Sinkler v. Commissioner
| Decision Date | 05 April 1977 |
| Docket Number | Docket No. 9680-74. |
| Citation | 1977 TC Memo 98,36 TCM (CCH) 440 |
| Parties | John W. Singleton, a/k/a John Westly, a/k/a John Sinkler v. Commissioner. |
| Court | U.S. Tax Court |
Laurence Goldfein, 1301 Avenue of the Americas, New York, N.Y. Ira L. Tilzer and Richard A. Levine, for the petitioner. Michael K. Phalin, for the respondent.
Memorandum Findings of Fact and Opinion
The Commissioner determined the following deficiencies in petitioner's Federal income tax and additions to tax as follows:
Additions to Tax
Year Deficiency Section 6653(b)1
1969 ........ $20,554.10 $10,277.05
1970 ........ 11,506.63 5,753.32
1971 ........ 6,624.07 3,312.04
1972 ........ 56,999.56 28,499.78
The facts resulting in the initiation of the tax investigation of petitioner are set forth in detail in John W. Singleton Dec. 33,720, 65 T.C. 1123 (1976). As a result of the concessions by respondent of errors in his computation under the expenditures method of proof, a partial abatement of amounts seized pursuant to a jeopardy assessment of August 9, 1974, has been made. The following issues are presented for decision:
(1) Whether respondent may use an indirect method of proof to establish petitioner's income under the facts of this case;
(2) Whether respondent must establish petitioner's net worth at the beginning and end of each taxable year in order to utilize the expenditures method of proof;
(3) Whether petitioner understated his taxable income for the years 1969 through 1972; and, if so,
(4) Whether any part of the underpayment in income tax was due to fraud.
Some of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated by this reference.
Petitioner John W. Singleton (hereinafter petitioner) resided in Englewood, New Jersey, at the time he filed his petition in this proceeding. Petitioner timely filed Federal income tax returns for the taxable years 1969 through 1972 with the following Internal Revenue Service Centers:
Year Service Center
1969 ......... Andover, Massachusetts
1970 ......... Andover, Massachusetts
1971 ......... Philadelphia, Pennsvlvania
1972 ......... Holtsville, New York
Petitioner was born in South Carolina and first attended school at the age of ten. He completed only four years of primary education and has limited reading ability. During the taxable years 1969 through 1972 and for many years prior thereto, petitioner was engaged in the bar and restaurant business in New York City. During the years in question, an office was maintained by petitioner at 1732 Amsterdam Avenue in New York City.
Prior to 1969 petitioner accumulated substantial assets. On June 25, 1963, petitioner purchased a home for $55,000 which was located at 488 North Woodland Street, Englewood, New Jersey, wherein he resided at the time he filed his petition in this case. He purchased a new 1968 Lincoln Continental Mark III on April 29, 1968, at a cost of $8,545. Petitioner owned real estate in New York City directly and through corporations and owned stock in National Investors Corp., Fund of America, and Freedom National Bank. He also maintained bank accounts at Chemical Bank, Freedom National Bank, Carver Federal Savings and Loan Association, First Federal Savings and Loan Association of Greenville, North Carolina, the Bank of Orangeburg, and Bowery Savings Bank.
On October 9, 1962, petitioner acquired a safe deposit box at Chemical Bank in New York City. On January 31, 1969, he exchanged that safe deposit box for a larger one.
On May 13, 1968, petitioner borrowed $5,000 from New Jersey Bank. The check issued by the bank was subsequently cashed by petitioner at Freedom National Bank. On May 23, 1968, petitioner borrowed $25,000 from Freedom National Bank which he used to pay an income tax deficiency of $25,790.25 assessed against him by the Internal Revenue Service for the taxable year 1961. Prior to the payment of the deficiency, petitioner discussed with Morris Butcher, his accountant, whether his mutual funds should be sold to pay the deficiency. Mr. Butcher advised him to borrow the money from a bank instead of selling the mutual funds.
In 1965 William Beck and Son of Englewood, New Jersey, began servicing the heating and air conditioning system in petitioner's home. On May 16, 1968, Irving Tschupp, an employee of William Beck and Son, went to petitioner's home to do a routine summer servicing of petitioner's air conditioning system. When he removed the panel covering the air conditioning system, a canvas bag, which was approximately 12 to 18 inches wide and 18 to 24 inches high and was of the type used by banks, fell out of the air conditioning unit onto petitioner's basement floor. When the bag hit the floor, six to ten bundles of currency fell out of it. The bundles were tied with strings or rubberbands. Mr. Tschupp only saw those bills on the top of each bundle. The denominations seen ranged from one dollar bills to one hundred dollar bills. Mr. Tschupp immediately placed the money back into the bag. He could see other bundles of currency in the bag when he opened it to replace the bundles that had fallen out, After the money had been returned to the bag, it was approximately one-fourth to three-eighths full. Mr. Tschupp then put the bag in the portion of the air conditioning unit from which it had fallen, replaced the panel and notified his employer, Robert Beck, of the discovery. Mr. Beck went to petitioner's home and waited for him to return and verify that the money was still intact. Petitioner returned about lunchtime.
Later that day, petitioner and his friend Ernest Gadson traveled to the home of petitioner's brother-in-law, James (Pete) Hagens, in Greenville, North Carolina, taking with them a canvas bag filled with money which was placed in the trunk of the car. The next day, Friday, May 17, 1968, petitioner opened a savings account with $5,000 in cash at the First Federal Savings and Loan Association in Greenville, North Carolina, where Mr. Hagens was employed. On the same day he lent Mr. Hagens $1,000 in cash which was taken from the canvas bag in the trunk of petitioner's car and consisted of ten and twenty dollar bills tied in a bundle with string. At the time the money was given to Mr. Hagens, he saw other bundles of currency neatly placed in the bag. Two days later, petitioner and Mr. Gadson drove to St. Matthews, South Carolina, taking with them the bag of currency. On May 20, 1968, petitioner acquired a safe deposit box at the Bank of Orangeburg in St. Matthews and opened a joint savings account at that bank with his mother, depositing in that account the sum of $3,000. The bag was not in the trunk when petitioner and Mr. Gadson left St. Matthews.
On July 7, 1969, petitioner purchased land in St. Matthews, South Carolina, for $2,000. On the same day he visited his safe deposit box maintained in St. Matthews. On August 19, 1969, petitioner deposited $6,000 in cash with Smoak Construction Co. in St. Matthews for the construction of a house on the land he had purchased on July 7, 1969. The money was in neat packages of $1,000 and was taken from petitioner's briefcase. At 12:15 p.m. that same day, petitioner visited his safe deposit box. On January 6, 1970, petitioner paid $9,472 in cash to Smoak Construction Co. for the house and $900 in cash to Grubbs Furniture Co. in St. Matthews. The safe deposit box maintained by petitioner in St. Matthews was visited by him at 10:00 a.m. that same day.
Petitioner sold 374 shares of common stock of Freedom National Bank for $7,234.60 on October 29, 1968. The check issued in payment of the shares was endorsed by petitioner to Ralph Sharpe, a representative of Investors Planning Corp., to be invested in shares of Comstock Fund. Mr. Sharpe never invested the money for petitioner in those shares. In 1969 petitioner attempted to recover his money by having a letter sent to Investors Planning Corp. In 1970 Gerard Zwirn, petitioner's attorney, was able to obtain $1,000 in partial payment from Mr. Sharpe which he deposited in escrow. Pursuant to the agreement between Mr. Sharpe and Mr. Zwirn, Mr. Sharpe was to pay petitioner $1,000 each month until the full amount was returned. When the second payment was not received, Mr. Zwirn contacted Mr. Sharpe who told him that the additional amounts would be sent. After a period of time, Mr. Sharpe could no longer be contacted. The money placed in escrow was returned to petitioner in 1971 or 1972. On December 10, 1970, Mr. Zwirn instituted a suit against Ralph Sharpe, Investors Planning Corp., and its successor, Equity Funding Corp., to recover petitioner's money. Mr. Sharpe could not be found and was never served. In June 1972, Mr. Zwirn filed a note of issue which is an announcement of readiness for trial. Equity Funding Corp. was declared bankrupt and Mr. Zwirn was enjoined in 1973 from continuing the lawsuit against it. With the exception of the $1,000 obtained from Mr. Sharpe in 1970, petitioner has recovered nothing further from Mr. Sharpe.
On June 7, 1968, petitioner submitted a statement of finances to the State of New York Liquor Authority on which he listed cash assets of $5,188.88, all of which was on deposit in bank accounts. The financial statements did not make any reference to petitioner's home, the automobile purchased by him on April 29, 1968, his mutual funds, or his common stock in Freedom National Bank. A financial statement as of August 1, 1969, submitted to Freedom National Bank listed total assets of petitioner of $155,765. Of this amount, only $4,000 represented cash on hand and in banks. The statement was not signed by petitioner and did not reflect the ownership of his residence.
During all or some portion of the period extending from 1969 through 1972, petitioner operated or performed...
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