McAlpine v. Commissioner
| Decision Date | 02 April 1984 |
| Docket Number | Docket No. 15347-80. |
| Citation | 47 TCM (CCH) 1403,1984 TC Memo 162 |
| Parties | Lawrence L. McAlpine and Celeste W. McAlpine v. Commissioner. |
| Court | U.S. Tax Court |
R.D. Worsley and John W. Ambrecht, 205 East Figueroa St., Santa Barbara, Calif. 93101, for the petitioners. Marc J. Winter, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined that for the year 1976 there was due from the petitioners a deficiency in income tax in the amount of $33,621, excise tax in the amount of $90 under section 4973,1 and an addition to tax under section 6653(b) of $16,811. Prior to trial, several issues were conceded by the parties including a concession by the petitioners that the statutory notice was issued within the period provided by section 6501(a). At trial, the issues presented were: (1) whether the petitioners are entitled to a deduction for a charitable contribution in the amount of $40,166; and (2) whether the petitioners are liable for the addition to tax under section 6653(b) in the amount of $16,811. On brief, the petitioners have conceded that they are not entitled to the charitable deduction because the recipient of the contribution did not qualify under section 170(c). Consequently, the only issue remaining is whether or not the petitioners are liable for the addition to tax for fraud as provided by section 6653(b), and since this issue is a question of fact to be determined from the record as a whole,2 we will combine our findings of fact and opinion.
Petitioners Lawrence L. McAlpine and Celeste W. McAlpine, husband and wife, resided in Santa Barbara, California, during 1976 and at the time they filed their petition. During 1976 Lawrence L. McAlpine was a practicing physician and a 50 percent shareholder in a professional medical corporation known as South Coast Pathology Services, Inc. He was also president of the corporation. Both his office and the office of the corporation were at 815 Cooper Road, Oxnard, California. Celeste W. McAlpine was a laboratory technician employed by the County of Santa Barbara.
On May 13, 1977, the petitioners filed a joint income tax return for 1976 with the Fresno Service Center of the Internal Revenue Service. On the return the petitioners claimed a deduction for "total cash contributions supported by receipts" in the amount of $40,166. The 1976 return as well as the returns of the medical corporation for the fiscal years ending on April 30, 1976, 1977, and 1978 were thereafter audited by Revenue Agent William D. Burns. During the audit, and pursuant to the recommendation of Revenue Agent Burns, the returns were referred to the Criminal Investigation Division (CID) and assigned to Special Agent Keith H. Billings for investigation. His investigation continued from March of 1980 until September 2, 1980, at which time he recommended "that this case be discontinued by the Criminal Investigation Division due to lack of criminal prosecution potential." In his withdrawal memorandum the special agent also stated that the "claimed contribution of $40,000.00 * * * appears to be highly questionable."
In the meantime, on May 13, 1980, the respondent had issued a deficiency notice to the petitioners. In his notice the respondent disallowed the deduction claimed by the petitioners for the charitable contributions, made the other adjustments which have now been disposed of by concessions, and determined that all or part of the underpayment of tax in 1976 was due to fraud within the meaning of section 6653(b).
Section 6653(b) provides that "if any part of any underpayment * * * of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 50 percent of the underpayment." The burden of proving fraud under section 6653(b) is upon the respondent and he must prove the same by clear and convincing evidence. Section 7454(a); Rule 142(b); Arlette Coat Co.v. Commissioner Dec. 17,629, 14 T.C. 751 (1950); Green v. Commissioner Dec. 33,893, 66 T.C. 538 (1976).
To carry his burden in this case the respondent must prove that the petitioners deliberately intended to evade taxes which they knew were owed by conduct calculated to conceal, mislead, or otherwise prevent the collection of such taxes. Stoltzfus v. United States 68-2 USTC ¶ 9499, 398 F. 2d 1002 (3d Cir. 1968), cert. denied 393 U.S. 1020 (1969); Acker v. Commissioner Dec. 21,679, 26 T.C. 107 (1956), affd. 59-2 USTC ¶ 9757 361 U.S. 87 (1959).
Since fraudulent intent can seldom be established by direct evidence, it is well settled that circumstantial evidence can be used by the respondent in his proof of fraud. Klassie v. United States 61-1 USTC ¶ 9389, 289 F. 2d 96 (8th Cir. 1961); Powell v. Granquist 58-1 USTC ¶ 9223, 252 F. 2d 56 (9th Cir. 1958); Grudin v. Commissioner 76-1 USTC ¶ 9445, 536 F. 2d 295 (9th Cir. 1976).
It is also well settled that the deliberate overstatement of a deduction, or a deliberate attempt to claim a nonexistent deduction, may constitute a fraudulent underpayment of tax under section 6653(b). Estate of Temple v. Commissioner Dec. 34,083, 67 T.C. 143 (1976); Hicks Co.v. Commissioner Dec. 30,920, 56 T.C. 982 (1971), 73-1 USTC ¶ 9109 affd. 470 F. 2d 87 (1st Cir. 1972); Neaderland v. Commissioner Dec. 29,635, 52 T.C. 532 (1969), affd. 70-1 USTC ¶ 9340 424 F. 2d 639 (2d Cir. 1970), cert. denied 400 U.S. 827 (1970). In fact a deliberately overstated deduction for a charitable contribution can be evidence of fraudulent intent. See Summers v. Commissioner Dec. 38,286(M), T.C. Memo. 1981-545.
Respondent contends that he has carried his burden of proof in this case with clear and convincing evidence of the following: (1) that the petitioners claimed a deduction on their 1976 return for a charitable contribution which they knew they had not made to an organization which they knew did not qualify to receive such contribution; (2) that during the audit of the return the petitioners attempted to mislead Revenue Agent Burns into allowing the deduction by furnishing him with a false document; and (3) that in an interview on March 18, 1980, petitioner, Lawrence L. McAlpine, attempted to mislead Special Agent Billings and his associate, Special Agent George L. Lindholm, into accepting the deduction by making false oral statements.
We will consider each of respondent's contentions in the order listed.
(1) Was A Deduction Claimed For A Contribution Which Was Not Made? At the trial Dr. McAlpine testified that in 1976 he contributed certain medical equipment, furniture and receivables to the Palmdale Youth Ranch which he understood to be a ranch or camp that Donald O. Dockendorf was trying to operate for troubled or disturbed children. Dr. McAlpine also stated that prior to the death of Dockendorf and his wife in 1980 in a plane crash, Dockendorf bought, sold, altered and repaired all types of medical equipment and furniture for about 100 doctors in the tri-county area of San Luis Obispo, Santa Barbara, and Ventura. Dr. McAlpine had known Dockendorf both in business and socially for several years and saw him at least two or three times each week during 1976. Among other things, they were fellow members of the Lacumbre Masonic Lodge and at an earlier time had worked together in the Sea Scouts.
Some time in 1975 Dockendorf first approached Dr. McAlpine in a round about way to either make a tax deductible contribution to the ranch or associate with Dockendorf in the operation of the ranch. At that time Dr. McAlpine declined because he did not need a tax deduction and because of certain other personal entanglements. Later on in 1976 Dr. McAlpine changed his mind and purportedly gave to Dockendorf for the ranch the medical equipment and furniture plus the receivables which all together had a value of at least $40,000.
According to McAlpine's testimony the medical equipment and furniture included in the contribution came from two sources. The first source was Southern California Cytology Association and the second source was the Port Hueneme Health Center.
Southern California Cytology Association was a corporation which Dr. McAlpine, who was then practicing pathology, and Elizabeth J. Ellsworth, a cytologist, organized in or about 1967 to do and perform pathological work at the Santa Barbara General Hospital.3 The corporation was active until about 1970 and during this period it accumulated various pieces of equipment such as: (1) a binocular microscope with magnification to 2000 power, an electronically controlled light meter and a separate power supply; (2) a teaching microscope with a projected head and separate power; (3) two small Lux microscopes; (4) a water bath used for enzyme analysis; (5) a photovolt for electrophrosis; (6) a cintilation counter for measuring variances in radiation; and (7) a number of jars and other items of glassware and paperware.
In or about 1970 Southern California Cytology Association became inactive or defunct and at some point thereafter Mrs. Ellsworth apparently transferred her interest in the corporation which was very nominal to Dr. McAlpine. At this time the corporation's only assets consisted of the aforesaid medical equipment, some of which was stored in Dr. McAlpine's garage until it was given to Dockendorf in 1976. The balance remained at the hospital where it was used by the hospital laboratory in return for its care and storage until about 1971 when it was picked up by or for Dr. McAlpine and stored in his garage until Dockendorf picked it up.
Port Hueneme Health Center was a medical partnership in which Dr. McAlpine and four other physicians carried on a family practice as partners from about 1973 to 1975. In its operation the medical partnership had eight examining rooms, two consulting rooms, a waiting room, a nurse's station, a reception department, a billing department, and an operating suite. The partnership was dissolved in 1975. In the dissolution Dr. McAlpine...
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