Petition — Cannon v. Commissioner

[Supreme Court U.S,

~ FILED ©

DEC 17 1976

3u the

Supreme Court of the Ruited States

OCTOBER TERM, 1976

No. 76-861 4

M. RALPH CANNON

Petitioner

versus

COMMISSIONER OF INTERNAL REVENUE,

Respondent

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

FIFTH CIRCUIT

DENIS A. BARRY

Attorney for Petitioner

1212 First National Bank

of Commerce Bldg.

New Orleans, La. 70112

Telephone: 522-7446

owe wee

i

INDEX

PAGE NO.

CORRSEOES 0 oc cc ccc ccc cccccesoesceeesccesages li

PET TRU T TCT TT Tee eT Ce eT TT 1

to PPTTTTTETETT TELE TL 2

Questions Presented for Review .............5: 2

Tt i PPUTTTUTULET TIT Tere 2

ROUMAGEE occ ccccccccccccccccccscsccccseee 3

IND 6 000060960 s0sddseedcovnsssaues 13

Ss 60 h6 bode dedeecdsascndcdcesbeus 14

Appendix “A” Fifth Circuit Court of-Appeals °

Order Denying Rehearing....... 15

Appendix “‘B” United States Tax Court Opinion . 16

Appendix “C” Fifth Circuit Court of Appeals

DORE oc cenenscésanseeese 25

Appendix “‘D” Motion for Leave to Amend

PD wn. b cc cedsusenecs 30

Appendix ““E” Motion to Amend (Ash) ........ 33

‘

CITATIONS

PAGE NO.

Cohen v Commissioner of Internal Revenue,

266 F.2d 5 (9th Cir. 1959). 02... 00. cece euees 11

U.S. v Lease, 346 F.2d 696

CBG, BOGE coc ce cee cccsesevovesctinen 11

Lucia v U.S., 474 F.2d 565 (5th Cir. 1973)

PEE . cocicccccdessesedseecdesscuess 11

Bar L. Ranch, Inc. v Phinney, 426 F.2d

IIE cos oucbaiciinsavecece 11

Helving v Taylor, 293 U.S. 507, 55 S.Ct.

ME oh 4n044eeeesnceceenbee as 11

Greenfeld v Commissioner, 165 F.2d 318

| ER Netee 12

IN THE SUPREME COURT OF THE

UNITED STATES

NO.

M. RALPH CANNON,

Petitioner

versus

COMMISSIONER OF INTERNAL REVENUE,

Respondent

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEAL FOR THE

FIFTH CIRCUIT

TO THE HONORABLE CHIEF JUSTICE AND

HONORABLE ASSOCIATE JUSTICES OF THE SUPREME

COURT OF THE UNITED STATES

Your petitioner, M. Ralph Cannon, hereinafter referred to

as petitioner, respectfully petitions this Honorable Court for

a Writ of Certiorari to review the decision of the United

States Court of Appeals for the Fifth Circuit in No. 74-4150

rendered on June 21, 1976.

JURISDICTION

The judgment of the Court of Appeals denying a petition

for rehearing was entered September 20, 1976. (Appendix

A).

Jurisdiction is conferred by U.S.C.A. Title 28, Sec. 1254

(1).

2

OPINIONS

The memorandum findings of fact and opinion of the

United States Tax Court is Appendix B.

The opinion of the Fifth Circuit Court of Appeals is Ap-

pendix C.

QUESTIONS PRESENTED FOR REVIEW

1. What legal effect should be given inconsistent tax

assessments in a consolidated proceeding?

2. Does an arbitrary tax assessment lose its presumed

validity?

3. Can and should credible evidence be disregarded

and an equitable solution adopted in the absence

of any factual basis?

STATEMENT OF THE CASE

The Commissioner of Internal Revenue made a determina-

tion that Idus P. Ash and M. Ralph Cannon each had earned

unreported income ef $64,680.00 during 1967. Each tax-

payer filed a petition for redetermination of the alleged

deficiency, the two cases were consolidated for trial, after

which the Tax Court set aside the Commissioner’s inconsis-

tent position and divided the $64,680.00 equally between

Ash and Cannon as income for tax purposes. The decision

created a deficiency of $16,785.75 in income tax due from

Cannon in 1967. Ash and Cannon appealed.

The Court of Appeals for the Fifth Circuit by a 2-1 de-

cision affirmed the Tax Court. This Writ of Certiorari is to

a ce eee

— a ERE Er ae

ae 8 ee TT WE ee 5 So

3

review that decision as it applies to petitioner, M. Ralph

Cannon.

On six occasions from October 5, 1967 to November 21,

1967 Joe H. Hodges of Houston, Texas sent Western Union

money orders to Idus P. Ash in Dallas totalling $64,680.00.

Hodges wired the money allegedly to place bets on football

games. Ash claimed to be a conduit and estimated that

petitioner received 90% of the funds as a bookmaker. Ash

received a 10% commission from petitioner and also money

from Hodges if he won. Ash did not report any wagering in-

come in 1967 and failed to report admitted commissions he

was paid by petitioner. Petitioner reported wagering income

of $15,040.00 in 1967, of which $11,000-$12,000 came

from Ash. Ash kept no records of money handled. Petition-

er submitted periodic bank deposits as proof of wagering in-

come.

There is no dispute that in 1967 Hodges wired $64,680.00

to Ash, Ash received the money orders and cashed them.

The only issue is how much, if any, of the $64,680.00

did Ash give to petitioner in order to determine taxable in-

come for each man.

This is a case of first impression for the Court of Appeals

which had never decided the legal effect of inconsistent

assessments in a consolidated proceeding.

ARGUMENT

For the past thirty-eight years petitioner has been a

businessman in Dallas operating a small variety store, bakery,

grocery and delved in real estate. During 1967 petitioner

reported an adjusted gross income of $28,315.93 which in-

4

cluded reported wagering of $15,040.00: he paid income tax

of $8,745.33.

Idus P. Ash is a retired builder and developer living in

Irving, Texas, a suburb of Dallas. Ash reported taxable in-

come of $5,360.00 and paid $878.00 in income tax. Ash did

not report income from wagering as a principal or the money

he admitted receiving as an agent.

Joe Henry Hodges is a disbarred attorney living in

Houston, Texas. Hodges is an admitted compulsive gambler

with two federal felony convictions (1964, 1967) for em-

bezzlement.

Hodges wired six Western Union money orders to Ash

totalling $64,680.00 on six occasions from October 5, to

November 21, 1967. It is undisputed that Ash did receive

and cash all money orders. What happened to the money is

the subject of this litigation.

Hodges testified that money was sent to cover bets on

college and professional football games. Ash testified that

the money was passed on to a bookie, alleging 90% had been

given to petitioner.

Petitioner admitted receiving during 1967 between

$11,000-$12,000 from Ash for wagering. Petitioner’s bank

deposits from wagering (in evidence) totaled $15,040.00.

During the approximately seven weeks in question, petition-

er deposited wagering income of $3,500.00. It should be

noted that petitioner was in Europe with his wife three out

of the seven weeks - from October 5, through October 26,

1967.

All wagering transactions were in cash. Ash kept no re-

5

cords of income or disbursements. Petitioner made ten cash

bank deposits during 1967 amounting to $10,500.00 and at

the end of the year had cash on hand of $4,540.00, or a

total of $15,040.00 deposited and reported as wagering in-

come.

Did Ash give Cannon any part of the money he received

from Hodges? If so, how much? What is the proof?

After the money orders were admittedly received by Ash

and cashed, the only specific testimony on what happened to

a portion of the money is the self-serving testimony of Ash

that 90% was given to petitioner. To testify otherwise

would cause the money to become taxable income to Ash.

Ash never said what happened to the other alleged 10%.

Hodges testified that all of the money he wired was lost

and that during this seven week period he never collected

any winnings (T 79).*

Any uninitiated person would question the extent of

Hodges gambling activities being void of any winnings. The

odds on such a possibility must be astronomical.

Hodges admitted embezzling approximately $400,000.00

during 1966 and 1967 which he used to gamble. Money

during this two year period was also wired to Ash but no ex-

planation was offered to its disposition (T 74).

Hodges did not know and had never spoken to petitioner

until December, 1967. Hodges never saw Ash give petitioner

money (T 68). Hodges testimony sheds no light and fails to

corroborate what Ash did with the $64,680.00 cash during

* (T - Tax Court Transcript).

October - November, 1967.

Two other witnesses testified. Jimmy George Wright, a

realtor and lifelong friend of Ash, said he was present a few

times when Ash delivered money to petitioner. No amount

of money was specified nor the month or year when it

happened. Wright’s testimony does not substantiate any of

the $64,680.00 being given to petitioner during October -

November, 1967.

The other witness was Mrs. Ash. She testified her husband

would pick up the money orders and give them to petitioner

or to Hodges (T 43). She did not know when the money was

allegedly given and did not know how much. She did testify

that Ash went to the airport in Dallas to deliver money to

Hodges, and Hodges went to her house to pick up money

(T 44, 45). None of Mrs. Ash’s testimony sheds light on any

of the $64,680.00 being given to petitioner. Her testimony

does bring out the interesting fact that Hodges went to Dallas

to receive monev from Ash. The testimony of Mrs. Ash and

Wright fails to corroborate Ash.

Hodges, Wright, and Mrs. Ash were witnesses called by Ash

in a vain and futile effort to substantiate his position as a

conduit for the cash. Petitioner testified on his own behalf.

The testimony of Hodges has no value and is suspect at

best. Hodges admitted that it was a fair statement he had no

knowledge of how much money Ash might have kept or

accepted personally as a bookie (T 64). Ash testified that he

never advised Hodges how each bet was placed (T 70).

Therefore, Hodges could not substantiate Ash’s position that

petitioner received any money.

It was admitted by Hodges, Mrs. Ash, Wright and Ash that

7

Hodges did fly to Dallas to pick up money from Ash. Ash

even testified that the amount picked up by Hodges was

more or less than $30,000 (T 21).

Various conflicts exist between the testimony of Ash and

his witnesses. Ash said he received 10% of any winnings

(T 12) and Hodges testified he had no agreement to pay Ash

(T 75). Ash claimed that petitioner had seen and knew

Hodges (T 25). Conversely, Hodges testified that he did not

know petitioner, and talked to him only once in December,

1967 (T 86).

Under cross-examination by the respondent it was indi-

cated that Hodges told the FBI that he was wiring money to

cover gambling debts owed to Ash (T 73). Another question

by the respondent indicated that Hodges told the FBI that he

paid Ash 20% of his winnings (T 75). Hodges denied the

percentage. Whatever statement Hodges made was in the

possession of the Government, never introduced into evi-

dence, and never furnished to petitioner.

Several possibilities come to mind as to the disposition of

the $64,680.00. For instance, Hodges testified that he sent

a money order to Dallas then picked up the cash and went to

Las Vegas. Hodges admitted this could have been one of the

six money orders (T 67). In fact, Hodges, Wright and Ash

all testified that they made trips to Las Vegas together which

were paid for by Hodges, including cash to gamble with

(T 39, 40). Hodges went to Las Vegas 10 or 15 times in

1967 (T 86).

Another possibility for use of the cash are the references

by Ash to “people” (T 11) and “other parties” (T 14). These

were references when Ash allegedly placed bets for Hodges,

and each reference is plural indicating a number of people

who received the money.

What Ash could have done with the $64,680.00 creates

endless possibilities. The most obvious is that Ash was a

bookmaker in 1966-67 when Hodges embezzled $400,000.90

which he forwarded to Ash (T 74). Also, because of the large

amounts, Ash could have “laid off’ bets with other book-

makers. It’s easy to consider the probability that Hodges

wired the money to Ash and some or all of it was later re-

turned to Hodges and/or divided with Ash. Cash transactions

cannot be traced and since neither Hodges or Ash kept re-

cords of any kind the embezzled funds could have been

“laundered”’.

Hodges was assessed on the embezzeled $400,000.00 for

tax purposes. The problem shifted to Ash to somehow show

that even though he received the cash, it was passed on to

others.

Two interesting documents were filed in the Tax Court by

Ash. A “Motion for Leave to Amend Petition’’ (Appendix

D) where on page 2, para. 3 the following is specified:

“The first time Petitioners (Mr. & Mrs. Ash) or

their counsel were able to discuss with Mr. Joe H.

Hodges his testimony in this matter was on Novem-

ber 8, 1971, and said discussion was conducted

in the presence of representatives of the Respon-

dent. At such conference, it was revealed that the

funds transmitted by Joe H. Hodges to Petitioners,

and which are here sought to be taxed to Petition-

ers, had as their source, embezzelment by Joe H.

Hodges from the Meyerland State Bank, Houston,

Texas, and further that the greater portion of the

9

funds involved had been personally picked up from

Petitioners (Ash) by Joe H. Hodges in Dallas,

Texas, and taken to Las Vegas, Nevada for gambl-

ing, rather than being transmitted to persons in

the Dallas, Texas area in payment of gambling

debts or for purposes of wagering. (Emphasis

added) It was further revealed on October 8, 1971

the Internal Revenue Service had assessed against

Joe H. Hodges federal incomz2 taxes with respect to

all funds embezzled from the Meyerland State

Bank, which funds were the same as those trans-

mitted to Petitioners for Joe H. Hodges ”’.

The Motion to Amend was allowed and the Amended

Petition filed by Ash (Appendix E) on page 2, para. 5(a)

states:

“Petitioners (Ash) received in 1967 Western Union

money orders from Joe H. Hodges in the amount

of $64,680.00. These Western Union money or-

ders were cashed and held by Petitioners for the

benefit of Joe H. Hodges, and said funds were

either subsequently picked up by Hodges or

Hodges directed that Petitioners transmit the funds

to other persons in payment of gambling debts

or as wagers on behalf of Hodges. (Emphasis

added) Some part of such funds, the exact amount

being unknown to Petitioners, was transmitted to

one M. Ralph Cannon (petitioner herein) in pay-

ment of gambling indebtedness from Joe H.

Hodges to M. Ralph Cannon or as wagers”.

For some unknown reason these admissions by Ash were

never mentioned during the Tax Court hearing or on appeal.

(New counsel for petitioner on this Writ found them in the

10

record.) Apparently Hodges admitted to Ash or his attorney

and some unnamed representative(s) of the Government that

he personally received back “the greater portion of the

funds”, i.e. $64,680.00, which was gambled in Las Vegas and

not given to “persons” in Dallas for gambling debts. This

startling admission is totally inconsistent with the testimony

of Hodges and Ash and smacks of perjury. To further dis-

credit Ash, if there be a need, Ash testified that in 1967 he

was paid commissions of approximately $4,000.00 from

petitioner (T 29) which was not reported as income for tax

purposes. (T 24)

Out of fear of over kill, attention is directed to the only

time Hodges met and talked to petitioner. This occurred in

December, 1967 after the embezzlement scheme of Hodges

had surfaced. Hodges telephoned petitioner and said he

needed $5,000.00 (T 30). Petitioner met Hodges near the

Dallas airport and gave Hodges $5,000.00 with petitioner’s

intent that he was returning Hodges’ money. (T 116, 117).

Hodges told petitioner that he was in “big trouble” and that

money had to be paid back to the bank if innocent people

were not to get hurt (T 97).

Hodges admitted embezzling approximately $400,000.00

which he forwarded to Ash for gambling purposes. Petitioner

admitted receiving and deposited $3,500.00 during the time

Ash cashed the six money orders. If Hodges actually knew or

even believed that petitioner had received the bulk of the

$400,000.00, why then did Hodges only ask petitioner for

$5,000.00? The $5,000.00 request is reasonably close to the

amount petitioner reported as income - $3,500.00 - during

October and November, 1967.

A Commissioner’s determination is presumed to be correct

and in Tax Court the burden of proof is on the taxpayer to

11

show that the determination is invalid. Cohen v. Commis-

sioner of Internal Revenue, 266 F. 2d 5 (9th Cir. 1959).

The arbitrary double assessments against Ash and peti-

tioner spotlights the Commissioner’s position as a stakeholder

seeking to protect its revenue. An assessment must have

some factual foundation or it is obviously arbitrary. How-

ever, an arbitrary assessment is stripped of presumed validity.

Lucia v. U. S., 474 F. 2d 565 (Sth Cir. 1973) (en banc); Bar

L. Ranch, Inc. v. Phinney, 426 F. 2d 995 (Sth Cir. 1970).

In Bar L. Ranch, Inc. v. Phinney, supra, the Fifth Circuit

said:

“We therefore agree with the conclusion of the

Court in U. S. v. Lease that a taxpayer defending a

cuilection suit need only show that the Govern-

ment’s assessment was arbitrary and that the bur-

den is then on the Government to show whether

any deficiency exists and, if so, in what amount”.

In the U. S. v. Lease, 346 F.2d 696 (2nd Cir., 1965), the

Court concluded that the taxpayer had the burden to show

only that the Government’s computations are arbitrary, after

which the burden is then upon the Government to show if

any deficiency exists and in what amount.

When the Tax Court determined that the Commissioner’s

assessment against the petitioner was invalid, the Tax Court

then assumed the responsibility to redetermine the deficien-

cy. Therefore, the presumption as to the correctness of the

Commissioner’s determination was no longer valid. Helving

v. Taylor, 293 U.S. 507, 55 S. Ct. 287, 75 L. Ed. 623.

The burden of proof, initially on the taxpayer, then shift-

12

ed to the Commissioner (Respondent) to establish any de-

ficiency and the amount thereof. Helving v. Taylor, supra.

Petitioner submits Respondent has failed to do so.

The case of Greenfeld v. Commissioner, 165 F. 2d. 318

(4th Cir., 1947) supports petitioner’s position on a fairly

parallel factual situation. In Greenfeld, the taxpayer was a

“racing broker” and cashed bearer bonds given to him by a

gambler to cover bets. Naturally the taxpayer testified he

did not retain the money which was paid to bookmakers on

behalf of the gambler. The taxpayer kept no books or

records.

In Greenfeld, the taxpayer was the only witness; Ash was

the only witness on his own behalf who could explain what

happened to the $64,680.00 during October - November,

1967.

The Fourth Circuit pointed out in Greenfeld that many

deficiencies appeared in the taxpayer’s testimony, one of

which was that he did not keep books or records of the bets.

Greenfeld failed to produce proof he was not the owner of

the proceeds and had no proof to show the distribution of

the proceeds.

In the first paragraph of the Appellate Court’s decision,

it was erroneously stated that the $64,680.00 “‘was stipulated

had been turned over to one or both of them for wagering in

the tax year 1967”. There is no stipulation herein that this

money had ever been turned over to petitioner. It was stipu-

lated that the $64,680.00 had been wired from Hodges to

Ash and cashed by Ash. The reason for this litigation is that

petitioner received only $11,000-$12,000 from Ash during

the entire year of 1967 which was reported as taxable in-

come.

13

CONCLUSION

Petitioner strongly urges that the Appellate Court disre-

garded the evidence, created a presumption, and without

logic decided to ‘cut the baby in half” as taxable income.

Circuit Judge Clark, in an excellent dissent, refused to adopt

the “equitable’’ solution as being contrary to the law and the

facts as established. The logic of petitioner’s position was

succinctly stated by Judge Clark:

“If this were a true ‘whipsaw’ situation involving

separate proceedings against competing taxpayers

where no credible evidence bearing on allocation

could be ascertained, we would be faced with a

different and more difficult question. It is not.

Even conceding that neither taxpayer’s whole story

was worthy of belief, the Court had before it re-

liable proof constituting a rational basis for the dis-

tribution of liability. That proof consisted of clear

documentatien that Ash received the $64,680.00

and Cannon’s admission that $12,000.00 of that

sum was wagered with him”. (Emphasis added)

The elusive $64,680 00 evaporates once it comes into the

hands of Idus P. Ash. shat’s where the buck should stop.

It is respectfully submitted that the decision of the Court

of Appeal for the Fifth Circuit and the Tax Court should be

reversed setting aside $32,340.00 as taxable income to M.

Ralph Cannon for 1967.

DENIS A. BARRY y

Attorney for Petitioner

1212 First NBC Building

New Orleans, La. 70112

Telephone: (504) 522-7446

14

CERTIFICATE

Copies of the above Writ of Certiorari were mailed to

Peter Winstead, Counsel for Idus P. Ash, 2001 Bryan Tower,

Suite 2680, Dallas, Texas 75201 and Scott P. Crampton,

Assistant Attorney General, U.S. Department of Justice,

Counsel for the Commissioner of Internal Revenue, Washing-

ton, D.C. 20530, this 16th,day of December, 1976.

a

DENIS A. BARRY 7

APPENDIX A

15

United Siutes Court of Appeals

FIFTH CIRCUIT

TEL SO04-S60-e014

EDWARD W. WADSWORTH OFFICE OF THE CLERK 600 CAMP STREET

Cisee

September 20, 1976

TO ALL COUNSEL OF RECORD

Nos. 74-4150 - M, Ralph Cannon vs. Commissioner of

Internal Revenue

NEW ORLEANS, LA. 70130

75-1143 = Idus P. Ash & Georgia L. Ash vs. Commissioner of

loternal Revenue

Dear Counsel:

This is to advise that an order has this day been entered

denying the petition( ) for rehearing, and no member of

the panel nor Judge in regular active service.on the Court

having requested that the Court be polled on rehearing

en banc (Rule 35, Federal Rules of Appellate Procedure;

Local Fifth Circuit Rule 12) the petition( ) for rehearing

en banc has also been denied, *

See Rule 41, Federal Rules of Appellate Procedure for

issuance and stay of the mandate,

Very truly yours,

EDWARD W. WADSWORTH, Clerk

By 7

eputy Cler

cc: Messrs. Lester L. May S

Kenneth A. Herridge

Mr. Scott P. Crampton

Mr. W. John Howard, Jr.

Mr. W. Mike Baggett

Mr. Meade Whitaker

* Clark, Circuit Judge, dissenting from the refusal to grant

the petition for rehearing for the reasons set out in his

dissent to the panel's opinion,

APPENDIX B

16

T. C. Memo. 1974-219

UNITED STATES TAX COURT

IDUS P. ASH and GEORGIA L. ASH, Petitioners v. COMMISSIONER

OF INTERNAL REVENUE, Respondent

M. RALPH CANNON, Petitioner v. COMMISSIONER OF INTERNAL

REVENUE, Respondent

Docket Nos. 360-71 Filed August 26, 1974.

6102-71. _ acs

Peter Winstead, for petitioners in docket No. 360-71.

Lester L. May, for petitioner in docket No. 6102-71.

W. John Howard, Jr., for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GOFFE, Judge: Respondent determined deficiencies

in the petitioners’ federal income tax as follows:

Docket Taxable

No. Petitioner Year Amount

360-71 Idus P. Ash and Georgia L. Ash 1967 $27,305.86

6102-71 M. Ralph Cannon 1967 36,993.48

17

e2-«

The cases were consolidated for trial and opinion. The

sole issue is the amount of income not reported by one

or both of petitioners. Respondent is in the position

of a stakeholder by his determination of identical

deficiencies against petitioners.

FINDINGS OF FACT

Some of the facts havé been stipulated. The

stipulations of facts and exhibits are incorporated by

reference.

Petitioners Idus P. Ash (hereinafter referred to

as Ash) and Georgia L. Ash resided in Irving, Texas,

when they filed their petition. Their joint Federal

income tax return for the taxable year 1967 was filed

with the district director of internal revenue at Dallas,

Texas. |

Petitioner M. Ralph Cannon resided in Dallas, Texas,

when he filed his petition. His Federal income tax

return for the taxable year 1967 was filed with the

district director of internal revenue at Dallas, Texas.

During the taxable year, Cannon operated a variety store

and bakery shop and participated in real estate trans-

actions. On his return for the taxable year 1967,

Cannon reported as miscellaneous wagering income the sum

18

of $15,040 computed on cash deposits to his bank account

as follows:

Date of

Detail Deposit Amount

Cash deposit 2/24/67 $ 1,000.00

Cash deposit 4/23/67 1,500.00

Cash deposit 5/ 1 /67 500 .00

Cash deposit 6/21/67 1,000 .00

Cash deposit 7/26/67 3,000.00

Cash deposit 10/13/67 500.00

Cash deposit 10/17/67 500 .00

Cash deposit 10/25/67 500 .00

Cash deposit 11/21/67 1,000.00

Cash deposit 11/22/67 1,000 .00

TOTAL CASH DEPOSITS $10,500.00

CASH NOT DEPOSITED 4,540.00

TOTAL $15,040 .00

Ash was in the general contracting business and

reported no wagering income on the income tax return he

filed with his wife.

During the taxable year 1967, Ash received Western

Union money orders from Joe H. Hodges totaling $64,680.

The funds transmitted by money orders had been embezzled

and swindled by Hodges from Meyerland State Bank in

Houston, Texas. The money orders were as follows:

Date of

Money Order Amount Details

10/ 5 /67 $ 3,700.00 Delivered to IDUS P. ASH, 1003 So.

Highschool Lane, Irving, Texas, and

cashed at Irving Bank and Trust

a! Company, Irving, Texas, on 10/9/67

10/21/67 & ,600.00 Draft signed for by IDUS P. ASH.

Cashed at Irving Bank and Trust

Company, Irving, Texas, 10/23/67

19

-4-

Date of

Money Order ‘mount Details

10/28/67 $12,300.00 Paid in cash by Western Union, Dallas,

Texas. Draft endorsed by IDUS P. ASH.

Notation on draft: “Known customer -

RY - Sex M."

11/10/67 13,200.00 Paid in cash by Pirst National Bank in

Dallas, Texas. Draft endorsed by

IpUS P. ASH.

11/18/67 12,680.00 Draft endorsed IDUS P. ASH and paid in

cash by Western Union, 10:43 a.m.,

11/20/67.

11/21/67 16,200.00 Paid in cash by Western Union. Receipt

signed by IDUS P. ASH.

Hodges wired the money to Ash on Fridays so that bets

might be placed in Dallas on college and professional

football games to be played on the upcoming weekend. Ash

required that the cash be sent to Dallas before he would

place the bets. After allowing time for Ash to receive

the funds, Hodges would telephone him and obtain the

“point spreads” on the various games. After deciding upon

his bets, Hodges would telephone Ash again and place his

bets. Ash would bet a portion of Hodges’ money with

Cannon. Since it was Hodges’ understanding that Ash was

to “lay the bet off" with a bookmaker, Hodges would call

Ash a third time and obtain confirmation that the bet had

been placed by Ash. Hodges never bet directly with Cannon.

The money wired to Ash was not intended by Hodges

to be applied toward past gambling debts owed Ash or for

bets on future weekends. During the taxable year 1967,

20

Hodges owed no gambling debts to Ash. There was no

agreement between Hodges and Ash as to a fee or com-

mission for placing the bets. Hodges would, however,

occasionally give Ash a portion of his winnings.

Ash was introduced to Cannon in 1966 when Ash was

seeking a horse racing bookmaker. Ash began to gamble

with him and the two men spent time together gambling

in Hot Springs, Arkansas, and Ruidoso, New Mexico. In

1966, Ash attempted to persuade Cannon to purchase real

estate with him in Dallas but Cannon declined. When

Cannon and another purchased a tract of land near the

land Ash offered, Cannon borrowed $10,000 from Ash and

provided Ash with collateral in an equal amount to make

it appear to his estranged wife that he was in poor

financial condition. The loan was never repaid.

Pursuant to his arrangement with Cannon, Ash was

paid a 10 percent commission of the net winnings from

bets which he placed with Cannon. The commissions were

not paid directly to Ash but were deducted by Ash from

amounts he paid over to Cannon. Ash placed bets with

Cannon for himself and for others besides Hodges.

Ash never identified Cannon to Hodges as the book-

maker with whom he placed Hodges' bets. Hodges assumed

21

-6-

that Cannon was the bookmaker but he had no knowledge

of the amount which Ash bet with Cannon. It was Hodges'

intention and understanding that Ash was to bet the

money for him and that none of the money was to be re-

tained by Ash as compensation. On one occasion in 1966

or 1967, Hodges accompanied Ash to Cannon's variety

store while Hodges‘ money was delivered to Cannon but

Hodges remained in the automobile as Ash delivered the

money to Cannon in the store. On another occasion,

Hodges was present in Ash's kitchen when Ash called to

place Hodges’ bet with a person whom Hodges thought to be

Cannon.

Hodges communicated directly with Cannon on only

two occasions. In October or November 1967, Hodges con-

tacted Cannon by telephone and informed him that the

money which Ash was losing had been stolen from a bank

and the money hed to be returned or innocent people would

be hurt. Hodges requested that Cannon give him the sum

of $5,000 and indicated to Cannon that this would solve

his difficulties with the bank. Being willing to give

Hodges “anything” to prevent embarrassment to his mother

and daughter, Cannon gave Hodges the requested amount in

cash in December 1967 at a motel near the Dallas airport

and received the following statement from Hodges:

22

To Whom It May Concern:

This letter is an admission that I have today

received from Ralph Cannon the sum of $5,000 in

cash. I have accepted this money in return for

a promise not to cause him any unfavorable pub-

licity of any kind, either spoken or written,

which might embarrass or humiliate him or his

mother and daughter in any way.

Signed,

/s/ Joe H. Hodges

During the 1967 football season, Hodges sustained

losses of approximately $200,000 as a result of his

gambling transactions with Ash. Over the two years,

1966 and 1967, he sustained losses of approximately

$400,000 as a result of his gambling transactions with

Ash. On two occasions during 1967, Hodges took Ash to

Las Vegas with him. Im addition to buying Ash's airplane

ticket, Hodges gave Ash money with which to bet.

Neither Ash nor Cannon retained any books or records

of the cash received or paid out in connection with

their gambling activities. Cannon's net winnings from

gambling were kept in a shoe box and periodically de-

posited in his bank account. The $5,000 given to Hodges

by Cannon was taken even the shoe box and was not

reported as income on Hodges’ 1967 Federal income tax

return. Cannon did not file a Pederal excise tax return

for wagering income for the taxable year 1967. He did

not possess a Federal wagering tax stamp during that year.

23

In notices of deficiency mailed to petitioners,

the Commissioner determined that petitioners Ash and

Cannon each failed to report on their Federal income

tax returns for 1967 the amount of $64,680 as gambling

income.

OPINION

The sole issue is the amount of unreported gambling

income received by Ash and/or Cannon during 1967.

There is no dispute that Hodges wired $64,680 to

Ash in 1967 for wagering. To the extent that Ash trans-

ferred the funds to Cannon, the income is not taxable to

Ash.

The record in this case is unsatisfactory. Neither

Ash nor Cannon had records to prove the amounts of cash

they handled. The testimony of each was vague, un-

convincing and entitled to little weight. The testimony

of other witnesses lent little support to the contentions

of either Ash or Cannon. The activities of both Ash and

Cannon were illegal and the money that changed hands was

embezzled from a bank. The $5,000 paid from Cannon to

Hodges resembles “hush money."

Given such a record, we conclude that both parties

failed to prove how much income they earned as a result

24

of their illegal gambling activities with Hodges’ ill-

gotten gains. Respondent admits an inconsistent

position and acts as a stakeholder. It would, therefore,

seem inappropriate to tax both Ash and Cannon on the

entire $64,680. Accordingly, we hold that Ash and Cannon

each earned one-half of the total sent from Hodges to

Ash, or $32,340.

Decisions will be entered

in docket Nos. 360-71 and 6102-71

under Rule 155,

25

APPENDIX C

CANNON v. COMMISSIONER OF INTERNAL REVENUE 4182

M. Ralph CANNON, Petitiener-Appel-

lant, Cross-Appellee,

v.

COMMISSIONER OF INTERNAL

REVENUE, Respondent-Appeliee,

Croes- Appellant.

Idus P. ASH and Georgia L. Ash, Peti-

tioners-Appellees, Cross-Appellants,

v.

COMMISSIONER OF INTERNAL

REVENUE, Respondent-Appel-

lant, Cross-Appellee.

Nos. 74-4150, 75-1143.

United States Court of Appeals,

Fifth Circuit.

June 21, 1976.

Two income tax payers appealed

from a decision of the tax court which

determined that each of them earned

one-half of a total of $64,680 which had

been turned over to one or both of them

for wagering. The Court of Appeals,

Tuttle, Circuit Judge, held that the tax

court's determination was not erroneous

absent evidence to the contrary present-

ed by the taxpayers.

Affirmed.

Clark, Circuit Judge, filed a dissen\-

ing opinion.

1. Internal Revenue @ 1525

Tax court’s determination that each

of two income tax payers earned one-

half of sum which had been turned over

to one or both of them for wagering was

not erroneous absent evidence to the

contrary presented by taxpayers.

2. Internal Revenue @=514

Where income tax payer received

money from embezzler for use in gam-

bling activities, entire sum was taxable

and sum voluntarily returned to embezz-

ler in nature of “hush money” was not

deductible.

Appeals from the Decisions of the Tax

Court of the United States (Texas

Cases).

Before TUTTLE, AINSWORTH and

CLARK, Circuit Judges:

TUTTLE, Circuit Judge:

This is an appeal from a decision of

the Tax Court which determined that

each of the petitioners earned one-half

of a total of $64,680 which it was stipu-

lated had been turned over to one or

both of them for wagering in the tax

year 1967. The petitioners, neither of

whom kept any records covering their

extensive wagering operations, both

claim that the Tax Court’s Solomon-like

decision, (I Kings 3:16—-28) to cut the

baby in half, was not supported by the

evidence and must therefore be set aside.

[1] It is undisputed that one Joe

Hodges of Houston, Texas embezzled

from a state bank, so far as is of impor-

tance in this litigation, the sum of $64,-

680 during the two months of October

and November in 1967 and that he deliv-

ered that amount by means of six drafts

or cash deliveries to petitioner Ash for

betting on college football games during

the 1967 Fall season. It is also undisput-

ed that Ash delivered substantial

amounts of this eash to petitioner Can-

non. Ash represented to Hodges that he

was placing the bets with Cannon as a

bookmaker. Cannon acknowledged re-

ceipt of between $11,000 and $12,000

during this period of time from Ash.

Synopses, Syllabi and Key Number Classification

COPYRIGHT © 1976, by WEST PUBLISHING CO.

The Synopses, Syllabi and Key Number Ciassifi-

cation constitute no part of the opinion of the court. INDEXED

26

4183 CANNON v. COMMISSIONER OF INTERNAL REVENUE

Cannon reported gambling net income of

$15,040 for the year 1967 of which $7,000

was shown by his return to have been

received prior to the two months in ques-

tion. Cannon testified that all of the

receipts which remained as net profits

from his gambling during the year went

into a shoe box and the sum of $15,040

was left in the shoe box at the end of

the tax year or had been represented by

cash deposits in the bank during the

year. Cannon testified that he had vol-

untarily given to Hodges the sum of

$5,000 in December 1967 when Hodges

got in touch with him personally and

made a plaint that he was in dire diffi-

culties because of his embezzlements,

and Cannon claims that this $5,000

should have been deducted from any

amount which he otherwise would owe

on his gambling receipts.

The Tax Court, very properly we

think, after having read the testimony,

stated in the following terms:

“The record in this case is unsatis-

factory. Neither Ash nor Cannon had

records to prove the amounts of cash

they handled. The testimony of each

was vague, unconvincing and entitled

to little weight. The testimony of oth-

er witnesses lent little support to the

contentions of either Ash or Cannon.

The activities of both Ash and Cannon

were illegal and the money that

changed hands was embezzled from a

bank. The $5,000 paid from Cannon

to Hodges resembles hush money.”

The Tax Court then without making

specific findings, as it could not under

the testimony then before it, made the

following conclusion:

“Given such a record, we conclude

that both parties failed to prove how

much income they earned as a result

of their illegal gambling activities

with Hodges ill-gotten gains. Respon-

dent admits an inconsistent position

and acts as a stake holder. It would,

therefore, seem inappropriate to tax

both Ash and Cannon on the entire

$64,680. Accordingly we hold that

Ash and Cannon each earned one-half

of the total sent from Hodges to Ash,

or $32,340.”

As conceded by counsel for one of the

respondents: ,

“Of course, the Commissioner was

always entitled to the presumption

against both parties that his determi-

nation was correct.”

This proposition has been clearly estab-

lished since Helvering v. Taylor, 293 U.S.

507, 55 S.Ct. 287, 79 L.Ed. 623 (1934)

when the Supreme Court stated:

“Unquestionably, the burden of

proof is on the taxpayer to show that

the Commissioner's determination is

invalid.” Citing Lucas v. Structural

Steel Co., 281 U.S. 264, 271, 50 S.Ct.

263, 265, 74 L.Ed. 848, 849 and Wick-

wire v. Reinecke, 275 U.S. 101, 104, 48

S.Ct. 43, 44, 72 L.Ed. 184, 185 and

Welch v. Helvering, 290 U.S. 111, 115,

54 S.Ct. 8, 9, 78 L.Ed. 212, 215.

Such a requirement is not met if the

proof adduced before the Tax Court is

insufficient to permit that Court to find

that as to either or both of these peti-

tioners the Commissioner’s determination

was erroneous. In dealing with this

problem the Court of Appeals for the

First Circuit, in United States v. Rexach

had the following comment to make:

“First, language regarding the Com-

missioner’s obligation to prove the ex-

istence and amount of the deficiency

apparently stems from Helvering v.

Taylor, supra, which held that once a

taxpayer in a deficiency case has

borne his burden of proving the Com-

missioner’s determination invalid, he

has no further obligation to show that

27

CANNON v. COMMISSIONER OF INTERNAL REVENUE 4184

no money is owed, or, if some, how

much. But this happy state is reached

only if the predicate is fulfilled, i. e.,

only if the taxpayer has carried his

burden of persuading the factfinder

that the deficiency was erroneous.

293 U.S. at 518, 514, 515, 55 S.Ct. 287,

79 L.Ed. 623. [Emphasis in original.}

482 F.2d 10, 17 n. 3 (ist Cir. 1973).

Since we conclude that the Tax Court

was justified in not relying on the con-

flicting testimony of either of these peti-

tioners in the two cases which were con-

solidated for hearings before that Court,

this would justify the legal result of hav-

ing the total amount taxed as income to

both of the petitioners. The fact that

the Tax Court ameliorated this condition

by entering a decision for one-half of the

amount as against each petitioner is cer-

tainly not a matter which either peti-

tioner can here complain of.

Cannon asserts that even though the

Tax Court could approve an assessment

against him hased upon receipt of in-

come amounting to $32,340 this amount

should be reduced by the sum of $15,040

already reported by him as income from

gambling. The trouble with this is that

the record clearly discloses that some

$7,000 of the amount which he reported

was represented by deposits in bank

accounts made prior to the two months

with which we are here concerned. Fur-

thermore, Cannon’s testimony is s0

vague and uncertain and unreliable that

the Tax Court would not have had to

accept a positive assertion by him, which

he did not in fact make, that any

amount of the monies received by him

during October and November were 4

part of the $15,040 reported by him on

1. “A whipsaw situation occurs in the tax field

when two different taxpayers take positions

with respect to a particular transaction which

are so inconsistent with each other that only

his return. He did state in general

terms that the $15,640 represented his

entire net income from gambling for the

ye.

{[2] Cannon also claims that the

$5,000 payment which he made to Joe

Hodges in December of 1967 should not

be included in income received by him

during that year. There is, of course, no

basis for this contention. The testimony

shows without dispute that this amount

was voluntarily given by him to Hodges.

It was no part of any legal obligation

and if it was in the nature of a compul-

sory payment, the Tax Court found it to

be in the nature of “hush money” which

is not a deductible item.

The decision of the Tax Court is AF-

FIRMED.

CLARK, Circuit Judge (dissenting):

The Tax Court’s equitable allocation

cannot be justified by either the law or

facts of this case. In approving this Sol-

omonic approach, the majority tacitly ex-

acerbates the difficulties inherent in the

use of alternative inconsistent deficiency

assessments and fails to credit the two

credible items of proof adduced at trial.

1 respectfully dissent.

The majority correctly states that in

the ordinary case the Commissioner’s as-

sessments are presumed valid until

shown by the taxpayer to be erroneous

or arbitrary. Likewise it cannot be seri-

ously questioned that the Commissioner

has the right to make inconsistent as-

sessments in order to protect the fise and

insure against a potential “whipsaw” ef-

fect.!. Estate of Goodall v. Commission-

er, 391 F.2d 775 (8th Cir.), cert. denied,

one should logically succeed—and yet, because

of jurisdictional or procedural reasons, first

one and then the other prevails against the

Government.” Remarks by Phillip R. Miller at

28

4185 CANNON v. COMMISSIONER OF INTERNAL REVENUE

393 U.S. 829, 89 S.Ct. 96, 21 L.Ed.2d 100

(1968); Malat v. Commissioner of Inter-

pal Revenue, 302 F.2d 700 (9th Cir.),

ert. denied, 371 U.S. 934, 83 S.Ct. 308, 9

L.Ed.2d 271 (1962).

What provokes me to dissent is that

the majority applies these two principles

in tandem to conclude that the Commis-

sioner was entitled to recover the full

amount against both taxpayers and that

the Tax Court’s amelioratory action in

reducing the liability by half cannot be

complained of on appeal. By consolidat-

ing the cases, the Commissioner gained

protection against any deleterious effects

the taxpayers’ conflicting stories might

have on his ability to collect the full

amount from someone. With all the

parties before it, the Tax Court could

insure that the public would not lose tax

revenues and that the Commissioner

would not receive a windfall by recover-

ing tax on the same income from two

taxpayers. As the Commissioner readily

concedes, the inconsistent assessments

are merely a mechanism to guard

against loss, not a procedural device tw

permit double recovery. ~

This court has never had occasion to

decide the legal effect that should be

accorded inconsistent assessments in a

consolidated proceeding such as this.

However, several cases have enunciated

the rule that an arbitrary assessment is

stripped of presumed validity. See, e. g.,

Lucia v. U'nited States, 474 F.2d 565 (5th

Cir. 1973) (en banc). Bar L. Ranch, Inc.

v. Phinney, 426 F.2d 995 (5th Cir. 1970).

In one sense. the assessments against

Ash and Cannon are not arbitrary be-

cause the Commissioner had a factual

Court of Claims Judicial Conference, October

14, 1971, on Whipsaw Problems in Tax Cases,

25 The Tax Lawyer 193 (1972).

basis for believing that either one or the

other had received gambling income.

However, the presumption clearly be-

comes irrational and arbitrary the mv-

ment it is extended to both taxpayers

simultaneously in a consolidated proceed-

ing. Cf. Tot v. United States, 319 US.

463, 63 S.Ct. 1241, 87 L.Ed. 1519 (1943):

Mobile, Jackson & Kansas RR Co. v.

Turnipseed, 219 U.S. 35, 31 S.Ct. 136, 55

L.Ed. 78 (1910). At most, the Commis-

sioner should be treated as a stakeholder

and the dual assessments should mean

only that the Commissioner's either-or

determination is entitled to presumptive

validity by the Tax Court to the extent

of asserting that one or the other or

both of the taxpayers together owe a

single full recovery. Anything more is

per se arbitrary and unfair.

If this were a true “whipsaw” situa-

tion involving separate proceedings

against competing taxpayers where no

credibie evidence bearing on allocation

could be ascertained, we would be faced

with a different and more difficult ques-

tion. It is not. Even conceding that

neither taxpayer's whole story was wor-

thy of belief, the court had before it

reliable proof constituting a rational ba-

sis for the distribution of liability. That

proof consisted of clear documentation

that Ash received the $64,680 and Can-

non’s admission that $12,000 of that sum

was wagered with him?

The Tax Court itself decided and the

majority agrees, as I do, that the re-

maining proof was unworthy of belief

Thus there is simply no credible basis for

assuming that half of the total was

transferred to Cannon, or that the re-

2. 1 agree that Cannon's asserted defenses of

payment of the tax and a bribe expense to

discount his liability are both totally meritless.

29

CANNON v. COMMISSIONER OF INTERNAL REVENUE 4186

maining half was retained by Ash. My

concern with affirming their decision to

“divide the baby” is that I cannot dis-

“ern any good reason for disregarding

the probative evidence which was devel-

oped in favor of an “equitable” solution

which has no factual foundation. With

deference, I suggest that the proper res-

olution of this controversy would be to

remand to the Tax Court for an alloca-

tion of $12,000 to Cannon and $52,680 to

Ash.

APPENDIX D

30

UNITED STATES TAX COURT

IDUS P. ASH AND GEORGIA L. ASH, )

Petitioners,

Vv. DOCKET WO. 360-71

COMMISSIONER OF INTERNAL REVENUE,

Respondent

MOTION FOR LEAVE TO AMEND PETITION

The Petitioners, pursuant to Rule 17 (b) (2), here-

by move the Court for Leave to Amend the original Petition

filed by Petitioners and to substitute in lieu thereof the Amended

Petition, attached hereto as Exhibit "A", and as grounds‘ for

said motion would show the Court as follows:

1. The original Petition herein was filed with the

Court on January 14, 1971. At issue in the case is whether the

Petitioners should be taxed on some $64,680.00 whi gh they re-

ceived from one Joe H. Hodges. {fn the origigal Petition it was

alleged (Paragraph 5 (a)) that the Petitiosers “merely cashed

the gambling payments and passed them on to others as the agent

for such persons and served only as a conduit in the Axansactions."

At the time the original Petition was filed, the Petitioners had

prev ously secured as of Aprii 23, 1969, an affidavit from Joe

H. Hodges to the effect that all funds transmitted to Petitioners

were used by them to pay gambling debts of Joe H. Hodges with

31

one M. Ralph Cannon of Dallas, Texas.

2. At the time the Petition was filed, and at the

time the initial affidavit was secured, Joe H. Hodges was incar-

cerated in Federal institutions at Texarkana, Texas, and

Leavenworth, Kansas, respectively. 7

3. The first time that Petitioners or their counsel

were able to discuss with Mr. Joe H. Hodges his testimony in

this matter was on November 8, 1971, and said discussion was

conducted in the presence of representatives of the Respondent.

At such conference, it was revealed that the funds transmitted

by Joe H. Hodges to Petitioners, and which are here sought to be

taxed to Petitioners, had as their source, embezzlement by Joe

H. Hodges from the Meyerland State Bank, Houston, Texas, and

further that the greater portion of the funds involved had been

personally picked up from Petitioners by Joe H. Hodges in Dallas,

Texas, and taken to Los Vegas, Nevada, for gambling, gather than

being transmitted to persons in the Dallas, Texas area in pay- —

ment of gambling debts or for purposes of wagering, It was

further revealed that on October 8, 1971, the Internal Revenue

Service had assessed against Joe H. Hodges federal ingome taxes

with respect to all funds embezzled from the Meyerland State

Bank, which funds*were the came as those transmitted to Petitioners

to be held for Joe H. Hodges.

4. Petitioners therefore desire to amend their

Original Petition so as to more specifically allege the person

or persons for whom they acted as agent or conduit in the trans-

mission of funds alleged to be taxable to Petitioners.

32

\

WHEREFORE, it is prayed:

1. That the Court grant this motion to permit

Petitioners to file the Amended Petition attached hereto.

2. That the Court consider this motion in conjunction

with Respondent's “Motion to Calendar and Consolidate, Or In The

Alternative, Continue", together with “Petitioners' Memorandum

in Opposition to Respondent's Motion to Calendar and Consolidate,

Or In The Alternative, Continue", both of which will be considered

by the Court on May 10, 1972, at which time they have been

calendared for hearing.

AKIN, VIAL, HAMILTON, KOCH & TUBB

1500 Republic Bank Tower

Dallas, Texas 75201 748-4541

Attorney for Petitioners

APPENDIX E

IDUS P. ASH AND GEORGIA L. ) -

Petitione ; cma

Vv. DOCKET NO. 360-71

COMMISSIONER OF INTERNAL REVENUE

Respondent.

AMENDED PETITION

The above named Petitioners hereby file their amended

petition for a re-determination of the deficiency set forth by

the Commissioner of Internal Revenue in his Notice of Deficiency

(AP:D:90) dated October 16, 1970, and as the basis for their

case allege as follows:

1. The Petitioners are individuals, who reside at

1003 High School Lane, Irving, Texas. The return for the period

here involved, the calendar year ending December 31, 1967, was

filed with the District Director of Internal Revenue, Dallas,

Texas.

2. The Notice of Deficiency (copy of which was attached

to the original petition and marked Exhibit "A") was mailed to

the Petitioners on October 16, 1970.

3. The deficiency determined by the Commissioner is

for income taxes for the calendar year 1967 in the amount of

$27,305.86, all of which proposed deficiency is in dispute.

exnigit A

34

4. The proposed tax deficiency set forth in the

said Notice of Deficiency is based upon the following erroneous

adjustments:

(a) Petitioners did n-* receive gambling pay-

ments in the amount of $64,680.00;

(b) Petitioners were not subject to the self-

employment tax of $422.40;

(c) Petitioners were entitled to a medical expense

deduction of $920.00;

5. The facts upon which the Petitioners rely as the

basis of this case are as follows:

(a) Petitioners received in 1967 Western Union

money orders from one Joe H. Hodges in the amount of $64,680.00.

These Western Union money orders were cashed and held by Peti-_

tioners for the benefit of Joe H. Hodges, and said funds were

either subsequently picked up by Hodges or Hodges directed that

Petitioners transmit the funds to other persons in payment of _

gambling debts or as wagers on behalf of Hodges. Some part of

such funds, the exact amount being unknown to Petitioners, was

transmitted to one M. Ralph Cannon in payment of gambling indebted-

ness from Joe H. Hodges to M. Ralph Cannon or as wagers. M.

Ralph Cannon is Petitioner in a case docketed with the Tax Court,

Docket 6102-71, wherein the Respondent, Commissioner of Internal

Revenue, is contending that the full amount of the same funds

received by Petitioners herein from Hodges (namely $64,680)

35

should also be treated as the income of M. Ralph Cannon. All

funds received by Petitioners herein were not the property of

Petitioners nor intended as any form of compensation to Peti-

tioners, who at all times held such funds as agent for Joe H.

Hodges or acted as a conduit for Joe H. Hodges in the payment

of some portion of the funds to M. Ralph Cannon. All funds

transmitted by Joe H. Hodges to Petitioners had as their source,

funds embezzled by Joe H. Hodges from the Meyerland State Bank

of Houston, Texas. Petitioners had no knowledge that the funds

involved had been embezzled from the Meyerland State Bank, and

in no way participated in any embezzlement from said bank.

Joe H. Hodges has been previously convicted for his actions in

this regard. Furthermore, the Internal Revenue Service has

included in the taxable income of Joe H. Hodges for 1967 the

embezzled funds from the Meyerland State Bank in the amount of

$144,292.96. It is these same funds which the Internal Revenue

Service now seeks to include as taxable income of Petitioners.

Taxes with respect to the embezzled income were assessed against

Joe H. Hodges on October 8, 1971.

(b) The Petitioners were not engaged in the trade

or business of accepting wagers nor did they use the payments for

their own benefit, hence, the payments did not constitute taxa-

ble income of Petitioners.

(c) For the reasons set forth in (a) and (b) above,

the Petitioners were not subject to the self-employment tax and

were entitled to the medical expense deduction cyaimed on their

return.

36

WHEREFORE, the Petitioners pray that this Court may

try the case and find that the Petitioners should not be taxed

on an additional $64,680.00 in income; that Petitioners are

not subject to the self-employment tax; that the medical expense

deductions were properly claimed and rule that the Commissioner

should not assess a deficiency in the amount of $27,305.86

with regard to these issues.

VE,

eter nstead

AKIN, VIAL, HAMILTON, KOCH & TUBB

1500 Republic National Bank Tower

Dallas, Texas 75201 748-4541

Attorney for Petitioners