Sporck v. Commissioner
| Decision Date | 27 February 1978 |
| Docket Number | Docket No. 3087-75. |
| Citation | 37 TCM (CCH) 378,1978 TC Memo 79 |
| Parties | William Sporck and Joyce Sporck v. Commissioner. |
| Court | U.S. Tax Court |
Irving Bell, Citizen Bldg., Cleveland, Ohio, for the petitioners. John P. Graham, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in income tax and additions to tax as follows:
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Additions to tax
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William Sporck2
Year Income tax Sec. 6654(a)1 Sec. 6653(b)
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1967 ................. $5,762.07 $11.48 $2,881.04
1968 ................. 7,974.49 — 3,987.25
1969 ................. 5,664.68 43.80 3,562.16
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The issues for decision are:
(1) Whether petitioners understated their taxable income during the years in issue, as determined by respondent, using the net worth method of reconstructing income.
(2) Whether any portion of the underpayment in tax was due to fraud on the part of William Sporck.
(3) Whether the statute of limitations bars assessment and collection of the deficiencies.
Some of the facts have been stipulated and are found accordingly. The stipulations of facts, together with the exhibits attached thereto, are incorporated herein by this reference.
Petitioners, William and Joyce Sporck (hereinafter William and Joyce), are husband and wife and resided in Bedford, Ohio, at the time of filing the petition herein. They filed joint tax returns for the years under consideration with the Internal Revenue Service Center, Cincinnati, Ohio.
After graduating from high school, William served in the Navy from 1957 to June 1960. He was first assigned to San Diego, California, where he attended medical corpsman school. He was then assigned to the Naval Hospital at Philadelphia, Pennsylvania, and then to the Finance Center at Cleveland, Ohio, and subsequently was reassigned to the Philadelphia Naval Hospital.
Upon his discharge from the Navy, William returned to his former job as a stock boy for an A & P grocery store. In September 1960, he married Joyce. While they both worked, he attended college and then beautician school in the evenings. They lived in a trailer which Joyce's grandfather gave them.
In 1963, William opened a beauty salon, Fountain of Fashion, which he operated as a sole proprietorship. During the latter part of 1969, William formed two partnerships, each with another person, to operate two additional beauty shops.
William employed Robert Mildenberger, a licensed public accountant, from 1963 to 1973 to prepare his income tax returns. Mildenberger did not audit William's books but relied on figures furnished by William for income and used check stubs and cash invoices to determine expenditures. He did not ask, and was not given an opportunity, to examine the cash register tapes, which were destroyed sometime prior to respondent's investigation. In 1967, 1968, and 1969, total expenditures and withdrawals exceeded business receipts, according to Mildenberger's records. When asked about this situation, William had no explanation for his accountant. Mildenberger made adjusting entries in the ledgers to reflect the excess withdrawals.
On August 2, 1966, petitioners purchased a two-family house and land located at 1 Elm Street, Bedford, Ohio. To finance this purchase, they applied for a loan to Third Federal Savings and Loan Association, Cleveland, Ohio. Their application stated that the beauty shop was worth about $30,000 and that they had paid $30,000 for equipment over three years. It also stated that William drew $300 a week and Joyce drew $175 a week in salaries. They asserted that they had $5,900 in bank accounts and no cash on hand.
In April 1968, William filed an application for a loan to finance the purchase of rental property at 157 Paul Street, Bedford, Ohio. On this application, he stated that his salary from Fountain of Fashion was $16,000 a year and that he had received rental income of $1,440 in the previous year.
Joyce's mother, Eleanore Fleischer, lent her $6,000 in connection with the purchase of property at 193 Columbus Road, Bedford, Ohio, on September 19, 1969. Joyce and her mother each purchased a one-half interest in that property for $13,750.
William filed property tax returns with Cuyahoga County and the State of Ohio for the years 1964 through 1969. None of these returns reported cash on hand.
In 1969, William received $2,100 from the Ohio Bell Telephone Company in settlement of his claim for damages caused to his business when the telephone company erroneously assigned the same number to his beauty salon and to a pizza parlor.
Respondent began his investigation of petitioners in June 1970 and one of his auditors interviewed William and his accountant in the fall of 1970. The auditor assigned to the case died and it was reassigned in June 1971 to a field audit agent. After examining the files, he referred the case to the Intelligence Division because of indications of tax evasion. The case was then assigned to a special agent, who approached William at his place of business in July 1971. Because William expressed a desire to consult his accountant prior to being interviewed by the special agent, a meeting was set for August 2, 1971, with the agent at the office of William's accountant. At that meeting, the method of handling business receipts in William's business was discussed. At a subsequent meeting on September 7, 1971, William and his accountant were shown a net worth computation prepared by respondent's agents which reflected substantial understatements of income for each of the years 1967, 1968, and 1969; the computation included $50 cash on hand in respect of each year. After reviewing the computation with his accountant, William stated at the meeting that it was substantially correct and offered no explanation for the understatements of income. Over a month later, William arranged a meeting with the special agent, at which he told him that when he was discharged from the Navy in 1960 he had a cash hoard of almost $38,000, which he had obtained by loaning money to others at interest rates of 50 percent to 100 percent.
The computation of petitioners' increase in net worth and their understatement of adjusted gross income is as follows:
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