Rinehart v. Commissioner
| Decision Date | 04 April 1983 |
| Docket Number | Docket No. 6514-78. |
| Citation | 1983 TC Memo 184,45 TCM (CCH) 1185 |
| Parties | Francis E. Rinehart v. Commissioner. |
| Court | U.S. Tax Court |
Francis E. Rinehart, Easthampton, Mass., pro se. Joan Ronder Domike and Deborah B.K.L. Rosensweig, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in petitioner's Federal income tax and additions to the tax under section 6653(b)1 as follows:
Tax Additions
Years Deficiencies to the Tax2
1969 ......... $ 2,915.20 $ 7,949.20
1970 ......... 3,447.73 14,120.36
1971 ......... 41,070.64 27,698.10
1972 ......... —0— 9,639.78
The issues for decision are: 1. Whether respondent has sustained his burden of proof to establish fraud by clear and convincing evidence for each of the years involved in this case so that assessment of the tax is not time-barred. This in turn may give rise to two subsidiary issues:
2. Whether the six-year limitations period of section 6501(e) applies to the year 1971 because of substantial omissions of gross income from both the original and amended return filed for that year so that that year remains open for assessment of the tax; and
3. If so, whether petitioner has sustained his burden of proof to establish that respondent's determination of the deficiency for 1971 was incorrect.
Some of the facts have been stipulated and are so found. The stipulation of facts, the supplement to the stipulation of facts, and the exhibits attached thereto are incorporated herein by this reference.
Petitioner resided in Easthampton, Massachusetts, when he filed his petition in this case. He timely filed his Federal income tax returns for 1969 through 1972, inclusive, with the Internal Revenue Service at Andover, Massachusetts. Petitioner, an experienced attorney familiar with the tax laws, prepared the joint income tax returns for himself and his wife for the years in issue without assistance from anyone.3
Petitioner was graduated from Harvard Law School in 1951. He took tax and accounting courses in law school. After his graduation he worked in the tax department of the New York City law firm of Davis Polk until July 1957. From 1957 until 1971, he was counsel for Newmont Mining Corporation at its principal offices in New York City. Petitioner reviewed Newmont's tax returns and prepared protests to the Internal Revenue Service with respect to the corporation's Federal income tax liability for the years 1960 through 1965.
Newmont Mining Corporation (Newmont) is listed on the New York Stock Exchange. It engages in mining operations all over the world. Newmont had a number of subsidiaries during the years in issue including Magma Copper Company, Newmont Oil Company, Canadian Export Gas and Oil, and Magma Arizona Railroad. From 1969 through 1971 petitioner was on the board of directors of Magma Copper Company, Newmont Oil Company, and Canadian Export Gas and Oil. In 1971 he was also on the board of directors of Magma Arizona Railroad. In 1970 and 1971 petitioner received from those companies director's fees that he failed to report on his income tax returns. While the fees were paid to petitioner in cash, each company furnished petitioner a Form 1099 or a statement showing the director's fees paid to him for the year.
In the fall of 1971 petitioner left Newmont and began working for Cypress Mines Corporation in Los Angeles. He worked and was paid under a contract with Cypress Mines until June 1972. Cypress reimbursed petitioner for various expenses he incurred, and petitioner deducted these reimbursed expenses on his 1972 tax return.
In November 1971 Revenue Agent Richard Paluck was assigned petitioner's 1969 income tax return for audit. Later the audit was expanded to include the years 1970, 1971, and 1972. Paluck made several attempts to reach petitioner by telephone, but it was not until April 6, 1972 that he made any contact with petitioner. Paluck obtained from petitioner's banks and brokers copies of his bank and brokerage statements. During the course of his investigation, Paluck also contacted several third parties to obtain information that petitioner did not provide. Petitioner was upset by these third-party contacts. On July 17, 1973, petitioner wrote the District Director requesting both that the audit be expedited and that there be no further third-party contacts before asking petitioner for the information. The Director denied the request citing petitioner's unavailability as both the reason for the delay and the reason for getting information from third parties. On October 31, 1973, petitioner received a telephone call from a special agent stating that the case had been turned over to him for investigation for possible tax fraud.
Respondent's agent made adjustments to petitioner's original returns as follows:4
__________________________________________________________________________________________________________
1969 1970 1971 1972
__________________________________________________________________________________________________________
Gross receipts ............................. $15,000.00 $30,500.00 $64,762.65
Director's fees ............................ ........ 2,400.00 1,520.00
State tax refund ........................... ........ 2,778.29 3,772.34 1,336.70
Stock options .............................. 8,884.57 10,174.93 20,155.73
Short term capital gain on stock options ... 1,153.48 248.54 144.87
Schedule D—long term capital gain .... (4,819.54) (5,211.73) (10,150.80)
Miscellaneous income ....................... ........ ........ (693.60)
Interest income ............................ ........ ........ 125.65 669.37
Depreciation ............................... 1,806.12 1,806.12 1,806.12 2,031.05
Other business expenses .................... 7,372.99 2,903.88 5,618.06 27,610.43
Schedule F—farm expense .............. 3,530.72 3,392.38 3,570.31 3,828.44
Contributions—Schedule A ............. ........ 6,774.55 8,057.12 8,052.63
Taxes—Schedule A ..................... 50.00 1,000.00 ........ (2,264.31)
Interest expense—Schedule A .......... ........ (1,150.61) 351.41 (1,206.31)
Medical expense ............................ ........ 1,175.33 56.05 511.00
__________ __________ __________ __________
Total adjustments .......................... $32,978.34 $56,791.68 $99,095.91 $40,569.00
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__________________________________________________________________________________________________________
On June 10, 1974, petitioner filed a first amended return for 1969. On June 18, 1974, petitioner filed a first amended return for 1970. On September 30, 1974, petitioner filed second amended returns for 1969 and 1970. On October 7, 1974, and October 15, 1974, petitioner filed amended returns for 1971 and 1972, respectively. Petitioner testified that he filed the amended returns "in an honest attempt, in a genuine effort, to file a nonfraudulent return." On the amended returns, petitioner therefore eliminated most of the deductions that he had claimed on his original returns and reported most of the items that the revenue agent had asserted were items of income. Petitioner's total tax liability for each of the years involved as reflected on his original returns and amended returns and as determined by respondent in the statutory notice were as follows:
___________________________________________________________________________________
1969 1970 1971 1972
___________________________________________________________________________________
Original return ......... $ 5,244.71 $ 5,060.64 $ 8,744.80 $ 6,634.44
First amended return .... 12,795.54 6,891.17 23,070.36 26,774.73
Second amended return ... 18,227.91 29,853.62 ......... .........
Notice of deficiency .... 21,143.11 33,301.35 64,141.00 25,914.00
___________________________________________________________________________________
The amended returns filed by petitioner were nonfraudulent and except for the year 1971 the amended returns were substantially correct.5
In April 1977 a Two-Count Information was filed against petitioner in the Federal District Court in Boston, alleging, pursuant to section 7206(1), that petitioner did willfully and knowingly make and subscribe to a joint Federal income tax return on behalf of himself and his wife which he did not believe to be true and correct as to every material matter. The First Count was for 1970 and the Second Count was for 1971. Count 1 charged that petitioner reported for 1970 taxable income of $21,741.29 when he knew and believed that his taxable income was $67,266.32. Count 2 of the information charged that he reported for 1971 taxable income of $32,201.91 when he knew and believed that his taxable income was $83,719.47.
Petitioner waived an indictment and, on ...
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