Williams v. C.I.R., 031792 FEDTAX, 28141-87

Docket Nº:28141-87, 28142-87.
Opinion Judge:HALPERN, JUDGE:
Party Name:MELVIN WILLIAMS AND MARY WILLIAMS Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent MELVIN WILLIAMS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Joseph L. Gibson, Jr., for petitioners. David E. Gaston and Mary Corrigan Gorman, for respondent.
Case Date:March 17, 1992
Court:United States Tax Court
 
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63 T.C.M. (CCH) 2396

MELVIN WILLIAMS AND MARY WILLIAMS Petitioners,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

MELVIN WILLIAMS, Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Nos. 28141-87, 28142-87.

United States Tax Court

March 17, 1992

         1. HELD: Respondent's notices of deficiency, determining, by a source and application of funds analysis, that petitioners had unreported income, from petitioner Melvin Williams' narcotics distribution activities, is sustained due to petitioners' failure to carry their burden of proof. HELD, FURTHER, petitioners failed to carry their burden of proof respecting an alleged cash hoard.

         2. HELD, FURTHER, respondent substantially carried her burden of proof respecting the increased deficiencies asserted in her amended answer.

         3. HELD, FURTHER, petitioners are liable for the additions to tax for fraud under sec. 6653(b)(1).

         4. HELD, FURTHER, to the extent we have determined there to be underpayments of tax, such underpayments are, in their entirety, attributable to fraud and, therefore, the additions to tax under sec. fraud and, therefore, the additions to tax under sec. 6653(b)(2) shall apply to such underpayments of tax in their entirety.

         5. HELD, FURTHER, petitioners are liable for the additions to tax under sec. 6661.

          Joseph L. Gibson, Jr., for petitioners.

          David E. Gaston and Mary Corrigan Gorman, for respondent.

          MEMORANDUM OPINION

          HALPERN, JUDGE:

         Respondent, in two notices of deficiency, determined income tax deficiencies and additions to tax with respect to petitioner Melvin Williams' 1980 and 1984 taxable years, and 'petitioners Melvin and Mary Williams' 1981, 1982, and 1983 taxable years, for which they filed joint returns, as follows:

Additions to Tax
Sec. Sec.
Year Deficiency 6653(b)(1) 1 6653(b)(2) 6661
1980 $ 6,075.49 $ 3,037.49 -- --
1981 70,410.73 36,098.36 -- --
1982 58,258.27 29,129.13 50% of the $14,654.57
interest due
on $58,258.27
1983 114,944.19 57,472.10 50% of the 28,736.05
interest due
on $114,944.19
1984 126,565.53 63,282.76 50% of the 31,641.38
interest due
on $126,565.53
         Unless otherwise noted, all section references are to the Internal Revenue Code of 1954 as amended and in effect for the years in issue and all Rule references are to the Tax Court Rules of Practice and Procedure.          In her amended answer, respondent asserted increased deficiencies of $20,763.27 for 1980, $20,980.25 for 1981, $3,975.25 for 1982, $8,560.66 for 1983, and $45,968.10 for 1984, plus additions to tax. After concessions and other recomputations, the total deficiencies and additions to tax at issue are as follows:
Additions to Tax
Year Deficiency Sec. 6653(b)(1) 1 Sec. 6653(b)(2) Sec. 6661
1980 $ 21,215 $10,608 -- --
1981 75,466 37,733 -- --
1982 50,337 25,169 50% of the $12,584
interest due
$50,337
1983 130,657 65,329 50% of the 32,664
interest due
on $130,657
1984 115,143 57,572 50% of the 28,786
interest due
on $115,143
         The deficiencies and additions to tax are based upon respondent's determination, using the " source of income and application of funds" method (source and application of funds method) of reconstructing income, that petitioner (or petitioners) underreported income as follows:
Table 1 - Unreported Income
1980 1981 1982 1983 1984
$45,570.63 $157,608.73 $110,056.39 $270,751.58 $232,193.12
         Respondent constructed tables of source funds per return, applications per return, additional source funds, and additional applications of funds. Consolidating respondent's tables somewhat, the following tables demonstrate how the above understatements were determined:
Table 2--Source of Funds
1980 1981 1982 1983 1984
Salaries
Melvin Williams $8,075.60 -- -- -- $30,000.00
Mary Williams 6,957.00 -- -- -- 4,869.00
Melvin & Mary
Williams -- $15,613.65 $20,271.00 $30,674.00 --
Net rental income -- 1,190.09 -- -- --
Depreciation 1 541.67 1,011.85 -- -- --
Interest Income -- -- -- -- 515.00
Chance winnings -- -- 10,000.00 35,000.00 80,000.00
Additional income
on amended 1040 -- -- 15,000.00 -- --
Insurance claim 25.00 -- -- -- --
Fed tax refund
Melvin Williams -- 15.45 -- -- --
Mary Williams -- 497.00 -- -- --
Melvin and Mary
Williams 565.39 -- 963.14 -- 574.15
State tax refund
Mary Williams -- 150.09 -- -- --
Melvin Williams -- 46.88 -- -- --
Melvin & Mary
Williams 241.22 -- 74.20 154.00 --
Birthday present 20.00 -- -- -- --
Loan proceeds 10,000.00 -- -- 15,985.00 --
Insurance -- 2,000.00 -- 2,500.00 --
-- 2,039.46 -- 25,469.75 --
-- 482.90 -- -- --
-- 122.76 -- -- --
Social security
death benefit -- 323.50 -- -- --
Sale of Cadillac -- 10,000.00 -- -- --
Decrease in credit
union account
(withdrawals) -- -- -- -- 3,609.13
Additional sources
funds credited
by resp. -- -- 11.00 -- --
Total sources $26,425.88 $33,493.63 $46,319.34 $109,782.75 $119,567.28
Table 3 - Application of Funds
1980 1981 1982 1983 1984
Applications
per return $ 5,218.79 $ 14,712.63 $ 8,514.49 $ 19,332.47 $ 12,547.65
Losses 1,344.40 -- -- -- --
Increase in
credit
union
account
(deposits) 690.62 350.55 1,278.93 1,617.04 --
Personal Living
Expenses 19,852.00 57,952.00 34,428.00 8,322.00 8,322.00
Mitchell
Properties
fee -- -- -- 83,000.00 --
Cash seized
from residence -- -- -- -- 29,874.76
Cash seized
in drug purchase -- -- -- -- 100,000.00
Cash downpayment
on Maserati -- -- 10,000.00 --
Jewelry purchases 290.00 1,560.25 7,687.52 7,687.52 64,403.76
Fur purchases -- -- 5,000.00 5,000.00 9,300.00
Park Avenue
improvements -- 1,000.00 19,666.67 22,475.42 16,857.92
Park Avenue
furniture -- -- -- 6,850.00 6,850.00
Investment in
Progressive -- 17,100.00 -- -- --
Motor Vehicle
accessories -- -- -- 1,000.00 1,462.09
Mortgage Payments 4,054.86 2,187.01 -- -- --
Forest Hills
State Bank 2,674.60 341.00 -- -- 1,129.52
Bel Air
Auto Mart 22,429.09 31,672.80 20,000.00 81,469.16 48,012.00
Scrapp 10,538.09 53,709.41 48,721.07 110,180.86 3,327.17
Personal
expenditures 4,904.06 10,516.71 10,079.05 23,599.86 49,673.53
Total
expenditures $71,996.51 $191,102.36 $156,375.73 $380,534.33 $351,760.40
Table 4--Source and Application of Funds
1980 1981 1982 1983 1984
Total Sources
of funds $26,425.88 $ 33,493.63 $ 46,319.34 $109,782.75 $119,567.28
Total Applications
of funds 71,996.51 191,102.36 156,375.73 380,534.33 351,760.40
Understatement
of income $45,570.63 $157,608.73 $110,056.39 $270,751.58 $232,193.12
       The issues for decision are: (1) Whether petitioners had unreported income during the years in question; and (2) whether petitioners are liable for the additions to tax.        Some facts have been stipulated and are so found. The stipulations of facts filed by the parties and accompanying exhibits are incorporated by this reference. Petitioner Melvin Williams was an inmate in the Federal Penitentiary, Lewisburg, Pennsylvania, when he filed his petitions in this case. Petitioner Mary Williams resided in Baltimore, Maryland, when she filed her petition in this case.        BACKGROUND        On December 5, 1984, a task force comprised of agents from the Drug Enforcement Agency (DEA), Internal Revenue Service (IRS) and Baltimore City Police Department (BCPD) seized various documents from petitioners' home, pursuant to a search warrant. The warrant directed the seizure of such documents in connection with an investigation of a possible violation of Title 21 of the United States Code, which in part deals with unlawful drugs. The Government also seized relevant documents from third parties in connection with this investigation. In substantial part, based on such documents, respondent determined the deficiencies and additions to tax outlined above.        Respondent's position is that petitioner Melvin Williams ran an illegal narcotics distribution organization and that petitioners received substantial unreported income therefrom. Among other things, respondent offers evidence of (1) the books and records of an automobile dealership -- the Bel Air Auto Mart (the Auto Mart), showing substantial payments made by petitioners; (2) third party statements of account and other documents showing payments made by petitioners' corporation, Scrapp-Investment, Inc. (Scrapp), greatly in excess of Scrapp's known sources of funds; and (3) third party statements of account, other third party documents, and petitioners' own documents, showing payments made by petitioners to third parties. Respondent argues that those payments, being in excess of petitioners' known sources of funds, imply a taxable source and, consequently, an underpayment of tax.        Respondent further argues (1) that petitioners concealed assets by placing them in Scrapp; (2) that petitioners concealed income by paying bills through the Auto Mart; and (3) that those actions were part of an overall scheme to conceal petitioners assets and income and thereby fraudulently avoid payment of the income tax.        I. UNREPORTED INCOME        A. INTRODUCTION        A taxpayer is required to keep sufficient records to enable respondent...

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