Swofford v. Commissioner

MEMORANDUM FINDINGS OF FACT AND OPINION

FAY, Judge: Respondent determined deficiencies in the Federal income taxes of Doris Swofford and additions to tax under section 6653(a) ¹ for the following calendar years in the following amounts:

There being no contest as to the amounts of the deficiencies, we are asked to decide (1) whether*225 petitioner is entitled to relief from tax liability by reason of section 6013(e); and (2) whether the additions to tax under section 6653(a) have been properly determined.

FINDINGS OF FACT

Certain facts have been stipulated and are so found. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.

At all times relevant here, petitioner, Doris Swofford (hereinafter Doris), resided in St. Louis, Missouri, with her husband, Samuel O. Swofford, Jr., (hereinafter Samuel) and four children, Scott, Stacy, Shawn and Shelly. Doris and Samuel filed joint Federal income tax returns for the calendar years 1965, 1966 and 1967 with the district director of internal revenue, St. Louis, Missouri.

From 1959 through November, 1967, Doris was employed by Reco Foods, Inc., (Reco) ² of St. Louis. Reco was engaged in the business of selling foods in wholesale lots to consumers in their homes.

Petitioner's position at Reco was that of office and sales manager. Under her direction were four salespeople working "on the street" and four to six others*226 selling food by telephone. Doris was compensated for her services and reported gross wages of $11,575.12, $13,770.66 and $8,879.10, respectively, on the income tax returns filed for 1965, 1966, and 1967. Late in 1965 Doris was provided an automobile ³ by Reco for her exclusive personal and business use. She had control of the automobile until her employment terminated.

During part of the calendar year 1965, all of 1966 and through March 2, 1967, Samuel was involved in the operation of a gambling organization or company in the city of St. Louis and in St. Louis County of the type known as "policy". The operations of the policy company are of little relevance to this controversy other than what is commonly referred to as the "cut-loose". This term describes the exchange, between a company man and a so-called "manager" of the drawings or winning numbers for the next lottery for the wagers and list of bets placed on particular numbers.

Samuel's activities, conducted at several locations other than his residence, in the operation of the policy company consisted of preparing drawings, checking figures prepared by his employees, and making*227 the "cut-loose" in the County. ⁴

On at least two occasions, Doris participated in making the "cut-loose". On both September 17, 1966 and October 15, 1966 she was observed by a special agent of the internal revenue service exchanging packages with individuals who were eventually found to be involved in the policy operations.

On March 2, 1967, the gambling operation terminated as a result of raids on the various locations where Samuel conducted the policy company's business. On March 6, 1967, Samuel was arrested for his participation in the operation. Due to the relatively large scale of the policy operation the local newspapers, the St. Louis Post Dispatch and the St. Louis Globe-Democrat, afforded the raids and arrests considerable publicity. ⁵

Throughout the years in question Doris was in control of several checking accounts at various banks in the St. Louis area. ⁶ Deposits to these accounts are known to have been made in the following amounts: *228

During 1965, petitioner paid for goods and services by check, as follows:

*229 During 1966, petitioner paid for goods and services by check, as follows:

*230 During 1967, petitioner paid for goods and services by check, as follows:

At various times throughout the period in issue petitioner and Samuel made the following automobile payments to the South Side National Bank for three automobiles they had financed at said bank.

Other cash payments were made by petitioner during 1965, 1966 and 1967 in the form of wages paid to a lady who cleaned her house one day a week. ¹⁰ An additional housekeeper, Miss Edna Baer, resided with the family Monday through Friday. In consideration of her assistance she received meals, board and $20 per week in cash. Further, during 1966 and 1967, petitioner expended $73.00 and $72.00, respectively, *232 in cash for parking, bridge tolls, and car washes while conducting her business.

After various payroll deductions (including Federal income tax withheld) Doris' net wages for each of the years in question were as follows: ¹¹

During the years in issue petitioner maintained several savings accounts with her husband. Interest earned on these accounts totalled $48.85 in 1965 and $80.98 in 1966. ¹² In addition during 1965, 1966 and 1967 petitioner and Samuel, as trustees for Scott Swofford, maintained a savings account at Gravois Bank. Doris made deposits to said account in the amounts of $250.00 and $50.00 in 1965 and 1966, respectively. Interest totalling $9.55 and $4.67 was earned on this account in 1965 and 1966, respectively. Petitioner also maintained a savings account in 1967 in her own name along with Scott Swofford and Shelly Swofford. In this account Doris deposited $1,781.66 of her earnings in*233 1967. Interest in the amount of $85.56 was earned in that year.

Aside from the items of expenditure to which we have already alluded, petitioner made payments for various reasons by direct use of her payroll checks. One dated September 10, 1966, in the amount of $342.43 was endorsed by Doris to Arthur Maier Plumbing Co. Doris also endorsed a payroll check dated November 5, 1966, in the amount of $333.10 to the Berger Furniture Company for the purchase of a bedroom set for petitioner's daughter. ¹³ In March of 1967, three such checks from Reco dated January 28, 1967, February 18, 1967, and February 25, 1967, in the amounts of $186.98, $535.00, and $202.98, respectively, were endorsed to the order of Richard Hackmeyer, an*234 attorney, who represented Samuel in a criminal case in 1967.

Respondent, on May 31, 1973, timely sent a statutory notice of deficiency to petitioner and her husband increasing their gross income and taxable income and consequently their tax due for 1965, 1966 and 1967, based upon Samuel's earnings from the policy company in those years. Doris alone has petitioned the Court with regard to the deficiencies. She does not contest the correctness of the said deficiencies but rather seeks relief from liability for them under section 6013(e).

OPINION

For Doris to be deemed an "innocent spouse" and relieved from an additional tax liability for 1965, 1966 and 1967 she must prove each element of section 6013(e). ¹⁴; . She has not done so. ¹⁵ The record herein indicates that petitioner was aware that items of gross income were not reported in each of the years in question.¹⁶ See section 6013(e)(1)(B).

*235 Specifically we note that petitioner deposited and expended more funds than she had available from her savings and earnings. Although the excess of the former over the latter in each of the years in issue is not excessive in amount, the financial data upon which we base the above statement makes no allowance for any funds expended by Samuel in his daily activities nor for any of the daily expenses petitioner would have encountered. ¹⁷ Additionally petitioner's actions belie her claim of ignorance. On at least two occasions, namely, September 17, 1966, and October 15, 1966, she was observed exchanging packages with known members of the policy company, making what is commonly referred to as the "cut-loose".

Furthermore, even if we were to assume arguendo that prior to March 2, 1967, Doris was unaware of her husband's income producing activities, we think it unlikely that such was the case subsequent to that date when the illegal policy*236 operation conducted by Samuel was terminated as a result of action by authorities. Due to the extent of the gambling activity the raids and subsequent arrests were afforded considerable coverage in the St. Louis newspapers. Not only was Samuel named as a part of the operation, but his picture appeared in the newspaper. Moreover, petitioner thereafter endorsed three of her payroll checks to Samuel's attorney for fees in the criminal matter.

In view of the foregoing, we hold petitioner to have had full knowledge of the omissions from gross income on the joint Federal income tax returns filed by her and her husband for 1965, 1966 and 1967. Accordingly, Doris does not qualify as an "innocent spouse" within the purview of section 6013(e).

Finally there is in issue the matter of the section 6653(a) additions to tax for negligence. The burden of proving that a penalty under that section has been improperly determined rests with the taxpayer. . In the absence of any credible evidence to support petitioner's position respondent's determination is sustained.

Decision will be entered for the respondent.