ZOUGANILES v. Commissioner, Docket No. 59439
| Decision Date | 27 January 1960 |
| Docket Number | 59440.,Docket No. 59439 |
| Citation | 1960 TC Memo 5,19 TCM (CCH) 13 |
| Parties | George D. Zouganiles, Petitioner, v. Commissioner. George D. Zouganiles and Estate of Eva T. Zouganiles, Deceased, Walter Melrose, Administrator v. Commissioner. |
| Court | U.S. Tax Court |
J. E. Simpson, Esq., Title Insurance Building, Los Angeles, Calif., for the petitioners. Earl C. Crouter, Esq., and Cyrus A. Johnson, Esq., for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in the income tax and additions to tax of George D. Zouganiles and Eva T. Zouganiles as follows:
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Addition to Tax
Year Deficiency Section 293(b)
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Docket No. 59439
George D. Zouganiles........ 1947 $ 1,502.50 $ 608.55
Docket No. 59440
George D. Zouganiles........ 1949 12,519.92 6,259.96
and Eva T. Zouganiles....... 1950 6,682.22 3,341.11
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The following issues are presented for decision:
1. Whether respondent properly resorted to and applied the net worth method in determining the net income of the petitioners for each of the years 1947, 1949, and 1950.
2. Whether any part of the deficiency for each of the years in issue was due to fraud with intent to evade tax.
3. Whether the assessment and collection of the deficiencies and additions to tax for each of the years 1947 and 1949 are barred by limitations.
During the years in issue George D. Zouganiles and Eva T. Zouganiles were husband and wife, residing in the State of California. Eva died on January 11, 1955, and Walter Melrose is the duly appointed administrator of her estate. Her estate is involved herein only because of certain income tax returns which Eva filed jointly with George. For the taxable year 1947, George timely filed an individual income tax return with the collector of internal revenue for the sixth district of California. George subsequently filed an amended individual income tax return for the year 1947. For each of the taxable years 1949 and 1950, George and Eva filed joint income tax returns with said collector. The returns for the years 1947 and 1949 were filed on or before March 15, 1948, and March 15, 1950, respectively. The deficiency notices here involved were mailed on or after June 15, 1955.
George was born in Greece and came to the United States as a small boy. During his youth he became a naturalized citizen of the United States. He has had no formal education in this country. During his adult life he has been a professional gambler. Prior to 1935 he worked in Florida and his wife worked as a night club entertainer. About 1936 they moved to Palm Springs, California, and commenced working in a gambling establishment located there. When he moved to California, George brought with him approximately $30,000. During the years 1937 to 1940, inclusive, George worked in a gambling establishment in Palm Springs at a salary of $200 to $250 per week, plus additional amounts which were sometimes paid him of approximately $50 to $100.
During the years 1941 to 1950, inclusive, George engaged in his own business as a bookmaker, accepting bets on the results of horse races. During the year 1947, he conducted his bookmaking operation in the back room of a store in Cathedral City, California, which is located about six miles from Palm Springs. After 1947, when the action of local law enforcement officers began to curtail gambling operations, George intermittently changed the site of his book-making business to the Athens Hotel in Palm Springs. Whether he conducted his business in Cathedral City or Palm Springs depended upon the extent to which local law enforcement officers curtailed his business operation. In addition to the book-making operation at Cathedral City, George offered gambling in the form of dice and card games.
During the period in issue, George leased and operated the Athens Hotel in Palm Springs, California, which had approximately eight rental rooms.
In December 1948, George became interested in a gambling establishment known as the North Shore Club which was located at Crystal Bay, Lake Tahoe, Nevada. He decided to buy a one-fifth interest in a partnership that was being formed to operate the North Shore Club. George borrowed $10,000 from the Bank of America on December 10, 1948. On May 19, 1949, he deposited $10,000 in the bank account of the North Shore Club.
Albert Ligier, who managed George's horse book operation, kept books of account relating to the operation of his bookmaking business. All daily records of gambling transactions were destroyed to minimize evidence of gambling and avoid detection by law enforcement officers. Ligier prepared the records of the Athens Hotel from information submitted to him by George. He did not keep any records of card or dice games conducted by George, but in 1947 George told him that he had won $2,120 at cards, which Ligier entered on the records kept for that year. Ligier kept no record of the North Shore Club operation. Ligier made monthly summaries of the daily records kept by him and delivered them to a "tax consultant" for use in the preparation of George's income tax returns.
In carrying on the bookmaking business it was necessary that a sizeable amount of cash or "bankroll" be kept on hand to cover all wagering payments. George's bookmaking business had its highest activity during the racing season at the Santa Anita track, which opened during the week between Christmas and New Year's during the period in issue. During this period it was necessary to carry a larger bankroll to cover the increased wagering activity. On January 1, 1947, and December 31 of each of the years 1947 to 1950, inclusive, George's bankroll amounted to $15,000.
In 1947, George purchased stock in Palm Spring Heights, Inc., at a cost of $7,500. In 1948, he obtained a loan from Walter Melrose in the amount of $7,500 and endorsed and delivered such stock to Melrose as security for such loan. George did not repay the loan during the period in issue.
In 1950, George invested $2,500 in a concern known as Pan American Chemicals Company.
During the summers of 1949 and 1950, when the North Shore Club was operating at Lake Tahoe, George worked at the club. He rented a cottage near Lake Tahoe for use as his lodging while working at the club. The rental costs of such cottage which were incurred by George amounted to $1,050 and $1,000 for the years 1949 and 1950, respectively.
George expended $396.50 and $351.99 during the years 1949 and 1950 for liquor, candy and food, some of which was given to local law enforcement officers. Of such amounts expended, he gave as Christmas presents to his customers items having a cost of $200 and $175 in the years 1949 and 1950, respectively.
The tax returns as prepared for George and accounting records maintained by him disclose the total amounts of bets placed by bettors with George, the amounts paid to customers, and the net receipts, as follows:
Net (After
Total Paid Bets and
Total Bets Customers Expenses)
1947..... $1,135,251.00 $1,057,740.05 $20,688.84
1949..... 979,208.25 925,718.12 17,149.94
1950..... 1,199,500.00 1,105,293.02 31,520.66
The above amounts include the sum of $2,120 as having been won from operating a "21" game for a few weeks in 1947 and $1,816 as the net amount won from operating "smokers" in 1950. The tax returns filed for said years also disclose the receipts and disbursements as reported by George from the operation of the Athens Hotel.
After George filed his amended return for 1947, an internal revenue agent audited the income tax returns filed by petitioner for that year. The agent accepted the amount George reported as income and expenses from his gambling operation and made no attempt to verify the accuracy of such figures. After the agent's examination, respondent issued a certificate of overassessment for the year 1947 in the amount of $1,073.91.
On April 10, 1952, respondent's agent Walton was assigned to the investigation of George's income tax returns for the years in issue. He spent 2,048 hours on the investigation from April 10, 1952 to October 15, 1954. Special agent Seay was assigned to the investigation from May 8, 1953 to June 6, 1956. Respondent's agents computed George's net worth during the years in issue by reference to his tax returns, financial statements submitted to banks by George, bank records, records maintained by George and affidavits and invoices from merchants and others dealing with him. The following net worth computation takes into account the adjustments to respondent's computation made necessary by our findings and correctly reflects George's net income and net income reported by him during the years in issue.
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