1956 U.S. Tax Ct. LEXIS 292">*292 Decision will be entered under Rule 50.
1. False and Fraudulent Returns -- Statute of Limitations -- Sec. 276 (a). -- The taxpayers filed false and fraudulent returns with intent to evade taxes for each of the years 1944 through 1947. The Commissioner failed to prove that the returns for the years 1942 and 1943 were false and fraudulent with intent to evade tax. The statute of limitations has run for those 2 years and the Commissioner is barred from assessing and collecting any deficiency or addition to the tax.
2. Fraud Additions -- Sec. 293 (b). -- A part of the deficiency in each year 1944 through 1947 was due to fraud with intent to evade taxes.
25 T.C. 824">*824 1956 U.S. Tax Ct. LEXIS 292">*293 The Commissioner determined deficiencies and additions to the tax against W. Y. Brame as follows:
| Additions to the tax under -- | |||
| Year | Deficiency in | ||
| income tax | |||
| Sec. 293 (b) | Sec. 294 (d) (2) | ||
| 1942 | $ 715.20 | $ 357.60 | |
| 1943 | 1,073.77 | 536.89 | |
| 1944 1 | 5,754.06 | 2,877.03 | |
| 1945 | 11,653.93 | 5,826.97 | $ 699.24 |
| 1946 | 26,205.14 | 13,102.57 | |
| 1947 | 5,109.74 | 2,554.87 | |
| 1948 | 79.88 | 39.94 | 12.78 |
25 T.C. 824">*825 The issues for decision herein are whether:
1. The amount of the deficiency for each of the taxable years was correctly determined,
2. the return for each year was false and fraudulent with the intent to evade taxes, and
3. any part of the deficiency for each year was due to fraud with intent to evade taxes.
FINDINGS OF FACT.
Willie Smith Brame was the wife of W. Y. Brame prior to January 16, 1942, on which date she died. Brame and petitioner Minnie D. Brame were married on March 7, 1944, and they lived together as husband and wife until1956 U.S. Tax Ct. LEXIS 292">*294 Brame died on July 6, 1952. Brame filed separate income tax returns for each year involved herein except that he and Minnie filed a joint return for 1944. All returns were timely filed with the collector of internal revenue for the district of Mississippi. Employees of the Internal Revenue Service in Meridian, Mississippi, as a part of the taxpayer-assistance program, filled in the returns for 1944, 1945, 1946, and 1947 from information furnished by Brame. They did not make any independent verification or audit of the figures supplied.
Brame was the elected county tax assessor of Lauderdale County, Mississippi, from 1932 until December 31, 1943. He was the elected sheriff and tax collector of that county from January 1, 1944, until December 31, 1947. He also engaged in the businesses of farming and of buying and selling real estate during some of the taxable years. Brame made substantial investments in real estate, in United States savings bonds, and in miscellaneous stocks during the years 1944 through 1947.
Brame maintained some records of his real estate transactions. He prepared, subsequent to the beginning of the investigation in 1950 of his tax liability for the years1956 U.S. Tax Ct. LEXIS 292">*295 involved herein, a series of cards and four memorandum lists of some of his real estate transactions, and those cards and lists were presented to the examining agents. Account books, containing information and figures on his real estate transactions, which were introduced in evidence at the hearing, were incomplete, dealing with installment sales only and failing to record cost figures to Brame. Those books were never made available to the examining agents who conducted the investigation. Brame's records of activities while sheriff and tax collector consisted of work sheets on which were listed various items of bank deposits and checks in and on his "official account" in the Merchants and Farmers Bank in Meridian. Brame kept no records of his farming activities.
25 T.C. 824">*826 Brame's books and records were incomplete and inadequate for the purpose of determining net income. The Commissioner reconstructed Brame's income for each year on the basis of the increase in net worth plus nondeductible expenditures for that year.
Brame never filed an income tax return prior to 1939. He filed returns in 1939 and 1940, reporting no taxable income. He paid tax of $ 44.67 on his income for 1941. 1956 U.S. Tax Ct. LEXIS 292">*296 Brame's first wife did not file a Federal income tax return for any year from 1917 until her death in 1942. Brame was not the recipient of any insurance proceeds or inheritance prior to 1942.
Brame filed financial statements in 1939, 1940, and 1941 with the Meridian Production Credit Association in connection with securing loans. He represented in those statements that he had cash on hand and in the banks in the following amounts:
$ 50 on March 28, 1939
$ 185 on June 24, 1940
$ 200 on July 21, 1941
He was delinquent on small monthly payments due during the period from 1938 until 1940 on property purchased. Seventeen checks totaling $ 1,027.20 given by Brame to a life insurance company between 1927 and 1943 were returned by the bank for nonpayment.
Brame was slow in settling his accounts with the Royal Feed and Milling Company from 1930 until 1942. That company charged off as bad debts the accounts due from Brame in the amounts of $ 222.99, $ 32.92, and $ 428.90, in 1939, 1940, and 1941. He continually borrowed small sums of money from a bank on short-term notes at 8 per cent interest prior to 1944. Many of those notes were renewed numerous times before payment. He had no1956 U.S. Tax Ct. LEXIS 292">*297 substantial amount of cash on hand on January 1, 1942.
Minnie D. Sharman, who became Brame's second wife in 1944, owned only the following assets at that date:
| Citizens National Bank checking account | $ 164.37 |
| Citizens National Bank savings account | 502.50 |
| U. S. savings bonds | 75.00 |
| Account receivable | 1,000.00 |
She had never paid any income tax prior to 1940. She paid income taxes in the following amounts:
| 1940 | $ 9.07 |
| 1941 | 48.76 |
| 1942 | 180.86 |
| 1943 | 49.44 |
Her gross income in those years never exceeded $ 1,750.68. She reported gross income of $ 3,000 in 1945 and in 1946, and $ 3,210 in 1947.
25 T.C. 824">*827 The balances in the bank accounts of Brame at the close of the taxable years 1941, 1942, and 1943, and the balances in all bank accounts of Brame and his wife at the close of the taxable years 1944, 1945, 1946, and 1947 were in the following approximate amounts:
| December 31 | Amount |
| 1941 | $ 92 |
| 1942 | 24 |
| 1943 | 151 |
| 1944 | 1,932 |
| 1945 | 4,285 |
| 1946 | 2,736 |
| 1947 | 2,374 |
The following table shows the net income reported by Brame for the taxable years and the amounts of additional income determined by the Commissioner:
| Year | Reported | Additiona | |
| 1942 | $ 2,359.90 | $ 3,634.83 | |
| 1943 | 3,206.90 | 2,714.12 | |
| 1944 | 5,241.94 | [jointly with wife] | 14,587.33 |
| 1945 | 5,318.12 | 27,294.89 | |
| 1946 | 6,899.19 | 47,551.68 | |
| 1947 | 2,154.38 | 14,104.74 | |
| Total | $ 25,180.43 |
1956 U.S. Tax Ct. LEXIS 292">*298 Brame's reported income was derived from salary as tax assessor, farm income, income from office of sheriff, commissions from trade and real estate, sales of land, and income from a feed company.
Brame bought a partnership interest in the Purpin Manufacturing Company in July 1946 for which he paid $ 4,000. The company was formed in Meridian, Mississippi, in November 1945. Brame advanced $ 551 to the company in 1945 and an additional $ 22,021.73 in 1946 all for operating capital, of which $ 1,000 was repaid in 1946. His total investment in this company equaled $ 26,200.51 on December 31, 1946, and $ 25,401.23 on December 31, 1947.
Brame invested $ 3,000 in the Queen City Feed Company in 1945. This was a partnership formed on January 8, 1945. He also loaned $ 3,000 apiece to his other two partners and they repaid the loans by June 18, 1946. Brame received $ 335 as his share of the profits in 1945. He sold his interest to one of the other partners on April 18, 1948, for $ 3,000.
Brame owned stock in the Magnolia State Publishing Co., which had cost him $ 200 during 1946. He held this interest on December 31, 1946, and December 31, 1947. He also owned an interest in Ready Made1956 U.S. Tax Ct. LEXIS 292">*299 Insulation Co. which he purchased for $ 1,000 during the year 1947.
25 T.C. 824">*828 Brame purchased United States savings bonds, Series E, during the taxable years as follows:
| Year | Purchase price | Redeemed | Total |
| investment | |||
| 1942 | $ 112.50 | $ 112.50 | |
| 1943 | 1,050.00 | 1,162.50 | |
| 1944 | 6,900.00 | 8,062.50 | |
| 1945 | 7,500.00 | 15,562.50 | |
| 1946 | 15,562.50 | ||
| 1947 | $ 9,000.00 | 6,562.50 |
Those purchased in 1942 were by Brame himself. All in 1943, except one $ 75 purchase by Minnie, were by Brame. All the remaining bonds were purchased in the name of Brame and his wife, except for four $ 75 purchases in 1944, three of which were in the wife's name and one of which was in Brame's name.
Brame, on July 16, 1946, bought for $ 20,000 property known as the Old Swift Oil Mill Property on which the Purpin Manufacturing Company was located. He paid $ 10,000 down with the balance represented by four promissory notes of $ 2,500 each. Brame and B. W. Purvis jointly purchased adjoining land on May 27, 1946, for $ 4,000, paying $ 1,000 down and the remaining balance by December 31, 1947.
Brame purchased a building known as the O. L. David Building in Meridian, Mississippi, on November 1956 U.S. Tax Ct. LEXIS 292">*300 28, 1945, for $ 1,700 cash, a note for $ 800, and the assumption of first and second mortgages on the property with unpaid balances of $ 12,450 and $ 2,700. He paid off the second mortgage in its entirety, reduced the first mortgage to $ 11,550, and paid off the note for $ 800 by a transfer of cattle by December 31, 1946. The first mortgage was reduced to $ 8,850 by December 31, 1947. Brame purchased property from W. E. Pigford in 1947 for which he paid $ 2,000 cash and $ 11,000 by check.
Brame purchased 54 parcels of real estate in the years 1942 through 1947 and sold 127 pieces of real estate in the same period. The deeds filed of record in the office of the chancery clerk, Lauderdale County, Mississippi, show such transactions. He also made many purchases of forfeited tax land from the State in the names of relatives or friends. He sold many of those parcels in 1942, 1943, and 1944 through deeds executed by the particular person in whose name the legal title rested. Those purchases were made in the names of other persons because the laws of the State of Mississippi did not allow any one individual to purchase from the State more than 160 acres of forfeited tax land in any1956 U.S. Tax Ct. LEXIS 292">*301 one year. The real consideration for the sale of those pieces by Brame was in almost all cases greater than the consideration recited in the deed.
25 T.C. 824">*829 The value to Brame of his real estate holdings at the end of each year was at least the following approximate amounts:
| Year | Amount |
| 1941 | $ 9,993 |
| 1942 | 10,940 |
| 1943 | 12,231 |
| 1944 | 17,974 |
| 1945 | 39,891 |
| 1946 | 59,076 |
| 1947 | 69,200 |
Brame's total liabilities increased from $ 9,186.82 to $ 26,657.72 during this same period wherein there was an increase of at least $ 60,000 in the cost of his real estate holdings. His accounts and notes receivable increased from nothing to at least $ 13,895 during the taxable period. He owned livestock, improvements to real estate, automobiles and trucks, the total cost of which steadily increased from $ 936 on December 31, 1941 to $ 10,667.45 on December 31, 1947.
Brame was charged, as sheriff of Lauderdale County, with the responsibility of enforcing the Mississippi statute forbidding the sale or possession of intoxicating liquors. He received large amounts of money during the years 1944 through 1947 for not having his law enforcement officers interfere with the wholesale and retail selling1956 U.S. Tax Ct. LEXIS 292">*302 of whiskey throughout his county. The payments varied in amount from $ 25 per week to $ 325 per week and depended on the volume of business done by the payor. There were no raids by the law enforcement officers as long as the protection payments were regularly made, but if any payments stopped, then there was an immediate raid by one of Brame's deputy sheriffs.
Brame supported himself, his wife, and his blind son's family during the taxable years after 1943. His son's income was at least $ 500 a year. The respondent determined that Brame's personal and living expenditures plus other unallowable expenditures were as follows:
| Year | Amount |
| 1942 | $ 2,406.40 |
| 1943 | 3,230.80 |
| 1944 | 6,221.04 |
| 1945 | 7,000.56 |
| 1946 | 9,090.14 |
| 1947 | 6,674.83 |
$ 1,400 a year as food expenditures was included in the above amounts. Brame's personal and living expenditures and other nondeductible expenditures in each year were at least as great as those determined by the Commissioner and exceeded the net income reported for that year.
25 T.C. 824">*830 Brame omitted substantial amounts of income from his reported net income for each year 1944 through 1947. The return for each of those years was false and fraudulent1956 U.S. Tax Ct. LEXIS 292">*303 with intent to evade tax and a part of the deficiency for each year was due to fraud with intent to evade taxes. The returns for the years 1942 and 1943 were not false and fraudulent with the intent to evade taxes.
The stipulated facts are incorporated herein by this reference.
OPINION.
The Commissioner seeks to avoid the bar of the statute of limitations on the assessment and collection of the deficiencies and the additions to the tax on the ground that the return filed for each taxable year was false and fraudulent with intent to evade tax within the meaning of section 276 (a). He also contends that a part of each deficiency was due to fraud with intent to evade tax. He has the burden of proof on those issues. The petitioners, in their brief, have abandoned their objection to the use of the net worth and expenditures method in determining Brame's net income. .
It is reasonably clear from the record that Brame did not have any substantial amount of cash at the end of 1941 or at the end of 1943. The petitioners concede as much in their briefs. Brame submitted a sworn statement to the revenue agents before1956 U.S. Tax Ct. LEXIS 292">*304 his death to the effect that he had cash of $ 8,000 or $ 9,000 in January 1942, and that was increased by about $ 16,000 from the sale of his farm in 1943, but he had made other statements that he never possessed any substantial amount of cash. The evidence shows that his earned income was small prior to 1944, he was slow in paying creditors, he had numerous checks returned for insufficient funds, he frequently borrowed small amounts at high rates of interest, his bank balances were small and he represented in net worth statements that he had only small amounts of cash on hand in 1941 and prior thereto. Likewise, the evidence shows that his wife Minnie, whom he married in 1944, had no substantial amount of cash or other assets on hand at that time. The Commissioner, in determining the deficiencies by the net worth and expenditures method, has allowed sufficient amounts to represent the cash held by Brame at the end of 1941 and at the end of 1943 and the assets owned by Minnie at the time of her marriage to Brame. The Commissioner, in determining the deficiencies for 1944 and later years, did not err by including in the net worth statement assets acquired during those years in 1956 U.S. Tax Ct. LEXIS 292">*305 the name of Minnie. The evidence shows that Brame used Minnie's name and the names of other relatives for his own purposes in making numerous transactions, all of 25 T.C. 824">*831 which were for his own benefit. Minnie had no such transactions of her own.
The Commissioner, to show that the returns for 1942 and 1943 were false and fraudulent with intent to evade tax, has proven omissions of only $ 966.33 and $ 382.90. Brame was not then sheriff. The evidence as a whole fails to disclose in clear and convincing fashion that his returns for those 2 years were false and fraudulent with intent to evade tax. This is not to say that amounts were not omitted from the returns which should have been reported for those years, but the amounts and circumstances are such that fraud cannot fairly be inferred. The assessment and collection of the deficiencies and additions for those years is barred by the statute of limitations.
The evidence in regard to the years 1944 through 1947 clearly and convincingly shows that the returns for those years were false and fraudulent with intent to evade tax. It shows sources from which Brame derived large amounts of income, and it shows that large amounts of income1956 U.S. Tax Ct. LEXIS 292">*306 were consistently omitted from the returns during those years. It is clear that Brame, in his capacity as sheriff, demanded either directly or indirectly that money be paid him by persons engaged in illegal liquor activities to protect them from raids and arrest by the sheriff's officers. The petitioners claim that those protection payments have not been traced into the hands of Brame and that the witnesses for the Commissioner on this point are persons not worthy of belief. Careful consideration has been given to the evidence on this point. It is obvious that the witnesses were not persons of the highest character or they never would have been engaged in the illegal businesses and the resulting activities with Brame. However, the Court is satisfied from the record that money was paid for protection and that that money found its way into the hands of Brame. Those ill-gotten gains were a part of the omitted income. Brame likewise used illegal procedures in his transactions in forfeited tax lands. He expended large amounts of money in each taxable year which could have come from no other source than taxable income. He failed to keep proper records. He knew that his income 1956 U.S. Tax Ct. LEXIS 292">*307 far exceeded the amounts which he disclosed to the representatives of the Bureau of Internal Revenue whose aid he sought in making out his returns for these taxable years. He consistently omitted from his returns large portions of his taxable income which he knew he had received. The Commissioner, in sustaining his burden of proof on the fraud issues, does not have to prove the precise amount of income omitted for any year where the evidence shows that the amount omitted in each of the 4 years was at least substantial. ; . The record as a whole leads inescapably to the conclusion that his omissions were deliberately made 25 T.C. 824">*832 for the purpose of avoiding tax. The Court has made findings that the return for each of the years 1944 through 1947, each of which is in evidence, was false and fraudulent with intent to evade tax so that no statute of limitations applies. A finding that a part of the deficiency for each year was due to fraud with intent to evade tax has also been made.
The petitioners did not contest the determination for1956 U.S. Tax Ct. LEXIS 292">*308 1948, and the only issue remaining which requires decision is whether for any year the amount of the deficiency was less than that determined by the Commissioner. The petitioners make certain contentions of that kind and they have the burden of proof. The Commissioner has made a few minor concessions which will slightly reduce the net income as originally determined by him under the net worth and expenditures method. Also, he filed a third amended answer in which he concedes that the deficiency for 1947 and the addition thereto under section 293 (b) should be reduced. Those concessions, being against interest, must be taken into account in the computation under Rule 50. The petitioners raised an issue in regard to credits for dependents but introduced no proof on the point. The petitioners also claim that the living expenses and other nondeductible expenditures used by the Commissioner in determining net income were excessive. Brame supported four adults and one minor child during each of the taxable years now under discussion. The evidence does not show that his expenditures for the purposes mentioned were less than the amounts determined by the Commissioner.
The Commissioner1956 U.S. Tax Ct. LEXIS 292">*309 filed an answer claiming additional deficiencies and additions to the tax for the years 1944, 1945, and 1946, but failed to introduce evidence to sustain those allegations.
Alternative contentions of the Commissioner do not require decision.
Decision will be entered under Rule 50.
Footnotes
1. The determinations for 1944 were against W. Y. and Minnie D. Brame.↩