Harris v. Comm'r of Internal Revenue (In re Estate of Mason)
| Citation | 64 T.C. 651 |
| Decision Date | 28 July 1975 |
| Docket Number | Docket No. 4473-70. |
| Parties | ESTATE OF MARY MASON, DECEASED, HERBERT L. HARRIS, ADMINISTRATOR, AND ROBERT MASON, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Henry A. Bornstein, for the petitioner Robert Mason.
Charles S. Stroad, for the respondent.
1. Deposits in petitioners' savings and checking accounts far exceeded their reported income. They kept no books or records of their income, and when an internal revenue agent investigated their returns, they failed to give any plausible explanation for the large amount of deposits. An explanation, offered for the first time at trial, indicated that some of the deposits were not income, and thereupon the Commissioner so conceded. Held, the Commissioner's determination to reconstruct their income by the bank deposit method was not arbitrary or unreasonable; held, further, the explanation offered at trial and the Commissioner's concession do not shift the burden of proof to the Commissioner.
2. The Commissioner also determined that the petitioners' underpayment of tax was caused by negligence or intentional disregard of the rules and regulations for reporting income. Sec. 6653(a), I.R.C. 1954. The petitioners offered no evidence and made no argument in their brief on this issue. Held, Commissioner's determination sustained.
The Commissioner determined the following deficiencies in and additions to the petitioners' Federal income tax:
+--------------------------------------+
¦ ¦ ¦Additions to tax ¦
+------+------------+------------------¦
¦Year ¦Deficiency ¦sec. 6653(a) 1 ¦
+------+------------+------------------¦
¦ ¦ ¦ ¦
+------+------------+------------------¦
¦1966 ¦$63,280.97 ¦$3,164.05 ¦
+------+------------+------------------¦
¦1967 ¦390,533.62 ¦19,526.68 ¦
+------+------------+------------------¦
¦ ¦ ¦ ¦
+--------------------------------------+
The issues to be decided are: (1) Whether the burden of proving the petitioners' gross income for 1966 and 1967 is on the Commissioner; (2) what income the petitioners actually received in 1966 and 1967; and (3) whether any part of the underpayment of the petitioners' tax for 1966 and 1967 was due to negligence or intentional disregard of rules and regulations.
Some of the facts have been stipulated, and those facts are so found.
The petition herein was filed by Robert Mason and Mary Mason, his wife, who, on the date of the filing of such petition, were legal residents of the State of Michigan. They filed their joint Federal income tax returns for 1966 and 1967, using the cash method of accounting, with the District Director of Internal Revenue, Detroit, Mich. Mr. Mason will sometimes be referred to as the petitioner.
Since the filing of the petition, Mrs. Mason has died, and Herbert L. Harris has been appointed successor administrator of her estate. By order, the administrator has been substituted for Mrs. Mason, but he made no appearance at the scheduled trial of the case. The Commissioner moved to dismiss the case for failure to prosecute as to the estate and reported to the Court that he had been advised by the administrator that he would not appear because the estate was insolvent. The motion was taken under advisement, and when the decision is entered as to Mr. Mason's deficiency, a decision will also be entered fixing the same deficiency for the estate.
On their returns for 1966 and 1967, Mr. Mason's occupation was stated to be ‘investments,‘ and his wife was said to be a homemaker. On their 1966 return, they reported gross income of $5,219.08 from the following sources:
+------------------------------------+
¦Interest: ¦ ¦
+---------------------------+--------¦
¦Home Federal Savings & Loan¦$319.08 ¦
+---------------------------+--------¦
¦Public Bank ¦150.00 ¦
+---------------------------+--------¦
¦Land contracts ¦970.00 ¦
+---------------------------+--------¦
¦Rental income ¦3,780.00¦
+------------------------------------+
On their 1967 return, they reported gross income of $6,499.44 from the following sources:
+------------------------------------+
¦Interest: ¦ ¦
+---------------------------+--------¦
¦Home Federal Savings & Loan¦$332.64 ¦
+---------------------------+--------¦
¦Bank of the Commonwealth ¦175.00 ¦
+---------------------------+--------¦
¦Land contracts ¦911.80 ¦
+---------------------------+--------¦
¦Rental income ¦5,080.00¦
+------------------------------------+
Mr. Mason maintained three bank accounts during 1966 and 1967. He had savings accounts in the Home Federal Savings & Loan Association of Detroit (Home Savings) and the Public Bank (Public), Detroit, Mich.2 In addition, he had a checking account in the National Bank of Detroit (National). The Public and National accounts were joint accounts with his wife.
From June 1966 through December 31, 1967, the following deposits were made in the three accounts:
+--------------------------------------------------+
¦ ¦Deposits in 1966 ¦Deposits in 1967 ¦
+------------+------------------+------------------¦
¦ ¦ ¦ ¦
+------------+------------------+------------------¦
¦Home savings¦$32,570.26 ¦$19,848.44 ¦
+------------+------------------+------------------¦
¦Public ¦3 3,414.76 ¦177.71 ¦
+------------+------------------+------------------¦
¦National ¦121,511.46 ¦4 603,590.97 ¦
+------------+------------------+------------------¦
¦Total ¦157,496.48 ¦623,617.12 ¦
+--------------------------------------------------+
The three accounts were very active in the period from June 1966 until January 1968. Approximately 250 deposits were made in the National checking account, while over 1.600 checks were drawn on that account. In addition, 37 deposits and 54 withdrawals were made in the two savings accounts.
During 1966 and 1967, Mr. Mason cashed many checks for other persons. For unexplained reasons, he cashed insurance drafts payable to the Trailer Construction Co. (Trailer) when it was otherwise unable to cash the drafts because they lacked proper endorsements. On other occasions, Mr. Mason made loans to Trailer until an insurance draft was payable. To secure the funds for the cashing of a check or for a loan, he drew his check on his National account and cashed it at Public. When a loan had been made, Trailer gave Mr. Mason its note, bearing interest. When Trailer received the insurance draft, it was given to Mr. Mason who deposited it in his National account. Trailer was a construction company specializing in fire repairs. Mr. Mason performed similar services for other unnamed companies.
In order to provide the funds for his loans, Mr. Mason frequently ‘kited’ checks. The kiting operation took place in the following manner. First, he drew a check on his National account and cashed it at Public, where he knew an officer who would cash his checks without inquiring to see whether there were sufficient funds at National to cover the check. The proceeds were used for a loan. If the loan was not repaid by the time his first check reached National for final payment through the bank collection process, he cashed a second check at Public and deposited the proceeds at National to cover the first check. These steps were repeated if the loan was not repaid by the time the second check reached National for payment. The cycle ended when the loan was repaid and the proceeds deposited in the National account.
A revenue agent was assigned to investigate the petitioners' tax returns for 1966 and 1967. Since Mr. Mason was in prison at the time for an arson conviction, the agent contacted Mrs. Mason to arrange an examination of their books and records. She informed him that she did not know of any records. The agent then visited Mr. Mason in prison, who told the agent that he kept no books or records. He did disclose that he had three bank accounts, which the agent then investigated.
When the agent discovered the large number of deposits in the three accounts, he became very suspicious and asked Mr. Mason for an explanation. Mr. Mason said he used the accounts to ‘float’ checks in order to gain the use of money without paying interest on it. He said that he would cash a check drawn on Public. By continuing this process, he claimed that he could acquire the use of funds without interest charges. The agent did not believe such story since the Public account was a savings account and not a checking account. Furthermore, there was no correlation between the deposits and withdrawals in the two accounts. When the agent asked Mr. Mason for his canceled checks and deposit receipts and requested that he prepare a list of the deposits indicating the source of each, Mr. Mason first told the agent that he would have an assistant provide him with such information. After allowing the assistant sufficient time to prepare the information, the agent contacted him and was then told that the canceled checks and deposit receipts had been destroyed, and Mr. Mason refused to provide any information as to the source of the deposits. Nor did the financial institutions have any retained copies of the canceled checks and deposit receipts. At no time did Mr. Mason describe to the agent his activities of cashing checks for and making loans to other persons.
After all efforts to obtain additional information failed and the petitioners refused to cooperate by providing any further help, the agent attempted to compute their income based upon their bank deposits. By correlating the deposits and withdrawals in the three accounts, he determined that $27,190.24 in 1966 and $21,618.85 in 1967 represented transfers from one account to another....
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