T.C. Memo. 1999-171
UNITED STATES TAX COURT
STEVEN H. TOUSHIN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21724-92. Filed May 20, 1999.
Angelo Ruggiero and Michael R. Esposito, for petitioner.
Luanne S. DiMauro and Donna C. Hansberry, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Respondent determined the following
deficiencies in and additions to petitioner's Federal income
taxes:
Additions to Tax
Year Deficiency Sec. 6653(b) Sec. 6653(b)(2) Sec. 6661
1980 $25,265 $16,983 $0 $0
1981 34,220 25,018 0 0
1
1982 21,196 10,598 5,299
1
50 percent of the statutory interest on $21,196.
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All section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
The issues for decision are: (1) Whether petitioner had
unreported income in 1980, 1981, and 1982; (2) whether petitioner
is liable for the additions to tax for fraud for 1980, 1981, and
1982; (3) whether petitioner is liable for an addition to tax for
a substantial understatement for 1982; and (4) whether respondent
is barred by the statute of limitations from assessing the
deficiencies and additions to tax for 1980, 1981, and 1982.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts, the supplemental stipulation of facts,
and the attached exhibits are incorporated herein by this
reference. At the time the petition was filed, petitioner
resided in Chicago, Illinois.
Petitioner's Business Interests Prior to May 1978
During the early 1970's, petitioner was a partner in the
Festival Theater Partnership (Festival Partnership), which owned
a three-story building located at 1349 N. Wells Street in
Chicago, Illinois. During that time, petitioner was also a
shareholder in the Festival Theater Corp. (Festival Corp.), which
owned and operated the Bijou Theater (the Bijou), a movie theater
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located in the first story of the building located at 1349 N.
Wells Street.
As a result of a dispute among the partners, the assets of
the Festival Partnership were placed into receivership in 1976.
The assets of the Festival Corp. were eventually added to the
receivership. On March 24, 1978, the receiver turned over the
Bijou and the building in which it was operated to petitioner.
Petitioner's Poor Financial Condition During Receivership
During the receivership years (1976-1978), petitioner had
serious financial problems. Petitioner borrowed from numerous
relatives, was frequently overdrawn on his personal checking
account, made minimum payments on his credit card balances, and
took a job performing menial tasks at his in-law's business.
Petitioner's Business Interests as of May 1978
From May 1978 through December 1982, Entertainment &
Amusement, Inc., a corporation incorporated in the State of
Illinois (E&A of IL), operated the Bijou. Petitioner was the
president of E&A of IL at all times and was the sole shareholder
of E&A of IL until 1981. In 1982, petitioner was at least a 50-
percent shareholder of E&A of IL.
On October 1, 1981, Entertainment and Amusement, Inc., was
incorporated in the State of California (E&A of CA). Petitioner
was the sole shareholder and president of E&A of CA. E&A of CA
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operated the Screening Room, a movie theater located in San
Francisco, California, similar to the Bijou.
Cash Receipts at the Bijou and the Screening Room
The Bijou and the Screening Room were predominantly cash
businesses. At both the Bijou and the Screening Room, there were
established procedures for dealing with the daily cash receipts.
At the Bijou, employees collected admission fees from
patrons, issued numbered tickets, and allowed patrons to pass
through a turnstile equipped with a counting device. The
employees would reconcile the tickets and turnstile numbers on an
hourly basis to ensure the correct amount of money had been
collected. After collecting $100 in admission fees, the Bijou
employees would put the $100 in an envelope (drop envelope), mark
the envelope sequentially, and drop it in a safe. Similar drops
were made for cash receipts from video and other sales.
The Bijou employees recorded their daily receipts from
ticket, video, and other sales on daily sheets (sometimes called
shift or drop sheets). Daily sheets contained the date, the
shift, the admission tickets and turnstile numbers (for admission
fees receipts), and each $100 drop into the safe.
Petitioner was the sole person with access to the Bijou's
drop safe. On a daily basis, petitioner removed the drop
envelopes and the daily sheets from the safe and placed them into
a duffle (shoulder) bag.
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After filling the duffle bag, petitioner left to reconcile
the drop envelopes and the daily sheets. After reconciling these
amounts, petitioner destroyed these documents.
From the daily sheets and the drop envelopes, petitioner
created "daily report sheets" and made ledger entries summarizing
the Bijou's monthly cash receipts. Petitioner's accountant used
the ledger to prepare the Bijou's income tax return. Petitioner
did not include all of the Bijou's cash receipts in the daily
report sheets or ledger.
Petitioner generally made the daily deposit for the Bijou.
Petitioner did not deposit all of the Bijou's cash receipts into
the corporate bank account. At times, petitioner deposited only
one-half of the day's receipts.
On a few occasions when petitioner was on vacation, Walter
Killeen, the unofficial manager of the Bijou from 1979 until
1981, collected the drop envelopes and deposited the Bijou's
receipts. Petitioner instructed Killeen to use deposit slips
previously prepared by petitioner and to deposit only up to the
amount already listed on the deposit slip for any particular
date. Petitioner instructed Killeen to put the rest of the
receipts aside for petitioner.
The Screening Room operated in a similar fashion to the
Bijou. Petitioner was not present on a daily basis at the
Screening Room, so Killeen, who became the Screening Room's
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manager upon its opening in 1981, collected the daily drop
envelopes and daily sheets. Killeen deposited all of the
Screening Room's daily receipts. Killeen kept some records
pertaining to the Screening Room despite petitioner's
instructions not to keep records and to destroy any previously
created records.
Internal Revenue Service's (IRS) Criminal Investigation
of Petitioner
During 1982, the IRS began a criminal investigation of
petitioner. Petitioner instructed Killeen to avoid the IRS.
Petitioner coached Killeen on how to answer questions from
the IRS. Additionally, when Killeen became nervous about the
IRS's investigation, petitioner sent Killeen on vacation to Long
Beach, California, for about 2 months.
Petitioner's Cash Dealings
Petitioner dealt in cash. Petitioner paid many of his
personal expenses with cash.
On occasion, petitioner used cash from the Bijou's drop
envelopes to pay his personal expenses. These expenses included
a downpayment of at least $23,000 on a condominium located at
3530 North Lake Shore Drive in Chicago (the 3530 condo) and the
babysitter's weekly salary.
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Petitioner's Cash Sources and Uses
Petitioner had the following cash sources in 1981 and 1982:1
1981 1982
Loans from E&A of IL $0 $11,110
Withdrawal from petitioner's
personal savings account
#143263-2 5,221
Cash back on deposits 600
Paychecks cashed 1,151
Checks cashed conceded
by respondent 936 178
Capital gains 26,500 40,350
Cash received from
money orders 5,756 3,843
Rental income 2,500
Total cash sources $40,164 $57,981
Petitioner had the following cash uses in 1981 and 1982:
1981 1982
Cash deposited into
petitioner's personal
checking account
#501-344 $6,551 $3,260
Cash deposited into
Walter Killeen Co.
checking account
#332-232 23,129 2,100
1
For convenience, all numbers are rounded to the nearest
dollar.
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Cash deposited into
Anthony J. Medina, Jr. Co.
account #541-834 100 12,285
Sheila Buralli, babysitter 3,000
Mercedes Benz 18,015
Ultimo, clothing store 1,100
Parking space rental 156 156
Sylvia Dawson, housekeeper 2,400
Tiffany's 742 1,559
Personal money orders 28,697 82,478
Gold Coast Travel Corp. 1,165
Susan Toushin's "walking
around" money 12,000
Total cash uses $97,055 $101,838
Petitioner's Plea Agreement
On August 8, 1991, petitioner pleaded guilty to filing a
false income tax return for 1980 in violation of section 7206(1).
In his plea agreement, petitioner admitted to skimming cash
proceeds from E&A of IL through his operation of the Bijou.
Petitioner admitted his unreported skimmed cash income totaled
$59,411 for 1980.
OPINION
I. Unreported Income
The first issue presented is whether petitioner had
unreported income for 1980, 1981, and 1982. Petitioner bears the
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burden of proof as to any underlying deficiency. See Rule
142(a).
A. Respondent's Indirect Method of Proof
When a taxpayer fails to keep sufficient records to enable
respondent to determine his correct tax liability, respondent may
compute the taxpayer's income by any method that clearly reflects
income. See secs. 446(b), 6001; Sutherland v. Commissioner, 32
T.C. 862 (1959).
Respondent used the cash method to indirectly prove that
petitioner had unreported income for the years in issue. The
Court of Appeals for the Seventh Circuit has held that the cash
method is an acceptable method for calculating a taxpayer's
unreported income. See United States v. Hogan, 886 F.2d 1497,
1509 (7th Cir. 1989). In United States v. Hogan, supra at 1508-
1509, the Court of Appeals stated:
[The cash method] is a variation on the "cash
expenditures" method * * *. The cash expenditures
method determines the amount of unreported income by
"establishing the amount of [defendant's] purchases and
services which are not attributable to the resources at
hand at the beginning of the year or to non-taxable
receipts during the year." If the amount of purchases
and services exceeds defendant's reported income,
resources on hand, and nontaxable receipts, the jury
may infer that the defendant underreported income.
Like the cash expenditures method, the cash method
focuses on the taxpayer's sources and uses of income.
Unlike the cash expenditures method, however, the tax
expert considers only coin and currency when using the
cash method, ignoring assets and purchases that do not
generate cash.12 * * * Sources for cash include cash
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returned on deposits, checks written to "cash," * * *,
cash contents of safe deposit boxes, in addition to
money on hand at the beginning of the taxable year.
The expert then adds cash received from nontaxable
sources of income--including loans, advances from
credit cards, gifts, and inheritances--to cash
generated by sources and compares this total to the
amount of purchases and services for which the taxpayer
paid cash. If the cash expenditures exceed the
sources, the tax expert infers that the taxpayer failed
to report income. [Citations omitted.]
12
Although the term "cash" is often intended to
include purchases made with checks, the cash method, as
defined by the government, does not include checks as a
type of cash. * * *
See also 1 Fink, Tax Fraud, sec. 17.03[7], at 17-30 (1998).
Utilizing this method, respondent determined that petitioner
had unreported income of $59,411, $57,656, and $43,857 in 1980,
1981, and 1982, respectively.
B. Petitioner's Cash On Hand as of January 1, 1980
Petitioner does not challenge respondent's authority to use
the cash method. Rather, petitioner contends that respondent
incorrectly used the cash method because respondent failed to
account for petitioner's beginning cash on hand.
Respondent determined petitioner had no cash on hand as of
January 1, 1980. Petitioner claims he had a cash hoard of at
least $80,000 in his home safe as of that date.
Petitioner admitted in his guilty plea that he had
unreported skimmed income from the Bijou in 1980 totaling
$59,411. This figure was computed based on cash on hand of $0 as
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of January 1, 1980. By his plea, petitioner thus implicitly
admitted that he had no cash hoard as of January 1, 1980.
Additionally, there is ample evidence that petitioner experienced
serious financial problems between 1976 and 1978 when his assets
were in receivership. Petitioner's allegation of a cash hoard
was inconsistent, implausible, and not supported by objective
evidence in the record. See Parks v. Commissioner, 94 T.C. 654,
661 (1990).
We therefore conclude that petitioner did not have a cash
hoard as of January 1, 1980.
C. Petitioner's Sale of Poppers
Petitioner alternatively argues that his unreported income
was attributable to his sale of "poppers"2 on behalf of the
Screening Room and that E&A of CA, and not petitioner, should be
taxed on the income from the sale of poppers.
From petitioner's testimony, it is unclear how petitioner
acquired the poppers, if and how petitioner transferred the
poppers to the Screening Room, the quantity sold, and the price
at which they were sold. Petitioner's testimony was vague and
contradictory as to this matter. See Tokarski v. Commissioner,
87 T.C. 74, 77 (1986). Even if we were to believe that
petitioner, acting as a representative of the Screening Room,
2
"Poppers" consist of a substance which a person inhales
"to get high".
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sold poppers, we would not be able to conclude how much of the
unreported income was attributable to these sales.
D. Petitioner's Unreported Income
Petitioner admitted in his plea agreement and we find that
he had unreported income of $59,411 in 1980. As for 1981 and
1982, based upon the above findings, we conclude that petitioner
had the following unreported income:
1981 1982
Cash on hand at beginning
of year $0 $0
Add: cash sources 40,164 57,981
Cash available for year $40,164 $57,981
Less: cash uses (97,055) (101,838)
Unreported income $56,891 $43,857
II. Addition to Tax for Fraud
For 1980 and 1981, section 6653(b), and for 1982, section
6653(b)(1) provide for an addition to tax of 50 percent of the
underpayment if any part of the underpayment of tax required to
be shown on a return is due to fraud. Additionally, for 1982,
section 6653(b)(2) provides for an addition to tax equal to 50
percent of the interest payable under section 6601 with respect
to the portion of the underpayment attributable to fraud. In
this case, respondent alleges that the entire underpayments are
due to fraud.
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Respondent bears the burden of proof to show by clear and
convincing evidence that (1) an underpayment exists, and (2) some
part of the underpayment is due to fraud. See Rule 142(b).
Where fraud is determined for each of several years, respondent's
burden applies separately for each of the years. See Estate of
Stein v. Commissioner, 25 T.C. 940, 959-963 (1956), affd. per
curiam sub nom. Levine v. Commissioner, 250 F.2d 798 (2d Cir.
1958).
A. Underpayment of Tax
Where the allegations of fraud are intertwined with
unreported and indirectly reconstructed income, respondent may
prove an underpayment either (1) by proving a likely source of
the unreported income or (2) where the taxpayer alleges a
nontaxable source, by disproving the nontaxable source so
alleged. See Parks v. Commissioner, supra.
Respondent contends that petitioner's unreported income in
the years in issue was the result of petitioner's skimming from
the Bijou's cash receipts, and such skimmed receipts constitute
constructive dividends which are taxable to petitioner.
Respondent carefully reconstructed the procedures used at
the Bijou for dealing with its daily cash receipts in 1980, 1981,
and 1982 and petitioner's unfettered access to those receipts.
Petitioner was the sole person with access to the drop safe at
the Bijou. Petitioner collected the drop envelopes from the
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safe. Petitioner deposited the Bijou's cash receipts; however,
petitioner sometimes deposited only one-half of those cash
receipts.
Petitioner routinely was seen making personal purchases with
large sums of cash. Petitioner was even seen making some
personal purchases with cash removed from a duffle bag in
envelopes resembling the drop envelopes used by the Bijou.
Petitioner also routinely sent large sums of cash and money
orders to the Screening Room in order to pay that business's
weekly expenses. Before its remodeling in 1982, the Screening
Room did not generate enough income to cover its expenses.
Furthermore, in his plea agreement, petitioner admitted that
his unreported income in 1980 was from skimmed cash receipts of
the Bijou.
From the entire record, we conclude that petitioner
routinely took cash from the Bijou's drop safe in 1980, 1981, and
1982 for his own personal use and to pay for the Screening Room's
expenses.
Generally, where a shareholder diverts corporate funds to
his own use, those funds constitute constructive dividends to him
and are ordinary income to the extent of the corporation's
earnings and profits. See secs. 301(c), 316; Truesdell v.
Commissioner, 89 T.C. 1280, 1295 (1987).
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Respondent has shown that E&A of IL had sufficient earnings
and profits during the years in issue to account for all of
petitioner's unreported income in those years. Petitioner has
presented no evidence to the contrary.
We conclude that respondent has established by clear and
convincing evidence an underpayment of tax for 1980, 1981, and
1982.
B. Fraudulent Intent
Respondent must also show that for each of the years in
issue the taxpayer intended to evade taxes known to be owing by
conduct intended to conceal, mislead, or otherwise prevent the
collection of taxes. See Parks v. Commissioner, 94 T.C. at 661;
Rowlee v. Commissioner, 80 T.C. 1111, 1123 (1983).
Because direct proof of a taxpayer's intent is rarely
available, fraud may be proven by circumstantial evidence and
reasonable inferences may be drawn from relevant facts. See
Spies v. United States, 317 U.S. 492, 499 (1943). Over the
years, courts have developed a nonexclusive list of factors that
demonstrate fraudulent intent. These badges of fraud include:
(1) Understating income, (2) maintaining inadequate records, (3)
failing to cooperate with tax authorities, (4) an intent to
mislead which may be inferred from a pattern of conduct, (5)
filing false documents, (6) failing to file tax returns, and (7)
dealing in cash. See id.
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The evidence establishes that petitioner consistently and
substantially understated his income in 1980, 1981, and 1982.
Petitioner maintained inadequate records for both of his
businesses. Petitioner destroyed existing records at the Bijou
and instructed Killeen to destroy any records kept at the
Screening Room. Petitioner attempted to disrupt the IRS's
criminal investigation by sending Killeen on vacation and
counseling Killeen to lie to agents when questioned. Petitioner
dealt extensively in cash both personally and in his businesses.
We also consider it significant that petitioner pleaded
guilty to a violation of section 7206(1) for 1980. Although his
plea does not, in and of itself, establish a fraudulent intent,
we consider the crime as probative evidence that he intended to
evade taxes, especially when combined with other factors taken
from the record as a whole. See Wright v. Commissioner, 84 T.C.
636, 643-644 (1985); McGee v. Commissioner, 61 T.C. 249, 260
(1973), affd. 519 F.2d 1121 (5th Cir. 1975).
We conclude that petitioner possessed the requisite
fraudulent intent to evade taxes known to be owing for 1980,
1981, and 1982.
C. Conclusion
We find that respondent has clearly and convincingly proven
that the entire underpayments of tax for 1980, 1981, and 1982
were due to fraud.
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III. Substantial Understatement of Income in 1982
Section 6661 imposes an addition to tax of 10 percent of the
amount of any underpayment attributable to a substantial
understatement of income tax. A substantial understatement is
one which exceeds the greater of 10 percent of the tax required
to be shown on the return or $5,000. See sec. 6661(b)(1)(A).
If the taxpayer has substantial authority for the tax
treatment of any item on the return, the understatement is
reduced by the amount attributable to it. See sec.
6661(b)(2)(B)(i). Similarly, the amount of the understatement is
reduced for any item adequately disclosed either on the
taxpayer's return or in a statement attached to the return. See
sec. 6661(b)(2)(B)(ii).
Petitioner bears the burden of proving that the addition to
tax under section 6661 does not apply. See Rule 142(a);
Tweeddale v. Commissioner, 92 T.C. 501, 506 (1989). Petitioner
has offered no evidence or argument that he is not liable for the
addition to tax under section 6661(a). We conclude that
petitioner is liable for the section 6661(a) addition to tax for
1982.
IV. Statute of Limitations
Where a fraudulent return is filed with the intent to evade
tax, the tax may be assessed at any time. See sec. 6501(c).
Petitioner argues that respondent's assessment of deficiencies
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and penalties for each of the years in issue is time barred
because respondent failed to issue the notice of deficiency
within the 3-year period prescribed by section 6501(a).
As we found herein, petitioner is liable for the additions
to tax for fraud for 1980, 1981, and 1982; therefore, the period
of limitations on assessment for those years remains open.
To reflect the foregoing,
Decision will be entered
under Rule 155.