Maddox v. Commissioner

MEMORANDUM FINDINGS OF FACT AND OPINION

FORRESTER, Judge: Respondent asserted deficiencies against petitioners Raymond and Katie Maddox of $4,718.75 and $2,964.05 for the taxable years 1973 and 1974, respectively, and section 6653(b) ¹ additions to tax solely against petitioner Raymond Maddox of $2,620.37 and $1,621.53 for 1973 and 1974, respectively.

Two issues are presented for our decision: (1) whether petitioners had unreported income from "running" in 1973 and 1974 and, if so; (2) whether petitioner Raymond Maddox's failure to report such income*369 was due to fraud, ² with intent to evade his lawfully owed taxes.

FINDINGS OF FACT

Petitioners Raymond and Katie Maddox (petitioner husband is hereinafter referred to as Raymond) resided in Baltimore, Maryland, when the petition in this case was filed.

Raymond is well educated. He has about 200 credits in college-level courses which include credits in automobile insurance law, and he has fairly good knowledge of the law and the workings of the criminal justice system.

In 1970 Raymond began working for various attorneys as a runner. As such, Raymond monitored a police radio to learn the location of traffic accidents. Upon learning of an accident, Raymond immediately traveled to the scene of the accident and attempted to persuade the persons involved therein to retain one of the attorneys for whom Raymond worked. Raymond was paid a referral fee for each case he referred to an attorney.

Raymond operated his running business in partnership with Wiley Hill (hereinafter Wiley) until mid-1974. Raymond and Wiley*370 evidently shared profits and losses evenly, although from Raymond's testimony it is impossible to determine how the partnership accounts were settled.

In 1974 some of the lawyers for whom Raymond worked as a runner became subjects of a Federal investigation known as "the doctors and lawyers investigation." The investigation focused on the filing of fraudulent insurance claims for personal injury. During this investigation, Raymond was identified as possessing relevant information. Raymond had several meetings with Federal prosecutors, and eventually agreed to provide information in exchange for immunity. On June 5, 1974, an order was issued granting Raymond immunity from criminal prosecution. ³

*371 During 1973 and 1974 Raymond was employed by the City of Baltimore. He reported his earnings from this job on his 1973 and 1974 returns.

Raymond reported no income from his 1973 and 1974 running activity, but he did report such income on his 1970, 1971 and 1972 joint returns, although it was falsely reported as income earned as a claims adjuster, rather than as income from running. On the 1970 return, Raymond reported gross receipts attributable to running of $7,580, and net running income of $4,327. On the 1971 return he reported gross receipts attributable to running of $20,000, and net running income of $9,300.61. On the 1972 return, Raymond reported gross receipts attributable to running of $16,492.50, and net running income of $8,812.83.

During 1973 and 1974, petitioners maintained bank accounts at Municipal Employees Credit Union of Baltimore, Inc., and Provident Savings Bank (hereinafter Provident).

In 1973 Raymond purchased a used boat for $5,500, of which $1,000 was paid by check; the remainder was paid in cash.

In his deficiency notice, applying the bank deposits and cash expenditures method, respondent computed Raymond's unreported gross income for 1973*372 and 1974 as follows:

Raymond borrowed $9,800 from Midtown Savings and Loan Association, Inc. (hereinafter Midtown), in March 1975. He did not receive any loan proceeds from Midtown in 1973 or 1974.

On January 4, 1978, Raymond was convicted of possession of a firearm by a convicted felon, in violation of 18 U.S.C., section 1202 (1970). *373 On May 16, 1978, Raymond was convicted of second-degree murder. He was serving a 30-year sentence for this crime at the time of the trial in this case. On December 28, 1978, Raymond was convicted of mail fraud in violation of 18 U.S.C., sections 1341 and 1342 (1970).

Raymond did not provide respondent with records adequate to determine his running income, or discuss his running activities with respondent's agents prior to the determination of the deficiency in this case.

OPINION

Issue 1. Unreported Running Income

Respondent computed the deficiencies in this case using the bank deposits and cash expenditures method. This method is a permissable method of computing the income of a taxpayer who fails to keep adequate books or records. Estate of Mason v. Commissioner,64 T.C. 651, 656-657 (1975), affd. 556 F.2d 2 (6th Cir. 1977); Nicholas v. Commissioner,70 T.C. 1057, 1064 (1978). Petitioners bear the burden of proving that the deficiency determined by respondent using the bank deposits and cash expenditures method is incorrect. Rule 142(a); Estate of Mason,64 T.C. at 657.

Raymond*374 concedes that he had some unreported running income in 1973 and 1974, but contends that his unreported income for each of those years was less than the amounts determined by respondent.

Raymond contends, as best we can understand him, that in March 1973, the Federal investigation into insurance fraud became widely known and talked about in the running community, and that as a consequence of this he and his partner Wiley terminated their practice of going personally to accident scenes, and instead began to acquire cases to refer to attorneys by buying them from runners who were still willing to meet with accident participants at the scenes of accidents. Raymond seems to be contending that respondent failed to allow him credits for amounts paid to purchase cases from other runners. According to Raymond, half of his gross running income in 1973 and 1974 was used to purchase cases from other runners.

On cross-examination, respondent asked Raymond to provide more details concerning the payments he claimed to have made to acquire cases. Raymond's response was vague, ⁴ and he failed to produce any witnesses willing to testify that they were paid for cases by Raymond. On this record, *375 we find and hold that Raymond's unsubstantiated, vague and self-serving testimony that he incurred expenses to purchase cases in 1973 and 1974 does not suffice to carry his burden of proof on this point.

Raymond also contends that he kited checks in 1973 and 1974, and that many of the deposits to his account with Provident in 1973 and 1974 are attributable to check kiting. ⁵

*376 Our examination of Raymond's Provident deposit receipts for 1973 and 1974 disclosed few instances in which several checks for the same amount were deposited within three days of each other, a pattern we found indicative of check kiting in Estate of Mason,64 T.C. at 661. In particular, we were unable to discover any pattern of deposits consistent with Raymond's testimony that he frequently kited, e.g., a $200 check for several weeks by making numerous $200 deposits in succession. Taking into consideration the record before us, our evaluation of Raymond's credibility as a witness, and his failure to point to any specific instances of check kiting, ⁶ we find and hold that Raymond has failed to carry his burden of proving that any of the deposits to his Provident account are attributable to kiting.⁷

*377 Since Raymond has failed to meet his burden of proof with respect to respondent's calculation of his unreported income for 1973 and 1974, respondent's determinations must be upheld.

Issue 2. Fraud

Fraud is the intentional evasion of a tax believed owed. McGee v. Commissioner,61 T.C. 249, 256 (1973), affd. 519 F.2d 1121 (5th Cir. 1975), cert. denied 424 U.S. 967 (1976). In order to prove that an underpayment is due to fraud, respondent must prove, by clear and convincing evidence, that petitioner had the specific purpose and intent to evade a tax believed owed, and that the underpayment of tax was due to, or caused by, the intent to evade tax. Sec. 7454(a); Rule 142.

Petitioner contends that because he believed his 1974 immunity agreement exempted him from Federal income taxation of his 1973 and 1974 running income, his failure to report that income in 1973 and 1974 was not based upon an intent to avoid tax believed owed.

After a careful review of the record, we find incredible Raymond's assertion that he believed his immunity agreement with the Federal prosecutors absolved him of his obligation to pay tax on his running*378 income.

The District Court order granting immunity to Raymond contains no language whatsoever to the effect that Raymond's 1973 and 1974 running income was exempt from Federal tax, nor does Raymond contend otherwise. Raymond contends that exemption from tax was promised him orally by one of the Federal prosecutors with whom he met concerning his role in the doctors and lawyers insurance fraud investigation. ⁸

James Marshall Kramon, a former Federal attorney, was present at the meetings described by Raymond. According to Kramon's testimony, in none of the meetings with Federal prosecutors did Raymond raise the issue of income tax liability related to his running activities. Kramon further testified*379 that he would have been unable to give any immediate response had Raymond asked about tax liability for his 1973 and 1974 running income. This directly contradicts Raymond's testimony that he received a positive response immediately following his inquiry concerning his liability for taxes on his running income.

In view of Raymond's education and knowledge of the law, and his understanding that running income was taxable, as evidenced by his reporting it in 1970, 1971 and 1972; and based on our evaluation of the credibility of Kramon and Raymond, and the entire record, we conclude that during the doctors and lawyers investigation Federal prosecutors never made any statement to Raymond that he could reasonably have construed as granting him exemption from Federal tax on his 1973 or 1974 running income. Accordingly, we find that Raymond did not believe when he filed his 1973 and 1974 returns that Federal prosecutors had arranged to make his running income for those years exempt from Federal tax.

Under these circumstances we are satisfied that Raymond knew that his running income for 1973 and 1974 was taxable. We find and hold therefore that respondent has met his burden of proving*380 that Raymond failed to report his 1973 and 1974 running income with the intent of evading a tax believed owed.

Decision will be entered for the respondent.