# Banks v. Commissioner

> United States Tax Court · August 22, 1961 · 20 T.C.M. 1165

URL: https://www.frixlaw.com/law-library/cases/4601202

## Case

- **Full name:** Thomas W. Banks v. Commissioner.
- **Court:** United States Tax Court
- **Decided:** August 22, 1961
- **Citations:** 20 T.C.M. 1165; 1961 T.C. Memo. 237; 1961 Tax Ct. Memo LEXIS 113
- **Precedential status:** Unpublished
- **Opinion:** Opinion
- **Cited by:** 13 later opinions in the Frix Law Library

## Citator (automated)

- **Yellow flag:** Modified on other grounds by Thomas W. Banks v. Commissioner of Internal Revenue, 322 F.2d 530 (1963).
- Negative treatments: 1
- Distinguished by: 0
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/4601202

## Opinion text

Thomas W. Banks v. Commissioner.
Banks v. Commissioner
Docket No. 42724.
United States Tax Court
T.C. Memo 1961-237 ; 1961 Tax Ct. Memo LEXIS 113 ; 20 T.C.M. (CCH) 1165 ; T.C.M. (RIA) 61237 ;
August 22, 1961
*113 During the years ending December 31, 1936, through December 31, 1947, inclusive, petitioner owned an interest in various business ventures, including several gambling establishments. In addition, he made personal wagers on sporting events. A substantial amount of the gross income reported on his Federal income tax returns for each taxable year involved herein was derived from his gambling activities. No books or records relating to such activities were available for audit by respondent's agents. Using the net worth plus nondeductible expenditures method, respondent reconstructed petitioner's income for the taxable years involved.
Held:
1. That the deficiencies for the years 1937 through 1940, inclusive, are barred by the statute of limitations.
2. That there is a deficiency in income tax of petitioner for 1941, but respondent has failed to prove that any part of the deficiency for that year was due to fraud with intent to evade income tax. Amount of deficiency for 1941 determined.
3. That with respect to the deficiencies determined for the years 1942 through 1947, inclusive, petitioner has failed to meet the burden of establishing error on the part of respondent, except to the extent *114 set forth in our Opinion. Adjustments and understatements determined.
4. That some part of the respective deficiencies for each of the taxable years 1942 through 1947, inclusive, was due to fraud with intent to evade taxes.
5. That any additions to tax under section 294(d) of the Code of 1939 for the year 1947 will be determined under Rule 50.
Joseph A. Maun, Esq., and William R. Busch, Esq., for the petitioner. T. A. Steele, Esq., and L. A. Hanns, Esq., for the respondent.
FISHER
Memorandum Findings of Fact and Opinion
FISHER , Judge: Respondent determined deficiencies in income tax and additions to tax as follows: Sec. 294
Sec. 293(b) (d)(2)
Addition Addition
Year Deficiency to Tax to Tax
1937 $ 645.94 $ 322.97
1938 780.28 432.93
1939 824.26 505.36
1940 780.43 408.21
1941 1,609.86 804.93
1942 24,447.02 12,223.51
1943 62,463.71 31,231.86 $ 3,295.86
1944 55,670.02 27,835.01 2,821.45
1945 46,808.10 23,404.05 2,750.37
1946 11,813.81 5,906.91 864.13
1947 9,042.65 4,521.33 659.87
Totals $214,886.08 $107,597.07 $10,391.68
The figures for the year 1943 shown above represent the amounts alleged in a claim for increased deficiencies filed by respondent on June 30, 1959, and also alleged in the third amendment to answer filed by respondent *115 by leave of Court granted on August 26, 1959. In the statutory notice, the deficiencies determined in income and victory tax and additions to tax under section 293(b) and section 294(d)(2), both supra, for the year 1943 were respectively $49,450.03, $24,725.02, and $2,515.04.
Respondent concedes that the addition to tax provided by section 294(d)(2), supra, is not applicable to the calendar years 1943 to 1946, inclusive.
The principal issues presented for our consideration are: (1) Whether and to what extent petitioner understated his net taxable income for the years 1937 through 1947, inclusive; (2) whether any part of the deficiency determined for each of the years in question was due to fraud with intent to evade tax; (3) whether the statute of limitations bars assessment and collection of any of the deficiencies determined for the years 1937 through 1940, inclusive, and 1942; and (4) whether the addition to tax provided under section 294(d)(2), supra, is applicable to petitioner for the taxable year 1947.
Findings of Fact
Part of the facts are stipulated (orally and in writing) and are so found and incorporated by this reference.
Background and General Facts
Thomas W. Banks, hereinafter *116 sometimes called petitioner or Thomas, is an individual residing at 3817 Drew Avenue South, Minneapolis, Minnesota. For each of the calendar years 1937 to 1947, inclusive, petitioner filed Federal income tax returns with the collector of internal revenue for the district of Minnesota.
Petitioner did not file any Federal income tax returns for the years 1920 to 1933, inclusive.
Records of the district director for the district of Minnesota (formerly collector of internal revenue) contain no indication that Reta Lee Banks, petitioner's wife, filed a Federal income tax return for any year prior to 1942, except that said records show that petitioner's original return filed for the year 1940 was treated as a joint return of petitioner and his wife. Reta filed a separate Federal income tax return with the collector of internal revenue for the district of Minnesota for each of the years 1942 to 1947, inclusive.
At the time of the trial petitioner was 64 years of age. Petitioner has been married to Reta since 1915. When petitioner first met his wife she was employed as a milliner. Thereafter, she quit her job and has never been employed since her marriage. Petitioner ran away from home at *117 13 years of age and went to Omaha, Nebraska, where he worked as a page boy at a hotel. He went into the military service in the spring of 1918 and was released in December 1918.
After being released from the Army, petitioner worked in Kansas City, Kansas, as a bellboy. In 1919, he came to Minneapolis, Minnesota, and worked as head bellman at the Dyckman Hotel, and also sold whiskey to people in the hotel. After he stopped working at the Dyckman Hotel in July of 1920, petitioner hauled whiskey from Canada. He was engaged in this illicit activity to about 1924. During this period petitioner kept no records concerning his income and expenses. At the beginning of 1924, petitioner began hauling alcohol from Chicago. This operation continued until about 1929.
About 1922, petitioner bought the National Cigar Store located in Minneapolis, Minnesota, and sold it about 1923. Around 1925, petitioner bought the Louana Apartment Hotel, Minneapolis, Minnesota, in partnership with another individual. About 1929 petitioner bought out the interest of the other partner. In 1931, petitioner sold the Louana Apartment Hotel and sustained a substantial loss in the sale thereof.
Until the year 1931, petitioner's *118 principal occupation was selling alcohol. However, as time went on, the profit from alcohol sales became less and less. For several years petitioner sustained a loss rather than a profit from alcohol sales.
In conducting his alcohol activities in the years about 1927 through 1929, inclusive, petitioner's only records consisted of a little vest pocketbook in which he personally recorded his daily sales. Petitioner kept no record of the cost price to him of the alcohol.
In 1930 or 1931, petitioner, in combination with other individuals, commenced ordering alcohol that would be shipped in box cars. Generally, there would be 80, 90, or 100 drums of alcohol to a box car. During this period petitioner maintained offices at the West Hotel for the purpose of conducting his alcohol business. While conducting his business at the West Hotel petitioner "never" kept records.
Petitioner was never in a position to know and did not pay any attention to any amount of money that he might be making at any time in connection with his alcohol activities.
Petitioner ceased the alcohol business in 1931. While conducting the alcohol business petitioner had heard of the Federal income tax laws that existed *119 at that time. He knew that he was supposed to keep records of any income that he might have obtained from his alcohol activities.
On November 14, 1929, petitioner pleaded guilty to a liquor conspiracy charge under Section 37 of the U.S. Criminal Code, in the United States District Court for the District of Minnesota, (3rd Div., St. Paul) and was fined $2,500, which he paid.
From 1934 to 1940, petitioner worked as a commission salesman for Old Peoria Company, a liquor distributor.
In 1934 a charge of conspiracy under Section 37, U.S. Criminal Code, to violate Sections 3258, 3296, and 3450, U.S. Revised Statutes, was made against various individuals in Minneapolis and St. Paul, including petitioner. The United States District Court for the District of Minnesota (4th Div., Minneapolis) accepted a plea of guilty from petitioner and fined him $2,000 which was paid by him.
In January or February 1935, Robert Kinsey, an accountant, advised petitioner that he should "square himself with the Government." In this connection Kinsey was referring to years earlier than 1934.
In 1934 as assessment was made against petitioner and other individuals for an alcohol tax liability in the total amount *120 of $33,589.92. On July 9, 1937, an offer in compromise was submitted on behalf of petitioner and others to compromise the alcohol tax liability. The terms of the offer were for a payment in the total amount of $5,000 to be paid as follows: $1,875 with submission of offer and $150 monthly until $5,000 had been paid. Said offer was subsequently accepted on October 7, 1937. In support of the offer in compromise, petitioner submitted to the Government a sworn affidavit dated July 2, 1937, pertaining to his financial condition. Said affidavit reads as follows:
State of Minnesota, County of Hennepin: ss.
Affidavit
I, Thomas William Banks, residing at 3817 Drew Avenue South, in the City of Minneapolis, County and State aforesaid, being duly sworn, depose and states as follows:
That I am 42 years of age and am married and that my wife's name is Reta Lee Banks. That my wife is not employed.
That I am employed by the Old Peoria Liquor Company, 301 North Seventh St., Minneapolis. That my salary is $100 per week. That I have been employed by said company for approximately three years.
That I also receive $25.00 per week for advertising purposes from the Seagrams Distilling Company, which I spend *121 in entertaining customers.
That my wife and myself have a safety deposit box in the First National Bank & Trust Company of Minneapolis, standing in the name of myself and my said wife, Reta Lee Banks.
That my wife owns the two story house located at 3817 Drew Avenue South, Minneapolis, where we reside. That the total value of house and lot is approximately $11,000. That same is encumbered with mortgage of between $7,000 and $8,000. That I contribute $110 monthly as payments of interest and principal on such mortgage.
That I give my wife for living expenses each month approximately $250 which included the $110 payment on house mentioned above.
That my wife owns a cottage located at 3952 Beard Avenue South valued at about $5,000 and mortgaged for about $3,500. That the rent received for such property pays the interest, taxes and principal payments on mortgage, and that I have not contributed anything of value in connection with the acquisition of this property.
That I own about 105 shares of Cities Service Common stock, which is listed stock and worth about $4.00 per share. That I also own twenty (20) $1,000 Insull Utility Bonds, which have no value. That I also have other stocks in *122 my possession which are worthless and have no value and that a list of such stocks is appended hereto.
That my wife owns 25% in the stock of Wheel Service Corporation of Minneapolis. That such stock was in my name at one time but was conveyed to her in about 1930. That such stock has cost about $4,500 in cash.
That my wife also owns one third interest in the stock of Flour City Body Corporation of Minneapolis, which she acquired in about 1930. That I paid about $1,000 of the cost of such stock and my wife $3,000 a total of $4,000.
That my wife owns and operated in her own name a 1935 Cadillac Sedan, and that is fully paid for.
That my wife, Reta Lee Banks, has both checking and savings accounts in the First National Bank of Minneapolis.
That I own two lots located in Ardmore, Oklahoma, which I have never seen. That I have continued to pay the taxes on same, which amount to between $2.00 and $3.00 per year.
That I took out a $10,000 life insurance policy in the Penn Mutual Life Insurance Company in 1926. That such policy now has a cash surrender value of approximately $2,500 against which I have borrowed $1,500.
That I also have Government War Risk Insurance, secured by reason of my *123 service in the army, and on which I pay $196 per year as premiums. That I failed to pay the premiums for several years but understand same can still be reinstated.
That I own Government Bonus bonds in the amount of $200, which I understand are exempt from attachment for government indebtedness.
That I have no bank account in my name and no safety deposit box in my name other than the joint safety deposit box mentioned above. That I have no bank account and no safety deposit box in any other name.
That I owe $2,000 to Harold Banks, Lexington, Nebraska, which I secured by giving my promissory note about January 1, 1934.
That it is my opinion that I am actually insolvent at the present time. That the most I have ever been worth was $30,000 about 1920.
That this affidavit is made for the purpose of disclosing my financial condition, in connection with offer in compromise filed by Peter Valder in July, 1937, to try and settle an assessment of $33,589.92 made in June, 1934.
(Signed) Thos. W. Banks
Subscribed and sworn to before me this, 2d day of July, 1937.
(Signed) N. A. Park (N A Park), Notary Public
Hennepin County, Minnesota, My. com. exp. 6/8/43
The list of stocks referred to in and *124 attached to said affidavit of Thomas William Banks is as follows: 60 shares Central Public Service Worthless
300 shares American Eagle Air-
craft Corp. Worthless
55 shares Corporation Securities
Co. Worthless
300 shares Krueger & Toll Co Worthless
52 shares Foote Bros. Gear &
Machinery Co. Worthless
$1,000 par value bonds of American
Commonwealth Corp. Worthless
Prior to submitting the affidavit to compromise petitioner's alcohol tax liability, petitioner's attorney, O'Gordon, explained to him that he would have to tell the Government about all of his assets, including all of his loans receivable.
The statement in the affidavit that petitioner was actually "insolvent" originated with petitioner and O'Gordon accepted the statement as being the truth.
Each item on said affidavit was examined separately by a revenue agent who made a field investigation to ascertain whether the item was correct. In the course of the investigation petitioner was personally questioned by a revenue agent to determine the authenticity of the affidavit. When Special Agent Peter V. Masica was assigned to investigate Banks for the taxable years 1937 through 1947, inclusive, he reviewed the previous investigations. He found that *125 an investigation of petitioner had been started in 1929 and that further work had been done in 1930 by various agents of the Internal Revenue Service. Masica conducted his investigation in cooperation with Revenue Agent Hanson. Hanson died several years prior to the instant trial. In the course of his investigation, Masica also reviewed the alcohol tax files relating to petitioner, including the aforesaid affidavit. He investigated various accounts and records of banks in Minneapolis, Minnesota, and talked to numerous people, including underworld characters, who might know something about petitioner's financial affairs. Also, Masica spoke to Kinsey, an accountant who did work for petitioner in connection with petitioner's prior income tax investigation involving the years 1920 through 1933. During the first interview, Kinsey told Masica that he had been engaged to prepare returns for all years for which petitioner might owe a tax and to work with the Federal agents in getting the facts straight. The information in connection with said returns never was produced by Kinsey. Kinsey told Masica at the time that it was very difficult to get any definite information from petitioner, that *126 petitioner had no records, and that he was unable to get any information regarding the alcohol operations.
Petitioner had no records relating to income tax for the years 1920 through 1933. Kinsey furnished very little information to Masica regarding petitioner for the years 1920 to 1933, inclusive. The information furnished by Kinsey was only general and related to petitioner's investments in the Flour City Body Company and Wheel Service, two items in issue herein. Kinsey told Masica that he would try to locate any records relating to petitioner's interests in two bank accounts in the names of W. A. Arnold and Peter Allen, to be discussed infra. Kinsey never did furnish such records.
On May 3, 1937, Kinsey promised to obtain information that might be available relating to the distribution of income from petitioner's bootlegging activities. Kinsey never furnished such information to Masica.
As a result of the investigation of petitioner for the years 1920 to 1933, inclusive, Masica and Hanson prepared a net worth schedule of petitioner's assets and liabilities for the period involved. They personally investigated and checked into the assets and liabilities shown on the net worth schedule *127 of petitioner. On the basis of this net worth statement, deficiencies and additions to tax were determined against petitioner in the amount of $5,679.13.
Under the provisions of Section 3176, Revised Statutes, as amended, on June 1, 1937, returns were prepared in the names of petitioner and his wife, Reta, for each of the years 1920 and 1923 through 1933, inclusive, and signed by the then deputy collector of internal revenue and filed with the collector for the district of Minnesota on September 20, 1937.
On September 8, 1937, petitioner signed and submitted to the Internal Revenue Service a Form 870 waiving restrictions on assessment and collection of deficiencies and additions to tax determined against him for the years 1920 through 1933, inclusive. Said form was also signed by petitioner's wife.
On April 2, 1946, Special Agent George McKusick began the investigation of petitioner for the taxable years ended December 31, 1937, through December 31, 1947, inclusive. (About five years later, in August 1951, McKusick completed his investigation and submitted his report.) McKusick began the investigation of petitioner by obtaining his returns from the revenue agents to whom they had been *128 assigned in a routine manner. Thereafter, investigators working with McKusick made inquiries of the banking houses where petitioner was rumored to have accounts. All of the sources of income on petitioner's Federal returns were surveyed to determine if there was any diversion from petitioner's ventures whereby he could receive money indirectly. The previous examination of petitioner by Masica and others, which ended in 1933 or 1934, was examined by McKusick. Then about eight special agents were divided into groups with instructions to go to banking houses and to examine the fronts and backs of every cashier's check, bank money order, and certified check which these banks handled. McKusick and others working on the case looked for both assets and liabilities for each year of the entire period involved herein. McKusick conducted an examination of numerous books and records of business places, banks, and various individuals engaged in commercial enterprises. He called on approximately 150 different business establishments to determine whether petitioner had an investment or interest in those ventures.
Also, McKusick analyzed petitioner's Federal income tax returns and ascertained certain *129 investments of petitioner. He then requisitioned returns of these ventures and ascertained that Leonard Weinstock, a public accountant, had prepared them. Weinstock maintained the records or did accounting work for many enterprises, including Brady's Bar, The Blue Goose Resort, McCarthy's Cafe, Casablanca, Inc., B & S Company, Power Brake and Equipment Company, Casanova, Koolaire, and Tenth Street Realty Company, in some of which petitioner had a financial interest.
Weinstock prepared the Federal income tax returns of petitioner and his wife from 1943 to the time of trial of the instant case.
Two or three years after Weinstock began to prepare tax returns for petitioner he also started preparing tax returns for petitioner's partner, Harry Shepard. Following the investigation of petitioner, Weinstock made a voluntary disclosure for Shepard. Weinstock prepared and submitted a net worth statement for Shepard which included a recognition of an addition to tax for fraud up until the year 1950.
The investigation of petitioner revealed that he used a lot of currency in his transactions and that many of his financial transactions were consummated without reference to any bank account whatsoever. *130 For example, petitioner would buy a cashier's check with currency, use currency or the cashier's check to buy property, sell the property, use the undeposited proceeds of the property to buy War Bonds, and later, cash the War Bonds to buy listed stocks.
In the course of his investigation, McKusick never saw any personal books and records of petitioner, although he asked Weinstock about them. When McKusick inquired of Weinstock regarding petitioner's checking account, McKusick was given incomplete cancelled checks from certain bank accounts of petitioner. In each instance, some bank statements and checks were missing.
On November 22, 1950, petitioner appointed O'Gordon as his attorney in fact to represent him before the Internal Revenue Service. On April 5, 1951, petitioner appointed Weinstock as his attorney in fact to represent him before the Internal Revenue Service. Thereafter, on June 21, 1951, petitioner appointed O'Gordon and John W. Graff to represent him as his attorneys in fact before the Internal Revenue Service.
McKusick talked often to petitioner's attorney, O'Gordon, and asked him many questions. On June 4, 1951, McKusick met with petitioner in Weinstock's office and advised *131 petitioner that if he had an explanation for the tax deficiency he would be given an opportunity to come in and make his explanation. Petitioner never came in thereafter to make an explanation of his tax deficiency to McKusick.
Special Agent McKusick died January 2, 1957.
A ninety-day letter in the instant proceeding was issued on April 29, 1952, prior to commencement of the criminal trial against petitioner for income tax evasion.
On January 14, 1952, a grand jury of the United States returned a criminal indictment against petitioner charging in three separate counts that under the provisions of Title 26, United States Code, Section 145 (b) , he wilfully and knowingly attempted to defeat and evade income tax due and owing by him to the United States for each of the years 1945, 1946, and 1947. Petitioner pleaded not guilty to each count of said indictment.
During the resulting criminal trial before the United States District Court for the District of Minnesota, by use of the net worth plus non-deductible expenditures method, the Government offered evidence to show that petitioner had fraudulently understated his taxable net income and resulting Federal tax liability for each of the *132 years 1945, 1946, and 1947 in the respective amounts of: Understated Understated
Year Income Tax
1945 $23,520.00 $15,044.06
1946 9,698.98 5,829.41
1947 20,843.78 12,067.55
In the criminal case, petitioner was represented by competent and experienced counsel. On May 30, 1952, the jury found petitioner guilty on all three counts of the indictment. United States v. Thomas W. Banks - F. 2d - F. Supp. (D. Minn. 1952). On June 23, 1952, petitioner was sentenced to three years in prison and fined $10,000.
Ultimately said decision of the United States District Court involving Thomas was affirmed, Banks v. United States, 204 F. 2d 666 (C.A. 8, 1953), reaffirmed 223 F. 2d 884 (C.A. 8, 1955). Petition for certiorari denied 350 U.S. 986 (1956) .
The Pearson News Service, hereinafter referred to as Pearson, was a booking establishment where bets were placed on football, baseball, and basketball games. Petitioner was a 10 percent owner of Pearson and, in addition to having a proprietary interest therein, he also personally gambled there.
The 318 Club, also known as the Kentucky Club, and the Social Club was a gambling establishment. It was located at 318 Nicollet, Minneapolis, Minnesota. Petitioner owned a *133 12 1/2 percent interest in the 318 Club.
Petitioner and several individuals from California and Minneapolis opened a poker club in California during the period from 1937 to 1947.
Coin-A-Matic Amusement Company, which appears on respondent's net worth schedule as an asset of petitioner, (Item 39) installed and operated pinball machines and Wurlitzer music boxes. Petitioner was engaged in this business with Harry Shepard.
The following schedule is an analysis of the adjusted gross income reported by petitioner for the years 1937 to 1947, inclusive, on his Federal tax returns. The schedule shows the amounts and percentages of the reported adjusted gross income which were reported as "wagering" income and "miscellaneous" income: Misc. Income Percentage
and Misc. Total of of Wagering Total or
Fees and Wagering Misc. and and Misc. Adjusted
Year Commissions Income Wagering to Total Gross Income
1937 $ 3,800.00 $ 3,800.00 66% $ 5,725.86
1938 5,500.00 5,500.00 86% 6,383.96
1939 0 5,977.05
1940 $ 3,900.00 3,900.00 78% 4,985.77
1941 4,814.57 4,814.57 47% 5,471.31
1942 4,800.00 6,509.47 11,309.47 66% 17,125.33
1943 12,538.62 3,400.86 15,939.48 67% 23,471.66
1944 8,385.26 7,315.42 15,700.68 115% 13,707.62
1945 2,000.00 15,422.47 17,422.47 83% 21,113.69
1946 2,000.00 23,829.24 25,829.24 81% 31,849.27
1947 2,000.00 16,463.24 18,463.24 74% 24,876.25
Totals $41,023.88 $81,655.27 $122,679.15 $165,502.34
Percentage of 25% 49% 74% 100%
total or
adjusted gross
income
Petitioner's *134 returns for the years 1937 to 1947, inclusive, do not reveal the sources of his gambling income. Petitioner's gambling income was referred to on said returns as "wagering - joint winnings," "wagering - personal winnings," "miscellaneous income, " "wagering-baseball book," "wagering - other," "miscellaneous income fees and commissions," and similar designations.
All such designations originated with petitioner personally and not with the accountants who prepared his returns. Petitioner would pick a round figure and insert the amount in his income tax return describing it as "miscellaneous" income or by one of the other aforesaid terms. At the end of each year, what purported to be petitioner's gambling income was given to his accountant, Weinstock, as a lump sum figure.
No details of petitioner's gambling income was given to his accountant who had no idea of the source of the income. The only records of petitioner's gambling income which were kept by Weinstock consisted of slips of adding machine tape that petitioner gave to him containing notations of his gambling receipts. Weinstock made no effort to audit or verify said information.
A meeting was held in the office of the Internal *135 Revenue Service on August 22, 1950, in St. Paul. In attendance at the meeting were petitioner, his attorneys, O'Gordon and Meshbesher, Arthur A. Stone, then Head of the Intelligence Unit, Special Agents Walter Thomas and George McKusick. The purpose of this meeting was to discuss questions which were to be submitted to petitioner. As a result of this meeting certain questions were prepared by McKusick and were submitted in writing under date of December 12, 1950, to O'Gordon. On February 1, 1951, O'Gordon, using his stationery, submitted answers to said questions to McKusick.
Petitioner discussed said questions with Weinstock at the latter's office on several occasions and with O'Gordon a number of times. O'Gordon attempted to obtain the answers from petitioner to several questions which were left unanswered. O'Gordon followed petitioner's instructions in such matters.
Respondent's net worth schedule does not contain a detailed itemization of assets and liabilities for the period beginning December 31, 1936, and ending December 31, 1941, because the books and records required to establish the details were not available.
The amount of income received by petitioner during each of the *136 years from 1937 to 1941, inclusive, was determined by a process of allocation. The net worth of petitioner was determined as of December 31, 1936, and again as of December 31, 1941. The increase in net worth determined for said period ($40,146.47) was allocated equally to the five intervening years from December 31, 1936, to December 31, 1941. The additional income as found in the revenue agent's findings for the years 1938 through 1940 ($5,688.49) was eliminated from the increase of net income from December 31, 1936 to December 31, 1941.
For an understandable presentation of the issues of fact and law to be considered infra, it is essential at this point to set forth the following schedules:
Schedule A represents our reconstruction of respondent's amended computations of increase in net worth for the five-year period beginning December 31, 1936, and ending December 31, 1941, and for the years 1942 to 1947, inclusive. Schedule B submitted by respondent represents a supplemental net worth computation showing an allocation of unreported income for the years 1937 to 1941, inclusive. Items on Schedule A which have been admitted in the pleadings, conceded at the trial, or on brief, are *137 indicated by the letter "c." Items which have been stipulated orally by the parties at the trial are indicated by the letters "o s." Items conceded and corrected by respondent by written stipulation are indicated by letters "w s."
Schedule C represents our revision of increases in net worth for the same periods and the ultimate resulting understatements. Disputed items are indicated by the letter "d." Items without designation are either stipulated, conceded, or uncontested. Schedule A
Net Worth - Thomas W. Banks
Item ASSETS 12-31-36 12-31-41 12-31-42 12-31-43
1. Marquette Nat. $ 63.39 $ 637.49 $ 1,373.90
Bank-Minneapolis
2. First Nat. Bank $ 159.15 301.49 374.60 1,058.05
Minneapolis
3. First Nat. Bank Anoka, 492.98 347.88
Minn.
4. Grand Marais State Bank,
Grand Marais,
Minn. 175.00
5. Jamieson & Co. check
6. Series D bonds 562.50 562.50 562.50
7. Series E bonds 375.00 7,537.50
7A. Bonus bond 200.00
8. Merchants Distilling
stock
9. Gillette Safety Razor
stock
10. Northwest Airlines stock
10A. Mohawk Liquor Corp. 750.00 750.00 750.00
stock
10B. Insull Utilities 3,497.40
10C. Cities Service stock 2,819.53 2,819.53 2,819.53 2,819.53
Receivables
10D. Rubin Shetsky
11. H. G. Lee
12. M. J. O'Connor note
13. Quality Drug Co.
14. T. E. Ewing
15. Ring Construction Co.
16. F. J. Wickers
17. Robert L. Schuettler
18. A. M. Cary
19. Harold Siegel & Howard
Gelb
20. Walter Halvorson 1,325.00
21. Brady's Bar (6,934.42) (7,434.42) 9,240.10
22. Pearson's News Service (998.15) (438.00) 1,610.00
23. Blue Goose Resort, Inc. (2,420.00) 10,469.45
24. McCarthy's Cafe
25. Flour City Body Corp.
25A. Casablanca, Inc.
26. Daily Mail
26A. E. A. Jefferds 5,000.00
Anoka Farms
27. Inventory 745.00 9,128.32 12,692.10
28. Bldgs. and Improvements 6,400.00 17,176.36 19,726.36
- Main Farm
29. Equipment - Main Farm 9,259.75 9,259.75
30. Land - Main Farm 3,830.35 3,830.35 5,130.35
31. Bldgs. - #2 Farm (Wm.
Hesli) (w.s.)
32. Land - #2 Farm
33. Bldgs. - #3 Farm (Lyle
G. Nichols)
34. Land - #3 Farm
35. Twin City Milk Producers 110.00 165.00
Assn. (w.s.)
36. Mortgages (4,394.75) (4,230.46) (4,059.53)
37. Reserve for Depreciation (532.00) (1,951.86) (3,422.72)
- Bldgs. & Equipt.
Investment in Operating
Companies
38. Banks and Shepard 4,679.77 6,796.96 8,677.83
39. Coin-A-Matic Amusement 5,192.26 4,156.46 6,140.77
Co.
40. McCarthy's Cafe, Inc. 7,364.14 11,864.14
41. B & S Company (o.s.) 3,400.00
42. Flour City Body Corp. 4,000.00 4,000.00 4,000.00 4,000.00
43. Power Brake & Equipment
Co.
44. Blue Goose Resort, Inc. 7,125.00 7,125.00 7,125.00
44A. Wheel Service 4,500.00
45. 10th St. Realty Co.
45A. Casablanca (o.s.) 7,800.00
46. Budweiser Tavern Bldg. 3,171.50 3,025.43
47. Pearson News Service 2,948.65 6,043.81 2,951.67
48. Music Installations 1,775.00 1,775.00 1,775.00
49. Koolaire, Inc.
50. National Plastics
Other Real Estate
51. 3817 Drew Ave. (Personal 13,500.00 13,500.00 13,500.00 13,500.00
Residence)
52. 3952 Beard Ave. 640.50 5,705.62 5,524.37 5,343.12
53. 4400 East Lake Street 2,100.00 2,100.00 2,100.00
54. 5238 Excelsior Blvd. 2,380.22 10,724.03 10,369.15
55. Oneida Bldg. 295.12
56. Crow Wing County Land 1,000.00 3,600.00 3,600.00 3,600.00
57. Hungry Jack Lodge (o.s.)
Total Assets $36,078.58 $55,619.46 $104,923.41 $173,727.45
LIABILITIES
Mortgages Payable
58. 3817 Drew Ave. So. $ 5,852.46 $ 2,075.98 $ 2,066.73 $1,187.87
(w.s.)
59. 3952 Beard Ave. 3,500.00 2,120.00 1,640.00 1,160.00
60. 4400 East Lake Street 1,700.00 1,700.00 1,700.00
61. 5238 Excelsior Blvd. 5,939.09 5,190.40
62. Oneida Bldg.
Loans and Accts. Payable
62A. Penn Mutual Life Ins. 1,500.00
Co.
63. Harold H. Banks 2,000.00 2,000.00 2,000.00 2,000.00
64. Marquette Nat. Bank 4,500.00 3,500.00
65. First Nat. Bank Anoka, 1,000.00
Minn.
66. Flour City Body Corp. 38.47 2,968.58 3,484.66
(w.s.)
67. Accts. receivable per 2,816.13 424.58 322.29
corporate books
68. Notes receivable per 1,500.00 1,500.00
corporate books (w.s.)
Total Liabilities $12,852.46 $15,250.58 $ 22,738.98 $ 16,545.22
TOTAL ASSETS $36,078.58 $55,619.46 $104,923.41 $173,727.45
Less: Total Liabilities 12,852.46 15,250.58 22,738.98 16,545.22
NET WORTH $23,226.12 $40,368.88 $ 82,184.43 $157,182.23
Less: Net Worth at 23,226.12 40,368.88 82,184.43
beginning of year or
period
Increase in Net Worth $17,142.76 $ 41,815.55 $ 74,997.80
(see a below)
Less: Nontaxable income
Increase in Net Worth a
Less: Nontaxable income $17,142.76 $ 41,815.55 $ 74,997.80
Plus: Living Expenses 10,000.00 10,000.00
Federal Income Taxes 267.66 17,366.35
Paid
Corrected Net Income of $ 52,083.21 $102,364.15
Thomas W. Banks & Reta
Banks
Less: Net income 464.65 478.63
reported by Reta b
Corrected net income of $ 51,618.56 $101,885.52
Thomas W. Banks
Less: Net income 14,415.92 21,307.01
reported by Thomas W.
Banks
Unreported Net Income $ 37,202.64 $ 80,578.51
*138 Schedule A
Net Worth - Thomas W. Banks
Item ASSETS 12-31-44 12-31-45 12-31-46 12-31-47
1. Marquette Nat. $ 899.45 $ 2,461.65 $ 2,177.79 $ 2,985.77
Bank-Minneapolis
2. First Nat. Bank 2,704.08 11,253.84 686.65 3,129.43
Minneapolis
3. First Nat. Bank Anoka, 1,004.38 1,365.20 2,558.57 1,788.88
Minn.
4. Grand Marais State Bank,
Grand Marais,
Minn. 476.95 781.95 1,114.25 825.67
5. Jamieson & Co. check 2,488.74
6. Series D bonds 562.50 562.50
7. Series E bonds 19,162.50 23,662.50 18.75 18.75
7A. Bonus bond
8. Merchants Distilling 9,380.91
stock
9. Gillette Safety Razor 14,349.04
stock
10. Northwest Airlines stock 22,019.29 28,957.29
10A. Mohawk Liquor Corp. 750.00 750.00
stock
10B. Insull Utilities
10C. Cities Service stock 2,819.53 2,819.53 2,819.53 2,819.53
Receivables
10D. Rubin Shetsky 5,000.00 5,000.00 5,000.00
11. H. G. Lee 5,000.00 5,000.00 5,000.00
12. M. J. O'Connor note 3,000.00
13. Quality Drug Co. 2,500.00 3,750.00 3,750.00 3,750.00
14. T. E. Ewing 10,000.00 10,000.00 10,000.00 10,000.00
15. Ring Construction Co. 2,000.00
16. F. J. Wickers 4,000.00 4,500.00
17. Robert L. Schuettler 10,000.00
18. A. M. Cary 12,500.00
19. Harold Siegel & Howard 32,358.33
Gelb
20. Walter Halvorson 1,025.00 725.00 400.00 200.00
21. Brady's Bar
22. Pearson's News Service 410.00 200.00
23. Blue Goose Resort, Inc. 16,514.82 9,477.02 (1,488.13) 511.87
24. McCarthy's Cafe 3,500.00 3,500.00 13,500.00 26,000.00
25. Flour City Body Corp. 2,500.00 5,000.00 2,750.00 2,750.00
25A. Casablanca, Inc. 11,600.00 11,600.00 11,600.00
26. Daily Mail 10,000.00
26A. E. A. Jefferds 5,000.00 5,000.00 5,000.00 5,000.00
Anoka Farms
27. Inventory 16,922.01 16,284.25 16,389.50 20,907.01
28. Bldgs. and Improvements 21,497.27 22,750.19 24,840.75 24,974.60
- Main Farm
29. Equipment - Main Farm 11,715.71 11,715.71 16,848.12 18,764.60
30. Land - Main Farm 5,130.35 5,130.35 9,880.35 9,880.35
31. Bldgs. - #2 Farm (Wm. 2,000.00 2,218.59 4,599.74
Hesli) (w.s.)
32. Land - #2 Farm 3,200.00 3,365.00 3,365.00
33. Bldgs. - #3 Farm (Lyle 1,800.00 1,800.00
G. Nichols)
34. Land - #3 Farm 4,240.00 4,240.00
35. Twin City Milk Producers 165.00 165.00 165.00 165.00
Assn. (w.s.)
36. Mortgages (1,072.18) (990.15)
37. Reserve for Depreciation (5,102.79) (7,015.28) (9,081.25) (12,235.14)
- Bldgs. & Equipt.
Investment in Operating
Companies
38. Banks and Shepard 7,884.56 9,258.95 8,219.03 9,038.14
39. Coin-A-Matic Amusement 6,894.85 8,058.53 8,862.45 7,505.72
Co.
40. McCarthy's Cafe, Inc. 11,864.11 11,864.14 11,864.14 11,864.14
41. B & S Company (o.s.) 8,849.33 8,849.33 8,849.33 8,849.33
42. Flour City Body Corp. 4,000.00 4,000.00 4,000.00 4,000.00
43. Power Brake & Equipment 3,750.00 3,750.00
Co.
44. Blue Goose Resort, Inc. 7,125.00 7,125.00 7,125.00 7,125.00
44A. Wheel Service
45. 10th St. Realty Co. 9,925.00 14,603.00
45A. Casablanca (o.s.) 7,800.00 7,800.00 7,800.00 7,800.00
46. Budweiser Tavern Bldg. 3,408.40 3,378.30 3,717.29 3,628.10
47. Pearson News Service 5,200.79 11,408.01 24,667.35 5,765.24
48. Music Installations 1,775.00 1,775.00 1,775.00 1,775.00
49. Koolaire, Inc. 18,200.00
50. National Plastics 8,125.00
Other Real Estate
51. 3817 Drew Ave. (Personal 13,500.00 13,500.00 13,500.00 13,500.00
Residence)
52. 3952 Beard Ave.
53. 4400 East Lake Street 2,100.00 2,100.00 2,100.00 2,100.00
54. 5238 Excelsior Blvd. 10,696.87 1,000.00 1,000.00 1,000.00
19,650.00 20,862.71 20,422.62
55. Oneida Bldg. 295.12 375.12 375.12 446.65
56. Crow Wing County Land 3,600.00 3,600.00 3,600.00 3,600.00
57. Hungry Jack Lodge (o.s.)
Total Assets $244,800.82 $302,038.79 $330,871.82 $350,297.34
LIABILITIES
Mortgages Payable
58. 3817 Drew Ave. So.
(w.s.)
59. 3952 Beard Ave.
60. 4400 East Lake Street $ 1,700.00 $ 1,700.00
61. 5238 Excelsior Blvd.
62. Oneida Bldg. 6,000.00 5,400.00 $ 4,800.00
Loans and Accts. Payable
62A. Penn Mutual Life Ins.
Co.
63. Harold H. Banks
64. Marquette Nat. Bank
65. First Nat. Bank Anoka,
Minn.
66. Flour City Body Corp. 3,484.66 3,484.66 2,284.66 $ (462.62)
(w.s.)
67. Accts. receivable per
corporate books
68. Notes receivable per 1,500.00 1,500.00 1,500.00 1,500.00
corporate books (w.s.)
Total Liabilities $12,684.66 $ 12,084.66 $ 8,584.66 $ 1,037.38
TOTAL ASSETS $244,800.82 $302,038.79 $330,871.82 $350,297.34
Less: Total Liabilities 12,684.66 12,084.66 8,584.66 1,037.38
NET WORTH $232,116.16 $289,954.13 $322,287.16 $349,259.96
Less: Net Worth at 157,182.33 232,116.16 289,954.13 322,287.16
beginning of year or
period
Increase in Net Worth $ 74,933.93 $ 57,837.97 $ 32,333.03 $ 26,972.80
(see a below)
Less: Nontaxable income 1,653.97 2,352.47 2,292.23 95.78
Increase in Net Worth
Less: Nontaxable income $ 73,279.96 $ 55,485.50 $ 30,040.80 $ 26,877.02
Plus: Living Expenses 10,000.00 10,000.00 12,000.00 12,000.00
Federal Income Taxes 3,639.71 131.17 5,482.44 9,565.66
Paid
Corrected Net Income of $ 86,919.67 $ 65,616.67 $ 47,523.24 $ 48,442.68
Thomas W. Banks & Reta
Banks
Less: Net income 1,030.68 1,374.38 948.40 352.42
reported by Reta b
Corrected net income of $ 85,888.99 $ 64,242.29 $ 46,574.84 $ 48,090.26
Thomas W. Banks
Less: Net income 11,858.28 20,170.11 27,100.99 20,609.29
reported by Thomas W.
Banks
Unreported Net Income $ 74,030.71 $ 44,072.18 $ 19,473.85 $ 27,480.97
*139
SCHEDULE B
SUPPLEMENTARY NET WORTH COMPUTATION
Showing Allocation of Unreported Net Income
for Years of 1937 to 1941, inclusive
Unreported Net Income for period 12-31-36 to 12-31-41, inclusive $45,834.96
Less:
Additional Net Income per prior determinations: Net Income Per Net Income Per Additional
Prior Deter- Original Net In-
Year mination Return come
1938 $7,104.89 $5,400.35 $1,704.54
1939 8,018.67 4,853.04 3,165.63
1940 4,253.70 3,435.38 818.32 5,688.49
Unreported Net Income in excess of prior determinations $40,146.47
Allocation of Unreported Net Income in excess of prior $ 8,029.29
determinations on an equal basis for each year: $40,146.47 / 5 =
*140 Computation of Corrected Net Income: Net Income Per Additional Per Additional Allo- Corrected
Original Prior Deter- cated Unre- Net In-
Year Return mination ported come
1937 $ 4,879.91 $ 8,029.30 $12,909.11
1938 5,400.35 $1,704.54 8,029.30 15,134.19
1939 4,853.04 3,165.63 8,029.29 16,047.96
1940 3,435.38 818.32 8,029.29 12,282.99
1941 4,008.56 8,029.29 12,037.85
Totals $22,577.14 $5,688.49 $40,146.47 $68,412.10
SCHEDULE C
Net Worth - Thomas W. Banks
Item ASSETS 12-31-36 12-31-41 12-31-42 12-31-43
A. Cash on Hand nd $ 60,000.00 $ 60,000.00 $ 60,000.00 $ 60,000.00
1. Marquette Natl. Bk., 63.39 637.49 1,373.90
Minneapolis
2. 1st Natl. Bk., 159.15 301.49 374.60 1,058.05
Minneapolis
3. 1st Natl. Bk., Anoka, 492.98 347.88
Minn
4. Grand Marais State Bk.,
Grand Marais,
Minn. 175.00
5. Jamieson & Co. check
6. Series D Bonds 562.50 562.50 562.50
7. Series E Bonds 375.00 7,537.50
7A. Bonus Bond 200.00
8. Merchant's Distilling
Stock
9. Gillette Safety Razor
Stock
10. Northwest Airlines
Stock
10A. Mohawk Liquor Corp. 750.00 750.00 750.00
Stock nd
10B. Insull Utilities 3,497.40
Investment nd
10BB. Old Peoria Co., Inc. nd 12,500.00
10C. Cities Service Stock 2,819.53 2,819.53 2,819.53 2,819.53
Receivables
10D. Rubin Shetsky (See
Living Expenses
below) nd
11. H. G. Lee nd
12. M. J. O'Connor Note
13. Quality Drug Co.
14. T. E. Ewing nd
15. Ring Construction Co.
16. F. J. Wickers
17. Robert L. Schuettler
18. A. M. Cary
19. Harold Siegel and
Howard Gelb nd
20. Walter Halvorson 1,325.00
21. Brady's Bar nd (6,934.42) (7,434.42) 9,240.10
22. Pearson's News Service (998.15) (438.00) 1,610.00
23. Blue Goose Resort, Inc. (2,420.00) 10,469.45
24. McCarthy's Cafe
25. Flour City Body Corp.
25A. Casablanca, Inc.
26. Daily Mail nd
26A. E. A. Jefferds nd 5,000.00
Anoka Farms
27. Inventory nd $ 745.00 $ 9,128.32 $ 12,692.10
28. Buildings & 6,400.00 17,176.36 19,726.36
Improvements - Main
Farm nd
29. Equipment - Main Farm 9,259.75 9,259.75
nd
30. Land - Main Farm nd 3,830.35 3,830.35 5,130.35
31. Buildings - #2 Farm
(Wm. Hesli) nd
32. Land - #2 Farm nd
33. Buildings - #3 Farm
(Lyle G. Nichols) nd
34. Land - #3 Farm nd
35. Twin City Milk 110.00 165.00
Producers Assn. nd
36. Mortgages nd (4,394.75) (4,230.46) (4,059.53)
37. Reserve for
Depreciation -
Buildings &
Equipment nd (532.00) (1,951.86) (3,422.72)
Investment in Operating
Companies
38. Banks and Shepard 4,679.77 6,796.96 8,677.83
39. Coin-A-Matic Amusement 5,192.26 4,156.46 6,140.77
Co.
40. McCarthy's Cafe, Inc. 7,364.14 11,864.14
41. B & S Company 3,400.00
42. Flour City Body $ 4,000.00 4,000.00 4,000.00 4,000.00
Corporation nd
43. Power Brake & Equipment
Co.
44. Blue Goose Resort, Inc. 7,125.00 7,125.00 7,125.00
44A. Wheel Service nd 4,500
45. 10th Street Realty Co.
45A. Casablanca 7,800.00
46. Budweiser Tavern Bldg. 3,171.50 3,025.43
47. Pearson's News Service 2,948.65 6,043.81 2,951.67
48. Music Installations 1,775.00 1,775.00
49. Koolaire, Inc.
50. National Plastics
Other Real Estate
51. 3817 Drew Ave. 13,500.00 13,500.00 13,500.00 13,500.00
(Personal Residence)
52. 3952 Beard Ave. 6,402.50 5,705.62 5,524.37 5,343.12
53. 4400 East Lake Street 2,100.00 2,100.00 2,100.00
54. 5238 Excelsior Blvd. 2,380.22 10,724.03 10,369.15
55. Oneida Building
56. Crow Wing County Land 295.12
57. Hungry Jack Lodge nd 1,000.00 3,600.00 3,600.00 3,600.00
TOTAL ASSETS $108,578.58 $115,619.46 $164,923.41 $236,858.45
LIABILITIES
Mortgages Payable
58. 3817 Drew Ave. $ 5,852.46 $ 2,075.98 $ 2,066.73 $ 1,187.87
59. 3952 Beard Ave. 3,500.00 2,120.00 1,640.00 1,160.00
60. 4400 East Lake St. 1,700.00 1,700.00 1,700.00
61. 5238 Excelsior Blvd. 5,939.09 5,190.40
62. Oneida Bldg.
Loans and Accounts
Payable
62A. Penn Mutual Life 1,500.00
Insurance Co.
63. Harold H. Banks 2,000.00 2,000.00 2,000.00 2,000.00
64. Marquette Natl. Bank 4,500.00 3,500.00
65. 1st Natl. Bk., Anoka, 1,000.00
Minn
66. Flour City Body Corp.
(Officers' ad-
vances per corporate 38.47 2,968.58 3,484.66
books)
67. Accts. Receivable per 2,816.13 424.58 322.29
corporate books
68. Notes Receivable per 1,500.00 1,500.00
corporate books
TOTAL LIABILITIES $ 12,852.46 $ 15,250.58 $ 22,738.98 $ 16,545.22
Total Assets $108,578.58 $115,619.46 $164,923.41 $236,858.45
Less: Total Liabilities 12,852.46 15,250.58 22,738.98 16,545.22
Net Worth $ 95,726.12 $100,368.88 $142,184.43 $220,313.23
Less: Net Worth at
beginning of yr. or
period 95,726.12 100,368.88 142,184.43
Increase in Net Worth $ 4,642.76 $ 41,815.55 $ 78,128.80
Less: Nontaxable Income
Increase in Net Worth $ 4,642.76 $ 41,815.55 $ 78,128.80
1/5 of Net Worth
Increase allocated to
1941
(See Resp's. Schedule 919.05
B)
Plus: Living Expenses 6,000.00 10,000.00 10,000.00
Rubin Shetsky
Fed. Income Taxes pd. 254.11 267.66 17,366.35
by petitioner
Corrected Net Income of
Thomas W. & Reta
Banks $ 7,173.16 $ 52,083.21 $105,495.15
Less: Net Income 236.43 464.65 478.63
reported by Reta
Corrected Net Income of $ 6,936.73 $ 51,618.56 $105,016.52
Thomas
Less: Net Income 4,008.56 14,415.92 21,307.01
reported by Thomas
UNREPORTED NET INCOME $ 2,928.17 $ 37,202.64 $ 83,709.51
*141 SCHEDULE C
Net Worth - Thomas W. Banks
Item ASSETS 12-31-44 12-31-45 12-31-46 12-31-47
A. Cash on Hand nd $ 60,000.00 $ 60,000.00 $ 60,000.00 $ 60,000.00
1. Marquette Natl. Bk., 899.45 2,461.65 2,177.79 2,985.77
Minneapolis
2. 1st Natl. Bk., 2,704.08 11,253.84 686.65 3,129.43
Minneapolis
3. 1st Natl. Bk., Anoka, 1,004.38 1,365.20 2,558.57 1,788.88
Minn
4. Grand Marais State Bk.,
Grand Marais,
Minn. 476.95 781.95 1,114.25 825.67
5. Jamieson & Co. check 2,488.74
6. Series D Bonds 562.50 562.50
7. Series E Bonds 19,162.50 23,662.50 18.75 18.75
7A. Bonus Bond
8. Merchant's Distilling 9,380.91
Stock
9. Gillette Safety Razor 14,349.04
Stock
10. Northwest Airlines 22,019.29 28,957.29
Stock
10A. Mohawk Liquor Corp. 750.00 750.00
Stock nd
10B. Insull Utilities
Investment nd
10BB. Old Peoria Co., Inc. nd
10C. Cities Service Stock 2,819.53 2,819.53 2,819.53 2,819.53
Receivables
10D. Rubin Shetsky (See
Living Expenses
below) nd
11. H. G. Lee nd 5,000.00 5,000.00 5,000.00
12. M. J. O'Connor Note 3,000.00
13. Quality Drug Co. 2,500.00 3,750.00 3,750.00 3,750.00
14. T. E. Ewing nd 10,000.00 10,000.00 10,000.00 10,000.00
15. Ring Construction Co. 2,000.00
16. F. J. Wickers 4,000.00 4,500.00
17. Robert L. Schuettler 10,000.00
18. A. M. Cary 12,500.00
19. Harold Siegel and 32,358.33
Howard Gelb nd
20. Walter Halvorson 1,025.00 725.00 400.00 200.00
21. Brady's Bar nd
22. Pearson's News Service 410.00 200.00
23. Blue Goose Resort, Inc. 16,514.82 9,477.02 (1,488.13) 511.87
24. McCarthy's Cafe 3,500.00 3,500.00 13,500.00 26,000.00
25. Flour City Body Corp. 2,500.00 5,000.00 2,750.00 2,750.00
25A. Casablanca, Inc. 11,600.00 11,600.00 11,600.00
26. Daily Mail nd 5,000.00
26A. E. A. Jefferds nd 5,000.00 5,000.00 5,000.00 5,000.00
Anoka Farms
27. Inventory nd $ 16,922.01 $ 16,284.25 $ 16,389.50 $ 20,907.01
28. Buildings & 21,497.27 22,750.19 24,840.75 24,974.60
Improvements - Main
Farm nd
29. Equipment - Main Farm 11,715.71 11,715.71 16,848.12 18,764.60
nd
30. Land - Main Farm nd 5,130.35 5,130.35 9,880.35 9,880.35
31. Buildings - #2 Farm 2,000.00 2,218.59 4,599.74
(Wm. Hesli) nd
32. Land - #2 Farm nd 3,200.00 3,365.00 3,365.00
33. Buildings - #3 Farm 1,800.00 1,800.00
(Lyle G. Nichols) nd
34. Land - #3 Farm nd 4,240.00 4,240.00
35. Twin City Milk 165.00 165.00 165.00 165.00
Producers Assn. nd
36. Mortgages nd (1,072.18) (990.15)
37. Reserve for
Depreciation -
Buildings &
Equipment nd (5,102.79) (7,015.28) (9,081.25) (12,235.14)
Investment in Operating
Companies
38. Banks and Shepard 7,884.56 9,258.95 8,219.03 9,038.14
39. Coin-A-Matic Amusement 6,894.85 8,058.53 8,862.45 7,505.72
Co.
40. McCarthy's Cafe, Inc. 11,864.14 11,864.14 11,864.14 11,864.14
41. B & S Company 8,849.33 8,849.33 8,849.33 8,849.33
42. Flour City Body 4,000.00 4,000.00 4,000.00 4,000.00
Corporation nd
43. Power Brake & Equipment 3,750.00 3,750.00
Co.
44. Blue Goose Resort, Inc. 7,125.00 7,125.00 7,125.00 7,125.00
44A. Wheel Service nd
45. 10th Street Realty Co. 9,925.00 14,603.00
45A. Casablanca 7,800.00 7,800.00 7,800.00 7,800.00
46. Budweiser Tavern Bldg. 3,408.40 3,378.30 3,717.29 3,628.10
47. Pearson's News Service 5,200.79 11,408.01 24,667.35 5,765.24
48. Music Installations 1,775.00 1,775.00 1,775.00 1,775.00
49. Koolaire, Inc. 18,200.00
50. National Plastics 8,125.00
Other Real Estate
51. 3817 Drew Ave. 13,500.00 13,500.00 13,500.00 13,500.00
(Personal Residence)
52. 3952 Beard Ave.
53. 4400 East Lake Street 2,100.00 2,100.00 2,100.00 2,100.00
54. 5238 Excelsior Blvd. 10,696.87 1,000.00 1,000.00 1,000.00
55. Oneida Building 19,650.00 20,862.71 20,422.62
56. Crow Wing County Land 295.12 375.12 375.12 446.65
57. Hungry Jack Lodge nd 3,600.00 3,600.00 3,600.00 3,600.00
TOTAL ASSETS $304,800.82 $357,038.79 $385,871.82 $400,297.34
LIABILITIES
Mortgages Payable
58. 3817 Drew Ave.
59. 3952 Beard Ave.
60. 4400 East Lake St. $ 1,700.00 $ 1,700.00
61. 5238 Excelsior Blvd.
62. Oneida Bldg. 6,000.00 5,400.00 $ 4,800.00
Loans and Accounts
Payable
62A. Penn Mutual Life
Insurance Co.
63. Harold H. Banks
64. Marquette Natl. Bank
65. 1st Natl. Bk., Anoka,
Minn
66. Flour City Body Corp.
(Officers' ad-
vances per corporate 3,484.66 3,484.66 2,284.66 $ (462.62)
books)
67. Accts. Receivable per
corporate books
68. Notes Receivable per 1,500.00 1,500.00 1,500.00 1,500.00
corporate books
TOTAL LIABILITIES $ 12,684.66 $ 12,084.66 $ 8,584.66 $ 1,037.38
Total Assets $304,800.82 $357,038.79 $385,871.82 $400,297.34
Less: Total Liabilities 12,684.66 12,084.66 8,584.66 1,037.38
Net Worth $292,116.16 $344,954.13 $377,287.16 $399,259.96
Less: Net Worth at
beginning of yr. or
period 220,313.23 292,116.16 344,954.13 377,287.16
Increase in Net Worth $ 71,802.93 $ 52,837.97 $ 32,333.03 $ 21,972.80
Less: Nontaxable Income 1,653.97 2,352.47 2,292.23 95.78
Increase in Net Worth $ 70,148.96 $ 50,485.50 $ 30,040.80 $ 21,877.02
1/5 of Net Worth
Increase allocated to
1941
(See Resp's. Schedule
B)
Plus: Living Expenses 10,000.00 10,000.00 12,000.00 12,000.00
Rubin Shetsky 5,000.00
Fed. Income Taxes pd. 3,639.71 131.17 5,482.44 9,565.66
by petitioner
Corrected Net Income of
Thomas W. & Reta
Banks $ 83,788.67 $ 65,616.67 $ 47,523.24 $ 48,442.68
Less: Net Income 1,030.68 1,374.38 948.40 352.42
reported by Reta
Corrected Net Income of $ 82,757.99 $ 64,242.29 $ 46,574.84 $ 48,090.26
Thomas
Less: Net Income 11,858.28 20,170.11 27,100.99 20,609.29
reported by Thomas
UNREPORTED NET INCOME $ 70,899.71 $ 44,072.18 $ 19,473.85 $ 27,480.97
*142 Where a contested item raises an issue of fact, we resolve the issue in our findings relating thereto, with further explanation in our opinion to the extent that elaboration of the basis of our ultimate findings seems required. Where the contested item involves the burden of proof, we likewise explain our view in our opinion. Our findings of fact and opinion with respect to disputed items will be set forth hereinafter in the order in which they appear on our revised net worth Schedule C, supra. In several instances, however, where petitioner contends that respondent erroneously omitted certain assets or liabilities, we resolve the issue in the appropriate relationship to other disputed items.
Opinion
Net Worth Method
At the threshold of our discussion, we note that petitioner's counsel conceded at the trial that respondent was justified in resorting to the comparative net worth plus gross expenditures method in reconstructing petitioner's taxable income during the years ending December 31, 1936, through December 31, 1947, inclusive. Petitioner's primary objection, however, is to the effect that the net worth method, when properly applied to the facts of record, establishes that petitioner *143 fully reported his taxable income for the years in controversy.
Apart from petitioner's concession hereinabove, we note, for clarity, the courts have repeatedly held that the net worth method is not a method of accounting, and may be used as a guide for determining the amount of income actually received where the net worth computation reveals a substantial gap between actual income and reported income, or where the books or other records are, as here, shown to have been inadequately maintained or destroyed. Holland v. United States, 348 U.S. 121 (1954) , rehearing denied 348 U.S. 932 ; Carmack v. Commissioner, 183 F. 2d 1 , (C.A. 5, 1950), affirming a Memorandum Opinion of this Court, certiorari denied 340 U.S. 875 (1950) ; Frank Imburgia, 22 T.C. 1002 (1954) . By a showing of a substantial increase in net worth in excess of reported income, without reasonable explanation of such discrepancies being attributable to gifts, inheritances, or other nontaxable receipts, the net worth method furnishes persuasive evidence of unreported income and reflects on the over-all accuracy of income reported on the books and on the returns. Harry Gleis, 24 T.C. 941 (1955) , affd. 245 F. 2d 237 *144 (C.A. 6, 1957); Michael Potson, 22 T.C. 912 (1954) , affd. sub nom. Bodoglau v. Commissioner, 230 F. 2d 336 (C.A. 7, 1956). In our analysis of the record we need not, therefore, restrict the use of the net worth method to finding particular inaccuracies, omissions, or defalcations in the taxpayer's books. Such may or may not exist and may or may not be discernible. Banks v. United States, 204 F. 2d 666 (C.A. 8, 1953), reaffirmed on reconsideration, 223 F. 2d 884 (C.A. 8, 1955), certiorari denied 350 U.S. 986 (1956) .
It is well settled that petitioner has the burden of establishing by a preponderance of the evidence that respondent's reconstruction of income is erroneous, and this extends to his determination of net worth at the beginning of the critical period. Of course, the burden of proving increases in deficiencies and additions to tax, affirmatively alleged by amended answer, and the entire burden of proving fraud, rests on respondent. Joseph V. Moriarity, 18 T.C. 327 , 329 (1952) , affd. per curiam 208 F. 2d 43 (C.A.D.C. 1953) .
We reject petitioner's contention that certain errors in respondent's beginning and ending net worth computations, supra, destroy the presumption *145 of correctness that normally attaches to his determination and shifts the burden to respondent of proving that his determination herein was correct in spite of such errors. Recently, in Commissioner v. Smith, 285 F. 2d 91 (C.A. 5, 1960), where it was likewise urged that the presumption "dropped out" of the case once evidence was produced by the taxpayer, the Court said that "a finding against the Commissioner on one item still leaves on the taxpayer the burden of showing with respect to each other item that the Commissioner was wrong. * * *"
In the absence of records or reliable information, respondent was obliged to resort to some reasonably effective technique for the determination of income and petitioner cannot, by lack of cooperation and concealment, deprive respondent of the right to use a practical method of making his determination. Obviously, petitioner's difficulty is of his own making in failing to maintain proper records of his extensive gambling activities, loans, and other material facts. Under the circumstances, we believe that the method adopted by respondent and the results reached were not arbitrary, and that the necessary adjustments which petitioner established *146 at the trial with respect to a few items did not impose on respondent the burden of proving that his determination of deficiencies for the years in question were correct. See Harp v. Commissioner, 263 F. 2d 139 (C.A. 6, 1959), reversing a Memorandum Opinion of this Court.
By consecutive timely executed agreements (Forms 872), the period for assessment of the deficiencies and additions to tax against petitioner for each of the calendar years 1941, 1943, 1 1944, 1945, 1946, and 1947 was held open until June 30, 1952. The deficiency notice in the instant case was issued April 29, 1952.
With respect to the years 1937 to 1940, inclusive, since respondent has failed to establish fraud for this period, to be discussed infra, said years are barred by the statute of limitations and we need not consider any disputed items which arise during said years and which have no impact upon other years in question.
Before considering the disputed items on our revised net worth schedule (Schedule C), we deem *147 it appropriate to point out that at all times during the years 1937 to 1947 petitioner owned at least one car. The cars were not shown on respondent's net worth schedule because respondent did not have figures as to the cost of the different automobiles. The cost of automobiles, however, increased from 1937 through 1947, and consequently the net worth of petitioner represented by ownership of automobiles would be greater in 1947 than in 1937. In the absence of precise figures and to avoid any inequity to petitioner, no automobiles were included in the net worth schedule for the taxable years involved herein.
Likewise, the cash surrender value of petitioner's Penn Mutual Life insurance policy was not shown in respondent's net worth schedule because it was considered that the item "living expenses" included the cost of the premiums paid and any increase in petitioner's net worth based on increase in the cash surrender value of the insurance policy might represent a partial duplication.
As indicated on respondent's net worth statement, in determining petitioner's correct taxable income, appropriate allowances and credits for nontaxable income have been given to him. Details of petitioner's *148 nontaxable income are set forth in the joint stipulation of facts which shows that petitioner had nontaxable portions of capital gains arising out of sales of real property and stocks and a small amount of nontaxable income derived from nontaxable interest.
The figures shown on respondent's net worth schedule for Federal income taxes paid for the years ended December 31, 1942, through December 31, 1947, represent Federal income taxes paid both by petitioner and his wife.
Findings of Fact
Cash on Hand
December 31, 1936, was selected by respondent as the starting point of the instant case because it was close to the date of July 2, 1937, on which petitioner submitted an affidavit to the Government showing his financial condition in connection with an attempt to settle an alcohol tax liability assessment made in June 1934, and also because it was a date which could be tied in with the previous income tax investigation covering the years 1920 to 1933, inclusive. The opening net worth of petitioner as of December 31, 1936, was reconciled with the closing net worth of the prior income tax investigation for the period 1920 to 1933, inclusive, as a test of the accuracy of the opening net *149 worth. In Banks v. United States, 204 F. 2d 666 (C.A. 8, 1953), at pp. 668, 669, the Court of Appeals recognized the propriety of using the net worth of the defendant (petitioner herein) as of the end of 1936 predicated upon his affidavit filed with the Bureau of Internal Revenue in 1937.
The net worth schedule of petitioner prepared by special agents Masica and Hanson for the period 1920 to 1933, inclusive, showed that petitioner's net worth as of December 31, 1933, amounted to $31,228.01.
For the years 1934, 1935, and 1936, petitioner reported on his tax returns a net income in the respective amounts of $3,127.62, $4,189.07, and $6,496.25.
The following schedule represents a reconciliation of the opening net worth of petitioner as of December 31, 1936, with the closing net worth as of December 31, 1933, which was determined in the prior income tax investigation of petitioner who did not contest the resulting income tax deficiency and additions to tax for fraud under section 293(b) of the 1939 Code. Net worth as of 12-31-33 per prior revenue $31,228.01
agent report
Plus:
Net income reported
1934 $3,127.62
1935 4,189.07
1936 6,496.25
Total net income reported 1934, 1935 and 1936 13,812.94
Total funds available $45,040.95
Less:
Capital stocks and bonds that became worth-
less prior to 1937:
AmericanCommonwealth Power $ 987.60
Corp. Securities of America 1,383.34
Foote Bros. Gear & Machine Co. 936.25
American Eagle Aircraft 540.00
Central Public Services 2,496.41
$ 6,343.60
Cash surrender value of life insurance not 2,493.27
included in net worth
Estimated living expenses for 1934, 1935 and 15,000.00
1936 at $5,000 per year
Total funds applied $23,836.87
lBalance
of funds
available
as of
12-31-36
$21,204.08
Net worth as of 12-31-36 * *150 20,578.58
Unreconciled difference $ 625.50
O'Gordon represented petitioner as his lawyer and attorney in fact in connection with the settlement of his income tax case for the years 1920 through 1933. In June 1937, at the termination of the investigation of petitioner for the years 1920 to 1933, inclusive, O'Gordon informed the revenue agent that he would advise Banks not to protest the income tax deficiency and probably not to protest the addition to tax for fraud. O'Gordon also told Special Agent Masica that he thought his client would try to borrow part of the money and arrange to pay the balance out of his salary at the Old Peoria Company, a liquor firm where he was employed.
In the affidavit dated July 2, 1937, submitted by petitioner to the Government to compromise the alcohol tax assessment of $33,589.92 made in June 1934, petitioner stated, inter alia: "That it is my opinion that I am actually insolvent at the present time. That the most I have ever been worth was $30,000 about 1920." See Findings of Fact, Background and General Facts *151 for said affidavit in extenso.
During the period November 8, 1930, to February 3, 1933, petitioner borrowed small amounts ranging from $400 to $2,500 at 6 percent interest from the First National Bank of Minneapolis. There was a total of 15 such loans (some of which were renewals) during the aforesaid period. Petitioner put up various stocks and bonds with the bank as security for the loans.
On one occasion the stock held by the First National Bank of Minneapolis as security for a $400 loan to petitioner declined in value and the bank sold the security, the proceeds being applied to the payment of the note in full.
During 1933, petitioner's wife also borrowed $1,000 from the First National Bank of Minneapolis and deposited stocks and bonds as security for the loan.
During the period December 5, 1930, to May 6, 1933, petitioner obtained several small loans at said bank on behalf of Flour City Body Corporation. The records of the bank indicate that petitioner "was in need of the money." The loans were secured by bonds and also by petitioner's life insurance.
In 1925, petitioner purchased a $10,000 life insurance policy on his life with the Penn Mutual Life Insurance Company. On December *152 27, 1932, petitioner borrowed $1,500 at 6 percent interest with the insurance policy as collateral. The loan was not paid in full until May 28, 1941. On June 23, 1930, a mortgage loan in the amount of $4,000 was taken out with Prudential Insurance Company on the property located at 3952 Beard Avenue South, Minneapolis. On January 2, 1935, when said property was owned by petitioner and he was delinquent in making his loan payments, the Prudential Insurance Company referred the loan to an attorney for foreclosure. No foreclosure proceeding was actually instituted. By 1935 petitioner had paid $500 on the principal of said loan.
A mortgage in the amount of $5,000 was taken out on May 8, 1933, against the property known as 3817 Drew Avenue South (Item 51). This property was the residence of petitioner for many years and remained so at the time of trial. Said mortgage was not paid in full until November 1, 1944.
In an application for a loan to the Northwestern Savings and Loan Association of Minneapolis dated August 31, 1942, Banks stated that his total assets amounted to "in excess $80,000.00 clear." (This amount coincides with the net worth as determined by the respondent for the year *153 ended December 31, 1942.)
Petitioner's two life insurance policies with the Veterans Administration in the total face amount of $10,000 lapsed on July 1, 1934, for nonpayment of premiums due.
Section 2337, General Statutes 1923, State of Minnesota, defines the money and credits which an individual was required to report in the money and credits tax returns of the State of Minnesota as follows:
As used in this section, the word "money" means gold and silver coin, Treasury notes, bank notes, and other forms of currency in common use; and the credit "credits" means and includes every claim and demand for money or other valuable thing, and every annuity or sum of money receivable at stated periods, due or to become due, and all claims and demands secured by deed or mortgage, due or to become due, and all shares of stock in corporations the property of which is not assessed or taxed in this state.
Section 2340 of the same law requires the taxpayer to make a return of the total amount of his "money and credits" taxable under the Act. Section 2341 of the law requires that the return of the taxpayer shall be under oath.
Money and credits tax of the State of Minnesota as assessed and paid by *154 petitioner during the years 1929 to 1936, inclusive, are as follows: Valua- Date Pen- Clerk
Year tion Paid Tax alties Fee
1929 $2,000 2/24/30 $6.00
1930 3,000 1/24/31 9.00
1931 200 1/13/32 .60
1932 300 3/30/33 .90
1933 450 7/17/34 1.35 .11 .25
1934 450 2/28/35 1.35
1935 450 2/29/36 1.35
1936 250 8/ 2/37 .75 .06 .25
There was no assessment of money and credits tax against petitioner for the years 1913, 1926, 1927, and 1928. There was no assessment for any of the years 1913 and 1926 to 1936, inclusive, against petitioner's wife, Reta.
In 1929, an assessment was originally set up against petitioner for money and credits tax showing a valuation of $3,000 and a tax of $9. However, said tax was abated by the State Department of Taxation on January 29, 1930, changing the valuation to $2,000 and the tax to $6. This assessment for money and credits was an assessment against petitioner and not an assessment against his wife.
The basis for the reduction in petitioner's money and credits tax was as follows. On January 10, 1930, Reta filed an application on behalf of petitioner for a reduction in the assessed valuation on money and credits with the County Board of Hennepin County, Minnesota. In the application, which was subscribed and sworn *155 to by Reta, she stated that petitioner had no money on hand, on deposit in banks or elsewhere, that an assessment against petitioner showing credits in the amount of $3,000 was an excessive arbitrary assessment, that the true and full value of the credits owing to petitioner was $2,000 and not $3,000 as assessed against petitioner; and she requested a reduction in the assessed valuation of petitioner's money and credits from $3,000 to $2,000.
Special Agent McKusick attempted to ascertain how much, if any, cash on hand petitioner had as of July 2, 1937, the date of the aforesaid affidavit submitted to compromise the alcohol tax assessment made in June 1934. McKusick found no evidence of any substantial cash in petitioner's possession as of that date. In question No. 1 of the written questions submitted to petitioner through his attorney, O'Gordon, petitioner was asked how much cash he and/or his wife had on hand as of July 2, 1937. Likewise, in question No. 20, it was asked how much cash was in the possession of petitioner and/or his wife as of December 31, 1947. None of the foregoing questions were answered in the written answers submitted to McKusick.
In the period 1930 to 1932, stocks *156 in Foote Bros. Gear and Machine Company, Central Public Service Corporation, Corporation Security Company of Chicago, and Associated Gas and Electric Company were issued to Reta Banks. These and other stocks were put up by Reta as security in 1933 for a $1,000 loan to her.
In the course of the investigation of petitioner, McKusick and the other agents working on the case made a diligent but unsuccessful search for cash on hand as of December 31, 1936. Their investigation revealed that Thomas had not inherited any amounts of money or received any substantial gifts during the taxable years involved herein.
Opinion
Cash on Hand
It is fundamental in the use of the net worth method to determine, with reasonable certainty, an opening net worth to serve as a starting point from which to calculate future increases in the taxpayer's assets. Holland v. United States, supra.
Respondent, in his computation of petitioner's net worth for the taxable years involved, does not include any cash on hand except a bank deposit of $159.15, as of the starting point, December 31, 1936. Petitioner contends, on brief, that he had $70,000 in cash on hand and that his wife had $52,352.46 in cash on hand as *157 of December 31, 1936.
In essence, it is petitioner's contention he amassed a cash hoard of $300,000 from his bootlegging activities during the prohibition era and that he had loaned a substantial amount of this cache to his friends during the ensuing years, leaving a balance of $70,000 as of December 31, 1936. Petitioner also argues that he had about $50,000 in currency in his vault, located in his residence, which belonged to his wife and which he had given to her prior to the critical date. We cannot wholly agree with petitioner.
Petitioner has advanced a possible source for his accumulation of the alleged cash hoard of $120,000 on hand as of December 31, 1936, ($70,000 of his and $50,000 belonging to Reta), but in view of other facts of record, to be discussed infra, we find his testimony unacceptable and insufficient to support the existence of a cash reserve in the amount claimed. We do not doubt, however, that he did keep substantial funds on hand prior to and during some of the critical years involved herein. The significant question is how much of said personal cash funds were on hand on December 31, 1936.
It would extend this opinion interminably, and at the same time serve *158 no useful purpose, to analyze all of the arguments pro and con advanced on behalf of petitioner, on the one hand, and respondent on the other. We have examined each of them with meticulous care. Most of the arguments presented on petitioner's behalf are either unsound, inconclusive, or based on evidence, unworthy of belief. It is impossible, on the record presented, for us to reach a precise conclusion. On the basis of the circumstantial evidence before us, we have determined the amount of petitioner's personal cash reserve on December 31, 1944, to be $60,000, and, in our judgment, there is no credible evidence of an amount in excess of that figure. We do not attribute any additional cash on hand to Reta. While we have reached this conclusion only after a careful analysis of the entire record, the result we have reached is substantially based upon the discussion which follows.
Although on the basis of petitioner's affidavit of 1937, there is some justification for respondent's position that petitioner had no substantial cash hoard as of December 31, 1936, we are satisfied that he did have a substantial amount of cash as of that date. As indicated above, the crucial question is how *159 much.
While we do not doubt that Thomas engaged in extensive bootlegging activities during the prohibition era, he has failed to establish to our satisfaction that the alleged net profits were kept in cash and intact during the intervening years before December 31, 1936. No reliable records of his alcohol purchases, sales, and cash retentions over the years prior to the critical date were introduced into evidence by him. The evidence shows that up until the year 1931, Thomas' principal occupation was selling alcohol; that as time went on the profits from his sales became less and less; and that for a number of years he sustained a loss from such sales rather than a profit. Moreover, petitioner never knew exactly how much money he was making in connection with his alcohol activities.
Assuming that petitioner may have done well from his illicit operations, the facts show that during some of the years prior to the taxable years involved, he was sharing his earnings with others, spending it on extensive travel, and to a substantial degree losing it in stock investments and other ventures. Petitioner admitted that his stock losses in 1931 and 1932 could have been large. There is no evidence *160 of frugality on the part of petitioner and his wife prior to or during the taxable years in question. Contrariwise, the record shows that during the years in question they maintained a comfortable standard of living and took several lengthy vacation trips to Mexico and Hawaii.
The record as to the amount of cash on hand which Banks claimed he had as of the starting date presents a jumble of inconsistencies. It is significant, we think, that no mention of any cash hoard was made during his criminal tax trial. The first allegation of cash on hand petitioner set forth in the pleadings was in the instant case (in the reply to second amendment to answer) filed March 16, 1959, three months before trial, wherein it is alleged that cash on hand as of December 31, 1936, was in the amount of approximately $30,000. Later, in the amendment to reply to second amendment to answer filed a month before trial, the amount of said cash was increased to approximately $60,000. At the beginning of the trial, Banks, on cross-examination testified that he had over $200,000 cash on hand as of December 31, 1936, and that the amount of cash on hand set forth in the pleadings was incorrect. Later, in the trial *161 petitioner offered several versions of how much currency he had on hand as of the critical date which ranged from a high of $275,000 to a low of $70,000. On cross-examination petitioner admitted that he did not know how much cash he had on hand as of the opening of the net worth period.
It is noteworthy that in his sworn affidavit dated July 2, 1937, submitted to compromise the alcohol tax liability, petitioner did not declare any substantial amount of cash, and stated that he was "actually insolvent" at that time. Petitioner now urges that said affidavit was "false" and did not reflect his true net worth at that time. It is also significant that petitioner never revealed to his accountant, Kinsey, or to his attorney, O'Gordon, anything about cash on hand at the time petitioner's tax case for the years 1920 through 1933 was being settled.
Likewise, with respect to the taxable years involved herein, petitioner was unable to recall whether he had ever told his attorney in the instant case how much cash he had on hand as of December 31, 1936. Until a short time before the instant trial Banks did not divulge anything about a cash hoard to his accountants or legal representatives even though *162 there is affirmative evidence that his representatives were interrogated in writing about this vital factor by revenue agents assigned to the investigation. 2
Thus, Special Agent McKusick, in an attempt to ascertain how much, if any, cash on hand Banks had as of July 2, 1937, submitted a list of questions to petitioner *163 through his attorney O'Gordon. In Question No. 1 of the written questions, petitioner was asked how much cash he had on hand as of July 2, 1937, and how much cash his wife, Reta, had on hand as of that date. Also, in Question No. 20, it was asked how much cash was in the possession of petitioner and/or his wife as of December 31, 1947. None of the foregoing questions were answered by petitioner. O'Gordon testified that he attempted to obtain the answers to said questions, that he always followed petitioner's instructions with respect to such matters, and that he (O'Gordon) did not answer those questions which he didn't think he could answer truthfully. O'Gordon testified further that he "never got any results" from interrogating Banks about his cash on hand as of December 31, 1936.
Apart from not knowing how much cash on hand he had as of December 31, 1936, petitioner was unable to state how much currency he had in his floor vault at home during the years 1940, 1941, 1945, 1947, or at the time of the trial. Nor did petitioner know how much cash his wife had as of December 31, 1936.
We note that after the settlement of the petitioner's income tax case, 1920 through 1933, O'Gordon told *164 Special Agent Masica in June 1937, that his client would try to borrow part of the money required by the settlement and arrange to pay the balance out of his salary at the Old Peoria Company. The deficiency in tax and additions to tax in the prior investigation totaled $5,679.13. Unless O'Gordon was misinformed, it is incongruous that an individual who allegedly had cash on hand in the approximate amount of $120,000, would have to borrow money to pay a tax liability of $5,679.13. During the instant trial, O'Gordon in effect reiterated his prior statements to the Government when he testified that his objective in 1937 was to get the tax down "where we could pay it."
In connection with the prior income tax investigation of Banks for the years 1920 through 1933, his accountant, Kinsey, told Masica that petitioner "didn't appear to have much." Kinsey testified that at the time of said investigation he had no knowledge of large amounts of cash on hand or of substantial amounts of debts owing to petitioner. Kinsey testified further that Banks never told him that he had large amounts of cash on hand at or about 1935 to 1937.
The record shows, as set forth in our Findings, that prior to the *165 taxable years in question, Banks on several occasions conducted his financial affairs unlike an individual claiming a substantial cash reserve. During the period November 1930 to February 1933, petitioner borrowed small amounts of money ranging from $400 to $2,500 at 6 percent from the First National Bank of Minneapolis. We do not accept petitioner's explanation that these small borrowings actually represented loans which were made under his name to his friends. Likewise, during 1933 Reta borrowed $1,000 at 6 percent from said bank and deposited stocks and bonds as security for the loan. No explanation was advanced by petitioner or Reta why it was necessary for her to borrow $1,000 when she purportedly had about $60,000 in cash in a wardrobe trunk at home.
Other factors cast further doubt upon the tenability of petitioner's contention. For example, during 1930 to 1933, inclusive, Banks obtained several small loans at the aforesaid bank on behalf of Flour City Body Corporation. In 1932, he borrowed $1,500 at 6 percent on a $10,000 life insurance policy with the Penn Mutual Life Insurance Company. Said loan was not fully paid until May 28, 1941. Our view is the same with respect to the *166 mortgage loan in the original amount of $4,000 which was taken out with the Prudential Insurance Company on the property located at 3952 Beard Avenue South, Minneapolis, Minnesota. The loan originated on June 3, 1930, and by 1935 only $500 had been paid on the principal. On January 2, 1935, when the property was owned by petitioner the mortgagee referred the loan to an attorney for foreclosure. Also, it is noted that a mortgage in the principal amount of $5,000 was taken out on May 8, 1933, on petitioner's residence located at 3817 Drew Avenue South, Minneapolis, and was not paid in full until November 1, 1944. Although petitioner may have a valid reason for the extended time of payment, it tends to negate his contention that he had a substantial cash hoard during those years. The fact that the mortgage was paid up in 1944, we think, buttresses respondent's determination that Banks was earning large amounts of unreported income at that time and during the taxable years involved herein.
Moreover, the fact that petitioner permitted two life insurance policies with the Veterans Administration in the total face amount of $10,000 to lapse on July 1, 1934, for nonpayment of premiums due, *167 further militates strongly against his cash hoard story. Although petitioner may have had a plausible reason (though undisclosed) for allowing his policies to lapse, it tends to negate his contention that he had a substantial cash hoard during those years.
Likewise, it is difficult to understand why Reta, who claims that her husband had assets in excess of $30,000 in 1929, would file a sworn application in that year with the State of Minnesota Department of Taxation on behalf of petitioner stating that the full amount of her husband's assets subject to the money and credits tax, was only $2,000 instead of a valuation in the amount of $3,000, in order to save $3 in tax.
Without further elaboration we find the foregoing transactions inconsistent with the possession of sizeable amounts of cash. To the same effect, see Blackwell v. United States, 244 F. 2d 423 (C.A. 8, 1957), and Bryan v. Commissioner, 209 F. 2d 822 (C.A. 5, 1954), affirming a Memorandum Opinion of this Court.
While we do not doubt that petitioner may have kept some cash in his home prior to and during the taxable years involved, it is difficult to believe that petitioner, who impresses us as a shrewd businessman, would *168 leave about $300,000 in cash in a wardrobe trunk in his house while he and his wife took pleasure trips to California for extended periods.
There are numerous circumstances supported by the record which demonstrate beyond question that petitioner is unworthy of belief. His numerous convictions and his admittedly false statements and false affidavits alone establish that an oath meant nothing to him. We need not repeat the further circumstances which support the same view. We are likewise satisfied that Reta's testimony is not to be accepted as credible. She was obviously biased and willing to testify to anything which she thought might be helpful to petitioner. We are urged to accept the testimony offered by petitioner as uncontradicted, but it is clear that the circumstantial evidence in the case furnished clear contradiction of such evidence. Moreover, the witnesses relied upon by petitioner were, in our opinion, unworthy of belief. Obviously, we are not required to accept blindly testimony which patently appears to be "highly improbable and manifestly unreasonable." Carmack v. Commissioner, supra, p. 621; Rand v. Helvering, 77 F. 2d 450 , 451 (C.A. 8, 1935).
Viewing the record *169 as a whole we believe the amount of cash on hand claimed by Banks is considerably inflated. His testimony at the trial was given after the significant issues in the case had been largely crystallized, and after respondent's statutory notice had been issued. It was then quite apparent that an opening personal cash hoard of $120,000, plus loans receivable of $248,250, to be discussed infra, (of which about $50,000 was attributed to Reta) would dovetail very effectively with petitioner's approach in his effort to demonstrate complete error in respondent's determination. Under the circumstances, we think petitioner's statements with respect to his cash on hand during the period involved made at the tiral was a mere rationalization based on his then projected position rather than on reliable recollection.
Despite the foregoing, we conclude, in the light of the needs of the types of business in which petitioner engaged, that he did have substantial cash on hand prior to and during the taxable years involved and that it is reasonable to infer from all of the circumstances that the amount was $60,000 as claimed in his amended reply to second amendment to answer. We are satisfied that it was *170 not in excess of that amount. We accordingly find opening cash in that amount as of December 31, 1936. At the same time, however, we think it reasonable to infer, from the nature of petitioner's business activities during the period in question, that this sum was in the nature of a revolving "bank roll" which varied little during the period 1936 to 1947, and we therefore attribute the same amount as of December 31st of each of the years 1937 to 1947, inclusive. In any event, petitioner has offered no acceptable evidence that he had less cash at the end of each year as the period progressed. In fact, in so holding, we think we give him the benefit of any doubt because we are satisfied that any variation would be reflected in an increase rather than a decrease in each of the years following 1937. Our conclusion attributes no additional cash to Reta because the circumstances in the record amount to a refutation of such a possibility.
Accordingly, in our adjusted net worth statement (Schedule C), cash on hand in the amount of $60,000 is shown as a constant amount during the entire taxable period involved herein, and any increases or decreases in net worth determined by us will not be affected *171 by the cash item.
We attribute no significance to the calculation of cash on hand for the years in question made by petitioner's accountant, Zimmerman, since Zimmerman had no way of verifying the figures used in his reconstruction of petitioner's net worth.
Findings of Fact
Accounts Receivable - General
At no time during the investigation of Banks for the years 1920 to 1933, inclusive, did the agents involved in the examination find any suggestions regarding accounts receivable that are now claimed by petitioner. Similarly, in the course of his investigation of the taxable years involved herein, Special Agent McKusick and the other agents working on the case made a diligent search, without success, for accounts receivable or any outstanding obligations owing to petitioner in any substantial amounts as of December 31, 1936.
Petitioner's accountant, Zimmerman, who prepared his net worth statement in the instant case, never furnished any information relating to receivables to any agent or representative of the Internal Revenue Service who was working on the Banks case prior to May 1959.
Likewise, Michael Malone, Special Agent of the Intelligence Division, Internal Revenue Service, discussed *172 petitioner's entire case with him while Banks was in prison for criminal tax evasion, and petitioner did not mention anything relating to receivables at that time. Also, in discussions between Malone and O'Gordon, the latter never told Malone anything about receivables owing to petitioner.
Malone discovered in June 1958 that petitioner was claiming in the instant case that he received repayments on loans to Michael O'Connor. This information was discovered through confidential sources who were friends of petitioner and was obtained without any assistance of petitioner or his counsel. Petitioner's counsel at no time informed Malone that petitioner was claiming that O'Connor had been repaying money to him during the taxable years involved herein.
In June 1958, Robert O'Connor (Michael's brother), was interrogated by representatives of the Internal Revenue Service regarding the O'Connor loan.
In conferences held in 1958, petitioner's counsel, Maun and Coffey, were asked for any information relating to assets of petitioner, including any receivables. Maun replied that he would furnish such information in court.
In a hearing before the Tax Court in Washington, D.C., on respondent's motion *173 (filed on July 29, 1958), petitioner's counsel, Maun, orally stated on September 17, 1958, that petitioner was claiming about $300,000 loans receivable and about $60,000 in cash as of the beginning of the instant net worth period.
On March 16, 1959, petitioner filed a reply to second amendment to answer, in which, for the first time, he asserted in the pleadings that there were receivables due petitioner as of December 31, 1936, in the amount of $262,850. Petitioner did not set forth any details as to the individuals from whom these receivables were claimed to be due or any breakdown of the various individual receivables claimed. Also, petitioner affirmatively alleged that he had cash on hand in addition to bank accounts in the amount of approximately $30,000.
On April 3, 1959, respondent filed with the Tax Court a motion to make said reply more definite and certain and to require verification of the reply. Respondent sought thereby to require petitioner to divulge details relating to the receivables which he was claiming were owing as of December 31, 1936.
On April 30, 1959, the Tax Court entered an order requiring petitioner to identify in some reasonable way the receivables he was *174 claiming by including a statement, inter alia, of the nature of each, the debtor or payor from whom the amount is due, the date when the obligation arose, and the date of payment; and also requiring petitioner to state the location of the cash he was claiming.
On May 19, 1959, (less than a month before the instant trial) petitioner filed an amendment to reply to second amendment to answer in which he set forth the names of the debtors, James A. Carlson, Herman Mitch, Michael Code, Michael O'Connor, Theodore Brown, and Stanley Schultz. Petitioner did not set forth any addresses or other identification of the alleged debtors.
At the commencement of the Tax Court session in St. Paul, on June 15, 1959, the Tax Court granted respondent's motion to require petitioner to supply the addresses or other reasonable identification of the aforesaid debtors. In response to the Court's order, petitioner, through his counsel, furnished in writing three addresses, two of which were wrong.
Petitioner prepared a slip of paper entitled "December notations" which he allegedly gave to Michael O'Connor at the time of an argument over the amount allegedly owed to petitioner. Said slip states "Michael O'Connor *175 notes for $135,650.00." Petitioner also prepared a slip of paper entitled "August notations" representing the loans allegedly owed to petitioner by Michael Code. Likewise, petitioner prepared a slip entitled "October notations" representing a record of the alleged loans from petitioner to Herman Mitch.
The handwriting on all three of the aforesaid slips of paper was that of petitioner.
Michael O'Connor never gave a note to petitioner.
(a) Michael O'Connor Receivable ($150,000)
Michael O'Connor's principal occupation was gambling. In 1924 he had an establishment with several pool tables, card tables, and a small bar. During that year he was also engaged in bootlegging activities.
The known sources of O'Connor's income consisted of the Mill Pond Trout Club (hereinafter sometimes called Mill Pond), from 1936 to 1940, and thereafter the Paddock Cigar Store and the 318 Club. O'Connor had a 35 percent interest in the 318 Club, a gambling establishment, which was in operation during 1941 to 1944. All individuals who had an interest in said club put up some money (i.e. a "bank roll") so that losses on wagers could be paid. O'Connor put up money for this purpose. Banks was associated in the *176 318 Club with O'Connor.
Every month during the period O'Connor operated the 318 Club, he would pay an undisclosed amount of money to petitioner representing petitioner's share of the profits of the 318 Club.
The Mill Pond Trout Club located at Shakopee, Minnesota, was opened in 1934. O'Connor worked at the gambling establishment as a croupier for about two years. In June 1936, O'Connor purchased an undivided one-third interest in the Mill Pond. Since O'Connor did not have sufficient funds at that time to purchase said interest, he furnished some equipment and executed a note for the balance. The note was subsequently paid off from the earnings of the business. At the time O'Connor executed said note he did not mention anything to the other partner, Otto Siems, about being in debt. Siems and O'Connor were in a partnership with respect to the Mill Pond in which they were equally liable on debts and obligations of the business.
After 1936, Siems, Ed McMahon, and O'Connor each had a one-third interest in Mill Pond. Siems had a close business relationship with O'Connor. Siems did not have any knowledge of the profits from the Mill Pond being distributed to petitioner.
The average annual *177 one-third split of the profits from the Mill Pond amounted to $10,000 or $12,000 to each co-owner.
At the time the casino part of the Mill Pond was dissolved in October 1941, there was a three-way split of the profits, which amounted to not over $2,000 for each partner.
For a short time after the casino in connection with the Mill Pond closed in 1942, the Mill Pond continued to have pinball machines, slot machines, and liquor. After 1942, the Mill Pond was a liability.
In question No. 5 of the written questions submitted to petitioner through his attorney, O'Gordon, it was asked whether petitioner had any interest in the Mill Pond. He was asked to give the dates and amounts of advances or investments and dates and amounts of any repayments. The answer given was that petitioner had no interest therein.
In 1936 or 1937, Halvor Steenerson, an accountant, began preparing Federal income tax returns for the Mill Pond at the request of Siems. Steenerson continued to prepare said returns until the dissolution of the casino, which was part of the Mill Pond. When he first began preparing the tax returns, the Mill Pond was a corporation. Later, about 1937, it was changed to a partnership.
When *178 Steenerson commenced to prepare the Federal income tax returns of the Mill Pond he required that someone other than the partners make up the daily cash sheets. Raymond Hill was employed for this purpose. His job consisted, among other things, of counting the cash at night, recording it on a sheet, and also reporting any cash shortage. His daily report was mailed to Steenerson in St. Paul. Steenerson made an effort to see that the information was complete and regularly submitted, although he never personally counted the cash.
In order to keep account of the winnings at roulette at Mill Pond, all of the money was dropped in a slot that was in the table. Winnings at the dice games were handled in the same way. Raymond Hill counted the money that was taken out of the slot machines.
The owners of the Paddock Cigar Store were Owen Taylor and Michael O'Connor. Baseball betting and some card playing were carried on at the Paddock Cigar Store. Steenerson also kept the books of Paddock.
Steenerson prepared both the Federal and state income tax returns of Michael O'Connor for the years 1937 to 1946, inclusive.
In connection with the preparation of O'Connor's return, Steenerson required some sort *179 of an accounting for his income as well as his disbursements. O'Connor agreed to give Steenerson such a statement each year.
For the years 1938 and 1939, O'Connor claimed on his Federal income tax returns as dependents 10 nieces and nephews. In 1940 he was allowed to take only three dependents by the Internal Revenue Service. He was financially unable to make his tax payments when they were due.
The maximum net income reported by O'Connor for the years 1937 through 1946, inclusive, is as follows: Year Amount
1937 $14,243.00
1938 11,961.77
1939 13,815.38
1940 16,833.32
1941 (3,037.37)
1942 8,341.73
1943 7,042.73
1944 8,114.00
1945 6,841.08
1946 2,907.45
$87,063.09
During the years 1937 to 1946, O'Connor and his wife lived well.
O'Connor did not have a safety-deposit box. He did have a safe at his home where he kept money. The most that he ever kept in this place was about $500.
Robert O'Connor, also known as Bob O'Connor, was a brother of Michael O'Connor. Robert's tendency to excessive drinking caused Michael considerable anxiety. Robert never did any work prior to 1937. In 1937 he did some work at the Mill Pond. Michael would not allow his brother, Robert, to operate the 21 game or do anything else around *180 the Mill Pond when he knew his brother was drinking.
About 1942, Robert was employed at the 318 Club dealing blackjack. About 1946, Robert worked as a doorman at the Paddock Cigar Store. Robert's duties as a doorman consisted of seeing that no strangers came in to the gambling establishment where a book was maintained for baseball and football games and the like. Michael O'Connor had a proprietary interest in the Paddock Cigar Store.
During the entire time from 1938 to 1947, Robert visited the home of Michael O'Connor only on seven or eight occasions.
At the time of the trial neither Robert nor his wife was employed. The only income he had $400was a year rent from a piece of ground.
Freda and Michael O'Connor were husband and wife from 1939 until Michael's death in 1947. When Freda first met Michael in 1933, he was a card dealer.
Freda was the beneficiary of a trust fund which had provided her with an independent means of income since 1931. She assisted her husband financially during the years 1937 to 1947.
Freda was the administratrix of her husband's estate.
Michael never told his wife, Freda, anything about any debt or large amount of money that he owed to petitioner.
Michael borrowed *181 the sum of $3,000 from petitioner on February 21, 1947, and gave petitioner a formal note. After Michael died, petitioner filed a claim against the estate of Michael O'Connor based on the amount owing on the aforesaid formal note. The $3,000 loan appears as Item 12 on respondent's net worth schedule.
The claim filed against the estate of Michael O'Connor was subsequently allowed in the amount of $2,000. Only the amount of $4,623.37 was available in Michael's estate for the payment of the expenses of administration and claims filed against the estate.
(b) Michael Code Receivable ($46,000)
The maximum net income reported by Michael Code for the years 1937 through 1946, inclusive, is as follows: Year Amount
1937 $ 3,870.56
1938 2,777.78
1939 2,500.00
1940 2,222.22
1941 1,936.87
1942 1,503.42
1943 2,341.06
1944 6,567.64
1945 7,857.70
1946 8,151.53
Total $39,728.78
Code passed away on December 1, 1946. His estate showed total receipts from all sources in the amount of $41,467.66. The total residue available for distribution amounted to $17,824.16. In his amendment to reply to second amendment to answer, petitioner alleged that Code owed him $1,000 at the time of his death. Petitioner did not file any claim of *182 any kind against the estate of Michael Code.
(c) Herman Mitch Receivable ($31,000)
The maximum net income reported by Herman Mitch for the years 1937 through 1947, inclusive, is as follows: Year Amount
1937 $ 3,222.22
1938 3,222.22
1939 3,222.22
1940 2,968.61
1941 1,666.67
1942 1,200.00
1943 1,697.94
1944 2,188.35
1945 9,210.70
1946 3,074.18
1947 1,684.20
Total $33,357.31
Herman Mitch passed away on June 16, 1948. The estate of Herman Mitch reported total receipts in the amount of $20,410, and had a residue for distribution in the amount of $7,348.55. Petitioner did not file any claim of any nature against the estate of Herman Mitch.
A claim was filed in 1948 against the estate of Herman Mitch for unpaid personal property tax for the year 1941. The original tax was $37.83, together with $21.23 interest and penalty, and $8.75 costs.
Robert Mitch was Herman's son. Robert lived at home with his father during the years 1937 to 1941. When Robert attended college in 1941 and prior thereto, his tuition was usually paid by his father. Herman did not pay his son's tuition for the last half of 1941 and the tuition remained unpaid from 1941 until 1945. When Robert was released from the Army he paid it himself.
(d) James *183 A. Carlson Receivable ($15,000)
James A. Carlson became blind in 1937. Petitioner bought a seeing eye dog for Carlson.
The liquor establishment known as James A. Carlson, Inc., reported net income in the year 1940 in the amount of $4,236.51. In the year 1941, James Carlson, Inc., reported a net loss in the amount of $5,295.10. Carlson ceased operating his liquor store in January 1942, when James Carlson, Inc., went into bankruptcy.
In the year 1935, Carlson filed a Federal income tax return showing a tax liability of $27.23. In the year 1936, Carlson filed a Federal income tax return showing a tax liability of $33.67. In the years 1937 through 1941, Carlson filed Federal income tax returns which showed that no Federal income tax was due. In the year 1942, Carlson did not file a return. In the year 1943, Carlson filed a return which showed that no Federal income tax was due.
(e) Theodore Brown Receivable ($11,750)
During 1925 and 1926, Brown purchased alcohol and liquor from petitioner which he resold. About 1928 Brown ceased selling alcohol because he was "called before a Federal court," where he pleaded guilty to a "charge" and received a suspended sentence.
During the 1920's, *184 Brown received income from a hotel, hunting lodge, and from the sale of alcohol. Prior to 1928 or 1929, he did not file any income tax returns.
Brown purchased the Palace Hotel at Miles City, Montana, for $9,000 in 1926. He sold the hotel for $11,000 in 1929 and did not report the sale on his Federal income tax return.
Brown did not pay more than $56 in Federal income tax in any one year between 1937 and 1947, except in the year 1941 when he was working for the Federal Government and a larger amount of tax was withheld.
(f) Stanley Schultz Receivable ($11,600)
Schultz's occupation in 1929 and 1930 was dealing in illicit alcohol. During the 1920's Schultz purchased alcohol and whiskey from petitioner.
In 1937, Schultz was convicted of a crime which included hijacking a truckload of whiskey. In 1924 or 1925, Schultz was convicted of the crime of transporting liquor in La Moure County, North Dakota. Schultz was released from the penitentiary around 1940.
Schultz had $50 to invest in the Alaska Club Tavern in Seattle, Washington. The balance of the purchase price of $6,500 was paid by Jack Hect. Schultz repaid Hect a loan of $6,500 during the years from 1942 to 1944.
In 1945 Schultz's *185 wife had a stroke and was paralyzed for three years. Her illness was expensive and required the attention of three practical nurses. Schultz's wife died in 1948.
From 1945 to 1948, Schultz did not have any employment except for some gambling. He spent most of his time taking care of his wife. Schultz did not earn any appreciable amount of money in that period of time.
Opinion
Accounts Receivable - General
We turn to consider petitioner's claim that respondent's beginning net worth statement omits loans receivable in the aggregate amount of $248,250 which he claimed he had loaned to friends.
Preliminarily we note petitioner testified that although the money he had allegedly saved in his wardrobe trunk represented "everything" to him, the only use he had made of the money in question prior to 1936 had been to lend the money out to his friends without interest or security. Petitioner further testified that he would require formal notes in the case of small loans, (around $2,500) but not in the case of a large loan. That Banks would loan a total of about $265,000 which allegedly represented his life's savings (acquired in illicit and hazardous activities) without notes, security, or interest, *186 in most instances to individuals with the most questionable financial and moral background, is unbelievable and completely out of context with the profit seeking motivation of petitioner.
The loans which Banks contends that he had at the beginning of the net worth period may be divided into two categories; receivables alleged to be due from Michael O'Connor, Michael Code, and Herman Mitch, which constitute large receivables and the smaller loans allegedly made to James A. Carlson, Theodore Brown, and Stanley Schultz. In the case of the large receivables the alleged debtors were all deceased at the time of the instant trial. None of the alleged debtors apparently told members of their family, business partners, accountants, or any other associates, about the alleged loans from Banks.
We have carefully considered the testimony relating to the three slips of paper which petitioner introduced into evidence to establish repayments of the three large loans. The slips of paper were all in the handwriting of Banks and not of the alleged debtors. (As to the alleged large obligations, petitioner received no evidences of indebtedness signed by the debtors.) It is our view that the testimony *187 of Richard Bowen, the questioned documents expert called by petitioner, does not contribute in any significant way to the establishment of petitioner's contention. To the contrary, we think his testimony casts considerable doubt on the significance of the three slips of paper. Bowen testified that the slip designated "August notations" was written at two sittings; that entries from 1938 through 1944 were made at one writing; and that entries for the year 1945 were made at a second writing. Likewise, Bowen testified that the entries on the slip for November 1942 and July 1943 were written continuously at one time. Although Bowen had no opinion regarding either the age of the ink or of the paper which constitutes the three slips of paper, he stated that it was possible all of the writing on the three slips of paper could have been done at the same time if an individual changed the ink, writing style, and spacing. He could not tell whether or not the three slips "December notations," "October notations," and "August notations," were made at the same time. In any event, with or without Bowen's testimony and irrespective of the time or times at which the notations were made, such notations *188 are merely self-serving statements which could have been made by petitioner if they were false as well as if they were true. The record abounds with false statements made by petitioner as well as fraudulent acts and omissions. We find nothing to satisfy us that the particular notations were true, and the surrounding circumstances, including the failure of petitioner to get signed evidences of indebtedness, and his general conduct and want of credibility point to the conclusion that they are false.
(a) Michael O'Connor Receivable ($150,000)
The largest loan in controversy is the alleged loan to Michael O'Connor in the total amount of $150,000. Petitioner contends that his first loans to O'Connor were made in the early 1920's shortly after O'Connor left petitioner's employment in his bootlegging operation and had gone into business for himself; that during the years 1921 to 1936, additional loans were made and repayments were received; and a running account was kept by both petitioner and O'Connor. Petitioner maintains further that during the early part of 1936 O'Connor borrowed $100,000 in cash from him to renovate a gambling establishment which O'Connor opened that year in Minneapolis *189 and operated for two or three months; that toward the end of 1936 after said establishment went out of business, O'Connor borrowed an additional $25,000 in currency from Banks to buy an interest in the Mill Pond; and that as a result of said loans, O'Connor was indebted to petitioner in the aggregate amount of $135,650 as of December 31, 1936. When asked if he didn't think O'Connor was a poor risk, Banks replied "Not from the kind of fellow he was - he had a bad habit of gambling - he was a wonderful fellow." In our opinion, O'Connor does not appear to be the type of individual to whom a shrewd businessman such as Banks would loan $150,000 without any evidence of such indebtedness signed by debtor, particularly when he took a note from the same alleged debtor for a loan of $3,000.
The record shows that Michael O'Connor discussed his financial condition with his accountant Steenerson but that O'Connor never mentioned anything about his indebtedness to petitioner at any time.
The record also shows that Michael O'Connor only had a maximum net income of $87,063.09 from known sources during the years 1937 to 1946, inclusive, and, hence, he did not have sufficient income to reimburse Banks *190 $150,000 during the period January 1938 through July 1945. The determination of O'Connor's maximum net income is based on retained copies of his own Federal and state income tax returns, the testimony of Steenerson who prepared O'Connor's returns, and the tax returns of the Mill Pond and the Paddock Cigar Store. We are satisfied that all of O'Connor's income from the Mill Pond was correctly reported to Steenerson on a daily record. The maximum net income of O'Connor is also supported by the testimony of Siems, his partner in the Mill Pond. We think it reasonable to infer that Michael had only the income which he reported during the period involved, and petitioner has not directed our attention to any other source of income of O'Connor, legal or otherwise, which would have enabled him to repay petitioner the $150,000 in question. It is noteworthy in this connection that O'Connor and his wife lived well during the taxable period involved so that a large part of his maximum net income went toward living expenses and was not available for any alleged repayments to Banks.
That O'Connor did not have a substantial income is supported by the fact that he had difficulty in making his tax payments *191 on time, and that some of his tax payments were delinquent. We think it clear that a consideration of all of the relevant circumstances support a reasonable inference that O'Connor did not have sufficient earnings to reimburse Banks the sum of $150,000 during the period January 1938 through July 1945.
Petitioner's contention that he loaned O'Connor $25,000 at the time O'Connor wished to buy an interest in the Mill Pond is inconsistent with the evidence of Siems, who testified that O'Connor did not have any money to purchase a one-third interest in the Mill Pond in June 1936, and that O'Connor obtained his interest by furnishing some equipment and giving his note for the balance of the purchase price. Said note was subsequently paid off from the earnings of the business.
We have painstakingly considered the testimony of Robert O'Connor (Michael's brother) with respect to the alleged loan of $150,000, and find it both vague and unworthy of belief.
Upon consideration of all of the evidence relevant to the alleged loans to O'Connor totaling $150,000, we conclude that no such loans were made, and that no such amount was paid by O'Connor to petitioner during any period or periods here relevant. *192
(b) Michael Code Receivable ($46,000)
The alleged indebtedness of Michael Code in the amount of $46,000 constitutes the second largest receivable in dispute. It is petitioner's position that Code was indebted to him as of December 31, 1936, in the amount of $46,000; that this indebtedness arose out of cash and property which Banks had made available to Code during the 1920's, and that petitioner prepared duplicate memoranda slips in 1937 covering the exact amount of the Code debt at that time. In support of his contention petitioner has introduced a memorandum slip showing the original amount of said indebtedness and the purported repayments thereof during the period 1937 to 1945, during which period it is claimed that the alleged debt was paid off in full. Petitioner avers that in 1928 or 1929 he left his inventory of alcohol with Code and agreed to give Code 50 percent of the profits from the sale of the merchandise; that when petitioner returned from a trip he discovered that Code had dissipated said alcohol inventory. Petitioner states further that the cost basis in the inventory dissipated was $41,000, and that said amount, plus the $5,000 in cash that petitioner loaned Code *193 prior to 1937, was repaid by Code to petitioner the period August 4, 1941, to July 1945, except for a balance of $1,000 which was forgiven by petitioner when the final payment was made.
We have carefully considered petitioner's testimony relating to the alleged indebtedness and the slip of paper entitled "August notations." For the same reasons discussed in relation to the O'Connor item, we attribute no significance to the self-serving statements made on the slips of paper. We do not think that the testimony of Murnane (a Deputy United States Marshal called by petitioner) may be taken as a corroboration of petitioner's position. While Murnane may have observed money being counted by petitioner, Code, and Ewing, in 1945 at the Casanova Bar, Murnane was unable to state how much cash was being counted or whose money was being counted. Nor did he know the purpose for which it was being counted. The money being counted could have belonged to Ewing (now deceased) or could have related to payments made in an entirely different context.
Petitioner maintains that in 1928 or 1929 Code dissipated his inventory of alcohol and whiskey through gambling and drinking and squandered his money as well. *194 Petitioner, however, produced no record of the cost of the alcohol involved, or any written evidence signed by Code acknowledging any indebtedness to petitioner.
The financial condition of Code, as disclosed by our findings, is sufficient to demonstrate the practical impossibility that Code paid all but a small amount of the alleged indebtedness during the years in issue. Code only reported $39,728.78 as income during the period 1937 through 1946, out of which Banks would have us believe Code paid him $45,000 and still had enough on hand to have an estate of $41,467.66 at the time of his demise in December 1946.
Petitioner urges that the sum of $1,000 remained unpaid on the alleged indebtedness of $46,000. In this connection, we observe that petitioner did not file any claim against the estate of Michael Code for $1,000 although there were sufficient assets in the estate to pay such claim. But in the case of his "dear friend" O'Connor, petitioner filed a claim based on a formal note in the amount of $3,000, even though there were insufficient assets in the estate to pay the claim in full.
The evidence again satisfies us that the indebtedness was a fabrication, and that, in any event, *195 Code did not pay petitioner $45,000 or any other substantial amount during the period December 31, 1936, to December 31, 1947, inclusive.
(c) Herman Mitch Receivable ($31,000)
The third largest sum involved is the alleged loan to Herman Mitch in the amount of $31,000. Petitioner contends that during the 1920's he advanced cash and property to Mitch on the guaranty of Fred Ullrich, a close acquaintance of petitioner. Petitioner avers that, in order to eliminate any question as to the amount of the indebtedness and the repayments thereon, in 1937 he prepared duplicate memoranda slips with respect to Mitch's indebtedness which amounted to $31,000 at that time. Petitioner maintains further that as the payments were received from Mitch, which he claims amounted to about $13,000 during the period 1941 through 1944, entries showing the dates and amounts thereof were made on the duplicate slips by petitioner. The memorandum written by petitioner on the slip presented in evidence is no more convincing as to Mitch than the like slips relating to O'Connor and Code. Mitch died in 1946, about a year after Ullrich had died. It is petitioner's contention that as a result of the death of Mitch and *196 Ullrich, the balance of said loan receivable in the amount of $18,000 became uncollectible in 1946, and that petitioner was entitled to a bad debt loss deduction in that year under section 23(k)(1) of the 1939 Code, and Regs. 118, section 39.23(k)-1(d).
At the outset we note that when the criminal tax case of Banks was in progress, Weinstock told McKusick that Mitch had repaid $19,000 which he owed to Banks into a Weinstock Trustee Account. No disclosure of this alleged payment was made by anyone during the period of the investigation of petitioner relating to the criminal charge and no supporting records were produced. This claim does not correspond with the alleged repayments by Mitch in the amount of $13,000 claimed in petitioner's pleadings and in his testimony in the instant case.
Mitch was one of the operators of the gambling establishment known as Casablanca, Inc. When petitioner was asked what caused him to first become interested in Casablanca, he stated that Mitch owed him money at the time and he was trying to place Mitch in a situation where petitioner would have a chance of reimbursement. Petitioner also testified that Mitch operated a gambling establishment known as the *197 Hollywood Inn. The deed to the Hollywood Inn was in the name of Banks and his wife.
The record supports the view that Mitch did not have sufficient income either to invest in businesses or to make repayments in the amount of $13,000 to Banks during the period 1941 through 1944. During said period, when Mitch allegedly repaid $13,000 to petitioner, Mitch reported a total maximum income of only $6,752.96. It is noteworthy that Mitch was unable to pay the last half-year tuition of his son at college. Also, the personal property tax against Mitch for 1941 was delinquent and was not paid until a claim therefor was filed against the estate of Herman Mitch in 1948. Our attention has not been directed to any evidence that Mitch had any accumulated funds or undisclosed income whether or not derived from unlawful activities during the years 1941 through 1944 from which he could have reimbursed petitioner the sum of $13,000 during said period.
We observe that when Mitch died his estate had a residue for distribution in the amount of $7,348.55. Petitioner did not file a claim against the estate of Mitch as he did in the case of his "dear friend" Michael O'Connor.
Without repeating our discussion *198 in detail, we conclude for substantially the same basic reasons as those discussed in relation to O'Connor, that the alleged loan to Mitch never existed and that Mitch did not pay petitioner $13,000 or $19,000 during the years in question. Since we hold there was no such loan, it follows that there can be no bad debt deduction allowable to petitioner.
(d) James A. Carlson Receivable ($15,000)
In the case of the smaller loans, including the alleged loan to James A. Carlson in the amount of $15,000, the pattern is reversed from the ones existing with respect to the larger receivables. In the case of the alleged smaller loans petitioner does not claim that he ever gave any of the debtors any memorandum slips of paper representing repayments.
Preliminarily, it is to be noted that with respect to two of the small debtors that petitioner gave wrong or misleading addresses when required by Order of Court of June 15, 1959, to supply respondent with the addresses of the alleged debtors.
It is petitioner's position that as of December 31, 1936, Carlson owed him $15,000 which petitioner had loaned to him in 1934 to enable him to open an off sale liquor establishment in Minneapolis; and that *199 in 1942, prior to the bankruptcy of James A. Carlson, Inc., petitioner received $15,000 in cash from Carlson.
Carlson did not earn sufficient money to pay Banks $15,000 in 1942. About 1937 Carlson became blind. In 1940, the liquor store which he operated only showed net income of $4,236.51 and in 1941 said establishment reported a net loss in the amount of $5,295.10. Carlson did not report sufficient income to require the payment of Federal income tax for most of the years prior to 1942. It is not suggested that petitioner received any written or signed evidence of the debt or that any record of it was made on the books of Carlson. Carlson was not called as a witness in the criminal trial.
We conclude, upon consideration of the surrounding circumstances, and without reliance upon any presumption, that no such loan was ever made, and, as a corollary, that the alleged repayment never occurred.
(e) Theodore Brown Receivable ($11,750)
Petitioner cont

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4601202. Public record. Not legal advice.