# Estate of Maceo v. Comm'r

> United States Tax Court · February 27, 1964 · 23 T.C.M. 258

URL: https://www.frixlaw.com/law-library/cases/4602779

## Case

- **Full name:** Estate of Sam Maceo Edna Sedgwick Maceo Plitt, Independent and Sam Serio, Independent and Edna Sedgwick Maceo Plitt, Individually <sup id="fnr_fnote1"><a href="fn_fnote1" id="">1</a></sup> v. Commissioner.
- **Court:** United States Tax Court
- **Decided:** February 27, 1964
- **Citations:** 23 T.C.M. 258; 1964 T.C. Memo. 46; 1964 Tax Ct. Memo LEXIS 290
- **Precedential status:** Unpublished
- **Opinion:** Opinion
- **Cited by:** 5 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/4602779

## Opinion text

Estate of Sam Maceo Deceased, Edna Sedgwick Maceo Plitt, Independent Executrix and Sam Serio, Independent Executor, and Edna Sedgwick Maceo Plitt, Individually, et al. 1 v. Commissioner.
Estate of Maceo v. Comm'r
Docket Nos. 55506, 55709, 63933, 63934.
United States Tax Court
T.C. Memo 1964-46 ; 1964 Tax Ct. Memo LEXIS 290 ; 23 T.C.M. (CCH) 258 ; T.C.M. (RIA) 64046 ;
February 27, 1964
*290 Net worth increase: Burden of proof: Beginning and ending computations. - Errors in the Commissioner's beginning and ending computations of the networth of taxpayers who failed to maintain adequate records of their gambling activities did not destroy the presumption that the Commissioner's determinations were correct and impose the burden of proof on him. The burden remained upon the taxpayers to demonstrate that the Commissioner was wrong as to each item involved.
Examination of books and records: Second examination: Amended returns. - After a first examination of the taxpayers' books and records by revenue agents, the taxpayers filed amended returns disclosing a substantial amount of unreported income. The revenue agents advised the taxpayers that the amended returns necessitated an examination. The taxpayers did not object, and a second examination was conducted. The Tax Court held that the protection afforded by the law against unnecessary examinations was waived by the taxpayers' failure to object. The Tax Court also said that the Commissioner was not prohibited from examining matters covered in the amended returns.
Net worth increase: Cash on hand: Failure to follow leads. *291 - The Tax Court found that there was no merit in the taxpayers' argument that revenue agents disregarded leads as to cash on hand where the taxpayers rather than furnishing material information, at all times resisted the development of such information.
Net worth increase: Adequacy of books: Expenditures exceeding income. - Use of the net worth method of reconstructing income is not restricted to a finding of particular inaccuracies, omissions, or defalcations in a taxpayers' books. Also, the Commissioner was not restricted from showing that disbursements made during the year were in excess of available funds at the start of the year plus those becoming available during the year.
Net worth increase: Cash hoard: Gambling activities. - An individual who independently and as a partner engaged in gambling activities was found to have $95,000, rather than $350,000, cash on hand at the beginning of 1948. In reaching its conclusion, the Tax Court considered the facts that the taxpayer claimed $45,000 of cash on hand and in banks on his financial statement, that he had an interest in a partnership bank account, and that he needed a substantial bankroll to carry on his gambling activities. *292
Net worth increase: Cash hoard: Financial statements. - In finding that the taxpayers did not have $385,000 cash in a concealed safe at the beginning of 1948, the Tax Court considered financial statements which they had given to banks, and held that the Commissioner was warranted in using the stipulated bank balances shown on the financial statements in determining cash on hand. The taxpayers' contention that they had a large cash hoard was also refuted by their borrowings, and their withdrawal of dividends from their company to pay income taxes.
Net worth increase: Cash on hand: Circumstantial evidence. - The Commissioner's finding that the taxpayer did not have an appriceiable amount of cash on hand in his safe deposit box as of January 1, 1948, was upheld by the Tax Court, which did not find the taxpayer to be a credibile witness. Circumstantial evidence which showed the improbability of a cash accumulation included the facts that the taxpayer had difficulty paying delinquent income taxes during 1936-1939, that he cashed Savings Bonds prior to their maturity during 1948, that he borrowed large sums during that year, and that his cash in the bank and at home remained relatively *293 constant throughout the year.
Net worth increase: Cash on hand: Evidence. - In sustaining, with modifications, the Commissioner's reconstruction of the taxpayers' income under the net worth method, the Tax Court found that the taxpayers' contention that they had $3,000 on hand from the liquidation of a business late in 1947 was refuted by the fact that they did not meet payments due on their note in 1948, poor payment records with stores, borrowings on life insurance, financial statements with banks, borrowings from relatives, gifts received from relatives, and nondeductible expenditures.
Tax Court Rules: Stipulation of evidence. - A stipulation as to gambling winnings agreed to by the Commissioner was set aside by the Tax Court on the ground that there was no meeting of the minds. The Commissioner would not have entered into the stipulation if he had been aware of the actual facts.
Fraud: Understatement of income: Burden of proof. - In upholding the Commissioner's determination that understatements of income were fraudulent, the Tax Court remarked that the Commissioner cannot meet the burden of proof on the basis of the taxpayers' failure to prove error in the Commissioner's determination. *294 However, fraud penalties were upheld where the evidence showed that the taxpayers consistently substantially understated their income from gambling enterprises, failed to cooperate during investigations of their tax liability, filed amended returns of admittedly unreported income after the investigation started, failed to keep records of business receipts, particularly gambling winnings, and employed unusual accounting techinques.
Joint returns: Fraud penalty: Wife's liability. - Wives who signed joint returns filed by their husbands, who were shown to have intended to evade income taxes, were jointly and severally liable for additions to tax for fraud. The wives resided with their husbands throughout the taxable year and elected to file joint returns.
Fraud penalty: Amount of deficiency: Amended returns. - The total deficiency for the purpose of computing the 50 percent addition to tax for fraud is the difference between the tax liability and the amount shown on the original return, rather than the amount shown on an amended return.
Statute of limitations: Waiver: Power of attorney. - Waivers of the statute of limitations executed by an individual who held a power of attorney from *295 the taxpayers were valid, even though the power of attorney did not specifically authorize him to execute waivers, where the individual was given broad powers to represent the taxpayers in "all matters pertaining to the adjustment and settlement of federal income taxes and claims in connection therewith." Furthermore, the taxpayers were estopped to deny the validity of the waivers, which were executed almost one month before the statute of limitations had run. If the waivers had not been executed, the Commissioner could have taken other steps to protect his interests.
FISHER
Memorandum Findings of Fact and Opinion
FISHER , Judge: These consolidated proceedings involve the determination of deficiencies in income tax and additions to tax as follows:
Estate of Sam Maceo, Deceased, et al., Docket No. 55506
Additions to Tax I.R.C. 1939 Year Deficiency Sec. 293(b) Sec. 294(d)(2)
1948 $148,016.64 $107,705.60 $11,484.67
1949 44,140.12 39,268.77 3,272.25
1950 46,018.26 23,009.13 250.00
Total $238,175.02 $169,983.50 $15,006.92
Estate of Rosario Maceo, Deceased, et al., Docket No. 55709
1948 $ 5,042.98 $ 28,174.26 $ 3,307.10
1949 23,682.48 29,734.67 1,783.61
1950 36,196.22 22,818.81
Total $ 64,921.68 $ 80,727.74 $ 5,090.71
O. E. Voigt, Docket No. 63933
1948 $ 8,364.60 $ 9,619.39 $ 1,164.44
1949 (.54) * 3,679.36
1950 2,324.68
Total $ 8,364.06 $ 15,623.43 $ 1,164.44
*296
Vincent A. Maceo and Estelle Maceo Parmer, Docket No. 63934
Additions to Tax I.R.C. 1939 Year Deficiency Sec. 293(b) Sec. 294(d)(2)
1948 $ 2,129.22 $ 1,084.91 $ 83.94
1949 5,815.70 3,100.89 273.87
1950 4,811.68 2,405.84
Total $ 12,756.60 $ 6,591.64 $ 357.81
The cases were consolidated for hearing pursuant to agreement of the parties.
The principal issues presented for our consideration are:
(1) Whether respondent was justified in making use of the net worth plus expenditures method in reconstructing net income for the taxable years 1948 through 1950, inclusive;
(2) Whether and to what extent petitioners understated their net taxable income for the years 1948 through 1950, inclusive;
(3) Whether the capital investments of Sam Maceo, Rosario and Vincent in Maceo and Company at December 31, 1950, were $245,742.02, $245,742.02 and $80,792.31, respectively, as contended by respondent in his motion to correct the amounts previously stipulated as investments of Rosario and Vincent in said company;
(4) Whether *297 any part of the deficiency determined against petitioners for each of the years 1948 through 1950, inclusive, was due to fraud with intent to evade tax within the meaning of section 293(b) of the 1939 Code; 2
(5) Whether assessment and collection of deficiencies determined in Docket Nos. 55709 (Rosario and Frances) and 63934 (Vincent and Estelle) for the years 1948 and 1949 and for the year 1948 in Docket No. 63933 (O. E. Voigt) are barred by the statute of limitations, as provided by section 275(a) of the 1939 Code;
(6) Whether Sam Maceo and Edna Maceo Plitt are liable for an addition to tax for 1950 for their failure to file a declaration of estimated tax for said year within the purview of section 294(d)(1)(B) of the 1939 Code; and
(7) Whether the several petitioners are liable for the addition to tax for substantial underestimation of estimated tax under section 294(d)(2), Code of 1939, for the respective years for which determined by respondent.
Findings of Fact
Part of the facts are stipulated (orally and in writing) and, together with stipulated exhibits, were so found and are incorporated *298 by this reference.
Background and General Facts
The petitioners in Docket No. 55506 are the Estate of Sam Maceo, Deceased, and Edna Sedgwick Maceo Plitt, wife of the decedent. The petitioners in Docket No. 55709 are the Estate of Rosario Maceo, Deceased, and Frances Maceo, wife of the deceased. The petitioner in Docket No. 63933 is O. E. Voigt. The petitioners in Docket No. 63934 are Vincent A. Maceo and Estelle Maceo Parmer.
During the taxable years 1948, 1949 and 1950, the aforesaid petitioners resided in Galveston, Texas.
Frances Maceo and Sam Serio are duly qualified independent executrix and executor, respectively, of the Estate of Rosario Maceo, Deceased. Frances Maceo, wife of the deceased Rosario, is also a petitioner in this proceeding in her individual capacity. Sam Serio and Frances Maceo are citizens of the United States.
Edna Sedgwick Maceo Plitt and Sam Serio are duly qualified independent executrix and executor, respectively, of the Estate of Sam Maceo, Deceased. Edna Sedgwick Maceo Plitt, former wife of the deceased Sam Maceo, is also a petitioner in this proceeding in her individual capacity.
Sam Maceo was born in Palermo, Italy, on March 1, 1894. He became a United *299 States citizen through naturalization and took up residence in Galveston, Texas, in 1915, which continued to be his residence until the time of his demise on April 16, 1951.
Sam Maceo was the younger brother of Rosario Maceo.
Sam Maceo married Jessica McBride prior to 1932 and they were divorced on November 8, 1941.
Sam Maceo married Edna Sedgwick on December 29, 1941, and she was his surviving spouse at the time of his death.
Sam and Edna Sedgwick Maceo Plitt had three children as a result of their marriage. They were Salvatore Maceo and Victor Edward Maceo, born in 1942, and Edna Sedgwick Maceo born in 1944.
Rosario Maceo was born in Palermo, Italy, on September 8, 1887, and came to the United States in 1901. Rosario was a citizen of the United States at the time of his demise on March 15, 1954. He established his residence in Galveston in 1913 and continued to reside there until the time of his death.
Rosario Maceo married Frances Dispensa in September 1922.
Frank Maceo and Vic C. Maceo are brothers and were first cousins of Sam Maceo and Rosario.
O. E. Voigt was born in Brenham, Texas, on November 18, 1888. Voigt married Bessie Downey and they were divorced sometime during the *300 period 1923 to 1925. Voigt and Bessie had three children. The married names of Voigt's three children during the taxable years 1948, 1949 and 1950 were Bessie Cripps, Estelle Maceo Parmer and Margaret Williams.
At the time of the instant trial Voigt had been engaged in the gambling business for about 50 years. He commenced his gambling activities in 1910 in Galveston where he ran a poker game.
Sam and Rosario had been barbers for a number of years before they went into the bootlegging business with Voigt in 1923 or 1924.
Vincent A. Maceo was born in New Orleans, Louisiana, on January 27, 1914. Vincent is the son of Frank Maceo and the son-in-law of O. E. Voigt. Vincent married Estelle Voigt, daughter of O. E. Voigt on June 1, 1939. Vincent and Estelle were divorced in November 1951.
Vincent A. Maceo was a second cousin of Sam and Rosario. Vincent is the nephew of Vic C. Maceo.
After Vincent left Texas A & M he worked as an apprentice for Home Electric Company until 1943.
In 1943 Vincent acquired an interest in a partnership known as McCarty Roofing Co. , which continued the roofing business operated by J. E. McCarty under the name of J. E. McCarty and Co. In 1944 the McCarty Roofing *301 Co. partnership ceased operations.
Vincent became a partner in the "Turf" owned by Maceo and Company on July 1, 1946, at which time he purchased a five percent interest from Voigt.
Turf was organized on August 6, 1932. The organizers were Rosario, Sam, Voigt, Frank and D. D. Alexander.
Sam Maceo, Rosario, Voigt and Vincent were partners in Maceo and Company during the taxable years 1948, 1949 and 1950.
Maceo and Company was the successor of Turf and R. Maceo and Company.
Partnerships in which Rosario, Sam, Voigt and Vincent had financial interests and the amount of their interests therein were as follows:
PERCENTAGE INTERESTS IN PARTNERSHIPS Maceo and Company Sam Rosario Voigt Vincent Frank Adams Vic C. Serio Others
10- 1-50 - 15 15 5 5 7 1/2 5 5 5 37 1/2
12-31-50
10- 1-46 - 20 20 10 5 15 15 10 5
9-30-50
Trustee
10- 1-49 - 20 20 10 5 15 15 10 5
12-31-50
R.M.A.C.
4-25-45 - 9-30-46 20 20 15 15 15 10 5
Turf
7- 1-46 - 9-30-46 20 20 10 5 15 15 10 5
10- 1-43 - 20 20 15 15 15 10 5
6-30-46
1- 1-39 - 9-30-43 No records available
1- 1-36 - 20 20 20 10 a 10 10 a 10
12-31-38
8- 6-32 - 20 20 20 10 a 10 a 20
12-31-35
Hollywood Sui-Jen
Dinner Club
1936 20 N.A. b *302 15 N.A. b
1935 20 N.A. b 15 N.A. b
Vin-
Hollywood Sam Rosario Voigt cent Frank Adams Vic C. Serio Others
Dinner Club
1932 - 1934 N.A. N.A. b N.A. b N.A. b
1931 25 25 25 25
1930 N.A. b N.A. b N.A. b
1928, 1929 No records available
1927 33 1/3 33 1/3 33 1/3
1926 25 25 25 25
Grotto
Dinner Club
1931 25 25 25 25
1929-1930 No records available
1928 33 1/3 33 1/3 33 1/3
The Grotto Dinner Club, hereinafter referred to as Grotto, was a partnership formed in February 1928 by Sam, Rosario and Voigt. Grotto was a night club gambling casino located at Galveston Pleasure Pier. Grotto operated until at least 1931.
The Hollywood Dinner Club, hereinafter referred to as Hollywood, was a partnership formed in June 1926 by Sam, Rosario, Voigt and Quinn. Hollywood was located at 6102 Avenue S, Galveston, Texas. Hollywood was organized as a fashionable dinner club which featured food, service, entertainment and gambling activities. Hollywood operated as a separate partnership through 1935. Commencing in 1936, Hollywood became Hollywood Sui-Jen Dinner Club, hereinafter referred to as Hollywood Sui-Jen. Sam, Rosario and Voigt had financial interests in Hollywood and Hollywood Sui-Jen during the years they were in operation. *303
Hollywood was started with an original capital of approximately $80,000, provided by the partners from their individual funds and from borrowed funds. Voigt paid in $40,000 which was allocated equally between him and Quinn. Sam and Rosario borrowed $35,000 of the $40,000 they invested in Hollywood. The monies provided by Rosario and Sam were shown on Hollywood's books as partnership loans.
The partners of Turf caused Gulf to be incorporated under the laws of Texas in 1938 with an authorized and issued stock of $250,000, which consisted of 500 shares of common stock having a par value of $500. The incorporators, in exchange for the capital stock of Gulf, transferred to Gulf real estate (which was subject to outstanding liabilities) together with insurance policies on said real estate, cash and certain accounts receivable.
Activities of Maceo and Company
During the years ended September 30, 1947, through September 30, 1951, Maceo and Company owned the capital stock of several corporations. The amount of capital stock outstanding, the cost of such stock to Maceo and Company and the percent of stock in said corporations owned by Maceo and Company is as follows: Cost of
Capital stock to Percent of
Stock
Name of Stock outstanding Maceo & Co. stock owned
(a) Derby Amusement Co. $10,000 $ 12,000 100
(b) Beach Amusement Park 5,000 5,000 100
(c) Miss Hollywood, Inc. 4,500 4,500 100
(d) Galveston Pleasure Pier, Inc. 3,000 30,000 100
(e) Galveston Isle Publishing Co., Inc. 2,500 2,500 100
(f) Murdoch Bath House, Co. 48,000 40,750 100
(g) Galveston Pier Corp. N.A. * *304 25,000 25
(h) San Luis Corporation N.A. * 165,817.75 100
(i) Playland Amusement Co. N.A. * 2,500 ** 20
The Derby Amusement Company, Inc., hereinafter referred to as Derby, (a) above, was incorporated under the laws of the State of Texas in 1937. Derby leased the property located at 25th and Boulevard, Galveston, Texas. A carousel was located on said property and was operated under the name of "Racing Derby."
Derby received income from the following sources in 1948, 1949 and 1950: Year Ride receipts Rents
1948 $17,450.04 $1,937.04 [$1,920]
1949 19,550.70 2,430.00
1950 None None
On December 31, 1948, Derby was indebted to Maceo and Company in the amount of $500. On December 31, 1949, and 1950, Maceo and Company owed Derby $4,500.
Beach Amusement Park, Inc., hereinafter referred to as Beach, (b) above, was incorporated under the laws of the State of Texas in 1939. Beach operated the equipment used in an amusement park located on Seawall Boulevard, Galveston.
Beach was indebted to Maceo and Company on an open account in the amount of $67,050, $76,050 and $87,250 at December 31, 1948, 1949 and 1950, respectively. Beach was also indebted on an open miscellaneous account of $3,400 at December 31, 1948, 1949 and 1950, respectively.
The income *305 from Beach's operations was reported by Beach. Beach received income from the following sources during the taxable years 1948, 1949 and 1950: Ride Ride Re- Concession
Year Receipts ceipts Pier Receipts Rent
1948 $36,756.30 $2,274.84 $16,952.45 $6,200.00
1949 33,929.01 2,667.01 5,523.11 8,580.00
1950 33,478.46 1,411.50 4,358.59 6,290.00
Miss Hollywood, Inc., hereinafter referred to as Hollywood, Inc., (c) above, was incorporated under the laws of the State of Texas in 1941. Hollywood, Inc., operated a pleasure boat called "Miss Hollywood."
Hollywood, Inc., reported boat rental receipts of $13,350, $11,700 and $14,250 in the years 1948, 1949 and 1950, respectively. Hollywood, Inc., was indebted to Maceo and Company on open account in the amounts of $58,700, $68,200 and $69,200 at December 31, 1948, 1949 and 1950, respectively.
Galveston Pleasure Pier, Inc., hereinafter referred to as Pleasure Pier, (d) above, was incorporated under the laws of the State of Texas in 1916. Pleasure Pier owned the pier in Galveston on which Turf Athletic Club Number 1, hereinafter called Balinese Room, was located.
Pleasure Pier received income from rentals of $14,500, $16,500 and $15,500 for the years 1948, 1949 and 1950, respectively. *306 Pleasure Pier was indebted to Maceo and Company on open account in the amounts of $44,000 and $37,500 at December 31, 1948, and 1949, respectively. Pleasure Pier was indebted to R. Maceo, Trustee, an open account in the amount of $40,500 at December 31, 1950.
Galveston Isle Publishing Co., Inc. , hereinafter referred to as Publication, (e) above, was incorporated under the laws of the State of Texas in 1947. Publication published a magazine called "Galveston Isle" which was distributed on a monthly basis to residents and visitors to Galveston.
Books and records of Publication show that it received the following income and sustained the following expenses in 1948, 1949 and 1950: Year Income Expenses
1948 $72,580.71 $72,551.99
1949 68,787.34 68,787.34
1950 57,832.56 57,832.56
Murdoch Bath House Co., Inc., hereinafter sometimes called Murdoch, (f) above, was incorporated under the laws of the State of Texas in 1914. Murdoch owns the property known as Murdoch Bath House, hereinafter referred to as Bath House, 22nd and 23rd Streets and Seawall Boulevard, Galveston. Murdoch rented part of the space in the Bath House to Maceo and Company. Maceo and Company used this space for a bingo concession. Murdoch *307 also derived rental income from space leased for other concessions which were operated by individuals and companies that were not affiliated with the company.
Murdoch received income from the follow sources in 1948, 1949 and 1950: Receipts
Year Bath Rent
1948 $10,788.19 $21,400
1949 8,937.50 24,250
1950 6,979.39 27,000
Murdoch was indebted to Maceo and Company on open account in the amounts of $45,000, $46,000 and $40,000 at December 31, 1948, 1949 and 1950.
Galveston Pier Corporation, hereinafter referred to as Pier Corporation, (g) above, was incorporated under the laws of the State of Texas in 1947. The majority of the outstanding stock of Pier Corporation was held by the Moody interests of Galveston which represented 67 1/2 percent of the outstanding stock.
San Luis Corporation, hereinafter referred to as San Luis, (h) above, was incorporated under the laws of the State of Texas. San Luis owned a parcel of land in Galveston.
Playland Amusement Company, hereinafter referred to as Playland, (i) above, operated properties located at 6102 Avenue J, Galveston. The operations of Playland consisted of bingo.
During the fiscal years ended September 30, 1948, 1949 and 1950, the operations of Maceo *308 and Company consisted of various types of gambling activities, the sale of food and drink and the rendition of services in connection with certain operations incident to the company's over-all gambling operations.
The gambling activities of Maceo and Company involved the conduct of dice, roulette and card games in clubrooms; the operation of slot machines in establishments owned and operated by Maceo and Company and in establishments owned by third parties located on Galveston Isle; the acceptance of bets on horse races, baseball, football and basketball games; the conduct of bingo games and the sale of tips on tip book lotteries.
During the fiscal years ended September 30, 1948, 1949 and 1950, Maceo and Company carried on its operations in properties and used equipment and fixtures owned by Maceo and Company, corporations controlled by Maceo and Company, Gulf and third parties. The locations at which Maceo and Company carried on operations during the taxable years are as follows:
Locations at which Company carried on its operations Name of Operation Address
Turf Grill 2210-2216 Market St.
Turf Tap Room Galveston, Texas
Studio Lounge (Turf Grill Bldg.)
Western Room
Horse Operations
Lay-off betting
Cigar stand - 2nd floor
Murdoch Bath House - Pier Seawall Blvd.
Home Plate Cigar Stand Galveston
Balinese Room Center and Seawall Blvd.
Equipment Operations:
Office - Turf Grill 2210-2216 Market St.
Warehouse Building in rear of Turf Grill Mechanic Street
Bldg.
Store locations Throughout Galveston
Bird Cage Galveston
Crystal Sportland # 1 2316 Boulevard
Crystal Sportland # 2 2111 - 23rd St.
Turf Stores 2027 B. St.
Stewart Beach Catering Company Stewart Beach
Maceo Catering Company 2210-2216 Market St.
and Center & Seawall Blvd.
Corner Galveston
Playland 6102 Avenue J
Park Sportland N.A. *
Chill Bowl Kemah, Texas
Streamline Club Algoe, Texas
Edgewater Lounge Kemah, Texas
Silver Moon (Dickinson Club) Dickinson, Texas
*309
Maceo and Company maintained offices at the Turf Grill Building, hereinafter referred to as "Turf," and in the building where the operations of Turf Stores were conducted. The offices of the Turf were located on the first and third floors. The first floor offices consisted of two offices that adjoined the check cashing booth. The first office was designated as the counting room and the second office, which contained two safes, was designated as the first floor office of Joe T. and Sam Serio, which is hereinafter referred to as the "safe office." The third floor of the Turf contained an office for Sam Serio, a large room for the acounting department, which adjoined a smaller office used jointly by Joe T. and Sam Serio, plus rooms used for other designated purposes.
During the taxable years involved herein Maceo and Company carried on extensive gambling and nongambling activities. Nongambling activities consisted of: The sale of food, drink and rendition of related services; the supplying by Turf Stores of merchandise that was used by gambling and nongambling departments of Maceo and Company; the operation of phonograph machines and cigarette machines in establishments *310 owned and/or controlled by Maceo and Company in establishments on Galveston Isle which were owned by third parties; the conduct of a pool hall, and a check cashing booth.
Gambling activities of Maceo and Company consisted of: The operation of clubrooms at which dice and roulette games were conducted; the operation of slot machines and pinball machines in establishments owned or controlled by Maceo and Company and in establishments located on Galveston Isle which were owned by third parties; the acceptance of bets on horse races, basketball, football and baseball games and other sporting events, which were made in person or via telephone to or at locations owned or controlled by Maceo and Company; the conduct of bingo games at locations owned by Maceo and Company; the sale of tip books at the cigar stand in the Turf Grill Building and the conduct of poker games on the second floor of the Turf Grill Building.
Clubroom Operations
Food, drink and other services were available at the locations where Maceo and Company conducted its clubroom operations. The supplying of food, drink and other services at such locations was not always under the control or direction of Maceo and Company. In *311 those instances where Maceo and Company was responsible for food, drink and other services, income was recorded on the books of Maceo and Company from such operations.
Dice and roulette games were available at the clubrooms operated by Maceo and Company. In connection with its operation of dice, roulette and card games at the Balinese Room, Maceo and Company employed individuals designated as manager, floormen, cashier and tablemen.
The manager of the Balinese Room was in charge of the operations conducted at the clubrooms. The manager was assisted by floormen.
The cashier at the Balinese Room had custody of the bankroll and chips that were placed in the clubrooms by Maceo and Company. He cashed checks for customers who patronized both the dining rooms and clubrooms, and sold chips to customers who participated in the dice, roulette and card games conducted in the clubrooms. Also, the cashier furnished tablemen with chips to sell to customers and accounted for the income derived from the games conducted in the clubrooms.
The floormen at the Balinese Room supervised the tablemen in their conduct of the gambling games and conferred with customers with respect to credit or approving the *312 customer's check.
A dice game at the Balinese Room was conducted on dice tables and three or four tablemen were assigned to each table. The men were designated as stickmen, boxmen and dealers.
The stickman in a dice game at the Balinese Room was in charge of the conduct of the game. The boxman in a dice game at the Balinese Room sold chips for cash only to customers. He raised the lid on a small mahogany box placed on the dice table and placed the cash in the box. The boxman could not withdraw money from the mahogany box after it had been placed therein.
Roulette games at the Balinese Room were conducted at a table having a roulette wheel and an appropriate betting layout. The dealer at a roulette table sold chips to a customer for cash. The cash derived from the sale of chips at the roulette table was placed in a mahogany box which was built into the roulette table. When a customer purchased chips at the roulette table he would place the money in a slot in the table where it would then drop into the mahogany box which was built into the table. If the customer tendered currency to the dealer for chips, the currency was placed over the slot in the table and the dealer would then push *313 the currency through the slot by using a stick of wood.
During the course of an evening's gambling at the Balinese Room, the cashier, among other duties, would perform the following tasks:
(a) Cash checks for customers, some of whom bought chips from him at the time he cashed their checks.
(b) Issue chips on credit directly to customers or to floormen who were acting for the customers and prepare records showing the amount of chips furnished on credit to customers, for example, making a notation in a special tablet maintained to show credit extended to customers or delivery of an IOU form for execution by the customer to evidence the customer's receipt on credit of a specified amount of chips.
(c) Accept payments on customer's debts, for example, payments on debts incurred during the evening or on prior occasions and return the money to an open table.
(d) Make arrangements with customers for the collection of debts incurred during the evening, for example, the acceptance of a postdated check or an IOU from the customer.
(e) Work with the manager and floormen in preparing a report showing the total win or loss sustained at the Balinese Room during the evening which included a verification *314 of the checks and chips in his possession.
When a clubroom was closed for the evening the manager and floormen counted the money in the money boxes.
The cashier would fill any empty reserve chip boxes in his possession with chips that he had redeemed.
The manager and floormen gave the cashier chips from a rack on the open table for the unredeemed IOU's received by the cashier during the course of the evening.
The cashier filed the IOU's in an index box to await their collection.
The cashier eliminated from his cash on hand at the close of business checks that were postdated more than one day. Postdated checks were placed in an index folder that was stored in the cashier's safe.
The manager, floorman and the cashier prepared a report showing the cash on hand at the beginning of the evening, the win or loss for the evening, and the total currency, silver and collectible checks on hand at the close of business. Also, they each counted the cash on hand at the end of the evening. The report, for example, showing the win or loss at the Balinese Room for the evening was in the following form:
VJF * *315 Cash on Hand
Cash on hand $10,000
Win 7,000
Balance $17,000
Checks 5,000
$12,000
The amount designated as checks represented the amount of checks sent to the office of Maceo and Company to be cashed and the proceeds returned to the Balinese Room.
The cashier of the Balinese Room prepared a slip of paper for his own record based on the aforesaid report in his safe for reference on the next business day. Said slip of paper showed the previous day's cash and checks.
At the time the cashier closed his office, he had a report for the current day showing the net win or loss for the clubroom and the cash on hand consisting of currency and silver plus the checks he had sent to the cash office of Maceo and Company to be cashed. The cash on hand equalled the assigned bankroll adjusted by the cumulative net win or loss. The cashier was required to account each day for the exact amount of cash on hand.
The cashier of the Balinese Room made arrangements for the delivery to the Maceo and Company safe office of the report showing the result of the day's operations and the checks which had been received during the course of the evening's operations. The next day, upon learning that the report had been delivered to the Maceo and Company *316 safe office and after checking his cash on hand, the cashier destroyed his copy of the previous day's report.
The cashier of the Balinese Room, on occasion, personally went to Houston to cash checks where collection was uncertain.
The cashier adjusted his cash on hand to reflect the proceeds from checks that were retained by the safe office of Maceo and Company or the cash that the cashier returned to said office on the request of an authorized official such as Joe T.
During the taxable years 1948, 1949 and 1950, the cashier did not have more than $45,000 or $50,000 in cash on hand at any one time at the Balinese Room. On many occasions during the taxable period involved herein, the Balinese Room was charged with accumulated winnings in excess of $60,000.
All of the clubrooms operated by Maceo and Company submitted reports of their daily gambling operations to Joe T. or Serio at the safe office.
The reports from the Balinese Room showing results of the gambling activities were prepared at the close of the gambling activities each night.
During 1948, 1949 and 1950, Maceo and Company operated a clubroom in Dickinson, Texas, hereinafter referred to as the "Silver Moon." The operations *317 were described on records maintained by Maceo and Company as Dickinson, Club or the Silver Moon Cafe. There were two dice tables and a roulette table at the Silver Moon. The restaurant operated in connection with the Silver Moon would seat about 50 people and served food and drink. Carlo Falco, Sam T. Maceo and Joe Salvato were in charge of the operations at the Silver Moon. Said individuals received a regular salary for the work they performed for Maceo and Company at the Silver Moon. Reports showing the results of the gambling activities at the Silver Moon were prepared at the close of business each night and were brought to Galveston each night for delivery to the safe office of Maceo and Company.
The Streamline Dinner Club was also operated by Maceo and Company during 1949 and 1950. Carlo Falco was in charge of its operations. There were three dice tables and one roulette table at the Streamline. Reports were prepared at the close of business each night and were brought to Galveston for delivery to the safe office of Maceo and Company.
Maceo and Company also operated and owned the entire interest in the Edgewater Lounge, hereinafter called Edgewater. Dice and roulette games were *318 operated at Edgewater. Reports would be prepared at the close of business each night showing the results of the gambling activities at Edgewater. Said reports were delivered to the safe office of Maceo and Company on a weekly basis, at which time approximately seven reports would be delivered to the safe office. Some of the checks received at Edgewater were taken to banks in Houston to be cashed.
The Studio Lounge was operated by Maceo and Company during 1948, 1949 and 1950. The Studio Lounge followed the same procedures for reporting income derived from its gambling activities as did the Balinese Room. Money received at the Studio Lounge was kept in a safe located on the second floor of the Turf.
The Western Room was opened by Maceo and Company in August 1950. Reports showing the results of gambling activities at said establishment were prepared at the close of business each night and were delivered to the safe office of Maceo and Company. Likewise, proceeds from the gambling operations conducted in the Western Room were delivered to the safe office.
Equipment Operations of Maceo and Company
Maceo and Company owned slot machines, pinball machines and phonograph machines which were *319 placed in approximately 300 establishments located throughout the city of Galveston. As part of this operation, Maceo and Company had a 75 percent interest in the Dickinson Equipment Company which owned pinball machines, slot machines, phonograph machines, and various other coin-operated devices which were placed in establishments located throughout the mainland portion of Galveston.
The placing and servicing of pinball machines, slot machines and phonograph machines in Galveston was handled by a division of Maceo and Company called "Novelty." During the taxable years 1948, 1949 and 1950, John Arena was the manager and director of Novelty's operations. Fabj was in charge of collecting money from Novelty's machines during the taxable years involved. Arena was Fabj's boss. Fabj and Arena were sons-in-law of Frank.
Novelty placed machines in locations subject to an agreement that the income derived from the machines would be divided equally between Novelty and the individual operating the location in which the machine was placed. In 1949 or 1950 Novelty changed its income-sharing ratio and began to retain 60 percent of the receipts obtained from the machines and return 40 percent of the *320 receipts to the location owner.
Collections were made from Novelty's machines one or more times each week.
The employee or Fabj counted the money removed from Novelty's machines immediately after removing the money from the machines. The collector would then withdraw sufficient monies from the receipts taken from the machines to reimburse the location owner for any expenses he had incurred in connection with Novelty's machines. The money that remained would then be available for division between Novelty and the location owner in the agreed percentages.
If Novelty and/or Maceo and Company had advanced money to the location owner, the collector would apply a certain portion of the location owner's share of the monies collected that day in reduction of the location owner's debt to Novelty and/or Maceo and Company. In certain instances, the owner allowed his share of receipts from the machines to remain on deposit with Maceo and Company.
The collector would complete the execution of the collection ticket. In the column designated "commission" the collector would enter the owner's commission on phonographs (victrolas) and all other machines. If any portion of the merchant's commissions *321 was applied against loans owed by him to Novelty, the amount so credited would be entered as a credit against the balance due from the owner which had been placed on the collection ticket by the Maceo and Company accounting clerk who had partially prepared the collection ticket for the collector. If the collector collected the stake money, the amount collected would be entered in the section of the collection ticket designated "stake."
The collector would have the location owner sign the collection ticket to acknowledge that an accounting had been made to him for his share of the monies collected from the machines in his establishment. The original of the collection ticket would be left with the location owner and the duplicate would be delivered to Joe T. or Serio at the safe office of Maceo and Company at the close of the day.
Fabj would prepare, from the retained duplicate collection tickets for that date, a single adding machine tape containing the following separate computations:
(1) Total collections by locations that had been made from Novelty's machines.
(2) Total collections from the owners that were recorded as credits on the duplicate collection tickets, that is, collections *322 from owners in respect to loans made to them by Novelty and collections from owners of stakes that had been placed ir Novelty's machines at the time the machines were placed in their establishments.
(3) The total amount of cash collections for which Fabj had to make an accounting, that is, a computation showing the sum of collections from locations and collections for owners.
Fabj delivered money to Joe T. or Serio at the safe office equal to the total amount of cash for which the collection tickets and related adding machine tapes showed that he was responsible.
Betting Operations of Maceo and Company
Betting operations of Maceo and Company were conducted by five different divisions of the company. The operations were conducted at the Turf, at locations throughout Galveston, and at two locations on the mainland in Galveston County. The betting operations involved wagers on sporting events (horse races, football, baseball and basketball games) and games of chance. Maceo and Company would also make and accept layoff bets on scheduled sporting events.
Bets on Horse Races
The horse race betting operations of Maceo and Company were carried on by the division known as "Horse Operations." *323 Bets on horse races were accepted by Maceo and Company at its operations conducted in the Turf, the Home Plate Cigar Stand and Murdoch Bath House Pier, all of which were located in Galveston, and at the Chili Bowl, located at Kemah, Texas, and the Streamline Dinner Club in Algoe, Texas.
Various records were prepared by the employees and partners of Maceo and Company in connection with its horse race betting operations. Printed betting slips were bound in books and each book contained 20 sets of betting slips. Each set of betting slips consisted of an original and duplicate sheet of paper which was printed in 10 different sections, each of which represented a betting slip. Each betting slip on the original page was assigned an identifying number.
Also prepared in connection with its horse betting operations were race sheets which showed the name of each horse that was running in a scheduled race.
Maceo and Company also kept track sheets that showed the results of each scheduled race at a particular track which included the winning horse in the race, and the rate of the pay-off in respect to the winning horses.
In carrying on horse race bets Maceo and Company would keep a bankroll at *324 each betting establishment to finance the betting operations carried on there.
Individuals having winning tickets would present them to the cashier for payment. In order to record the payment of the bet the cashier would circle the serial number on the retained copy of the betting slip and then deposit the winning betting slip in a receptacle where it would be retained until the end of the day at which time it would be destroyed.
At the close of each day the cashier or the individual in charge of the betting operation would add on an adding machine the amounts shown on the duplicate betting slips as "Tackes" (wins) and "Outs" (losses). The difference between the "Takes" and "Outs" represented a win or loss for the day. The adding machine tape would be placed with the duplicate betting slips and the track sheets and all of said records would be delivered to Joe T. or Serio at the safe office in the Turf.
Betting operations at the Home Plate Cigar Stand, hereinafter sometimes referred to as Home Plate, differed from those carried on at Murdoch Bath House Pier, Turf, Chili Bowl, and Streamline Dinner Club, in that Home Plate was owned by Quinn. The horse race betting operations at Home *325 Plate were conducted by employees of Maceo and Company. Quinn and Maceo and Company split the income derived from the horse race betting operations. Maceo and Company received one-half of the net income and Quinn received one-half thereof. At the end of a day's betting operations at Home Plate, a report covering such operations and the net proceeds from the betting operations were delivered to Joe T. or Serio at the safe office at the Turf.
In connection with its horse race betting operations during 1948, 1949 and 1950, Maceo and Company purchased a total of 3,831,000 individual betting slips and 113,675 individual track sheets.
Bets on Baseball, Football and Basketball Games
Bets on the baseball, football and basketball games were handled by employees of the divisions of Maceo and Company designated as "Cigar Stand" and "Horse Operations." Bets were accepted at the Tip Counter which was located on the first floor of the Turf and in the Horse Operations located on the second floor of the Turf.
During the football and basketball seasons bets were accepted by Maceo and Company on football and basketball games at the Tip Counter in the Home Plate Cigar Stand and at 25 or 30 locations *326 throughout Galveston where Maceo and Company had made arrangements for the proprietors of such establishments to accept bets that were recorded on football and basketball cards. The proprietors of said locations received 25 percent of the total bets placed at their location.
On Saturday morning before the commencement of the game scheduled for that date, employees of the Tip Counter visited the locations where football cards were being handled for Maceo and Company and picked up the money represented by such bets. At that time the employees of the Tip Counter would withdraw from said monies the 25 percent commission which the location owner received for having accepted the bets on behalf of Maceo and Company.
The football cards were then taken to Maceo and Company where they were checked in by Joe T. Joe T. then placed the money in a safe until the scheduled games were completed and the football cards were processed.
Joe T., Adams, and other employees processed the football cards to ascertain the number of winning bets that had been accepted. Employees of the Tip Counter would deliver to each location the funds necessary to pay off winning bets that had been accepted at such locations. *327
Records were prepared by Joe T. or other employees of Maceo and Company showing whether a net win or loss had been sustained in respect to bets accepted by a particular location and whether a net win or loss had been sustained in connection with football bets placed at all locations. The amount of the net win or loss sustained in respect to football bets for a particular date would be written on an envelope and delivered to Joe T.
Telephone Bets and Lay-Off Bets
Maceo and Company also accepted and made bets via telephone. The telephone bets were of two types, that is, a bet accepted by Maceo and Company from a bettor and bets that were being laid off by Maceo and Company to other book-makers.
A lay-off bet arises when a bookmaker who has accepted a bet determines that the risk involved therein is too great to be borne solely by himself. Arrangements are then made with another bookmaker to accept an agreed portion of the bet. After the event on which a lay-off bet is completed, a settlement is made by the bettor making the lay-off and the bettor accepting the lay-off.
Lay-off bets were made by Maceo and Company in respect to horse races, football and baseball games.
Slips were executed *328 by Adams or Maceo and Company's employees showing the acceptance of telephone bets regardless of whether it was a direct or lay-off bet. The slip evidencing the bet showed the name of the bettor, the contest on which the bet was made, the amount and the date of the bet. The slips were delivered to Joe T. prior to the commencement of the event on which the bet had been accepted. The betting slip covering the telephone bet was placed by Joe T. in the safe located in the safe office.
Bets placed by telephone could be paid in cash or by check depending upon the arrangements of Maceo and Company with the bettor.
At the time Maceo and Company laid off some of its bets it had not received the money for the bet. Monies received in respect to lay-off bets were generally received by Adams. When a bet had been lost, Maceo and Company would pay the winner of the bet the full amount of the bet and then collect from the lay-off bookmaker the portion of the loss that had been covered by the lay-off bet. Maceo and Company obtained themoney to pay its lay-off bets from funds turned in by the various locations where it conducted horse operations or from the money kept by Joe T. in the safe in the safe *329 office.
Poker
A poker game was generally conducted on the second floor of the Turf on several nights each week. The game was conducted by a dealer working under the direction of Joe Megna. The amount specified as the "house's" share of the betting income was withdrawn by the dealer from the betting pot developed on each hand of poker. At the end of each evening Megna would compute the net income derived from the game, that is, the house's share of the bets minus any expenses that he sustained in conducting the game. Megna would place 50 percent of the net income in an envelope, mark "poker" on the envelope, and turn it over to the night watchman for delivery to Joe T. Upon receiving the envelope, Joe T. would count the money in the envelope, return the money to the envelope, reseal and place it in the safe in the safe office.
Bingo
Maceo and Company operated bingo games at Murdoch Bath House Pier and the Chili Bowl. Maceo and Company also had a percentage interest in the bingo games operated by Playland Amusement Company. At the end of each day employees conducting the bingo games at Murdoch Bath House Pier and the Chili Bowl prepared a report showing the number of games played *330 and the income derived therefrom. The report was delivered to Joe T.'s office at the Turf where the amount of money turned in was verified by Joe T.
Tip Books
The Cigar Stand of Maceo and Company was open 24 hours per day where so-called "tips" were sold from "tip books." Tip books were sold by Turf Stores to the Cigar Stand.
Tip books represent a form of gambling whereby an individual for the payment of five cents or ten cents can take a chance on winning a sum of money not to exceed a specified amount.
Money from the sale of tip books was delivered to the safe office on the first floor of the Turf.
Employees of the Tip Counter at the Cigar Stand maintained a journal book in which was entered income and expenses attributed to the sale of tip books.
Nongambling Operations
Food and beverages were sold at a number of locations where Maceo and Company had clubrooms and in four establishments where there were no clubrooms; that is, Turf Grill, Turf Tap Room, Stewart Beach and The Corner.
At the close of each day a locked pouch was received at the safe office from each location at which food and drink services were supplied. Each pouch contained the day's receipts, food and beverage checks *331 and cash register tapes. Joe T. counted the money received from the locations.
Turf Stores were operated as a central purchasing agency for various divisions of Maceo and Company or for the corporations which were owned or controlled by Maceo and Company or its partners. Turf Stores consisted of a warehouse in which food stocks and beverages were stored.
Maceo and Company maintained a check cashing booth on the first floor of the Turf Grill Building. A ten cent charge was made to cash checks.
Records Maintained by Maceo and Company in Respect to Receipts and Expenditures
The receipt of cash by Maceo and Company was verified by Joe T., Serio, Adams or other individuals working in the safe office on the first floor of the Turf. In accordance with Rosario's wishes, money of Maceo and Company was always counted in the presence of two trusted individuals, that is, either partners like Serio and Adams or employees such as Joe T. and Frank Fertitta.
The following records were prepared and maintained in connection with the clerical work performed in the safe office: (a) daily cash statements showing the cash received from locations at which nongambling activities were conducted by Maceo and *332 Company or its controlled corporations; (b) daily and periodic cash statements showing cash to be reported as having been received at locations or in connection with gambling operations conducted by Maceo and Company; (c) deposit slips recording deposits made to bank accounts maintained in the name of Maceo and Company or in the name of a nominee or designee thereof, such as Galveston Novelty Company; (d) memoranda showing income reported by various divisions and locations as being derived from gambling operations carried on by Maceo and Company in its clubrooms and at the locations where it accepted bets on sporting events; (e) memoranda showing postdated checks received and held at the safe office; (f) memoranda showing portions of money received from clubrooms that were placed in the safe of the cashier's office and not deposited in the bank accounts of Maceo and Company or distributed to the partners of Maceo and Company; (g) win and loss books showing some of the income received from some of the clubrooms operated by Maceo and Company.
The records maintained by the accounting department included, inter alia, a cash receipts journal, a cash disbursements journal, check stub books, *333 daily and weekly cash position analysis, general journals, general ledger, payroll journals, departmental payroll summary sheets showing departments included in particular payrolls, monthly financial statements showing the results of the company's operations per the general ledger; daily or weekly summaries of checking account balances, and records showing income received by Maceo and Company from slot machines, pinball machines, marble machines and victrolas installed in establishments located throughout Galveston.
Receipts Recorded on General Ledger of Maceo and Company
Receipts reported by Maceo and Company on its books as having been received from its various operations during its fiscal years ended September 30, 1948, 1949 and 1950 are set forth in the following summary: Year ended September 30
1948 1949 1950
Income from gambling
operations:
Clubrooms $ 564,905.35 $ 720,903.15 $ 830,586.25
Betting operations 262,545.80 210,911.69 371,263.44
Equipment operations 513,694.50 553,929.10 564,463.00
Gambling games and pool 223,019.60 229,164.71 223,812.99
Total $1,564,165.25 $1,714,908.65 $1,990,125.68
Income from nongambling
activities:
Sale of food, drink & other $1,091,223.18 $1,135,597.43 $1,231,398.61
services & dues & fees
Sale of merchandise 583,182.58 582,652.37 613,684.74
Total $1,674,405.76 $1,718,249.80 $1,845,083.35
Income from gambling $3,238,571.01 $3,433,158.45 $3,835,209.03
operations & sales of food,
drink, services, merchandise
& supplies recorded on
general ledger & reported on
income tax returns as total
receipts
*334 Receipts from gambling at clubrooms during the years ended September 30, 1948, 1949 and 1950 which were recorded on the various accounting records of Maceo and Company are as follows: Year ended September 30
Name of Operation 1948 1949 1950
Income from gambling operations at
clubrooms
operated by company:
(A) Net wins shown on clubroom
win-and-loss books kept by Company
and accounted for as part of
"Clubroom Receipts - Horse Account":
Balinese Room $448,622.59 $585,370.70 $551,536.34
Studio Lounge 25,995.11 55,959.17 13,448.50
Silver Moon 21,576.22 a *336
Edgewater Lounge 33,613.08
Western Room 12,084.11 a
Total $474,617.70 $641,338.87 $632,258.25
Total brought forward $474,617.70 $641,338.87 $597,714.25
Less net wins shown on clubroom
win-and-loss book
Balinese Room - win 37,218.00 a
Studio Lounge - (loss) (5,145.00 a )
Western Room - win 165.00 a
Edgewater Lounge - win 2,306.00 a
Net wins not reported $ 34,544.00
Total $474,617.70 $641,338.87 $597,714.25
(B) Amounts separately recorded as
clubroom
receipts in cash receipts journal -
Horse
Account:
1. Dickinson Clubroom
a. Distribution 12,000.00 5,000.00
b. Salaries paid with clubroom 55,744.47 58,938.15
receipts
2. Salaries paid with clubroom 21,946.18
receipts from unidentified clubrooms
3. Poker 596.00 3,427.00
4. Tax paid with clubroom receipts 10,069.19
from unidentified sources
(C) Error in computation - Balinese 1.00
Room
Total clubroom receipts recorded in $564,905.35 $718,773.21 $597,714.25
clubroom receipts "Horse Account" on
General Ledger
(D) Clubroom receipts of Streamline 2,129.94 170,458.12 a
Dinner Club separately recorded in
win-and-loss book [Ex. S(33)] and
separately shown in general ledger
under Dinner Club
(E) Clubroom receipts of Studio 62,413.88
Lounge separately recorded on
general ledger and omitted from
win-and-loss book
Total clubroom receipts recorded in $564,905.35 $720,903.15 $830,586.25
general ledger
*335
Receipts from bingo, tip books and pool during the years ended September 30, 1948, 1949 and 1950 that were recorded on the accounting records of Maceo and Company were as follows: Name of Operation 1948 1949 1950
Income from gambling games and pool:
Bingo:
Murdoch Bath House Pier $ 87,028.80 $ 66,691.00 $ 56,791.00
Playland 6,904.50
ChiliBowl 27,360.35
Tip Books - Cigar Stand 124,840.60 151,333.70 122,817.10
Pool - Cigar Stand 11,150.20 11,140.01 9,940.04
Total $223,019.60 $229,164.71 $223,812.99
Receipts from nongambling activities during the years ended September 30, 1948, 1949 and 1950 were recorded on the accounting records of Maceo and Company as follows: Income from Nongambling 1948 1949 1950
Activities
1. Sale of food, drink and
other services,
and dues and fees:
Turf Grill $ 355,056.68 $ 369,173.20 $ 336,816.09
Turf Tap Room 126,090.11 99,932.42 77,917.62
Studio Lounge 21,508.18 94,602.09 87,473.01
Western Room 10,464.55
Horse Operations 7,431.00 978.70 4,154.38
Cigar Stand 173.20 494.45
Balinese Room 506,980.31 498,861.42 505,140.06
Stewart Beach Catering Co. 73,094.47 67,980.99 61,092.93
Fish House 23.18
Maceo Catering Company 1,039.25 1,200.00 1,332.50
Corner 17,885.63
Chili Bowl 14,164.51
Streamline Dinner Club 2,695.41 114,462.88
Total $1,091.223.18 $1,135,597.43 $1,231,398.61
2. Sale of merchandise,
supplies, etc.
Bingo - Murdoch Bath House 1,791.00 1,648.00 1,604.00
Pier
Turf Stores 581,391.58 581,004.37 612,080.74
$ 583,182.58 $ 582,652.37 $ 613,684.74
Total income from nongambling
activities $1,674,405.76 $1,718,249.80 $1,845,083.35
*337 Handling and Accounting for Cash in the Safe Office
Monies received from the gambling and nongambling activities of Maceo and Company, with one exception involving the Studio Lounge, were received and counted in the so-called "safe office."
After the net receipts from a nongambling location were counted, a daily cash statement was prepared showing the net amount being deposited in that location's bank account for that day's operations. Collections on customers' accounts receivable attributable to particular locations were delivered to Joe T. for counting and inclusion in the location's daily cash statement and bank deposit.
The receipts that were turned in each day by each location at which Maceo and Company conducted horse race betting operations were counted by Joe T. On occasion, the amount turned in by a location was increased or decreased by an amount representing the monies that Joe T. would attribute to lay-off bets handled by Maceo and Company. After the completion of the aforesaid count, Joe T. would prepare a recapitulation or summary (consolidated report) showing an amount that would be recorded on the books of Maceo and Company as the net wins or losses sustained by Maceo *338 and Company on that date at its various locations; that is, the Turf, Home Plate, Murdoch Bath House Pier, Chili Bowl and Streamline Dinner Club. The amount shown on the recapitulation sheet as the net win or loss from horse race betting operations was reduced by the cost of daily racing forms that had been purchased with cash supplied by the safe office. The net amount was then entered on a daily cash statement as the net income for the horse betting operations conducted by Maceo and Company on that date. The data submitted by the locations in support of the wins or losses reported by them was destroyed as soon as Joe T. prepared the recapitulation.
In connection with its horse race betting operations, Maceo and Company from time to time received checks from individuals in settlement of their gambling debts subject to an agreement that the checks would be held for a period of time prior to their presentment for payment. The checks would be delivered to the safe office or to the accounting office where they would be retained until they were cashed at a Galveston bank. The following checks were received by Maceo and Company in settlement of debts incurred by C. H. Alexander and were *339 cashed in accordance with A. J. Adams' agreement with Alexander. Checks received on or about September 18, 1948.
Date of Amount of Date cashed at
check Payee check Galveston bank Form of endorsement
9-18-48 A. J. Adams $1,130 9-20-48 A. J. Adams; "MACEO &
COMPANY [stamp]
9-18-48 A. J. Adams 1,500 11-17-48 A. J. Adams
9-18-48 A. J. Adams 1,500 1-17-49 A. J. Adams: "ENDORSED FOR
CASH ONLY FOR THE TURF
A. J. ADAMS" [stamp]
9-18-48 A. J. Adams 1,500 1-17-49 A. J. Adams
Total $5,630
Checks received on or about January 22, 1949.
1-22-49 A. J. Adams $1,500 * 3-31-49 A. J. Adams; "ENDORSED FOR
CASH ONLY FOR MACEO &
COMPANY JOE T. MACEO"
[stamp]
1-22-49 A. J. Adams 1,500 4-25-49 A. J. Adams; "MACEO &
COMPANY" [stamp]
1-22-49 A. J. Adams 1,500 * 6-20-49 "ENDORSED FOR CASH ONLY
FOR MACEO & COMPANY
JOE T. MACEO NO. 2" [stamp]
Total $4,500
Said checks cannot be traced as specific amounts into the cash receipts journal (horse account) of Maceo and Company.
Receipts were turned in by the Cigar Stand employees covering baseball bets made at the Tip Counter. Each day the employees turned in an envelope showing the win or loss *340 on baseball bets. Joe T. entered on a daily cash statement for the Horse Operations an amount designated as the net win or loss of Maceo and Company in respect to its baseball bets for that date. Joe T. then destroyed the envelope showing the results of the baseball betting that had been received from the Tip Counter.
The cash turned in by the Tip Counter employees in respect to football bets handled by Maceo and Company was counted by Joe T. and checked against the reports turned in by each location. After a net win or loss was determined in respect to football bets accepted by Maceo and Company during a particular week, Joe T. would prepare a daily cash statement showing an amount which was recorded as the net win or loss for the football betting operations. The data used in checking the amount of money turned in to Maceo and Company by locations handling its football cards was destroyed by Joe T. immediately after he checked the records.
The monies turned in by the "robbers" each day as the result of their equipment collections were counted by Joe T. or Serio. After the money was counted it was placed in the safe in the safe office. After counting the money, Joe T. wrote two amounts *341 on a sheet of paper. One amount was designated as Maceo and Company's share of income collected from its machines and the other amount was designated as monies collected from location owners in respect to debts owed Novelty or to Maceo and Company. The entries made by Joe T. on the sheet of paper were made on a daily basis. At the end of each week the entries appearing on the sheet of paper maintained by Joe T. were totaled. A cash statement was perpared once each week by Joe T. which showed two amounts: that is, an amount of money that was to be recorded on the books of Maceo and Company as income from its equipment operations and an amount of money that was to be recorded as collections on loans made in connection with the equipment operations of Maceo and Company.
Reports submitted by the clubrooms were reviewed by Joe T. or Serio upon their receipt from the clubrooms.
The clubrooms sent checks into the safe office for cashing or depositing to the account of Maceo and Company. Clubrooms located on the mainland generally took checks they had received in their operations to Houston and cashed them at the banks on which they were drawn.
Clubrooms located on the mainland sent cash *342 to the safe office to pay the salary expense incurred by the clubrooms or by other departments of Maceo and Company which were operated at the locations where Maceo and Company had clubrooms; for example, Silver Moon, Streamline Dinner Club, Edgewater Lounge.
Joe T. prepared an adding machine tape covering the checks that were sent to the safe office to verify the correctness of the total shown on the adding machine tape that was attached to the checks that had been received from the clubrooms.
If the checks were to be cash pursuant to the "AJA" check cashing arrangement that Maceo and Company had with two Galveston banks, (explained infra) the tape that had been furnished by the clubroom was detached from the checks and the tape prepared by Joe T. substituted for it.
The "AJA" check cashing agreement that Maceo and Company had in effect in 1948, 1949 and 1950 with the United States National Bank, Galveston, and the City National Bank, Galveston, was an agreement whereby checks presented to such banks would be accepted or cashed by such banks without a formal endorsement by Maceo and Company. Maceo and Company and the banks agreed that the identifying initials "AJA" would be written *343 in the upper left-hand corner of each check in lieu of a formal endorsement on the reverse side of each check. In connection with said check handling agreement, Maceo and Company furnished the banks with letters which advised the banks that in the event checks containing the identifying initials "AJA" were returned to the banks for any reason, Maceo and Company would immediately reimburse the bank for the amount of the returned check.
Postdated checks which had been received by clubrooms such as the Balinese Room were cashed in accordance with the "AJA" check cashing arrangement. In some cases, Maceo and Company placed identifying numbers in the lower left-hand corner of postdated checks which they had accepted in satisfaction of gambling debts incurred at its clubrooms. The identifying numbers enabled Maceo and Company to account for the checks in its possession and the sequence in which they were to be cashed. The Balinese Room did not maintain records showing the number or amount of postdated checks turned over to the safe office.
Checks picked up in Houston by clubroom employees from Houston residents who had become indebted to Maceo and Company for gambling losses sustained at *344 the Balinese Room and Studio Lounge were also cashed under the "AJA" check cashing arrangement.
The clubroom or location at which individuals lost money was sometimes indicated by writing an appropriate identifying initial next to the "AJA" initials that were placed on the checks prior to their cashing. Serio stamped the initial "B" on checks which he sent to the safe office from the Balinese Room. The initial "S" was used to identify checks that were sent to the safe office by the Studio Lounge.
Prior to the cashing of certain of the "AJA" checks, someone working in Maceo and Company placed a check mark on the face of checks sent by clubrooms to the safe office for cashing.
Monies received from "AJA" checks which were actually cashed by Maceo and Company were returned to the safe office. The exact amount of money represented by the "AJA" checks which had been received at the safe office from a clubroom was returned to the clubroom accompanied by the original adding machine tape that had been submitted by the clubroom.
After "AJA" checks of a clubroom were cashed, sufficient money would be withdrawn from the cash derived from such checks to reimburse Joe T. for the cost of dice which *345 he had purchased for a clubroom. The remainder of the cash attributable to the foregoing "AJA" checks was then returned to the clubroom that had sent the checks to the safe office.
A portion of the monies derived from the cashing of "AJA" checks was returned to the clubroom and the remainder of the monies attributed to the cashing of "AJA" checks was retained in the safe office by Joe T. and classified as surplus money of a clubroom.
Checks cashed or deposited during various periods in 1948, 1949 and 1950 by Maceo and Company pursuant to its "AJA" check cashing arrangements were as follows: Amount of
No. of checks cashed
checks Period covered and/or deposited
1178 150 days during period 1-29-49 to 6-22-49 $ 377,346.66
1259 90 days during period 6-22-49 to 10-1-49 331,649.24
1869 124 days during period 6-22-49 to 9-15-49 427,435.11
Total $1,136,431.01
Moody National Bank successor to City National Bank
1199 476 days during period 12-31-47 to 1-3-50 415,449.09
Total checks $1,551,880.10
From time to time Joe T. reviewed his records showing the amount of cash on hand at the clubrooms to ascertain if the cash being retained by the clubroom was in excess of the amount needed for its operations. If Joe T. determined *346 that there was too much cash at a clubroom, he would request the clubroom to send in the excess cash to the safe office. When excess or surplus cash was received from a clubroom, the excess cash was placed in a safe in the safe office and a slip of columnar accounting paper was placed upon it noting the clubroom from which it had been received. Such funds which were delivered to the safe office were regarded by Joe T. as surplus funds of the particular clubroom from which they had been received. The surplus funds of each clubroom were segregated from the surplus funds of every other clubroom. (There were no compartments in the lock box in the safe in the safe office.)
Joe T. placed the daily reports received from the clubrooms in the safe in the safe office along with the surplus cash of a clubroom and the related sheet of columnar accounting paper used by him to account for the monies which he had set aside as surplus funds of a clubroom.
In addition to the surplus monies from the clubrooms that were kept in the two-door safe in the safe office, there was also a $100,000 bankroll which had been supplied for company use by the partners of Maceo and Company. The $100,000 bankroll was *347 not recorded on the general ledger of Maceo and Company. The $100,000 bankroll was used to provide bankrolls for the various clubrooms operated by Maceo and Company and to supply cash for the check cashing operations carried on by Maceo and Company.
Joe T. also supervised the bankrolls which were supplied to the gambling operations of Maceo and Company other than the clubrooms. The bankrolls for the aforesaid gambling operations were established with monies from a "petty cash fund" (equivalent to "bankroll") that was reflected on the general ledger of Maceo and Company.
Monies were advanced to, or for the benefit of, the partners of Maceo and Company from the safe in which the $100,000 bankroll and the surplus funds of the clubrooms were maintained. Monies advanced to or for the partners of Maceo and Company were used to purchase cashier's checks.
On occasion, Joe T. would be notified by the accounting department that funds were needed to finance certain phases of the operations of Maceo and Company which included such things as salary expenses of the clubrooms, expenses sustained in the dining room operations carried on in connection with clubrooms operated by Maceo and Company and *348 the cost of operating the yacht, Miss Hollywood. In this connection, the accounting department furnished Joe T. with a monthly profit and loss statement showing the results of the operations of the departments needing funds. In addition, Joe T. was furnished with a statement showing the balances in the various bank accounts maintained by Maceo and Company. Joe T. withdrew sufficient funds from the monies he had previously designated as surplus funds of clubrooms in order to defray the expenses or losses of the various operations needing funds.
Serio withdrew money from the surplus funds of the clubrooms to make distributions to the partners which were described by the partners as "dividends."
The records of Maceo and Company include daily cash statements on the horse account which record the receipt of clubroom receipts that were used to defray expenses or provide funds for various departments of Maceo and Company. These daily cash statements also show the disbursement of the same funds to the department or location of Maceo and Company or partner of Maceo and Company receiving such funds.
In the fiscal year ended September 30, 1950, funds were received and daily cash statements were *349 prepared in the safe office for the Studio Lounge recording clubroom receipts in the total amount of $62,413.88. Said clubroom receipts were used to pay salaries and entertainment expenses incurred in connection with the operation of Maceo and Company. This amount of $62,413.88 was in addition to clubroom receipts of the Studio Lounge that were included in clubroom receipts reported in the horse account.
In the fiscal years ending September 30, 1949, and 1950, funds were received and daily cash statements were prepared for the Streamline Dinner Club, recording clubroom receipts in the total amounts of $2,129.44 and $170,458.12, respectively. Said receipts were used to pay salaries and entertainment expenses incurred in connection with the operation of the Streamline Dinner Club.
Joe T. or Serio prepared bank deposits consisting of cash, currency and checks after daily cash statements were prepared showing the results of the operations at the nongambling locations operated by Maceo and Company and at those gambling operations of Maceo and Company other than the clubrooms. Joe T. and Serio also prepared bank deposits at the time receipts from the clubrooms were made available for use *350 in the operations of Maceo and Company.
Personnel in the accounting department of Maceo and Company generally prepared, on a monthly basis, a daily cash statement for the horse account that showed the receipt and use of monies that were described as clubroom receipts to pay salaries incurred in connection with the operation of the respective clubrooms.
The cash statements prepared during the months of March, April and May 1950 by Maceo and Company personnel did not account for the entire amount of clubroom receipts which were used in those months to pay clubroom salaries. A cash statement was not prepared in June 1950 to account for the clubroom receipts used to pay clubroom salaries in that month.
On July 31, 1950, a daily cash statement was prepared showing the use of $67,640.08 in clubroom receipts to defray salary expenses incurred by various clubrooms operated by Maceo and Company during the months of March through July 1950. An adding machine tape was attached to the cash statement which showed the amount of clubroom salaries which had been paid with such clubroom receipts. The amount of salaries paid with said receipts, the clubrooms and the months of payment are shown in the *351 following schedule. Months in 1950 in
Name of clubroom which salaries paid Amount
Edgewater Lounge March through July $22,355.49
Balinese Room and Studio Lounge March, June and July 41,043.49
Silver Moon June and July 4,241.10
$67,640.08
Records Showing the Results of Gambling Activities Carried on at Clubrooms Operated by Maceo and Company
Two bound columnar journals, hereinafter referred to as win-and-loss books (10inch X 12 1/3inch in size) having prenumbered columnar pages were produced by Joe T. at the trial. Poe T. identified said journals as the only records showing the daily wins and losses of Maceo and Company at its clubrooms in the years 1948 through 1950. The win-and-loss books did not show the daily wins or losses sustained by Maceo and Company in 1948 and 1949 at the Silver Moon.
Daily cash statements of Maceo and Company and entries in the cash receipts journal of the horse account record the receipt in 1948 and 1949 of $67,744.47 and $63,938.15, respectively, in "Clubroom receipts of the Silver Moon."
Daily cash statements of Maceo and Company and entries in the cash receipts journal of the horse account record the receipt in 1948 of $21,946.18 in clubroom receipts, without an *352 identification being made as to the clubroom which had received such receipts.
A daily cash statement of Maceo and Company and an entry in the cash receipts journal of the horse account dated September 30, 1949, record the receipt of $10,069.19 of clubroom receipts. Neither the daily cash statement nor the entry in the cash receipts journal identify the clubroom from which the money was received. Both documents have the notation "Tax" written next to the entry. The win-and-loss book showing the 1949 operations of the various Maceo and Company clubrooms does not show a withdrawal of clubroom receipts in September 1949 in the amount of $10,069.19.
The win-and-loss book showing the results of the gambling operations at the Studio Lounge in the year ended September 30, 1950, does not include the winnings totaling $62,413.88 which were separately recorded on daily cash statements.
Joe T. made the entries in the win-and-loss book during the periods September 30, 1947, through September 30, 1950. After September 30, 1950, Frank Fertitta maintained the win-and-loss book.
Each page of the win-and-loss books on which were posted the wins or losses of a clubroom was divided into seven columns. *353 Said books reported, inter alia, amounts won and lost by a clubroom on a particular date, salaries paid to clubroom employees with winnings of the clubroom, and the accumulated amount of cash chargeable to a clubroom, that is, the bankroll with which the clubroom was charged plus all winnings with which the clubroom was charged minus recorded withdrawals of bankroll and minus recorded withdrawals of monies to pay salaries to provide other departments with funds or make dividend payments to the partners of Maceo and Company.
Additions or reductions of the bankroll assigned to a clubroom were indicated by entries in the column in the win-and-loss book designated "Cap."
On those dates on which salaries were recorded in the win-and-loss book as being paid with clubroom winnings, the amount designated as the win or loss for that date differed from the actual win or loss sustained on that date. Every month from January 1, 1948, through February 1950, clubroom receipts were credited with a certain amount of winnings and the payroll account was charged with the same amount.
The reports submitted by the clubrooms were not posted to the win-and-loss book on a daily basis. Instead, Joe T. accumulated *354 the daily reports submitted by the clubrooms for periods of three or four weeks and posted from such reports at one time.
The win-and-loss books were allegedly kept in Joe T.'s desk in his third floor office at the Turf Building. Once every three or four weeks Joe T. would remove from the double door safe in the safe office all of the records that had been developed in connection with the income received from the various clubrooms. Joe T. then allegedly posted the data from said records to the win-and-loss book. The records used by Joe T. in posting to the win-and-loss books were:
(1) Daily reports that had been received from the Balinese Room and other clubs. Some of the daily reports from the Balinese Room had notations that had been written thereon by Joe T. which showed the amount of money that Joe T. had requested the Balinese Room to return to the safe office on the ground that such monies exceeded the total amount of cash that Maceo and Company wanted to maintain at the Balinese Room; the amount of money that Joe T. had not returned to the Balinese Room after he had cashed "AJA" type checks which had been submitted to the safe office for cashing; and the amount of any monies *355 derived from cashing postdated checks that had been turned in to the safe office.
(2) A memorandum sheet on which Joe T. had noted the amount of money the payroll department had requested him to deposit in the payroll bank account in order to cover clubroom salaries; amounts withdrawn from surplus funds of the clubroom for the purpose of making advances to partners; and the amount of monies withdrawn in order that they could be used in the general operations of Maceo and Company.
(3) Records or documents prepared by Serio or others as to the amount of cash dividend that had been paid to partners of Maceo and Company with monies derived from the clubrooms.
The foregoing data would then be examined and entries based upon notes and memoranda made by Joe T. and the daily reports submitted by the clubrooms would be entered in the win-and-loss book. After the win or loss and any other entries were posted, a computation was made to show the amount of funds (balance) with which a clubroom was charged.
At the time Joe T. made entries in the win-or-loss books the balance that appeared on the daily report submitted by the Balinese Room was not the same as the balance that appeared in the win-and-loss *356 book for the reason that the Balinese Room was not advised of the withdrawal and use of surplus funds by Joe T. Based upon entries in the win-and-loss book, the final daily report for the month of October 1948 that would have been submitted by the Balinese Room would have shown a balance of $52,511.66, whereas, the win-and-loss book showed that the Balinese Room was charged with a bankroll plus accumulated winnings minus withdrawals of $13,656.
The win-and-loss book of Maceo and Company shows a $121 net loss ($10,000 opening bankroll minus $9,879, closing bankroll) from the operations of the Streamline Dinner Club that was not deducted from clubroom receipts of $2,129.44 which was reported as clubroom winnings for the Streamline Dinner Club for the period September 21 through 30, 1949.
The win-and-loss book of Maceo and Company shows the following net wins or losses that were not included in the clubroom receipts of horse account, Studio Lounge and Streamline Dinner Club. Clubrooms having winnings or
losses not included in clubroom Cash balance Omitted net
receipts shown on general at clubrooms wins or (loss)
ledger at 9-30-50 Amount on 9-30-50 at 9-30-50
Balinese Room $15,000 $52,218 $37,218
Studio Lounge 10,000 4,855 (5,145)
Western Room 10,000 10,165 165
Edgewater Lounge 10,000 12,306 2,306
Streamline Dinner Club 10,000 12,925 2,925
Silver Moon 10,000 5,732 (4,268)
Net wins per win-and-loss book $33,201
The *357 unreported net clubroom winnings of Maceo and Company for its year ended September 30, 1950, were $33,322, which included an unclaimed $121 loss of Streamline at September 30, 1949. In order to eliminate the need for a $121 compensating adjustment in the year ended September 30, 1949, respondent's adjustments to the partners' capital accounts at September 30, 1950, have been based upon unreported winnings of $33,201.
Accounting Department Personnel and Procedures
Maceo and Company had an accounting department during the fiscal years ended September 30, 1948, 1949 and 1950 which was conducted under the supervision of Sam Serio.
The accounting department personnel maintained the general ledger, cash receipts and disbursements journals, general journal, payroll records, subsidiary accounts receivable ledger and accounts payable records of Maceo and Company and related businesses.
The daily cash statements showing the net cash received at the safe office along with cash register tapes, food and beverage checks and other memoranda submitted by the nongambling operations of Maceo and Company were processed by the accounting department after they had been received from the safe office. Employees *358 of the accounting department, among other things, completed the daily cash statement and prepared analyses showing the receipts derived from the sale of food, beverage and cigarettes. Said analyses were based upon a review of each individual customer check.
Maceo and Company had an internal auditing staff which prepared detailed analyses showing the results of its various nongambling operations. Said audit was carried on under the direction of a national firm of accountants specializing in food and beverage control for institutions and hotels. In connection with this activity, Maceo and Company maintained a perpetual inventory and took weekly physical inventories of merchandise that was in stock at the locations where it carried on its nongambling activities.
The accounting department, under the supervision of R. N. Cox, prepared annual balance sheets and monthly profit and loss statements which showed the results of the operations of the various departments as recorded on the general ledger of Maceo and Company.
Daily cash statements covering the gambling operations of Maceo and Company were submitted to the accounting department for entry in the various cash receipts and disbursements *359 journals of Maceo and Company. The personnel in the accounting department had no knowledge as to whether win-and-loss books were maintained by Maceo and Company to show the results of the gambling operations that were conducted at its clubrooms or at the locations where it accepted bets.
Transactions recorded in the cash receipts and disbursements journals of Maceo and Company did not always occur in the manner indicated by the entries recorded in such journals, that is, matters actually handled by Maceo and Company as cash transactions were written in such a way that they appeared to have been handled as check transactions which passed through the bank accounts of Maceo and Company. For example, entries would be made showing the deposit of funds in a bank account and the simultaneous crediting of such funds to an appropriate nominal or real account and entries would concurrently be made in the cash disbursements journal showing the withdrawal of the same funds from the bank and the use of such funds to discharge certain obligations of Maceo and Company. Clubroom winnings were entered on the general books of Maceo and Company in order that monies could be made available to an operation *360 needing money. Clubroom receipts were shown in the cash receipts book of the horse account as a deposit into and withdrawal from the horse account checking account and the monies were then entered as a deposit in the bank account of the operation needing the money.
Transactions Not Reflected on the Books of Maceo and Company
Maceo and Company conducted betting transactions with W. M. (Boston) Smith in the years 1948, 1949 and 1950. Maceo and Company maintained subsidiary accounts receivable to which were charged amounts owed it by W. M. Smith and to which were credited amounts received from Smith in payment of his debts to Maceo and Company. Smith issued the following checks to Maceo and Company: Endorsement Date cashed by
Date Payee Amount (Stamped) Maceo & Company
9- 8-48 Turf Athletic Club $1,445 Turf Athletic Club 9-10-48
12-13-48 Turf Athletic Club 1,500 Turf Athletic Club 12-14-48
1- 1-49 Turf Athletic Club 1,000 Turf Athletic Club 1- 6-49
10- 3-49 Turf Athletic Club 300 Turf Athletic Club 10- 5-49
The accounts receivable ledger sheet of Maceo and Company for W. M. Smith contains the following entries between the dates of August 31, 1948, through January 24, 1949. Debits Credits
Date Fol. Amount Date Amount
1948 1948
8-31 $1,435.65 9-9 $1,445.00
12-6 1234 550.00 12-4 550.00
1949 1949
1-24 1336 550.00 1-22 550.00
5-30 1617 1,000.00 5-28 1,000.00
9-26 300.00 10-4 300.00
The *361 aforesaid numbers 1234, 1336 and 1617 were the numbers of Maceo and Company checks drawn on the horse bank account that were issued to W. M. Smith in payment or settlement of claims that Smith had against Maceo and Company. Each of the foregoing checks was issued after Maceo and Company's liability to Smith was recorded on its books.
The credits of $1,445 on September 9, 1948, and $300 on October 4, 1949, which appear on the accounts receivable ledger sheet for Smith represent Smith's payment or settlement of his account with Maceo and Company. Each of the foregoing checks was received by Maceo and Company after Smith's liability to Maceo and Company was recorded on its books.
The cash receipts journal for the horse account shows the receipt of $1,445 (from Smith) on September 9, 1948, which was recorded as a payment on an account receivable and was included in a deposit made to the account of Maceo and Company in the Moody Bank in the amount of $2,427.95.
The cash receipts journal for the horse account shows a payment on accounts receivable (from Smith) of $300 on October 4, 1949, and such payment was then included in a net deposit of $1,235.20 which was made in the Moody Bank. The *362 daily cash statement for October 4, 1949, shows the collection of two accounts receivable, that is, one from Andrew D'Albergo, $20, and Boston Smith, $300.
The subsidiary accounts receivable records of Maceo and Company do not show the receipt from Boston Smith of the following checks which were payable to Turf Athletic Club. Date of Check Payee Amount
12-13-48 Turf Athletic Club $1,500
1- 1-49 Turf Athletic Club 1,000
Neither the daily cash statements for the horse account nor the cash receipts journal horse account of Maceo and Company show the collection of $1,500 and $1,000 from Boston Smith on or about December 31, 1948, or January 1, 1949. The $1,200 collection on accounts receivable on January 4, 1949, is identified as a collection from T. K. Jackson.
Maceo and Company purchased three separate cashier's checks (Nos. 13826, 13827, 13828) on December 12, 1948, in the amount of $1,000 each which were payable to Wheaton B. Nichols. The checks were purchased in order to pay Nichols the net amount of his winnings at the Balinese Room about July 12, 1948. The records of Maceo and Company do not show the source of the funds used to purchase said cashier's checks. There are no disbursements *363 from the checking accounts of the Balinese Room, the Horse Account, the Cigar Stand, the Bingo Account or the Equipment Account on or about December 12, 1948, to account for the source of funds used to purchase said cashier's checks.
On January 4, 1949, a cashier's check, No. 135542 in the amount of $1,500 payable to T. H. Ivey, was purchased by Maceo and Company from The City National Bank, Galveston. The check was mailed to Ivey at his home in Dallas. The check register of Maceo and Company does not show the disbursement of any monies on or around January 4, 1949, by the Balinese Room, Studio Lounge, Cigar Stand, Bingo, Equipment or Horse Accounts that would provide the funds which were used for the purchase of the cashier's check on January 4, 1949.
During the fiscal years ended September 30, 1948, 1949 and 1950, cashier's checks totaling $807,826.79 were purchased at Galveston banks by employees and partners of Maceo and Company, viz., Joe T., Adams and Serio. The cashier's checks were generally purchased with cash. The names in which the cashier's checks were purchased as shown by bank records and the total amount of such purchases is as follows: Names of Hutchings-Sealy The City First U.S. W. L.
Purchasers Moody
of Cashier's National National National National & Co.
Checks
per Bank Bank Bank Bank Bank Bankers
Records
Turf, The Turf, $ 99,765.86 $317,100.28 $ 65,008.04
Turf (cash)
Turf Athletic 55.00 150,535.96
Club
Turf-Joe T.; 16,251.52 25,801.54
Sam Maceo-Turf;
Poretti-Turf;
Turf Cit. St.
Bk.-Houston;
Turf Grill; A.
J. Adams-Turf
Maceo and 35,029.10 5,506.46 $ 1,435.14 15,128.25
Company
Collection 2,650.00 1,599.40
Sam Maceo-L. J. 1,000.00 6,000.00
Dibrell for Sam
Maceo
Rosario Maceo 12,000.00
Maceo 30,185.24
Joe Maceo $22,775.00
$134,849.96 $342,508.26 $31,620.38 $276,073.19 $22,775.00
*364 Cashier's checks that were purchased in the years 1948, 1949 and 1950 to make payments on the partners' income tax liabilities totaled $525,332.34.
Monies received by Galveston Novelty Co. with respect to loans to individuals operating establishments into which Maceo and Company had placed its slot machines and victrolas, and from other sources, were deposited in the First National Bank, Galveston. The account was maintained in the name of Galveston Novelty Company and was not recorded on the books of Maceo and Company as a bank account owned and controlled by it. During the period December 6, 1948, through December 30, 1950, Galveston Novelty Company deposited the total amount of $517,607.22 in the bank.
Income Tax Returns Filed by Petitioners
The income tax returns filed by Sam and Edna, Rosario and Frances, Voigt, and Vincent and Estelle for the years 1947, 1948 and 1949 were examined by Revenue Agent Donald Whitaker. As a result of said examination, petitioners agreed to the deficiencies shown in the following schedule: Date Petitioners
Agreed to Deficiency
by Execution of Form
870, Waiver of
Amount of Restriction on Assess-
Year Agreed Deficiency ment and Collection
Petitioner Examined (Overassessment) of Deficiency on Tax
Rosario 1947 $ 643.51 12-16-49
Frances 1947 643.51 12-16-49
Rosario and Frances 1948 1,466.57 12-16-49
Rosario and Frances 1949 4,942.39 3-12-51
Sam 1947 946.08 12-16-49
Edna 1947 946.08 12-16-49
Sam and Edna 1948 1,204.04 12-16-49
Sam and Edna 1948 6,389.94 5-19-50
Sam and Edna 1949 903.04 3-12-51
Voigt 1947 (1,289.78) 1- 9-50
1948 1,444.61 1- 9-50
1949 1,552.14 3-12-51
Vincent 1947 (91.69) 12-16-49
Estelle 1947 (91.69) 12-16-49
Vincent and Estelle 1948 40.60 12-16-49
Vincent and Estelle 1949 386.08 3-12-51
*365 On July 19, 1951, Rosario and Frances and Sam and Edna filed amended joint income tax returns for 1948, 1949 and 1950 with the collector of internal revenue, first district, Austin, Texas. On the same date Voigt also filed amended separate income tax returns for the years 1948, 1949 and 1950 with the same collector of internal revenue. An examination was conducted beginning September 10, 1951, and ensuing years by the Intelligence Division of the Internal Revenue Service of the original and amended returns filed by Rosario and Frances, Sam and Edna and Voigt for the years 1948, 1949 and 1950. An examination was also made of the original returns filed by Vincent and Estelle for the years 1948, 1949 and 1950 concurrently with the examination of the aforesaid returns. The original and amended returns filed by Adams, Frank, Vic C. and Serio and their respective spouses for the years 1948, 1949 and 1950, were also examined by the Intelligence Division of the Internal Revenue Service at the same time the returns of the petitioners in the instant cases were examined.
Sam Maceo reported income from bets and wagers on his income tax returns for a number of years. The amount of such income as *366 shown by the returns, revenue agents' reports and work papers used in the preparation of his returns was as follows: Revenue Agents' Original Amended
Year Reports Work Papers Returns Return
1950 $11,350 $11,350 $ 59,262 *
1949 13,700 ** 13,700 74,263 *
1948 38,500 38,500 100,947 *
1946 8,300
1945 4,500
1943 5,400 5,350
1942 4,870
1940 1,483
1936 $2,375 2,375
1935 3,150
Rosario reported income from bets and wagers on his income tax returns for a number of years. The amount of such income as shown by the returns, revenue agents' reports and work papers used in the preparation of his returns was as follows: Revenue Agents' Original Amended
Year Reports Work Papers Returns Return
1950 $42,330 *
1949 No Amount ** 53,045 *
1948 $3,000 $3,000 72,105 *
1945 4,500
1940 2,500
1936 $3,500 3,500
1935 3,150
Voigt reported income from bets and wagers on his income tax returns for a number of years. The amount of such income as shown by the returns, revenue agents' reports and work papers used in the preparation *367 of his returns was as follows: Revenue Agents' Original Amended
Year Reports Work Papers Returns Return
1950 $ 8,466
1949 10,609
1948 14,421
1936 No Amount * $2,500
1936 No Amount *
Sam's account receivable ledger sheet with Maceo and Company (horse account) shows that Sam had net winnings of $25,250 as a result of bets he had placed with Maceo and Company in 1948.
The work papers used in the preparation of Sam and Edna's original 1949 return shows income from bets and wagers of $13,700. On the line of the work papers where the $13,700 appears, there are two figures that have been crossed out, that is, $11,200 and $2,500. A transcript of Sam's account receivable ledger sheet (horse account) reveals that Sam won the aggregate amount of $11,200 betting with Maceo and Company in September and October 1949. Said bets were paid Sam on March 15, 1950, when the Bingo section issued its check No. 598 for $11,200 to Sam.
The work papers used in the preparation of Sam and Edna's original 1950 return show income from bets and wagers in the amount of $11,350. The $11,350 figure was given to Serio by Sam. A transcript *368 of Sam's account receivable ledger sheet (horse account) reveals that Sam won $2,600 betting with Maceo and Company in September 1950. Said bets were not paid by Maceo and Company in 1950.
The work papers used in the preparation of the original 1948 return of Rosario and Frances show income from bets and wagers in the amount of $3,000.
The work papers used in the preparation of the original 1949 return of Rosario and Frances contains the notation "Bets" written on the left side of the page. The notation "Bets" was scratched out by Serio after he had asked Rosario if he had any bets and wagers and found that Rosario had none.
After the work papers and records pertaining to each partner's income tax liability had been prepared and assembled, Serio would send the work papers and documents to T. W. Lain, an employee of a Galveston bank who prepared income tax returns as a side line occupation. Lain would take the work papers and records supplied by Serio to his home and prepare ink copies of returns for the partners on the basis of the information submitted to him by Serio. Lain did not check the oil figures shown on the schedules given him by Serio. When the ink copies of the returns *369 were completed, Lain would take them to Serio at his office in the Turf Building. Maceo and Company employees would then type the final returns. Lain would return to the office of Maceo and Company and verify that the returns had been correctly typed. In addition to preparing the returns for the partners of Maceo and Company, Lain also reviewed the partnership return of Maceo and Company after it had been prepared by Raymond Cox. Serio would question Lain in respect to items appearing on the returns.
Sam and Edna made the following payments on their declarations of estimated tax for the years 1948, 1949 and 1950: 1948 1949 1950
Sam $12,000
Edna 12,000
Sam and Edna $24,000 $7,500
Rosario and Frances made the following payments on their declarations of estimated tax for the years 1948, 1949 and 1950: 1948 1949 1950
Rosario $31,821.48
Frances 13,500.00
Rosario and
Frances $30,803.16 $34,884.94
Voigt made payments totaling $20,965 on his 1948 declaration of estimated tax.
Vincent and Estelle made payments totaling $7,052.12 and $3,554.46 on their 1948 and 1949 declarations of estimated tax, respectively.
The statutory notices of deficiency in the instant cases were mailed on the dates shown in the following *370 schedule: Docket No. Date of Statutory Notice
55506 Sept. 23, 1954
55709 Sept. 28, 1954
63933 June 8, 1956
63934 June 8, 1956
Preparation of Amended Returns
During the latter part of April 1951, Garrett, a cerified public accountant, was contacted by an associate of the petitioners and was told to communicate with Rosario or Serio. On or about April 27, 1951, Garrett contacted Serio who introduced him to Rosario. Rosario, acting on behalf of Sam Maceo and the other individuals who had been partners of Maceo and Company during the taxable years 1948, 1949 and 1950, hired Garrett. Rosario informed Garrett that he wanted Garrett to review the individual partners' returns and in addition he wanted the books of Maceo and Company compared with the partnership returns of Maceo and Company to see if all the money received had been recorded on the books of Maceo and Company and reported on the various returns.
Garrett recommended to Rosario and Serio that all the partners of Maceo and Company execute powers of attorney authorizing him to represent them before the Treasury Department in all tax matters for the years 1948, 1949 and 1950. Garrett furnished Serio with a blank form for a power of attorney. *371 After Garrett had given Serio said blank power of attorney, Serio had copies of the form prepared. Rosario and Frances, the Estate of Sam Maceo and Edna, Voigt, and Vincent then executed the powers of attorney and Serio delivered them to Garrett.
Garrett had no conferences with any of the partners other than Serio and Rosario during the course of his examination. The other partners, who were then living, were Adams, Vincent, Voigt, Frank and Vic C.
In connection with his work, Garrett prepared schedules showing information pertaining to Maceo and Company and each partner of Maceo and Company, four of whom are petitioners in these cases. Garrett prepared schedules of cash disbursements for the years 1948, 1949 and 1950 for Rosario, Sam, Voigt and Vincent; an analysis of partnership drawings and other cash income for said period; and an analysis of the returns of Rosario and Voigt for 1950, of Sam for 1948 through 1950, inclusive, and none for Vincent.
The amounts entered on these schedules were copied from various records examined by Garrett. Garrett did not verify the accuracy of the amounts he copied on to the schedules. The preparation of the aforesaid schedules was completed prior *372 to June 15 or 20, 1951.
In addition to said schedules, Garrett prepared the following single page schedules.
1. Schedule of additional income to partners of Maceo and Company for the years 1948 through 1950.
2. Schedule of cash income to partners of Maceo and Company for the years 1948, 1949 and 1950 which showed income from Maceo and Company, additional bets and wagers, and other sources.
Garrett for the taxable years involved herein did not:
(a) Analyze the individual partners' bank accounts to determine the nature of disbursements and withdrawals.
(b) Ascertain the circumstances of specific withdrawals by the partners from Maceo and Company other than to determine whether the withdrawals were cash withdrawals or otherwise.
(c) Examine subsidiary records in support of the general journal, general ledger or cash receipts and disbursements books.
(d) Prepare a working trial balance of Maceo and Company's books nor utilize the trial balance prepared by the employees of Maceo and Company.
(e) Make an independent analysis of the amounts that appear in the income and expense accounts on the general ledger of Maceo and Company for the fiscal years ending September 30, 1948, 1949 and 1950. *373 Garrett did trace income and expense account balances for the year ended September 30, 1950, from the general ledger to the partnership income tax return.
(f) Examine, verify or analyze the win and loss books, accounts receivable, accounts payable, major assets, loans payable or the capital accounts of the partners of Maceo and Company on the books of Maceo and Company.
(g) Reconcile the bank account of Maceo and Company or obtain verification from the banks of the bank balances of the bank accounts of Maceo and Company.
(h) Ascertain how many clubrooms Maceo and Company operated, or examine records of Maceo and Company which showed income derived from horse race, baseball, basketball and slot machine betting carried on by it in Galveston or on the mainland.
(i) Examine the records of Dickinson Equipment Company to determine if Maceo and Company correctly reported its share of the earnings.
(j) Analyze the intercompanies' accounts receivable and accounts payable records on the books of Maceo and Company and related operating corporations in which Maceo and Company had a proprietary interest.
(k) Review the system of internal control utilized by Maceo and Company.
(l) Verify the figures *374 complied by the employees of Sam Maceo Oil Operations showing expenditures by the partners nor analyze disbursements made on behalf of the partners by Sam Maceo Oil Operations.
(m) Make an independent analysis of the capital investments of each partner in Sam Maceo Oil Operations nor analyze the depletion claimed by each partner for 1948, 1949 and 1950, nor verify the income received by each partner from Sam Maceo Oil Operations.
(n) Verify independently the income reported and deductions claimed by each partner on their individual income tax returns for the years 1948, 1949 and 1950.
During the year 1952 Garrett examined retained copies of Sam Maceo's income tax returns back to the year 1940 and examined income tax returns of the other partners for the years prior to the tax year 1948 at the office of Maceo and Company. During the instant proceedings Serio did not produce the retained copies of Sam and Jessica's returns for the years 1932 to 1941, or the retained copies of Sam and Edna's returns for the years 1941 through 1947.
Garrett prepared a statement which showed that the partners' cash expenditures for oil investments exceeded the cash receipts for the years involved. This *375 statement was prepared after Garrett had completed his analysis of the individual partners' transactions.
Garrett prepared a final schedule after he completed his accumulation of cash income and cash disbursements which showed cash income or receipts and cash disbursements. This schedule was given to Serio in 1954. The schedule had been subpoenaed, but Garrett did not produce it at the trial.
After Garrett completed his work, he had a conference with Rosario and Serio sometime during the period June 15 and 21, 1951, and told Rosario and Serio that his examination showed that most of the partners' cash expenditures were in excess of their cash income for the three years involved. Garrett questioned Serio and Rosario as to the sources of income examined, but they did not inform Garrett at this time as to any additional source of income. Garrett di dnot make any specific recommendations at this meeting.
On or about June 20, 1951, Serio telephoned Garrett and asked him to come to Galveston. Garrett went to Galveston and conferred with Serio individually and with Rosario and Serio jointly. During his individual conference with Serio, Garrett was given a schedule which Serio told him he *376 had prepared on the basis of figures Rosario had given him. Serio told Garrett the schedule showed income which the seven participating partners had failed to report on their individual income tax returns. Garrett made no examination or inquiries to verify the correctness of the figures as to the additional unreported income of the partners that had been furnished to him by Serio.
The written statement submitted by Garrett to Agents Roberts, Ney and Schwartzbach on September 12, 1951, contained the following explanations as to the source of the income set forth in the schedule Serio gave Garrett:
During the course of my examination of the partnership records and tax returns of the partners, it was noted that the partners' interests in oil & gas leases was maintained individually and separate from all other partnership interests.
Upon inquiry as to the reasons for this, Mr. Serio stated that the oil & gas business was started with funds received from sources known only to Sam Maceo, and that he had received as his part, over a period of years, various sums from Mr. Maceo amounting to approximately $33,500.00.
As this income was received in small amounts over a period of five or six *377 years, and no records maintained, it was overlooked and forgotten about, when the tax returns were filed.
This additional income was apportioned to the years 1948, 1949 & 1950, being the only years open, on the basis of $14,421.00 for 1948, $10,609.00 for 1949, $8,466.00 for 1950.
Using the above total of $33,496.00 as 5% of the total partners' income from the source mentioned, the total additional income for the partners amounted to $669,920.00 for the three years as follows: 1948 1949 1950
Sam Maceo 35% $100,947 $ 74,263 $ 59,262
Rose Maceo 25% 72,105 53,045 42,330
Frank Maceo 20% 57,684 42,436 33,864
A. J. Adams 5% 14,421 10,609 8,466
Sam Serio 5% 14,421 10,609 8,466
Vic Maceo 5% 14,421 10,609 8,466
O. E. Voigt 5% 14,421 10,609 8,466
$288,420 $212,180 $169,320
Amended returns were prepared, filed and the tax paid on this additional income.
* * *
During his joint conference with Rosario and Serio about June 22, 1951, Garrett recommended that the partners report the income that had been disclosed to him and pay the tax on it. Rosario directed Garrett to prepare amended income tax returns. Rosario also instructed Garrett to hold up the actual preparation of the amended income tax returns until the publicity of the Texas Crime *378 Committee had died down.
On July 10, 1951, Serio told Garrett to prepare the amended income tax returns for the partners of Maceo and Company but not to prepare an amended return for Vincent. Garrett completed the preparation of the amended income tax returns for the partners for the years 1948, 1949 and 1950 by July 12, 1951. The amended returns were signed by the partners on July 17, 1951, and filed by Garrett with the collector of internal revenue at Austin, Texas, on July 19, 1951.
The amended individual income tax returns prepared by Garrett reported the receipt of additional income from bets and wagers in the aggregate amount of $669,920 that had been omitted from the original income of the individuals. The $669,920 of unreported income on the amended returns was the same amount of income that was shown on the statement Garrett gave the agents on September 12, 1951.
The amended returns filed by Sam and Edna, Rosario and Frances, and Voigt had the following unsigned statement attached to them:
STATEMENT CONCERNING THE FILING OF AMENDED INCOME TAX RETURNS FOR THE YEARS 1948, 1949 and 1950 ATTACHED
On or about April 28, 1951, Ernest E. Garrett was engaged by Maceo & Co., a partnership, *379 to make a tax audit of the partnership books in conjunction with income as reported on the partners' personal Income Tax Returns.
During the course of the examination, certain income to the partners was disclosed that had not been included in the Partnership Tax Returns, and therefore overlooked in the preparation of the Individual Returns. The methods used in reporting such income to the office by the deceased partner evidently accounted for the oversight.
This income has been included in the amended returns.
Joe Salvato owned a one-fourth interest in Dickinson Equipment Company, and Maceo and Company owned a three-fourths interest in Dickinson Equipment Company which was a partnership during the years involved.
During March 1951, Agent Nuel Lewellan completed an examination of the income tax returns for the years 1948 and 1949 of Salvato, who was associated with Maceo and Company in certain business interests. In connection with a more detailed examination to be made of Salvato's 1948 and 1949 income tax returns, Agent Lewellan visited the office of Serio in Galveston on July 10, 1951, in order to examine records of Dickinson Equipment Company, Sam Maceo Oil Operations, Gulf Properties, *380 Inc., and any other records pertaining to the tax liability of Salvato. Serio was informed that a fraud examination was being conducted with respect to Salvato. Serio caused the general ledger and general journal of Dickinson Equipment Company to be made available for Lewellan's inspection. No collection tickets, location ledger or route cards were produced. On July 11 and 12, 1951, Lewellan returned to the offices of Maceo and Company and worked on the records of the oil operations.
Investigation of Income Tax Returns Filed for Maceo and Company and Its Various Partners
The examination of the original and amended income tax returns filed by the partners of Maceo and Company for the years 1948, 1949 and 1950 was conducted by agents assigned to the Intelligence Unit of the Internal Revenue Service. On September 17, 1951, Acting Special Agents Bernard Roberts and Bernard Schwartzbach informed petitioners' representatives Garrett and Serio, that an investigation was to be conducted of the partners of Maceo and Company for the taxable years 1948, 1949 and 1950. Sam Rosario, Voigt and Vincent were four of the partners of Maceo and Company whose income tax returns were examined. Garrett *381 and Serio were also informed on that date of the nature and type of examination that would be conducted by respondent's agents.
On September 19, 1951, Garrett, Serio, Rosario, Adams, Voigt, Vincent, Frank and Vic C. met with Roberts and Schwartzbach and were informed that the latter were assigned to the Intelligence Unit of the Internal Revenue Service and that their examination would go outside the available books and records of the partners. Each of the partners of Maceo and Company who were present were questioned individually as to the status of their respective books and records. Rosario, Voigt and Vincent stated that they had no personal books and records.
During the conference on September 17, 1951, Serio was asked by respondent's agents to ascertain if the partners of Maceo and Company had any cancelled checks, bank statements, check stubs and deposit slips. Serio subsequently informed respondent's agents that all the records about which inquiry had been made had been destroyed.
The investigation of the income tax returns filed by the partners of Maceo and Company, four of whom are petitioners in these cases, for the years 1948, 1949 and 1950 commenced in September 1951. At *382 the time theinvestigation was started Serio requested respondent's agents not to question Rosario, claiming that the latter was physically ill and that any questioning might jeopardize his health. Serio submitted statements from doctors which supported his statements with respect to Rosario's health. In view of Serio's request, Rosario was not interviewed during the course of the investigation.
Throughout the investigation of the income tax returns of the partners of Maceo and Company, the partners always referred the examining agents to Serio in order to obtain answers to their questions.
The examining agents investigated leads wherever information appeared to be reasonably susceptible to investigation and was relevant to the examination they were conducting.
At the commencement of the investigation in September 1951, neither Garrett as representative, nor Serio as spokesman, for the partners of Maceo and Company, and none of the partners of Maceo and Company in their individual capacities protested the examination of their 1948 and 1949 returns on the grounds that it constituted a second examination by the respondent of their returns for such years. At the time various books and *383 records of Maceo and Company and the other books and records which were subject to the control of the partners of Maceo and Company were being inspected by respondent's agents, no protest was made by the partners of Maceo and Company or their representative, Garrett, and their spokesman, Serio, that the work of the respondent's agents constituted a second examination of the partners' 1948 and 1949 income tax returns. For the first time on December 7, 1953, petitioners' representatives requested a letter from the respondent authorizing a second examination of the partners' 1948 and 1949 income tax returns. At no time has the respondent issued a letter to the partners of Maceo and Company (four of whom are petitioners in the instant case) in which they were notified that a second examination of their 1948 and 1949 income tax returns was being authorized.
Commencing in September 1951, Serio, as spokesman for the partners, allowed respondent's agents to inspect certain books and records of Maceo and Company and its related business enterprises. On October 7, 1952, Serio refused to allow the agents to have further access to said records. Upon subsequent requests to review certain books *384 and records of Maceo and Company, Serio refused to grant the requests.
In connection with their examination of the partners' income tax liabilities, respondent's agents made a detailed investigation of the affairs of the partners for the years 1948, 1949 and 1950. The work performed by the respondent's agents included, among other things, the following:
(a) Preparation of trial balances of the accounts appearing in the general ledger of Maceo and Company, Dickinson and Gulf for the years ending September 30, 1947, through September 30, 1950. In addition, a trial balance of the accounts appearing in the general ledger of Trustee for the fiscal year ended September 30, 1950, was prepared.
(b) Preparation of transcripts of various accounts listed on the books and records of Maceo and Company (horse account), Dickinson, Sam Maceo Oil Operations, Gulf and Trustee.
(c) Review, wholly or partially, of the general ledger, general journal, cash receipts and disbursements journal and some daily cash statements of Maceo and Company for the fiscal years ended September 30, 1947, through September 30, 1950.
(d) Review of the general ledger, general journal and cash receipts and disbursements journal *385 of Gulf.
(e) Examination of the books of account of Sam Maceo Oil Operations.
(f) Examination of the income tax return filed by Maceo and Company and Dickinson for the year ended September 30, 1950.
(g) Preparation of a check spread based upon information shown on Recordak films of Galveston banks as to all transactions recorded in the checking and savings accounts of the following individuals for the years 1948, 1949 and 1950: Sam and Edna; Rosario and Frances; Vincent and Estelle; Vic C. and his wife; Adams and his wife; Frank and his wife; Serio and his wife; and Voigt. Said check spread listed the date the check was issued by the individual drawing the check, the amount, payee, name of the maker of the check, endorsements, and the date of payment by the bank on which the check was drawn. It took two agents three to four months of full time work to complete the check spreads. The preparation of the check spreads was commenced after Serio informed the agents that the partners of Maceo and Company had destroyed their cancelled checks, check stubs, bank statements, and bank deposit slips. When Serio learned that the agents were making said check spreads, he offered to have employees *386 of Maceo and Company prepare a ditto stencil in order that columnar headings could be printed on the accounting paper used by the agents in preparing their check spreads. Serio dittoed the headings onto the ledger paper for the agents.
(h) Interviewed owners and employees of business organizations doing business with Maceo and Company, and the partners of Maceo and Company, in order to secure information, documents and records pertaining to such transactions. In this connection the information contained in the aforesaid documents and records was analyzed to determine the assets acquired, liabilities and expenditures paid or incurred by the partners of Maceo and Company. Said investigation involved contacting individuals and businesses located in Galveston, Houston, Dallas and San Antonio, Texas, as well as individuals living in Detroit, Michigan, Chicago, Illinois, New York, Los Angeles, and various other places.
(i) Copying all of the bank records pertinent to the investigation of the affairs of the partners of Mace

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4602779. Public record. Not legal advice.