Davidson v. Commissioner

*342 The respondent has determined deficiencies in income tax and fraud penalties as follows:

*1519 The basis for the respondent's determinations is that petitioner was engaged in an illegal liquor business during the taxable years and that he failed to report in his income tax returns substantial amounts of income received therefrom. The petitioner contends that the statute of limitations against the assessment and collection of the deficiencies had run prior to the mailing by the respondent of his notice of deficiencies and further that he did not receive income in the amounts and of the character determined by the respondent. The respondent by affirmative allegations claims that the statute of limitations has not run for the reason that the returns filed by petitioner were false and fraudulent, with intent to evade tax.

FINDINGS OF FACT.

Since about 1930 the petitioner has been a resident of the State of Texas. For a number of years prior thereto and during the taxable years he was a resident of San Francisco, California. He filed income tax returns for each of the taxable years with the collector *343 at San Francisco, reporting income received from an ice manufacturing business in Amarillo, Texas, and certain rents and royalties received from properties in*1520 California. He did not report any items of income or claim any deductions with respect to the liquor business above referred to.

From about 1913 until the adoption of the prohibition amendment in 1919 petitioner was engaged in the wholesale beer business in San Francisco, operating under the firm name of "Blue Ribbon Beer Company." During the last few years of that period he was also engaged in the wholesale whiskey business. Upon the advent of prohibition he held a large stock of liquor which was shipped to Canada and disposed of prior to the taxable years.

In the latter part of 1921 the petitioner purchased 15,000 cases of American bourbon whiskey from King & Ramsey, London, England. Shortly thereafter he met Robert T. Colquhoun, who was associated with a concern known as Lloyd & Son, Ltd., established liquor dealers in Vancouver, British Columbia. Petitioner told Colquhoun that he had purchased 15,000 cases of whiskey and was desirous of obtaining a storage and shipping point in Canada. After negotiations Colquhoun, or the firm which he represented, undertook the handling and selling of the whiskey. In general, it was agreed that petitioner would finance the deal and*1521 Colquhoun would manage operations. Some of the whiskey arrived in Vancouver in December 1921 and the remainder in the first part of 1922. Petitioner financed the purchase by a loan from the Wells Fargo Bank & Union Trust Co. of San Francisco, sometimes referred to hereinafter as the Wells Fargo Bank. The bank accepted bills of lading and warehouse receipts as security for the loan, which was to be repaid as the liquor was sold.

In May 1922 Colquhoun wrote to petitioner, outlining his understanding of the terms of their oral agreement, which among other things provided that in handling the liquor the firm would receive a monthly fee of $150 for storage; that it would have the goods fully covered by insurance, the cost of which was to be paid by petitioner; that a commission of $2 per case was to be allowed for wharfage, cartage, etc.; that in selling the whiskey the base price to be used was $15 per case and the profits from sales over and above that base price would be divided equally, one-half to Lloyd & Son, Ltd., and one-half to petitioner; and that if the whiskey had to be rebottled and relabeled the cost thereof was to be added to the base price of $15.

After arrangements*1522 were made the whiskey was shipped by means of two boats from Vancouver to certain points 25 or 30 miles off the California coast, where the boats were anchored. Colquhoun, or his agents, sold the liquor in small lots to bootleggers and upon *344 payment of the purchase price the bootleggers received a receipt or delivery order on the captain of one of the ships. In conformity with his agreement with petitioner, Colquhoun would retain a portion of the proceeds from such sales to cover expenses and his share of the profits and would deliver the remainder to the petitioner or his agents.

In the fall of 1923 petitioner made a trip to Scotland where he purchased 15,000 cases of Bulloch & Lade Scotch whiskey. That whiskey was also shipped to Vancouver and sold by petitioner and Colquhoun under arrangements the same as or similar to those under which they disposed of the bourbon whiskey above mentioned. This purchase was also financed at least in part by a loan obtained by petitioner from the Wells Fargo Bank. In the settlement between petitioner and Colquhoun this latter shipment of whiskey was put in at a base cost of 55 shillings per case.

The business relations between*1523 petitioner and Colquhoun were terminated by agreement of the parties on November 15, 1924. On that date petitioner signed a written statement certifying that they had settled their accounts and had paid to each other all outstanding debts and that neither party had any further claim against the other.

In the latter part of 1921 petitioner and B. H. Brotman purchased 2,000 cases of whiskey which they shipped to Vancouver. Petitioner financed the deal by obtaining a loan from the Wells Fargo Bank in the amount of $24,000. Brotman disposed of the liquor under an agreement with petitioner that the profits would be divided equally. Final settlement was made in 1922, at which time petitioner received all of his investment plus a profit of $1,500.

During 1922 the petitioner received three items of $28,912.81, $27,751.74, and $93,485.97 from Colquhoun, representing proceeds from the sale of liquor after Colquhoun had taken care of operating expenses and allowed to himself his share of the profits. Also during 1922 $117,000, which was not represented by charges against petitioner's checking account or otherwise identified as to source, was paid on petitioner's loan account at the*1524 Wells Fargo Bank. None of the sums received by petitioner from the sale of liquor were reported or in any way reflected by petitioner's income tax return for 1922.

In 1923 petitioner received from Colquhoun thirteen items aggregating $153,026.83 and representing proceeds from the sale of liquor over and above the expenses of operation and Colquhoun's share of the profits. Also during 1923 $20,000 was paid on petitioner's loan account at the Wells Fargo Bank, which payment was not made from petitioner's checking account and its source was not otherwise identified. None of the sums received by petitioner from the sale of liquor were reported or in any way reflected by the petitioner's income tax return for 1923.

*345 In 1924 the petitioner received from Colquhoun eleven items aggregating $131,801, which represented proceeds from the sale of liquor, exclusive of expenses of operation and Colquhoun's share of the profits. Also during 1924, $60,150 was paid on petitioner's loan account at the Wells Fargo Bank. This amount was not paid from petitioner's checking account and its source was not otherwise identified. None of the sums received by petitioner from the sale of*1525 the liquor were reported or in any way reflected by the petitioner's income tax return for 1924.

In determining the deficiency for 1922 the respondent included the amounts received by petitioner from Colquhoun, totaling $149,150.52, the $1,500 received from Brotman, and the $117,000 reflected by amounts paid on petitioner's loan account at the Wells Fargo Bank. Against the aggregate of the above items, amounting to $268,650.52, the respondent allowed $116,000 as the cost of the King & Ramsey whiskey, thereby determining a profit to petitioner from the liquor business in 1922 in the amount of $152,550.52.

In determining the deficiency for 1923 the respondent included the items received from Colquhoun, aggregating $153,026.83, and the item of $20,000 reflected by amounts paid on petitioner's loan account at the Wells Fargo Bank. Against the total of the above items, amounting to $173,026.83, the respondent allowed $93,307.50 as the cost of one-half of the Bullock & Lade whiskey, thereby determining a profit to petitioner from the liquor business in 1923 in the amount of $79,719.33.

In determining the deficiency for 1924 the respondent included the payments received from Colquhoun*1526 in the amount of $131,801 and the item of $60,150 reflected by amounts paid on petitioner's loan account at the Wells Fargo Bank. Against the total of the above items, amounting to $191,951, the respondent allowed $93,307.50 as the cost of one-half of the Bullock & Lade whiskey, thereby Determining a profit to petitioner from the liquor business in 1924 in the amount of $98,643.50.

In June 1935 the petitioner was indicted, prosecuted, and acquitted in criminal proceedings in the United States District Court for the Northern District of California, the charges being that he willfully, knowingly, and feloniously attempted to defeat and evade a large part of his income tax for the year 1924.

OPINION.

TURNER: The first question for determination is whether petitioner's income tax returns for the taxable years were false and fraudulent with intent to evade tax. If not, the statute of limitations bars the assessment and collection of the deficiencies determined, and the respondent so concedes. The petitioner contends that his *346 returns for the years in question were not false and fraudulent, with intent to evade tax, and that the period within which any tax for such*1527 years may be assessed has expired; and in that connection he has alleged that by reason of his acquittal in the United States District Court for the Northern District of California on the charge that he willfully, knowingly, and feloniously attempted to defeat and evade income tax for the year 1924, the issue of fraud herein is res judicata. A similar contention was considered by the Supreme Court in , and decided adversely to the contention made by the petitioner here. Accordingly the petitioner's claim of res judicata is denied.

The burden of proving fraud is upon the respondent and that burden he assumed at the hearing. To establish fraud, he has introduced and relies upon the following: The deposition of Robert T. Colquhoun, together with 37 exhibits attached thereto, consisting largely of records, canceled checks, and correspondence taken from his files; deposition of W. E. Lyman, general auditor of the Wells Fargo Bank, together with certain ledger sheets showing petitioner's accounts at that bank; deposition of R. F. Schacht, assistant cashier of the Bank of America, with certain exhibits attached thereto; *1528 deposition of J. E. Turner, assistant cashier of the First National Trust & Savings Bank of Santa Barbara, California, with several canceled cashier checks attached thereto; deposition of W. S. Davis, branch manager of the Seventh and Valencia Branch of the Security First National Bank of Los Angeles, with seven canceled checks attached thereto; deposition of Dan J. Chapin, internal revenue agent in charge at San Francisco in 1922; the oral testimony of E. H. Shine, assistant cashier of the Wells Fargo Bank, together with several canceled checks identified by him; oral testimony of Raleigh M. Fremont, one of Colquhoun's agents in the liquor business; and the oral testimony of several special agents of the Bureau of Internal Revenue who participated in the investigation of petitioner's tax liability.

Petitioner admits that he was engaged during the taxable years in an illegal liquor business along the general lines disclosed in the testimony of Colquhoun; he also admits that the results of his operations were not reported in his income tax returns, the reason offered for such failure being that his operations resulted in net losses for those years and that his attorney advised him*1529 that since the losses resulted from the operation of an illegal business they were not therefore deductible. He testified that he did keep records of all transactions in question but that such records were destroyed when he moved to Texas in or about 1930 or 1931. The evidence offered by the respondent clearly refutes the reasons given by the petitioner for his failure to disclose the results of his operations in his income tax returns. From this evidence it appears that the petitioner, instead of sustaining net losses *347 in his liquor operations, realized substantial profits therefrom. From the record it appears that the only financial outlay made by petitioner in each instance was the cost of the liquor sold. The expenses of operation were paid by Colquhoun out of the proceeds from sales and, after taking out his share, the balance was paid by him to petitioner or to others for petitioner's benefit. These payments, after making due allowance for the cost of the liquor sold, disclosed substantial profits to petitioner in each of the years before us. Obviously petitioner's returns for the years 1922, 1923, and 1924 were false, and from the evidence of record we are*1530 convinced that the falsification of the returns was willful and with intent to evade tax. The reason given for the failure to report the income from his operations, namely, that he sustained net losses, was untrue, and certainly the petitioner was fully aware of that fact. It is accordingly our conclusion and we so hold that the petitioner's returns for the years before us were false and fraudulent, with intent to evade tax, and as a result the period within which the income tax for those years may be assessed and collected has not expired. See ; ; affd., ; ; affd., .

The respondent having sustained the burden of proving that the returns filed by the petitioner were false and fraudulent, with intent to evade tax, the burden of proving error in the deficiencies determined by the respondent is on the petitioner. , and *1531 He seemed content to rest his case principally on the fraud issue and has offered nothing substantial to refute the correctness of the deficiencies determined by the respondent. In fact there is little more to his testimony than a reiteration that the operation of the business resulted in a net loss for each of the years before us. There are some inferences that he considered Colquhoun as an extortioner and that, in the light of unfriendly relations between them at the time of the termination of their operations, Colquhoun's testimony should be disregarded. He also denied that he ever used certain names under which Colquhoun claims petitioner received some of the payments. It appears, however, that in connection with his oral testimony Colquhoun supplied records and papers maintained currently during the operations with petitioner which reflected the moneys received and the payments made to petitioner or for his benefit. Furthermore, Colquhoun's testimony as to numerous payments is corroborated by the testimony of Shine and various canceled checks and bank records. In making his determination as to the profits realized by petitioner, respondent*1532 has made allowance for the cost of the whiskey sold and in computing the items reflected or evidenced by amounts paid on petitioner's loans in the Wells Fargo Bank, he has not included any *348 sums that were paid from petitioner's checking account or sums that were otherwise identified. The petitioner has failed to show that the items included by the respondent in his determination of the deficiencies did not represent income or were to any extent duplications of income items. The deficiencies determined by the respondent for the years 1922, 1.23, and 1924 are accordingly sustained.

We also conclude from the evidence of record that a part or all of the deficiency for each year is due to fraud, with intent to evade tax, and the respondent's determination of the fraud penalties is also sustained;

Decision will be entered for the respondent.