*194 Decision will be entered under Rule 50.
1. Conviction for income tax evasion on plea of nolo contendere held admissible to impeach a witness.
2. Payments made by petitioner on behalf of her two employees and her subsequent entry into a partnership agreement with them held, on facts, not to be compensation for services.
3. Petitioner's gross understatement of income accompanied by other circumstances held, on facts, to constitute fraud with intent to evade tax.
4. Respondent's computation of petitioner's 1943 tax liability by including part of 1942 income under Current Tax Payment Act of 1943 held erroneous in view of petitioner's liability for full 1942 tax by reason of fraud.
*446 Respondent determined deficiencies in income tax and penalties against petitioner for the calendar years 1942 and 1943 as follows:
| 50 per cent | ||
| Year | Income tax | fraud penalty |
| 1942 | $ 34,491.76 | $ 17,245.88 |
| 1943 | 39,685.96 | 10,565.49 |
| Total | $ 74,177.72 | $ 27,811.37 |
At the hearing petitioner moved to strike Exhibit H, which was a copy of a judgment convicting petitioner upon her plea of nolo contendere of filing false and fraudulent income and Victory Tax returns for the years 1943, 1944, and 1945, and also moved to strike every question and answer appearing in the transcript bearing upon the criminal proceedings. Both motions were taken under advisement. The issues not stipulated by the parties are:
1. Whether petitioner's motion to strike Exhibit H and every question and answer appearing in the transcript dealing with the criminal proceedings should be granted.
2. Whether certain payments made by petitioner on behalf of Velma and Clyda Sutherland in 1942, and whether the value of a 50 per cent partnership interest acquired by Clyda and Velma Sutherland on January 1, 1943, constituted reasonable compensation*196 for past services rendered by the Sutherlands.
3. Whether deficiencies for 1942 or 1943 are barred by the statute of limitations.
4. Whether petitioner is liable for 50 per cent fraud penalties for each of the years 1942 and 1943.
*447 5. Whether the Current Tax Payment Act of 1943 is applicable and if it is not, whether respondent is entitled to compute petitioner's tax liability for 1943 as though that act were applicable.
FINDINGS OF FACT.
Some of the facts were stipulated and they are hereby found.
Petitioner resides in Panama City, Florida, where she has operated a ladies' ready-to-wear and dress shop since 1931. Petitioner's personal income tax returns for the years 1942 and 1943 were filed with the collector of internal revenue for the district of Florida.
Between 1914, when petitioner finished the eleventh grade of high school and 1931 when petitioner moved to Panama City, she operated a ladies' ready-to-wear and dress shop in Marianna, Florida, a small rural community with a population of about 2,500.
In 1931, petitioner accepted a position in the Order of the Eastern Star of Florida, an affiliate of the Masonic Fraternity, which she had belonged to for several years. *197 Her duties took her away from her business. To keep the store open, she employed a manager, whose operation proved unsuccessful. The business failed and bankruptcy proceedings were initiated. She then moved to Panama City, which is situated on St. Andrews Bay, adjacent to the Gulf of Mexico.
At the time petitioner moved, fishing was the chief enterprise of Panama City, but the Southern Kraft Division of International Paper Company had commenced the erection of a large mill nearby which eventually stimulated business conditions. Petitioner opened a shop in a suburb adjacent to Panama City called Millville, which was near the site of the new paper mill. She stayed at Millville 9 or 10 months and then moved her shop into a location which she rented in the business district of Panama City.
Her business enjoyed moderate financial success during the early 1930's, and in 1935 petitioner purchased a store in Panama City and moved the business into this property.
In 1935, Clyda and Velma Sutherland were employed by petitioner to work in the business, and they remained as petitioner's employees until January 1, 1943. Petitioner is not related by blood or marriage to either Clyda or Velma*198 Sutherland.
Sometime around 1936, petitioner and Clyda and Velma Sutherland moved into quarters over the store and shared expenses.
During the first part of World War II, Panama City grew rapidly. Tindall Field, a Navy Counter Measure Station, and a sizable shipyard were opened nearby. As a result, sales in petitioner's business increased substantially.
Petitioner made the following expenditures during 1942: *448
| Living expenses paid by check | $ 642.23 |
| Living expenses paid by cash | 1,200.00 |
| Cash difference paid on auto purchase | 500.00 |
| Life insurance payments | 155.58 |
| Payments for Clyda and Velma Sutherland | 6,404.15 |
| Gift to brother, E. G. Kilpatrick | 1,000.00 |
| Income tax payments | 626.78 |
| Total | $ 10,529.04 |
None of these amounts were claimed by petitioner as deductible expenses in her 1942 or 1943 individual income tax returns.
The following is an analysis of the $ 6,404.15 expended by petitioner for Clyda and Velma Sutherland during 1942:
| Check Number | Date 1942 | Payee | Amount | |||
| 5205 | 1-1 | Covington | Company, | Jacksonville, | Florida | $ 18.18 |
| 5323 | 2-1 | " | " | " | " | 18.05 |
| 5335 | 2-10 | " | " | " | " | 41.56 |
| 5402 | 3-1 | " | " | " | " | 21.93 |
| 5495 | 4-1 | " | " | " | " | 21.93 |
| 5608 | 5-1 | " | " | " | " | 21.93 |
| 5729 | 6-1 | " | " | " | " | 21.93 |
| 5844 | 7-1 | " | " | " | " | 21.93 |
| 5962 | 8-1 | " | " | " | " | 21.93 |
| 6060 | 9-1 | " | " | " | " | 21.93 |
| 6164 | 10-1 | " | " | " | " | 21.93 |
| 6273 | 11-1 | " | " | " | " | 21.93 |
| 6281 | 11-7 | " | " | " | " | 2,501.53 |
| The above checks inscribed "For Clyda and Velma | ||||||
| Sutherland" are payments on the mortgage in connection | ||||||
| with the purchase of property described as Lot 42 and | ||||||
| S 1/2 of Lot 43, Block 38, Bunkers Cove. | ||||||
| 6272 | 11-1United Benefit Life Insurance Company | $ 66.03 | ||||
| 5611 | 5-1""""" | 66.03 | ||||
| On policies Nos. C299796 and C299797 of Velma and | ||||||
| Clyda Sutherland. | ||||||
| 5414 | 3-1Jefferson Standard Life -- Loan | $ 92.40 | ||||
| 5742 | 6-10"""" | 91.50 | ||||
| 6439 | 12-10"""" | 89.70 | ||||
| 6519 | 12-22"""" | 1,980.80 | ||||
| The above checks inscribed "Loan No. 15-362 Q-3 V & C | ||||||
| Sutherland" are payments on the mortgage in connection | ||||||
| with the purchase of property described as Lots 6 & 7, | ||||||
| Block 35. | ||||||
| 5204 | 1-1Colonel Henry Page | $ 101.50 | ||||
| 5324 | 2-1""" | 102.00 | ||||
| 5397 | 3-1""" | 102.50 | ||||
| 5502 | 4-1""" | 103.00 | ||||
| 5610 | 5-1""" | 103.50 | ||||
| 5727 | 6-1""" | 104.00 | ||||
| 5843 | 7-1""" | 104.50 | ||||
| The above checks, inscribed "For Clyda and Velma | ||||||
| Sutherland" are payments on the purchase of property | ||||||
| described as Lots 8 & 9, Block 35. | ||||||
| Investors Syndicate. | ||||||
| 7-3Contract No. G-352205 | $ 130.00 | |||||
| 7-3""G-352206 | 130.00 | |||||
| 7-3""G-378445 | 130.00 | |||||
| 7-3""G-378446 | 130.00 | |||||
| Total | $ 6,404.15 |
*199 *449 Clyda Sutherland did not report any of these amounts in her income tax returns.
On January 1, 1943, the petitioner entered into a partnership agreement with Clyda and Velma Sutherland. The agreement provided:
THIS PARTNERSHIP AGREEMENT, Made this 1st day of January, 1943, by and between the undersigned Lillian Kilpatrick and Velma Sutherland and Clyda Sutherland who, jointly and severally, by these presents, in consideration of the matters herein contained to the mutual advantage of each of said parties, said three parties hereby mutually agree to associate themselves and do hereby associate themselves into a partnership, evidenced by this partnership agreement, who shall do business under the style and firm name of LILLIAN KILPATRICK'S, and said three co-partners hereby agree as follows:
(1) That, as aforesaid, they have associated themselves and have agreed to become co-partners to engage in the mercantile business in ladies' ready-to-wear at Panama City, Florida, in the location at Harrison Avenue where LILLIAN KILPATRICK'S is now located and elsewhere as may be mutually agreed to between them.
(2) The ownership in the partnership business shall be as follows: *200 Lillian Kilpatrick 50% thereof, Velma Sutherland 25% thereof, and Clyda Sutherland 25% thereof.
(3) All assets of the partnership shall be held and owned according to the respective percentages of the respective parties hereto above named.
(4) The compensation in the way of salaries and disbursement of profits to each partner shall be on the basis of and on the date of, as hereafter mutually agreed to between said three partners; and, unless otherwise shown, the division of profits shall be on the basis of the respective percentages to the respective partners as above shown.
(5) The partnership assumes payment of all accounts payable, now due and owing by LILLIAN KILPATRICK'S: and said partnership shall be entitled to all accounts receivable, now due and owed to LILLIAN KILPATRICK'S.
(6) This partnership may be dissolved at any time hereafter upon written notice by either partner to the others.
Clyda Sutherland did not report the value of her 25 per cent interest in the partnership and its assets as income in her 1943 return.
In 1950, Velma Sutherland withdrew from the partnership, and on January 1, 1952, the business was incorporated. The stock of the corporation is held as follows: *201
| Proportion | |
| Stockholder | of share |
| Lillian Kilpatrick | 4/8ths |
| E. G. Kilpatrick, Jr | 1/8th |
| Clyda Sutherland | 3/8ths |
*450 When Velma Sutherland withdrew from the partnership, she received the following items of property from the remaining partners:
| Amount or | |
| approximate | |
| Items | value |
| One-half interest in McKenzie property | $ 3,250 |
| Property on South McArthur Avenue | 10,000 |
| Property on South Palo Alto | 10,000 |
| One-half interest in Investor's Syndicate Bond | 7,500 |
| Cash | 6,000 |
| Payment of her personal income tax | 36,000 |
| Total | $ 72,750 |
Clyda Sutherland did the bookkeeping work in connection with the store. She had previously taken a little bookkeeping training. Petitioner's tax returns for 1942 and 1943 were prepared by an accountant from Marianna upon the basis of information furnished by Clyda Sutherland.
The records of petitioner and the partnership, "Lillian Kilpatrick's," were burned or otherwise destroyed prior to September 10, 1946. Respondent determined petitioner's net income for the taxable year ended December 31, 1942, on the basis of the increase in her net worth plus nondeductible personal expenditures.
During the year 1942, petitioner had*202 an increase in net worth of $ 54,053.69. Petitioner maintained a checking account with The Commercial Bank of Panama City and the balance of said account as of January 1 and December 31, 1942, was $ 8,130.39 and $ 49,164.37, respectively.
For the taxable year ended December 31, 1943, the partnership filed with the collector of internal revenue in Jackonsville, Florida, its Federal income tax return wherein it reported partnership net income in the amount of $ 18,099.28 and petitioner's share as a partner in the amount of $ 9,049.64.
The beginning and ending net worth of the partnership and its unallowable expenditures for the taxable year ended December 31, 1943, and net income computed thereby, are as follows:
| Jan. 1, 1943 | Dec. 31, 1943 | |
| Assets: | ||
| Checking account (Commercial Bank, Panama | ||
| City) | $ 49,164.37 | $ 25,113.12 |
| Checking account (Chase Nat'l Bank, New York | ||
| City) | 36,915.10 | |
| U. S. Treasury Bonds | 15,000.00 | |
| Merchandise inventory (per income tax returns) | 28,362.06 | 30,485.18 |
| Furniture and fixtures | 15,546.37 | 15,546.37 |
| Less reserve for depreciation (furniture and | ||
| fixtures) | (2,218.64) | (3,004.77) |
| Total assets | $ 90,854.16 | $ 120,055.00 |
| Less liabilities | ||
| Net worth -- end of period | $ 90,854.16 | $ 120,055.00 |
| Less net worth -- beginning of period | 90,854.16 | |
| Increase in net worth -- during period | 29,200.84 | |
| Add personal withdrawals: | ||
| Lillian Kilpatrick | 38,373.66 | |
| Clyda Sutherland | 12,500.09 | |
| Velma Sutherland | 12,521.62 | |
| Total net worth increase plus personal | ||
| withdrawals | $ 92,596.21 | |
| Less cash contributions to partnership by partners: | ||
| Lillian Kilpatrick | (1,944.09) | |
| Clyda Sutherland | (914.09) | |
| Velma Sutherland | (914.09) | |
| Net income | $ 88,823.94 |
*203 *451 During 1943, the partnership opened a checking account with The Chase National Bank, New York City, and the balance thereof as of December 31, 1943, was $ 36,915.10. During the same year, petitioner received dividends in the amount of $ 844.09 from the Investors Mutual Company, Inc., and she reported in her 1943 Federal income tax return the amount of $ 236.38 as dividends received from that company. Petitioner is entitled to the amount of $ 386.86 as depreciation for 1943 on rental property rather than the amount of $ 875 claimed in her 1943 return.
On August 30, 1946, when the examining agent, Hoke Smith, commenced his investigation of the petitioner's and the partnership's 1943 income tax returns, petitioner told him that it would take several days to get together the books and records, ledgers, canceled checks, and bank statements which he requested. At petitioner's request, the examining agent returned 11 days later on September 10, 1946, and she then told him that there were no records available as they had been burned. Petitioner was unable to state either the year or season of the year when her records and those of the partnership were burned or otherwise destroyed.
*204 On September 10, 1946, petitioner told the examining agent that The Commercial Bank of Panama City, Panama City, Florida, was the only bank with which she had an account. The examining agent subsequently discovered that petitioner had an account with The Capitol City Bank in Tallahassee, Florida, in addition to her account in The Commercial Bank of Panama City. In a sworn statement made to Special Agent George A. Otto in the presence of Revenue Agent Hoke Smith on June 12, 1947, petitioner admitted having an account with The Capitol City Bank in Tallahassee, Florida, and stated that she had made only one deposit which was in the amount of $ 994.83. In a sworn statement made before Special Agent D. L. Webb *452 on February 10, 1949, petitioner stated that she had made more than one deposit to her account with The Capitol City National Bank in Tallahassee, Florida, and that to the best of her memory the balance in this account grew to approximately $ 5,050, including interest of about $ 50.
In a sworn statement made before Special Agent D. L. Webb and Revenue Agent H. D. High on January 17, 1949, petitioner stated that the checking account with The Commercial Bank of Panama *205 City and the savings account with The Capitol City Bank in Tallahassee were the only bank accounts maintained during the years 1942 to 1947, inclusive, either by herself as an individual or by the partnership of "Lillian Kilpatrick's." On the morning of January 18, 1949, Special Agent D. L. Webb asked her if information disclosed during the investigation which tended to indicate that there was at least one active bank account which she had not disclosed to the agents of the Bureau of Internal Revenue was correct. Petitioner replied under oath that such information was incorrect. Special Agent Webb then asked petitioner if she denied that there was a checking account in the name of "Lillian Kilpatrick's" in The Chase National Bank of the City of New York on which checks could be signed by petitioner, Clyda Sutherland, or Velma Sutherland. Petitioner declined to answer this question and asked for some time before making any further statements.
On the afternoon of January 18, 1949, petitioner resumed her testimony under oath before Special Agent D. L. Webb, and admitted that there was a checking account in the name of "Lillian Kilpatrick's" in The Chase National Bank of the City of*206 New York on which checks could be signed by her, Clyda Sutherland, or Velma Sutherland. Petitioner further stated under oath that she had advised or instructed Velma and Clyda Sutherland not to disclose to the agents of the Bureau of Internal Revenue the existence of this account in The Chase National Bank, and that the bank statements and canceled checks of this account, with the exception of the last month's statement, had been destroyed.
On January 17, 1949, petitioner stated under oath to Special Agent D. L. Webb that all United States Government bonds purchased by her or by the partnership, "Lillian Kilpatrick's," during the years 1942 to 1947, inclusive, totaled approximately $ 41,000, and were inventoried previously by Revenue Agent Smith. On the same day, petitioner authorized Special Agent Webb to inspect and inventory the United States Government bonds owned by her and the partnership. Agent Webb made the inventory, and only those bonds located in the safe-deposit box at The Commercial Bank in Panama City, which totaled approximately $ 41,000, were submitted to him.
*453 On January 18, 1949, petitioner stated under oath to Special Agent Webb that she had purchased*207 United States Government bonds from funds in The Chase National Bank account and that she kept these bonds at home. Petitioner then presented for the inspection of Special Agent Webb and Revenue Agent High the United States Government bonds in the possession of herself, Clyda Sutherland, and Velma Sutherland, including those bonds which petitioner had kept at home. The face amount of the bonds thus submitted was $ 167,325.
On March 17, 1950, in the United States District Court for the Southern District of Florida, petitioner was convicted upon her plea of nolo contendere of the offenses of filing and causing to be filed false and fraudulent income and Victory Tax returns for the calendar years 1943, 1944, and 1945. The court imposed fines totaling $ 30,000. Clyda Sutherland was also convicted, after a plea of nolo contendere, of evading income taxes for the years 1943, 1944, and 1945.
On her 1942 and 1943 income tax returns petitioner reported her net taxable income in the respective amounts of $ 8,470.36 and $ 7,542.10.
For the taxable years ended December 31, 1942, and December 31, 1943, the petitioner's correct taxable income, and the understatement of income on her income *208 tax returns, were as follows:
| Understatement | ||
| Correct net | of income per | |
| Taxable year ended Dec. 31 | taxable income | return |
| 1942 | $ 64,582.68 | $ 56,112.32 |
| 1943 | 43,800.34 | 36,258.18 |
Part of the deficiencies for each of the taxable years 1942 and 1943 were due to fraud with intent to evade tax.
OPINION.
I.Petitioner's motions made at the hearing to strike one exhibit and all reference in the transcript relating to the nolo contendere pleas of petitioner and one of her witnesses and their subsequent convictions thereon for income tax evasion for the years 1943, 1944, and 1945 were then taken under advisement. Two distinct questions are involved: (1) Whether the evidence as to their convictions is admissible and respondent's cross-examination proper for purposes of impeaching the testimony of petitioner and Clyda Sutherland 1 as witnesses; (2) whether the record of petitioner's conviction is admissible to prove her alleged fraudulent intent for the years 1942 and 1943.
*209 *454 We think the questioning and the exhibit were properly used by respondent to attack the veracity of petitioner and Clyda Sutherland. The Tax Court is bound by "the rules of evidence applicable in the courts of the District of Columbia in the type of proceedings which prior to September 16, 1938, were within the jurisdiction of the courts of equity of said District." Sec. 1111, I. R. C. The District of Columbia Code, enacted on March 3, 1901, provides:
No person shall be incompetent to testify, in either civil or criminal proceedings, by reason of his having been convicted of crime, but such fact may be given in evidence to affect his credit as a witness, either upon the cross-examination of the witness or by evidence aliunde; and the party cross-examining him shall not be concluded by his answers as to such matters. In order to prove such conviction of crime it shall not be necessary to produce the whole record of the proceedings containing such conviction, but the certificate, under seal, of the clerk of the court wherein such proceedings were had, stating the fact of the conviction and for what cause, shall be sufficient. [D. C. Code 1951, sec. 14-305.]
As stated in*210 Bostic v. United States, (C. A., D. C.) 94 F.2d 636">94 F. 2d 636, certiorari denied 303 U.S. 635">303 U.S. 635:
The test provided by Congress is clear and certain. Any person who has been convicted of a crime * * * may have that fact given in evidence against him to affect his credit as a witness.
See also Goode v. United States, (C. A., D. C.) 149 F.2d 377">149 F. 2d 377.
The term "conviction" used in the District of Columbia statute includes convictions based on nolo contendere pleas as well as those based on jury verdicts or pleas of guilty. See Pfotzer v. Aqua Systems, (C. A. 2) 162 F. 2d 779; United States v. Dasher, (E. D., Pa.) 51 F. Supp. 805">51 F. Supp. 805; Haley v. Brady, 17 Wash. 2d 775, 137 P.2d 505">137 P. 2d 505; State v. Herlihy, 102 Me. 310">102 Me. 310, 66 Atl. 643. Contra, Olszewski v. Goldberg, 223 Mass. 27">223 Mass. 27, 111 N.E. 404">111 N. E. 404. In the quotation from 22 Corpus Juris Secundum, pages 658, 659, set out in petitioner's brief, the following*211 appears relating to the plea of nolo contendere:
When accepted by the court, it becomes an implied confession of guilt, and, for the purposes of the case only, equivalent to a plea of guilty; and, when judgment has been entered on the plea, the record is competent evidence of the fact of conviction. * * * [Emphasis added.]
Petitioner also quotes a statement from Berlin v. United States, (C. A. 3) 14 F. 2d 497, reading in part:
The plea of nolo contendere has the same effect as a plea of guilty in the trial of a criminal case. * * *
Only Massachusetts appears to follow the rule relied on by petitioner. 2 All the other cases cited are distinguishable, most of them *455 either on the ground that there was apparently proof of a plea only, not a conviction, Collins v. Benson, 81 N. H. 10, 120 Atl. 724; see also State v. Conway, 20 R. I. 270, 38 Atl. 656, or that the holding dealt with the admissibility of the plea as an admission of facts in a civil action to which the accused was a party, e. g., Twin Ports Oil Co. v. Pure Oil Co., (D. C., Minn.) 26 F. Supp. 366">26 F. Supp. 366,*212 affd. (C. A. 8) 119 F.2d 747">119 F. 2d 747, certiorari denied 314 U.S. 644">314 U.S. 644; United States v. Plymouth Coupe, (W. D., Pa.) 88 F. Supp. 93">88 F. Supp. 93, reversed on other grounds (C. A. 3) 182 F. 2d 180; Commonwealth v. Warner, 156 Pa. Super. 465, 40 A. 2d 886, or in some cases both. In Connecticut the comparable statute appears to have been construed to exclude a misdemeanor from the category of "crimes," Drazen v. New Haven Taxicab Co., 95 Conn. 500">95 Conn. 500, 111 Atl. 861; so that subsequently a misdemeanor conviction on a plea of nolo contendere was, on the authority of the Drazen case, supra, held inadmissible to affect the plaintiff's credibility. Krowka v. Colt Patent Fire Arm Mfg. Co., 125 Conn. 705">125 Conn. 705, 8 A. 2d 5.
*213 We deny petitioner's motions and admit the court record of the convictions. We think they are admissible 3 for impeachment purposes as would be any conviction of a crime committed by any witness, and that they may be noted as part of the background of the present case. We refrain from deciding, for reasons which will presently appear, whether it is permissible to consider petitioner's plea as evidence on the fraud issue. See 4 Wigmore on Evidence (3d ed.) sec. 1066, and cases cited in footnote 4; cf. Cohen v. Commissioner, (C. A. 10) 176 F.2d 394">176 F. 2d 394.
II.In 1942 petitioner wrote checks amounting to $ 6,404.15 for the repayment of loans made to Clyda*214 and Velma Sutherland and for the purchase of real estate, insurance policies, and Investors Syndicate contracts in their names. In 1943 petitioner entered into a partnership agreement with Clyda and Velma Sutherland by which the Sutherlands received a 50 per cent partnership interest. Petitioner claims that $ 6,404.15 and $ 45,427.08, the latter being one-half the adjusted book value of her sole proprietorship as of December 31, 1942, were *456 paid as and constituted reasonable compensation in 1942 and 1943, respectively, for past services rendered by the Sutherlands.
While petitioner is not related to the Sutherlands she shared an apartment and was in close business association with them during 6 or 7 years prior to the period in question. Apart from the question of reasonableness, the 1942 payments were not necessarily payment for services, see Spang-Chalfant & Co., 9 B. T. A. 858, and the alleged assignment in 1943 of one-half the business, for all that appears, was inspired by a desire to have the Sutherlands possess a proprietary interest and share the responsibilities of the business. See Norman G. Nicolson, 13 T. C. 690.*215 Petitioner did not take these deductions on her returns and at least one of the recipients failed to report any of these amounts as income.
To show that these amounts were nevertheless intended as compensation, petitioner relies almost exclusively upon her own testimony and that of her present partner, Clyda Sutherland. The credibility of both petitioner and Clyda Sutherland, however, is open to serious question, not only by reason of their proven convictions, but for numerous other reasons. Both concealed the existence of bonds and out-of-state bank accounts. Both lied under oath to respondent's agents regarding these funds. 4*216 Their testimony in this proceeding not only conflicted with sworn statements made in the past, 5 but was misleading and evasive. 6
*217 *457 We do not regard the testimony of petitioner and her present partner as sufficiently trustworthy to carry petitioner's burden of proving that the amounts in question were intended in 1942 and 1943 as compensation, or that the present claim is other than a perfunctory afterthought. See Max Cohen, 9 T. C. 1156, 1165, affd. (C. A. 10) 176 F.2d 394">176 F. 2d 394. Without some such evidence, the burden has not been met, and the deficiencies must be sustained, without considering the doubtful question of reasonableness.
III.For reasons which we discuss under the following issue, the defense of the statute of limitations would not be available as to either year, even had the issue not been implicity abandoned by petitioner.
IV.Our ultimate finding that part of the deficiencies for each of the years was due to fraud disposes of the fourth issue. Petitioner's understatement of gross income admitted in these proceedings to have been in amounts in excess of $ 56,000 and $ 36,000 for the two years, see Frank A. Weinstein, 33 B. T. A. 105, the unsatisfactorily explained disappearance of petitioner's records, *218 see Louis Halle, 7 T. C. 245, affd. (C. A. 2) 175 F. 2d 500, certiorari denied 338 U.S. 949">338 U.S. 949, and her deliberate concealment of funds and intentional falsification under oath, see Maroosis v. Smyth, (C. A. 9) 187 F.2d 228">187 F. 2d 228, 233, certiorari denied 342 U.S. 814">342 U.S. 814; Victor A. Dorsey, 33 B. T. A. 295, 300, are inconsistent with innocence. This is so even though we are giving no consideration to petitioner's prior conviction on this issue. As we said in M. Rea Gano, 19 B. T. A. 518, 533:
*458 A failure to report for taxation income unquestionably received, such action being predicated on a patently lame and untenable excuse, would seem to permit of no difference of opinion. It evidences a fraudulent purpose.
Petitioner pleads that he was a busy man and delegated all details to others. This fact does not excuse him, nor palliate his conduct in swearing to the truth of divergent statements of fact. * * *
Nor is it the fact, as petitioner contends, that the only indication of fraud*219 is the gross understatement of income. At least the elements emphasized (in a criminal case) in the following excerpt, quoted by petitioner, were shown either conclusively or presumptively by the evidence:
we would think affirmative willful attempt may be inferred from conduct such as keeping a double set of books, making false entries or alterations, or false invoices or documents, destruction of books or records concealment of assets or covering up sources of income, handling of one's affairs to avoid making the records usual in transactions of the kind, and any conduct, the likely effect of which would be to mislead or to conceal. [Mr. Justice Jackson in Spies v. United States, 317 U.S. 492">317 U.S. 492, 499. Emphasis added.]
Petitioner would have us consider the 2 years separately and find no fraud for 1942 even though we reach the opposite conclusion as to the succeeding year. Either the legal or the practical aspects of such an approach render it an impossibility. Repeated gross understatements of income without an adequate explanation, even over a period of a few years, are evidence of fraudulent intent. See David J. Pleason, 22 T.C. 361">22 T. C. 361;*220 Arlette Coat Co., 14 T. C. 751; cf. L. Glenn Switzer, 20 T. C. 759 (on appeal C. A. 9). And here the 2 years have numerous additional similarities. The understatement of gross income was as great, and in fact greater, for 1942. The excuse given is as inadequate. Petitioner was an experienced and capable businesswoman no less in 1942 than in 1943. The unsatisfactory explanation for the disappearance of petitioner's books is as applicable to the one year as to the other. The false statements were made to the revenue agents in an examination covering both years. Petitioner's testimony and conduct on the stand, and that of her principal witness, were equally damaging as to each year. And the unorthodox siphoning off of proceeds of the business by payments for the benefit of her two associates occurred more flagrantly in 1942 before there was any partnership than in 1943.
The fraud penalties are accordingly sustained, and the statute of limitations may not be interposed as a defense. Sec. 276 (a), I. R. C.
V.Respondent determined deficiencies under the Current Tax Payment Act for both 1942 and 1943. The 1942 determination*221 must be *459 sustained for the reasons just stated since additions to the tax for that year are applicable by reason of fraud. 7
Presumably to safeguard the revenue, respondent also took the inconsistent position that the tax for 1943 should be computed by including therein a part of the tax for 1942 under the Current Tax Payment Act. Since we have sustained respondent's position as to the year 1942, and since the alternative position is not pressed, we regard it as having been abandoned. To the extent that the deficiency for 1943 is based on any part of petitioner's 1942 income, it must be disapproved.
Decision will be entered under Rule 50.
Footnotes
1. In the cross-examination of Clyda Sutherland, respondent brought out that she too had been convicted upon a plea of nolo contendere of filing false and fraudulent returns for 1943, 1944, and 1945. Whether petitioner's motion covered this testimony is not altogether clear, but the parties have so treated it.↩
2. * * * On the other hand in a number of jurisdictions it has been held that a conviction on such a plea [nolo contendere] is as competent to impeach a witness as one entered on a plea of guilty or on a verdict. * * * The only relevant question is what are the limitations which the law assures the accused that he will be entitled to invoke if he files the plea. That is a mere question of what the courts have decided -- one alternative is no more rational than the other -- and, so far as we can see, the greater number of jurisdictions allow the conviction as evidence to impeach a witness. Where there is a doubt as to the competency of evidence, Federal Rules of Civil Procedure, rule 43 (a), 28 U. S. C. A. following section 723c, admonishes us to admit it rather than to exclude it; and for that reason we think it should have been here admitted. * * * [L. Hand, J., in Pfotzer v. Aqua Systems, supra↩.]
3. Petitioner states in her brief: "Moreover, we feel that if the Court should permit the respondent to cross-examine in connection with the convictions on the theory that said inquiry is permissible as affecting credibility, then the Court may as well admit the pleas and convictions as admissions for all purposes in this proceeding."↩
4. Petitioner testified under oath before respondent's agents as follows:
Q. Please state the name of each bank in which an account was maintained during the years 1942 to 1947, inclusive, either by you as an individual or by the partnership of "Lillian Kilpatrick's."
A. Commercial Bank at Panama City, checking account; and Capitol City Bank in Tallahassee, a savings account.
* * * *
Q. Miss Kilpatrick, this investigation has disclosed information tending to indicate that there is at least one active bank account which you have not disclosed to the agents of the Bureau of Internal Revenue. Is that information correct or incorrect?
A. That's incorrect.
Q. Do you deny that there is a checking account in the name of "Lillian Kilpatrick's" in the Chase National Bank of the City of New York, Pennsylvania Branch, on which checks may be signed by you, by Velma Sutherland, or by Clyda Sutherland?
A. Do I have to answer that?
Q. You may decline to answer if you wish. Do you decline to answer?
A. Yes, sir.
Q. Do you have any statement that you wish to make at this time?
A. I'd like just a little time -- about an hour.
* * * *
Q. Are you now ready and willing to answer the question as to whether or not there is a checking account in the name of "Lillian Kilpatrick's" in the Chase National Bank of the City of New York, Pennsylvania Branch, on which checks may be signed by you, by Velma Sutherland, or by Clyda Sutherland?
A. Yes, there is such a bank account.↩
5. On January 18, 1949, petitioner testified under oath before respondent's agents as follows:
Q. Did you advise or instruct Velma and Clyda Sutherland not to disclose to the agents the existence of this account in the Chase National Bank?
A. Yes, sir.
At the hearing before the Tax Court petitioner testified as follows:
Q. * * * Is it not a fact that you directed Clyda and Velma Sutherland not to disclose the existence of this bank account in the Chase City National Bank to anyone?
A. I did not.↩
6. Clyda Sutherland testified at the hearing as follows:
Q. Have you ever been adjudged guilty of committing a felony?
A. In what do you mean by that, sir?
Q. At any time during your life have you ever been adjudged by a Court to be guilty of committing a felony?
A. What is a felony?
Q. Well, a felony is an offense against the laws of the state, a criminal offense?
A. I have never been in any court except this one.
* * * *
The Court: * * * I must say I don't understand the answer to one of the questions of the witness' answer that she had never been in any other court except this one.
Now, did she mean this room or --
The Witness: I'm talking about this room, sir.
* * * *
Q. Is it not a fact that you were adjudged guilty of evading or attempting to evade your income taxes due and owed for the years 1943, '44 and '45?
A. That is true.↩
7. Section 6 (a) of the Current Tax Payment Act of 1943 provides in part that "This subsection shall not apply in any case in which the taxpayer is convicted of any criminal offense with respect to the tax for the taxable year 1942 or in which additions to the tax for such taxable year are applicable by reason of fraud."↩