SHADES RIDGE HOLDING COMPANY, INC. v. Commissioner
| Decision Date | 21 October 1964 |
| Docket Number | Docket No. 84652,94991,84653,4219-62. |
| Citation | 23 TCM (CCH) 1665,1964 TC Memo 275 |
| Parties | Shades Ridge Holding Company, Inc., Transferee, et al. v. Commissioner. |
| Court | U.S. Tax Court |
Winston B. McCall, for the petitioners. George W. Calvert, for the respondent.
Memorandum Findings of Fact and Opinion
In these consolidated proceedings, respondent determined the following deficiencies in income tax and additions thereto under section 6653(b)2 due from petitioners Sam and Katherine Fiorella:
Dkt. Taxable Income Section 6653(b)
No. Year Tax Addition to Tax
84653....... 1956 $286,693.04 $143,346.52
94991....... 1957 298,258.48 149,129.24
1958 131,016.26 65,508.13
Respondent also determined that petitioner Shades Ridge Holding Company, Inc., is liable as transferee for a part of the deficiencies in income tax and additions thereto due from petitioners Sam and Katherine Fiorella as follows:
Dkt. Taxable Transferee
No. Years Liability
84652 ...... 1956 $105,480.681
4219-62 .... 1957-1958 105,480.681
1 Plus interest as provided by law
Respondent has conceded on brief that Shades Ridge Holding Company, Inc., is not liable as a transferee. Accordingly, decision will be entered for petitioner in docket Nos. 84652 and 4219-62, and hereafter Sam and Katherine Fiorella will be referred to as petitioners.
The issues remaining for decision are:
(1) Whether petitioner Sam Fiorella realized taxable income from lottery operations in the taxable years 1956, 1957, and 1958 in addition to amounts reported by him for these years as income from wagering, and if so, the amounts thereof; and
(2) Whether petitioners Sam and Katherine Fiorella are liable for the addition to tax for fraud for each of the years 1956, 1957, and 1958.
Petitioners Sam and Katherine Fiorella (hereafter referred to respectively as Sam and Katherine) are husband and wife who resided in Birmingham, Alabama, during the years 1956, 1957, and 1958. They filed joint Federal income tax returns for the taxable years 1956, 1957, and 1958, with the district director of internal revenue, Birmingham, Ala.
In their return for 1956, petitioners reported net income from rentals in the amount of $3,114.98, computed after allowance for depreciation with respect to three buildings, the date of purchase and the costs of which were reported. Petitioners also reported a capital loss from the sale of one of the buildings3 in 1956. Petitioners reported the amount of $2,000 as a loss from a joint venture in drilling an oil well, and, as income from "Other sources," they reported the amount of $41,500 with the explanation, "Wagering." They attached a Schedule C, "Profit (or Loss) From Business or Profession," to their return, with Sam's name typewritten on the schedule; otherwise the schedule was not completed. They reported the amount of $41,500 as net profits from business for purposes of computing self-employment tax.
In their return for 1957, petitioners reported the amount of $2,932.42 as net income from rentals from two buildings for the period January 1 to May 27, 1957, when, it was reported, the buildings were sold. However, no details of the sales were given and no gain or loss reported. Petitioners attached a Schedule C to their 1957 return with Sam's name at the top and showing the amount of $19,800 as net profit with the explanation, "Wagering." Nothing else appeared on the schedule. This amount of $19,800 was shown as net profit from business for purposes of computing the self-employment tax.
In their return for 1958, petitioners reported the amount of $21,000 as income from "Other sources," with the explanation, "Wagering." No details were given. They also reported the amount of $16,528 as income from a partnership described as "Joe Agnesia & Sam Fiorella, Birmingham, Alabama." The amount of $21,000 was reported as net income from business for purposes of computing the self-employment tax.
A Federal partnership information return for the taxable year 19584 was filed with the district director of internal revenue, Birmingham, Ala., for a partnership comprised of Joe Agnesia and Sam, with its address at 2805 15th Avenue North, Birmingham, Ala. It was reported in that return that the partnership commenced business on August 1, 1958; that its principal business activity was "Amusement"; that gross income for 1958 amounted to $34,374.92; that operating expenses totaled $13,714.92; and that, of the resulting net income in the amount of $20,660, the amount of $16,528, or 80 percent, was distributable to Sam, who devoted 100 percent of his time to the business. No balance sheets or details of the partners' capital accounts or information regarding partnership assets, if any, were shown on the return.
The Fiorella-Agnesia partnership return for 1958 and petitioners' income tax returns for 1956, 1957, and 1958, were prepared by a certified public accountant in Birmingham, who had prepared petitioners' income tax return for 1955. In preparing petitioners' return for 1955, the accountant discussed with Sam the necessity of Sam's maintaining records for his wagering income. The accountant told Sam that he should keep "memorandum records of such income."5 In preparing petitioners' returns for 1956, 1957, and 1958, the accountants obtained the information for the returns from Sam, and he examined canceled checks, check stubs, rental statements from a rental firm, and real estate sales memoranda. For each year, Sam gave the accountant the lump-sum figures mentioned above as his income from wagering. Sam, in giving this information, referred to a memorandum or note which he kept in his possession and which the accountant did not examine. Sam gave the accountant no information regarding the sources or details of the wagering income, or how it was computed, and the accountant, who assumed the wagering income was from several sources, sought no details. The canceled checks and check stubs which the accountant examined did not pertain to Sam's business. However, for each year the accountant discussed with Sam petitioners' expenditures and acquisitions during the year and satisfied himself that information as to petitioners' income, as given by Sam, was consistent with the information regarding petitioners' expenditures and increases in net worth. The accountant made no independent investigation of petitioners' expenditures or net worth increases and relied on information given him by Sam without verification.
In preparing the partnership return for the Fiorella-Agnesia partnership for 1958, the accountant examined records maintained for the business.
During the years 1956, 1957, and 1958, a checking account was maintained in Katherine's name at Exchange Security Bank, Birmingham, Ala. Katherine paid household expenses by check drawn on the account. The highest yearly month-end balances of the account for the period 1956-58 were $1,654.22 at September 30, 1956; $2,133.40 at April 30, 1957; and $530.49 at August 31, 1958. Deposits to the account of $500 or more during the 3-year period were as follows:
Date Amount
Jan. 18, 1956......... $25,000.001
May 7, 1956......... 500.00
Sept. 11, 1956......... 1,378.63
Oct. 8, 1956......... 763.32
Nov. 6, 1956......... 718.11
Dec. 15, 1956......... 681.99
Jan. 7, 1957......... 10,000.002
Feb. 2, 1957......... 11,000.003
Feb. 6, 1957......... 730.36
Mar. 6, 1957......... 792.51
Apr. 16, 1957......... 745.87
May 7, 1957......... 520.00
July 6, 1957......... 960.00
Sept. 4, 1957......... 500.00
Oct. 8, 1957......... 725.00
Mar. 4, 1958......... 700.00
Apr. 15, 1958......... 5,000.004
July 8, 1958......... 650.00
Aug. 25, 1958......... 500.00
Oct. 6, 1958......... 500.00
Dec. 4, 1958......... 500.005
1 There was debit to the account on January 25, 1956, in the amount of $25,000
2 There was debit to the account on January 10, 1957, in the amount of $10,000
3 There was debit to the account on February 20, 1957, in the amount of $11,744.41
4 There was debit to the account on April 23, 1958, in the amount of $4,990.77
5 The account was overdrawn prior to this deposit
During the years 1948, 1949, and 1950, Sam had an interest in a lottery known as the "Joe Louis" policy. Sam had an interest in lotteries known as the "Boy and Girl" and the "King and Queen," which were in operation in the Birmingham area for periods during 1956, 1957, and 1958.
A lottery, also known as a policy or a numbers game, was customarily conducted in the Birmingham area by an operator, or operators, working at a central location, or counting house. The operator (or operators) had several employees at the central location. Wagers were accepted from individual bettors throughout the Birmingham area by writers who worked out of station houses, or locations which were generally known to bettors.
To record wagers, a writer used a pad containing 100 sheets of white paper, 2 by 4 inches. The writer would write the amount bet and the numbers chosen by the bettor on a sheet of the pad, or "bet slip." By use of a double-faced piece of carbon paper, a carbon copy of the "bet slip" was prepared simultaneously for the bettor for him to keep as his record, and the information written on the face of the "bet slip" would be duplicated by carbon copy on the reverse side of the "bet slip" in order to prevent alteration of the numbers bet after winning numbers were determined. The original of the "bet slip," with information penciled on one side and the same information carbon copied on the reverse side was retained by the writer. These original "bet slips" were placed by the writer in...
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