Simkins v. Commissioner
| Citation | 1978 TC Memo 338,37 TCM (CCH) 1388 |
| Decision Date | 28 August 1978 |
| Docket Number | Docket No. 3216-74. |
| Parties | Estate of Roger Simkins, Deceased, Yvonne Simkins, Administratrix, and Yvonne Simkins v. Commissioner. |
| Court | United States Tax Court |
Roger V. Barth, Robert J. Bird, and Paul S. Richter, for the petitioners.
Charles B. Norris, and Thomas C. Morrison, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency of $346,897.56 in petitioners' Federal income tax for the taxable year 1970 and an addition to tax under section 6653(a)1 of $17,344.88.
The parties have presented five issues for our determination:
(1) Whether respondent's audit and the determination in the notice of deficiency were so arbitrary and capricious as to deny the notice of deficiency its usual presumption of correctness.
(2) Whether, and to what extent, petitioners failed to fully report their taxable income from numbers activities on their joint 1970 Federal income tax return.
(3) Whether the section 6653(a) addition to tax for "negligence or intentional disregard of the rules and regulations" should be imposed.
(4) Whether petitioner Yvonne Simkins is an "innocent spouse" entitled to relief under section 6013(e).
(5) Whether petitioners have been denied due process of law.
Some of the facts have been stipulated. The stipulation of facts and attached exhibits are incorporated herein by this reference.
Roger W. Simkins, Sr., (hereinafter Simkins) was born on February 15, 1899, and married petitioner Yvonne Simkins (hereinafter Yvonne) in July 1945. They have two children, Roger and Lorilyn. Simkins died on July 15, 1973.
Yvonne and Simkins timely filed a joint Federal income tax return for 1970. Yvonne is administratrix of her husband's estate. She appears in this case as a party-petitioner both in a representative capacity on behalf of the estate, and individually on her own behalf. Yvonne resided in Washington, D.C. at the time petition in this case was filed.
Simkins, who was also known as "White Top" Simkins, had a record of gambling related convictions arising out of the conduct of illegal lotteries dating back to 1935. In 1954 he was arrested with several other individuals and convicted of bribery related offenses. Monroe v. United States, 234 F. 2d 49 (D.C. Cir. 1956), cert. denied 352 U.S. 873 (1956). As a consequence, he was sentenced to prison, and released on parole on December 17, 1959, soon after it was discovered that he suffered from cardiac problems in addition to a mild case of diabetes. From 1960 through and including 1970 he was employed as an automobile salesman in the Washington, D.C. area.
Simkins was not arrested after his release on parole until March 26, 1970. However, he continued to be involved in illegal lottery operations commonly referred to as the "numbers." A numbers operation is essentially a betting game in which an individual (bettor) bets money on a number, usually a three-digit number. During 1970, Washington, D.C. numbers operations were run in the following manner: Numbers operators chose the winning numbers based on the pari-mutuel payoffs on three different horse races at local race tracks. The results of each race supplied a different digit constituting the three-digit number. Bettors commonly knew which races were used for this purpose. Because of its accuracy, a periodical commonly called an "Armstrong Scratch Sheet" (which listed the pari-mutuel) payoffs at various racetracks around the country) was read by numbers operators as well as the betting public to determine the winning numbers. These winning numbers could range between 000 and 999 inclusive so that the odds of correctly selecting the winning number were one in 1,000. A new winning number was chosen each day except for Sunday when no number was chosen.
Bettors placed their wagers with writers who wrote down the number bet and generally received the amount bet immediately in cash. The amount wagered most commonly ranged between $0.25 and $1 with bets as large as $10 being quite rare. Sometimes the bettor would place a "keep in" bet. This meant that an amount was to be bet on a number for several consecutive days. Numbers writers, after collecting several bets, transmitted the numbers and amounts bet thereon to the office of a numbers backer. This information would be transmitted either by telephone or through a runner employed by the numbers backer. At the office, employees of the backer wrote down the bets submitted by the writers usually using code names for each writer. It was their duty to tabulate the amount of bets each writer took in, the numbers bet and the total amount bet on each number. Frequently the amount bet by various bettors on a single number would be so large the backer would be faced with a significant loss should it be the winning number for the day. To insure against such loss, the backer would "lay off" part of that amount with another person commonly called a lay off operator. If the number so laid off won, the lay off operator paid at odds of 850 to 1 enabling the backer to pay the individual bettors without an overall loss. If the number laid off did not win, the backer paid the lay off operator the amount laid off. Lay off operators took lay off bets through an office which functioned similarly to that run by backers.
The amount received by a winning bettor varied depending upon the number bet. For most numbers, he was paid $600 for each dollar bet. This constitutes real odds of 599 to 1. But, because some numbers tend to be bet by the public more often than others, the amount paid on about one-third of the numbers was only $400 for each dollar bet or sometimes even less. These were called "cut numbers." Persons involved in running gambling operations commonly carried cards referred to as "cut cards" listing these cut numbers. Because of such numbers, only 52 to 54 percent of the gross amount of money bet was repaid to winning bettors.
Numbers writers retained the money given them by bettors until after the winning number for the day had been determined. Then they determined whether any of the bets placed with them had won, and if so, they normally paid the winners from the proceeds of the bets collected. If these proceeds proved insufficient, the backer supplied the necessary funds. Writers received a commission for their activities amounting to 30 percent of the bets placed with them. They were required to pay their backers the gross amount of money bet with them less their 30 percent commission and less "hits" (amounts paid out for winning numbers). Normally writers paid the amount owed their backers on a weekly basis. However, some writers were required to settle accounts in cash on a more frequent basis.
Lay off operators tended to be individuals possessing experience in the numbers business, and frequently also operated as backers for various writers. They functioned in a capacity similar to that of a reinsurer for backers. Their profit ratio before expenses amounted to 15 percent of the gross amount laid off. They normally settled with backers on a weekly basis, although sometimes balances were carried a bit longer because of the greater certainty of collection. Office personnel and others employed by backers and lay off operators worked for them on a salary basis. The extent to which backers and lay off operators actively directed the day to day functions of their office personnel varied greatly. In some cases their contact with the office was relatively infrequent.
Throughout the 1960's and 1970, numbers operations were illegal under various Washington, D.C. statutes. Income from such operations most often took the form of cash.
In 1957 Yvonne and Simkins were audited with respect to their joint Federal income tax returns for the years 1953 through 1956, inclusive. At this time, Yvonne first employed Leon Bookman (Bookman) to represent them during the audit. Bookman was and is a certified public accountant. The 1957 audit was settled by the adoption of a gross receipts and gross expenditure method. By this method, estimated cash living expenses were added to taxable gross receipts to determine taxable income. From this figure, allowable deductions were taken to arrive at net taxable income. This method resulted in a net increase in tax liability for the 4-year period of $3,136.11. This was based on an agreement as to net income in the following amounts for the following years:
Year Net Income
1953 ............. $15,590.43
1954 ............. 28,868.94
1955 ............. 18,874.06
1956 ............. 19,583.39
Thereafter, Bookman was employed to prepare petitioners' joint Federal income tax returns for the years 1957 through 1970, inclusive. He consistently prepared these returns on the same basis used to settle the 1957 audit. In preparing these returns, he dealt exclusively with Yvonne, and received all his information from her. Net gambling income (from illegal numbers activities) was determined in the following manner: After discussing with Yvonne cash payments made during the year, Bookman attempted to ascertain petitioners' additional living expenses based on the formula used during the 1957 audit. The amount of additional living expenses paid in cash as thus computed was assumed to equal Simkins' net gambling income. This income was then combined with rental income, and the sum was listed on Schedule C of their Federal income tax returns. Gross gambling income, gambling expenses, and other gambling related deductions were never listed on the returns, nor was Schedule C income ever segregated so that the amount of reported income attributable to Simkins' numbers activities, as distinguished from that due to rentals, could be determined. By contrast, legal gambling income was reported in 1970 on line 39 of Form 1040 where it was designated "Race Track Winnings Hialeah."
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