties provided by law. The records you are required to keep include records showing in detail each transaction engaged in by you, including the date thereof, the amount of each item of gross income received, and a description of the nature of the income so received. Detailed records should also be maintained of all payments made by you, including the date of each payment, the name of the payee, address of payee, and a description of the nature of each payment.

Section 29.54-1 of Regulations 111 provides in part as follows:

‘The books or records required by this section shall be kept at all times available for inspection by internal-revenue officers, and shall be retained so long as the contents thereof may become material in the administration of any internal-revenue law.’

Any questions which you may have as to compliance with the requirements set forth in this letter should be taken up with this office.

Very truly yours,

P. L.CHARLES, District Director of Internal Revenue.

The original of this letter was served upon petitioner on December 28, 1955, by an agent of the Internal Revenue Service.

Petitioner's income tax liability for the years 1952 and 1953 was considered by this Court in Docket No. 66272 and a Memorandum Opinion (T.C. Memo 1958-190) was filed therein on November 13, 1958. Decision was entered January 28, 1959, and no appeal was taken therefrom.

An investigation of petitioner's tax liability for the year 1957 was made by an internal revenue agent of many years' experience. Requests were made of petitioner for his books and records relating to his gambling activities on two or more occasions but none were ever produced. In the absence of such records respondent's agent canvassed the banks in and around Charleston for checking and savings accounts of petitioners and for safety deposit boxes. Only one small checking account was located. Courthouse and State records were examined for possible property owned or listed by either petitioner. Title to only one 1956 DeSoto automobile was discovered. The agent also examined the records of the Charleston Retail Credit Bureau for credit charges but none were found.

Respondent's agent computed petitioner's gross wagering income in 1957 on the basis of testimony given by petitioner in Docket No.66272 that his net income in 1952 and 1953 was 8 percent of gross income. He then determined that the average percentage of net income, after deduction of expenses but before deduction of wagering excise taxes, in 1952 and 1953, as shown by the Court's findings in Docket No. 66272, was 29 percent of gross income and applied this percentage to determine petitioner's net wagering income in 1957. The agent's computations are the same as these shown by the statement attached to the notice of deficiency filed as an exhibit to the petitioner herein.

Petitioner paid no wagering excise tax for 1957, and neither petitioner testified at the trial of the present proceedings.

Petitioner failed to maintain books and records from which is income from gambling could be ascertained.

Petitioner has not established that the deficiency determined by respondent for the taxable year 1957 was arbitrary.

The deficiency and additions to tax determined by respondent for the taxable year 1957 were neither arbitrary nor unreasonable.

OPINION

Neither petitioner appeared at the trial of this proceeding and no evidence was offered as to their business or wagering transactions. Petitioner seeks to avoid the tax effect of respondent's determination herein, as we understand his contention, solely on the ground that respondent's determination of the deficiency herein was arbitrary and is, therefore, entitled to no presumption of correctness, for the reason that it was based on ‘findings before the Tax Court of the United States in regard to prior years'; that in the absence of such a presumption there was no burden on petitioner to show the correct amount of tax, if any, owed by him; and that respondent has presented no evidence herein to support his finding of a deficiency. Respondent, on brief, agrees with the principles announced in Helvering v. Taylor, 293 U.S. 507; Durkee v. Commissioner 162 F.2d 184; Gasper v. Commissioner, 225 F.2d 284; Commissioner v. R. J. Reynolds Tobacco Co., 260 F.2d 9 (C.A. 4, 1958); and Welch v. Commissioner, 297 F.2d 309 (C.A. 4, 1961), cited by petitioner, to the effect that if respondent's determination was arbitrary and...