Marinzulich v. Comm'r of Internal Revenue
| Decision Date | 28 November 1958 |
| Docket Number | Docket No. 64892. |
| Citation | 31 T.C. 487 |
| Parties | JOHN AND MARY MARINZULICH, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Henry Hammer, Esq., for the petitioners.
Raymond Whiteaker, Esq., for the respondent.
Evidence is reviewed and it is held respondent failed to establish petitioners filed false and fraudulent income tax returns for any of the years involved, with intent to evade taxes, and, consequently, respondent's determinations of deficiencies are barred by the statute of limitations.
Respondent determined deficiencies in income tax and additions thereto for the petitioners are follows:
FN1 And Victory tax.
The issue is whether petitioners filed false and fraudulent income tax returns for any of the years involved with intent to evade taxes.
Some of the facts were stipulated and are found accordingly.
John and Mary Marinzulich are husband and wife who live in Tampa, Florida. John Marinzulich, hereinafter sometimes referred to as petitioner, filed his individual income tax return for the year 1942, and John and Mary Marinzulich filed their joint income tax returns for the years 1943 to 1952, inclusive, with the then collector of internal revenue for the district at Jacksonville, Florida.
Petitioner, who was 63 years old at the time of trial, was born in Austria. He finished the third grade in school, which was the extent of his formal education. He came to this country in 1907 and stayed here for 6 years and then returned to Austria. While in Austria he was drafted for service in the Austrian army and, thereafter, he returned to this country in 1921 and went to work on a towboat for the New York Central Railroad. After about 2 years he went to Freeport, New York, where he worked as a fisherman. He stayed in Freeport until about 1934 or 1935 when he went to Port Royal, South Carolina, and engaged in the shrimping business. At first he had one boat and later, when his sons began to help him, he got another boat, and later on a third boat so that by the beginning of World War II he was operating three boats, all engaged in his business of catching shrimp which he sold mostly to the New York Markets. These boats were requisitioned by the United States Government at the outbreak of World War II and petitioner spent about 2 years working on the dock and packing shrimp for others. After about 2 years two of the boats were turned back to petitioner; the third boat had been lost during the war. Petitioner built two or three more boats so that around 1946 he had four or five boats operating in his shrimping business.
During the years involved petitioner carried on his shrimping business in Beaufort, South Carolina, in the summer and in St. Augustine, Florida, in the winter. He lived at both places and maintained bank accounts in banks at both cities.
Petitioner can read and write but he had no training in bookkeeping and he was familiar with tax matters. He kept a simple record of receipts and expenditures in a notebook and checking and savings accounts in banks at Beaufort, South Carolina, and St. Augustine, Florida. There was also a savings account in a bank at Freeport which was closed out in 1950. The notebook method of recording receipts and expenditures was maintained for the years 1942 to 1947. When his sons returned to the business after World War II, a double entry set of books was kept by one of the sons for the years 1948 to 1952. The books for the years 1943 to 1947 were not found but the single entry notebook for either all or a part of the year 1942 was found. This book, together with all of the double entry books for the years 1948 to 1952, and the bank statements, canceled checks and check stubs were turned over to the revenue agents in three or four large boxes when they started their investigation in June of 1954.
Petitioner's income tax returns for all of the years in question were prepared by A. S. Russell, of St. Augustine, Florida, and they were all prepared from information furnished Russell by petitioner. Petitioner paid Russell from $100 to $300 each year for his services. Russell has been in the accounting business for about 38 years and he prepares about 500 Federal income tax returns a year.
In 1942 petitioner's boats, the Princess Mary and Lady Mary were requisitioned by the United States Government and sold to the War Shipping Administration. Respondent computed the gains on these sales to be $3,303.33 and $1,496.33, respectively. In 1944 petitioner sold a boat named Baby Mary and respondent computed the gain on this sale to be $1,360.41. Petitioner admitted the correctness of these computations.
During the years involved John Marinzulich had interest income on savings accounts in the following amounts:
+----------------+
¦Year ¦Amount ¦
+------+---------¦
¦1942 ¦$43.37 ¦
+------+---------¦
¦1943 ¦57.38 ¦
+------+---------¦
¦1944 ¦56.82 ¦
+------+---------¦
¦1945 ¦200.11 ¦
+------+---------¦
¦1946 ¦183.74 ¦
+------+---------¦
¦1947 ¦159.86 ¦
+------+---------¦
¦1948 ¦223.03 ¦
+------+---------¦
¦1949 ¦327.94 ¦
+------+---------¦
¦1952 ¦292.46 ¦
+----------------+
On their Federal income tax returns for each of the taxable years 1942 to 1949, inclusive, and 1952, the petitioners reported net taxable income as follows:
+--------------------+
¦ ¦Net income ¦
+------+-------------¦
¦Year ¦per return ¦
+------+-------------¦
¦1942 ¦$3,164.60 ¦
+------+-------------¦
¦1943 ¦4,435.46 ¦
+------+-------------¦
¦1944 ¦2,312.88 ¦
+------+-------------¦
¦1945 ¦5,644.31 ¦
+------+-------------¦
¦1946 ¦20,345.72 ¦
+------+-------------¦
¦1947 ¦(14,868.89) ¦
+------+-------------¦
¦1948 ¦6,227.55 ¦
+------+-------------¦
¦1949 ¦4,340.66 ¦
+------+-------------¦
¦1952 ¦(15,432.30) ¦
+--------------------+
The net worth schedule upon which respondent's determination of income was based discloses variations of income as between the net worth statement and income tax returns as filed as follows:
+------------------------+
¦ ¦Amount of ¦
+------+-----------------¦
¦Year ¦understatement ¦
+------+-----------------¦
¦1942 ¦$14,013.48 ¦
+------+-----------------¦
¦1943 ¦5,525.55 ¦
+------+-----------------¦
¦1944 ¦4,556.81 ¦
+------+-----------------¦
¦1945 ¦16,298.96 ¦
+------+-----------------¦
¦1946 ¦43,419.15 ¦
+------+-----------------¦
¦1947 ¦44,658.51 ¦
+------+-----------------¦
¦1948 ¦22,114.50 ¦
+------+-----------------¦
¦1949 ¦23,392.60 ¦
+------+-----------------¦
¦1952 ¦17,762.83 ¦
+------------------------+
No part of the deficiencies for the years 1942 to 1949, inclusive, and 1952 is due to fraud with intent to evade tax.
OPINION.Respondent, through the use of the net worth plus personal expenditures method, computed the petitioner's net income for the years 1942 through 1952. Such computation showed amounts of net income in each of the years except 1950 and 1951 in excess of the amounts reported by the petitioners in their income tax returns for those years. In each of the years 1950 and 1951 the petitioners reported a net loss and the respondent in his net worth computation merely reduced the amount of the net loss for each of the years. Respondent, in addition to the deficiencies determined that the petitioners were liable for additions to tax under section 293(b) of the Internal Revenue Code of 1939. Respondent concedes that all of the years are barred by the statute of limitations unless the returns were false or fraudulent with intent to evade tax. Sec. 276(a), I.R.C. 1939.
The burden of proof to show fraud is on the respondent and it must be established by clear and convincing evidence. Arlette Coat Co., 14 T.C. 751. In William W. Kellett, 5 T.C. 608, 616, we said:
What constitutes fraud is a question of fact which frequently requires a nicely balanced judgment to answer. To be considered are all of the facts and circumstances surrounding the conduct of the taxpayer's business and all the facts incident to the preparation of the alleged fraudulent return. The conclusion must be reached not on isolated bits of testimony, but on the whole record. * * * [Emphasis added.]
Respondent emphasizes the consistent understatements of income by the petitioners on their income tax returns. It is not enough, however, to establish fraud merely by showing understatements of income. Holland v. United States, 348 U.S. 121; Blackwell v. United States, 244 F.2d 423; James Nicholson, 32 B.T.A. 977, 989, affd. 90 F.2d 987. Repeated understatements of income, of course, are evidence from which fraud may be inferred, Nathan Bilsky, 31 T.C. 35, but there must be something more in order to meet the ‘clear and convincing’ test, especially in those cases where, as here, the understatements appear by comparing the income returned with income computed by the net worth method.
Respondent argues that the petitioner's failure to...
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