# Petition — Cannon v. Commissioner

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1977
- **Citation:** 430 U.S. 907

## Text

[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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_1051%3A1. Public record. Not legal advice.