Patton v. Commissioner
| Decision Date | 27 March 1985 |
| Docket Number | Docket No. 782-78. |
| Citation | 49 TCM (CCH) 1068,1985 TC Memo 148 |
| Parties | Luther R. Patton v. Commissioner. |
| Court | U.S. Tax Court |
Albert Sidney Johnston, Jr., 1111 W. Howard Ave., Biloxi, Miss., for the petitioner. Robert W. West and Katherine S. Weed, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined the following deficiencies in and additions to petitioner's Federal income taxes:
Year Deficiency Sec. 6653(b)1
1968 ....... $27,391.17 $13,695.59
1969 ....... 35,158.24 17,579.12
1970 ....... 20,132.06 10,066.03
This is a fraud case involving whether or not petitioner received payoffs and kickbacks and paid sham salaries to political cronies while serving as the elected sheriff and tax collector of Harrison County, Mississippi. In addition to respondent's determination of underreported income and overstated salary deductions, there are also issues as to petitioner's claimed loss in 1968 from an equipment leasing venture and petitioner's claimed deduction in 1969 for an automobile insurance premium. Respondent denied both the loss and insurance deduction for lack of substantiation. Unless respondent proves fraud, the statute of limitations will preclude assessment and collection of any deficiencies for the years in question. Sec. 6501(a), (c)(1).
Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.
Petitioner resided in Gulfport, Mississippi at the time he filed his petition in this case. Petitioner's wife, Florence H. Patton (Mrs. Patton), originally filed a separate income tax return for the taxable year 1968. She later filed an amended Federal income tax return to cancel her separate return in order to file a joint return with petitioner. Petitioner and Mrs. Patton then filed an original joint Federal income tax return and a subsequent amended joint return for the year 1968, and joint Federal income tax returns for the years 1969 and 1970, with the Internal Revenue Service Center at Chamblee, Georgia. Mrs. Patton is not a party to this case.
During the years at issue in this case, petitioner was the elected sheriff and tax collector of Harrison County, Mississippi. Petitioner had unsuccessfully sought election as sheriff in 1963. He ran again in 1967, was elected, and took office in January of 1968. In 1968 petitioner also operated a farming business and during that year also became a partner in an equipment leasing venture with one E. E. Ladner.
As sheriff, petitioner was the chief law enforcement officer of Harrison County and was also the tax collector. He operated two distinct offices to carry out these functions. The sheriff's office involved operating the county jail, hiring and supervising deputy sheriffs, and maintaining law and order in the county. The tax collector's office involved collecting county and state taxes (except income and sales taxes) and making proper distribution of these tax receipts. Petitioner's offices were located in two adjoining buildings in Gulfport, Mississippi.
During the years in issue, a Mississippi sheriff ran his office much like an ordinary private business, i. e., sole proprietorships. The sheriff was to collect the taxes and maintain law and order. He received fees for conducting these activities. The fees came partly from tax collections and partly from a percentage of fines levied for criminal offenses. The sheriff also personally received a salary from the county. The sheriff was expected to operate his office (pay employees, purchase automobiles, supplies, etc.) from the fees he made for collecting taxes and from fines.
Petitioner's books and records as sheriff and tax collector were maintained by J. C. McGuire (McGuire), petitioner's chief office deputy (primarily for tax collection but some law enforcement work). McGuire prepared summaries of petitioner's monthly gross receipts from the operation of the offices of sheriff and tax collector. Additionally, schedules of the salaries petitioner paid as sheriff and tax collector were prepared. Charles P. Logan (Logan), a Certified Public Accountant (C. P. A.), was petitioner's accountant. Logan used the summaries of petitioner's gross receipts prepared by McGuire and the salary schedules in preparing petitioner's 1968, 1969, and 1970 joint Federal income tax returns.
Petitioner's returns for the years in issue reported gross receipts from the operation of the offices of sheriff and tax collector on a Schedule C (Profit (or Loss) From Business or Profession). Included in the 1969 Schedule C gross receipts were $12,107, identified as dozer rental, timber sales, and other miscellaneous income. Included on the 1970 Schedule C was $296.93 of miscellaneous income. Petitioner's returns for each year separately reported the salary payments he received from the Harrison County Board of Supervisors, payments evidenced by Forms W-2.
Petitioner's books as sheriff and tax collector were periodically audited by state agents, and the auditors were satisfied with petitioner's records. None of the unreported income determined by respondent in this case involved public monies. There are no allegations that petitioner misappropriated public monies or other monies coming into his possession through the ordinary operation of the offices of sheriff and tax collector. Petitioner's books as sheriff and tax collector are involved in this case only in the matter of possible overstatement of salary payments to certain individuals. On the salary issues, there is no dispute that the payments were in fact made, but only disputes as to whether the payments were compensation for services actually rendered and reasonable in amount.
Payoffs. Before and during the years petitioner was the sheriff of Harrison County, there was a type of coin-operated machine, known variously as a Bally in-line pinball machine or bingo machine. This machine could be used for amusement purposes or used for gambling purposes. The machine's operation for nongambling purposes was legal under state and Federal law, but its operation for gambling purposes was illegal. However, the operation of these pinball machines for gambling purposes was widespread on the Mississippi Gulf Coast, and there was no real attempt to hide the gambling from law enforcement authorities. The existence of this gambling was common knowledge in Harrison County. A number of persons operated such pinball machines for gambling purposes, including Clarence and Arnold Alston (the Alstons), James Ware (Ware), Harold Burt (Burt), Anthony Ingrassia (Ingrassia), Tony Quanica (Quanica), Joseph Taranto (Taranto), and Johnny Bertucci (Bertucci).
Petitioner took office as sheriff on January 1, 1968, after having campaigned for office on an anti-gambling platform. His publicly-stated position against gambling was well known throughout his term of office. However, as discussed below, petitioner's enforcement of gambling laws with respect to the pinball or bingo machines during his term of office was far different from his publicly-stated position.
Two or three months after taking office, petitioner ordered a raid one weekend on various business establishments, resulting in the seizure of many of the bingo machines. The primary purpose of this raid was to enable petitioner to identify the numbers and locations of the bingo machines operating within the county. After petitioner had confiscated the machines, he met with the various operators whose machines had been seized. At these meetings, petitioner told the operators his terms for them to recover their machines and to be permitted to continue operating the machines for gambling purposes. Generally, petitioner demanded from the operators $15 to $20 per month per machine. In one instance, petitioner agreed to accept a lesser, fixed sum from Burt and deferred the payoffs approximately 10 months to permit Burt to recoup the cost of one of his machines, which had been accidentally destroyed during the raid. Petitioner informed the operators that Ware, one of petitioner's political supporters during the recent election campaign, would pick up the monthly payments from them. Petitioner also required payment of cash up front by some, if not all, of the operators as a condition to his release of the pinball machines, demanding amounts approximately equalling the total monthly payments "accrued" from his assumption of office until the time of the raid. For his services as the "satchel" or "bag" man, Ware was permitted to operate his pinball machines without having to make the monthly payoffs petitioner demanded from the other operators. Ware did not begin operating any bingo machines until after petitioner's raid on the other operators early in 1968. Throughout the remainder of 1968, and all of 1969 and 1970, Ware collected the monthly payoffs in cash from the Alstons, Ingrassia, Quanica, Taranto, and Bertucci, and delivered the money to petitioner. Burt, however, made his monthly payments directly to petitioner himself.2 In exchange for these payoffs, petitioner agreed not to interfere with the operators' gambling activities. Petitioner made no further raids on the machine operators during the rest of his term as sheriff of Harrison County. Unhindered by petitioner's law enforcement officials, the various operators continued their gambling activities until 1971, when the Federal Bureau of Investigation (FBI) seized most, if not all, of the bingo pinball machines in Harrison County.
On his joint returns with Mrs. Patton for the years in issue, petitioner reported none of the payoffs he received from the pinball machine gambling operators.
Kickbacks. At the time petitioner was elected sheriff, Mississippi law authorized the sheriff to appoint the bail bondsmen for his county. Prior to his...
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