Harper v. Comm'r of Internal Revenue
| Citation | 54 T.C. 1121 |
| Decision Date | 26 May 1970 |
| Docket Number | Docket No. 4588-67. |
| Parties | JOHN HARPER AND CONSTANCE HARPER, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | United States Tax Court |
OPINION TEXT STARTS HERETANNENWALD, J., concurring in part and dissenting in part: I agree with the majority opinion that warnings with respect to constitutional rights, including the right to counsel, specified in Miranda v. Arizona, 384 U.S. 436 (1966), are unnecessary in order for evidence procured through noncustodial interrogation to be admissible in a civil tax case.
Isidore R. Tucker, for the petitioners.
William F. Chapman, for the respondent.
Held: (1) Respondent's use of the bank deposits-expenditures method of determining taxable income was not arbitrary and capricious. (2) Statements made by petitioner to revenue agents in noncustodial, noncoercive interviews should not be excluded as evidence because of the failure of the agents to advise her of her constitutional rights under the fifth and sixth amendments. Miranda v. Arizona, 384 U.S. 436, inapplicable. (3) Petitioners substantially understated their income and overstated their expenses in the years 1957 through 1960. (4) Petitioners are liable for the additions to tax for fraud under sec. 6653(b), I.R.C. 1954. (5) assessment of the deficiency for 1957 is not barred by the statute of limitations. (6) Petitioners are entitled to certain dependency exemption deductions. (7) Petitioners did not make a valid election to report the sales of real property in 1959 on the installment method under sec. 453(b), I.R.C. 1954. C'de Baca v. Commissioner, 326 F.2d 189, distinguished.
Respondent determined the following Federal income tax deficiencies and additions to tax against the petitioners:
+---------------------------------------+
¦ ¦ ¦Additions to tax, ¦
+------+------------+-------------------¦
¦ ¦ ¦Sec.6653(b), ¦
+------+------------+-------------------¦
¦Year ¦Deficiency ¦I.R.C.1954 ¦
+------+------------+-------------------¦
¦ ¦ ¦ ¦
+------+------------+-------------------¦
¦1957 ¦$14,112.79 ¦$7,056.40 ¦
+------+------------+-------------------¦
¦1958 ¦10,675.66 ¦5,337.83 ¦
+------+------------+-------------------¦
¦1959 ¦23,470.26 ¦11,735.13 ¦
+------+------------+-------------------¦
¦1960 ¦8,844.15 ¦4,422.08 ¦
+---------------------------------------+
The issues presented for decision in this case are (1) whether respondent's use of bank deposits and estimated expenditures to determine income was arbitrary, capricious, and unreasonable so as to shift to the respondent the the burden of proving the amounts of the deficiencies; (2) whether statements made by petitioner Constance Harper to revenue agents in the initial stages of the audit investigation are inadmissible because of the failure of the agents to advise petitioner of her constitutional rights under the fifth and sixth amendments in accordance with Miranda v. Arizona, 384 U.S. 436 (1966); (3) whether petitioners failed to report substantial amounts of rental, interest, and dividend income for the years 1957 through 1960; (4) whether petitioners overstated their expenses for any of the years 1957 through 1960; (5) whether any part of the understatement of tax for each of the years 1957 through 1960 was due to fraud with intent to evade tax under section 6653(b);1 (6) whether the assessment of any deficiency for the year 1957 is barred by the statute of limitations; (7) whether petitioners are entitled to deductions for dependency exemptions for a niece and an aunt for each of the years 1957 through 1960; and (8) whether petitioners may not elect to report the sales of certain realty in 1959 on the installment method under section 453.
Some of the facts have been stipulated and are found accordingly.
John and Constance Harper (herein called petitioners) are husband and wife, who were legal residents of New York, N.Y., at the time they filed their petition herein. They filed their joint Federal income tax returns for the years 1957, 1958, 1959, and 1960 with the district director of internal revenue for the Manhattan District, New York.
Constance Harper (herein referred to individually as petitioner) was born in Jamaica sometime around 1910. Although she was instructed in the English language, her formal schooling is limited, and consequently she had some difficulty explaining herself and understanding others.
Petitioner later moved to the United States. She became a citizen in 1943. Since that time she has had considerable financial success renting apartments and roominghouses in New York City. By 1957 the petitioners jointly owned real properties located at Nos. 12, 20, 22, 28, 38, 42, and 44 West 130th Street, in New York City. In addition, petitioners leased property at Nos. 16 and 18 West 130th Street. All of these properties were operated by petitioners as rooming houses. Petitioners also jointly owned and operated an apartment house at 243 West 135th Street, in New York City.
On November 16, 1959, petitioners contracted to sell the properties at 20 and 22 West 130th Street. They received $15,000 for each property; $1,500 when the contract was signed, $2,500 with the delivery of the deed, and an $11,000 mortgage at 5-percent interest. The closing was held December 28, 1959, at which time petitioners received $2,500 for each property. Petitioners received mortgage payments of $116.68 per month for each property, beginning January 28, 1960.
Petitioners did not report the sale of the two properties or the income therefrom on their 1959 or 1960 Federal income tax returns. However, they did claim depreciation deductions for them on their 1960 return. The amount of $8,000 received in 1959 was never deposited in petitioner's U.S. bank accounts. Neither petitioner's bank statements nor deposit slips reflect that the monthly checks of $116.68 were ever deposited in her U.S. bank accounts during 1960. In February and March of 1960 petitioner made four deposits of $116.32 and one deposit of $232.64 to her Manufacturers Hanover Trust savings account. But the amounts do not match the amount of mortgage receipts, they were deposited at weekly intervals, and they are not designated as having been checks. Thus the amounts received from the realty sales represent unreported income not included in bank deposits calculations.
The 20 West 130th Street property had been purchased for $10,807.65 on March 26, 1948. Petitioners allocated $7,000 of the purchase price to the building and depreciated it at 4 percent per year. Through 1956 petitioners had been allowed depreciation of $2,454. The parties have stipulated for the years 1957 through 1960 that 60 percent of the price is allocable to the building, and depreciation is 4 percent per year. Thus $6,484.60 is allocable to the building, and petitioners are entitled to depreciation of $259.40 per year in 1957, 1958, and 1959. Petitioner's basis in the building at the end of 1959 was $3,252,40; her basis in the land was $4,323.05. Her gain on the sale of the property for $15,000 was $7,424.55.
The 22 West 130th Street property was purchased for $11,200 on April 20, 1938. Petitioners allocated $8,000 to the building and depreciated it at 4 percent per year. Through 1956 petitioner had been allowed depreciation of $5,982.20. The parties have stipulated that 60 percent of the price is allowable to the building and that depreciation of 4 percent per year is proper. Thus, $6,720 is allowable to the building, and petitioners are entitled to depreciation of $268.80 in 1957 and 1958. Depreciation of $200.20 in 1959 reduces petitioners' basis in the building to zero. With a basis of $4,480 in the land, the 1959 gain from the $15,000 sale price is $10,520.
During the years 1957 through 1960 petitioner had a checking account at the Manufacturers Hanover Trust Co. in New York City.
During the years 1957 through 1960 petitioner had savings bank accounts in New York City as follows: Manufacturers Hanover Trust Co., Carver Federal Savings & Loan Associates, Harlem Savings Bank, Empire Savings Bank, New York Savings Bank.
During the years 1957 through 1960 the petitioner made deposits to her several bank accounts as follows:
+-----------------------------------------------------------------------------+
¦ ¦1957 ¦1958 ¦1959 ¦1960 ¦
+---------------------------------+----------+----------+----------+----------¦
¦Manufacturers Hanover Trust ¦$28,896.75¦$30,399.54¦$28,772.34¦$25,524.38¦
¦checking account ¦ ¦ ¦ ¦ ¦
+---------------------------------+----------+----------+----------+----------¦
¦Savings accounts: ¦ ¦ ¦ ¦ ¦
+---------------------------------+----------+----------+----------+----------¦
¦Manufacturers Hanover ¦12,257.60 ¦11,621.42 ¦26,831.32 ¦10,773.73 ¦
+---------------------------------+----------+--------------------------------¦
¦New York Savings Bank ¦6,000.00 ¦ ¦
+---------------------------------+----------+--------------------------------¦
¦Carver Savings and Loan ¦ ¦ ¦3,153.00 ¦ ¦
+---------------------------------+----------+----------+---------------------¦
¦Harlem Savings Bank ¦ ¦1,195.00 ¦ ¦
+---------------------------------+----------+----------+---------------------¦
¦Total ¦47,154.35 ¦43,215.96 ¦58,756.66 ¦36,298.11 ¦
+-----------------------------------------------------------------------------+
The following deposits to the Manufacturers Hanover Trust Co. checking account were corrections, redeposits, or transfers from savings accounts:
+-----------------+
¦Date ¦Amount ¦
+--------+--------¦
¦1/2/57...To continue reading
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