1941 BTA LEXIS 1407">*1407 1. Amount of income realized by the petitioner from gambling and operating gambling house determined upon basis of facts reflected by purchase and use of cashier's checks and by bank accounts.
2. Penalties imposed by the Commissioner for fraud and failure to file returns sustained.
43 B.T.A. 1100">*1100 The Commissioner determined deficiencies in income tax and penalties under sections 291 and 293(b) of the Revenue Act of 1928, as follows:
| Penalties | |||
| Year | Deficiency | Sec. 291 | Sec. 293(b) |
| 1929 | $8,238.30 | $2,059.58 | $4,119.15 |
| 1930 | 21,093.82 | 10,546.91 |
The issues are (1) whether the Commissioner erred in including $69,085.84 and $120,935.24 in the petitioner's income for the respective years 1929 and 1930 as profits from gambling and unexplained bank deposits, and (2) whether the penalties for delinquency and fraud should be imposed.
FINDINGS OF FACT.
The petitioner, now a resident of New Orleans, Louisiana, resided in Kansas City, Missouri, during the taxable years. He was married and supported his wife and a dependent1941 BTA LEXIS 1407">*1408 nephew. He has been engaged in gambling for about 40 years and his income during the taxable years was derived solely from gambling and profits of gambling houses.
The petitioner was employed in a gambling house is Dallas, Texas, from January 1 to about April 1, 1929, at a salary of $20 per day. When he returned to Kansas City he had approximately $1,200. He operated a dice game in Kansas City for Booth Baughman from April 1 to August 1, 1929, for which he received $10 per day and 10 percent of the profits. Prior to September 1929 he was associated with John Lazia in some gambling operations.
In September 1929 the petitioner entered into an arrangement with Arthur McNamee, John Lazia, and Tim Crummett for the operation of a gambling house, night club, and restaurant, known as the Cuban 43 B.T.A. 1100">*1101 Gardens, in Clay County near Kansas City. Petitioner was to receive 15 percent of the profits. Crummett was to receive a percentage and the remaining profits were to be shared equally by Lazia and McNamee. Lazia and McNamee were to make certain advancements and were to be reimbursed therefor. No salary was provided for any of the interested parties. They opened for business1941 BTA LEXIS 1407">*1409 on September 12, 1929, and, except for about four months during 1930, operated continuously until January 1, 1931, when the place was closed by the law enforcement authorities.
Gamblers in that locality used a cash fund, commonly known as a "bank roll", to "bank" the games conducted by them. The petitioner had handled such funds for various gamblers, and during the periods above mentioned he handled the bank roll for the Cuban Gardens and Baughman. In order to prevent losses through robbery, it was the practice to carry the greater part of the bank roll in the form of cashier's checks, which were used and accepted in lieu of cash. The petitioner purchased the cashier's checks included in bank rolls handled by him from banks in and near Kansas City, and they were payable "to the order of A. M. Slavin." When a person won money, the petitioner endorsed and delivered a cashier's check, but if the amount involved was small or the payee so desired the petitioner paid him in cash. The expenses incurred in the operation of the Cuban Gardens, such as rent, salaries, supplies, protection payments, etc., were paid by petitioner in the same manner. None of the money comprising the bank1941 BTA LEXIS 1407">*1410 rolls of Baughman or the Cuban Gardens was furnished by petitioner, but sometimes he bought supplies for the Cuban Gardens out of his own funds and reimbursed himself out of the bank roll.
The business of the Cuban Gardens was carried on under the direction of McNamee, who contributed an initial bank roll of $6,000 and agreed to and did furnish additional funds whenever necessary. In 1929 Lazia paid $1,500 ground rent on a tract of land in Clay County, and he constructed a building thereon and provided gambling equipment at a cost of about $30,000. He devoted no time to the business. The petitioner was placed in charge of the "casino", or gambling rooms, where he ran roulette, blackjack, dice, and other games. Crummett negotiated with and made payments to the county officials for "protection." While the Cuban Gardens was in operation, the petitioner devoted his entire evenings to the "casino", and in the daytime he attended to the banking transactions and gambled on his own account.
Up to January 1930 Lazia had received $18,500 for his advances and McNamee had received a part of his advances for the bank roll. Due to a dispute with McNamee, Lazia at that time agreed to withdraw1941 BTA LEXIS 1407">*1411 upon payment to him of $13,000, and he was paid $6,000 in cash in January 1930, and thereafter was paid $7,000 at the rate of $500 per 43 B.T.A. 1100">*1102 week. The total repayments to him of $31,500 were made either out of the bank roll or profits. McNamee and Lazia were not on friendly terms and the settlement was negotiated by the petitioner and Crummett. The Cuban Gardens was thereafter operated by McNamee, Crummett, and the petitioner, upon the understanding that the petitioner and Crummett should each receive 25 percent of the profits, and McNamee should receive the remaining profits and the amount due him for the advances. During each week the Cuban Gardens was open Crummett received a cashier's check for $500, which he used to pay for "protection" by several county offcials.
McNamee converted the greater part of the initial bank roll of $6,000 into cashier's checks, payable to the order of the petitioner, and turned the checks and cash over to the petitioner. The money received over the gambling tables consisted of cash, personal checks of patrons, and cashier's checks interchanged as money. It was counted by the petitioner and McNamee at the close of each day and the difference1941 BTA LEXIS 1407">*1412 between it and the amount on hand at the beginning of the play was considered as daily profit or loss. No written records were kept of such profits and losses. McNamee knew from day to day what they amounted to and also knew the amount due him for advances and the amount left in the hands of the petitioner. The petitioner from time to time purchased additional cashier's checks. Such purchases were paid for with cashier's checks on hand, which were exchanged for other cashier's checks of different denominations, with personal checks received from patrons, and with cash taken over the tables, or, when necessary, cash provided by McNamee. Personal checks were left at the bank for collection, and, after they had cleared, the petitioner received the proceeds in cash or in cashier's checks. In exchanges of cashier's checks, the petitioner often received some of the proceeds in cash. Most of the cashier's checks were in denominations of from $100 or less to $500; some were in denominations of from $1,000 to $2,000. At times the petitioner held single checks varying in amount from $5,000 to $7,000.
The petitioner purchased cashier's checks from banks during 1929 and 1930 in the1941 BTA LEXIS 1407">*1413 number and total amounts shown below:
| 1929 | 1930 | |||
| Issuing bank | Number of checks | Amount | Number of checks | Amount |
| Merchants Bank | 434 | $247,738.81 | 367 | $122,062.06 |
| Baltimore Bank (formerly Twelfth Street Bank) | 21 | 11,374.48 | 138 | 52,972.50 |
| Home Trust Co | 586 | 259,125.06 | ||
| National Bank of North Kansas City | 1 | 1 2,000.00 | ||
| Total checks purchased | 455 | 259,113.29 | 1,092 | 436,159.62 |
43 B.T.A. 1100">*1103 Some of the above cashier's checks were issued in exchange for the surrender of cashier's checks previously issued. The remainder were returned to the issuing bank and paid, some bearing only the endorsement of the petitioner and others bearing the endorsement of the petitioner and later endorsements of other persons. The amount of each class of such checks was as follows:
| 1929 | 1930 | |
| Checks exchanged for others | $123,690.18 | $179,054.93 |
| Checks endorsed by petitioner | 53,546.13 | 106,756.09 |
| Checks endorsed by the petitioner and others | 81,879.98 | 150,348.60 |
| Total | 259,113.29 | 436,159.62 |
The checks1941 BTA LEXIS 1407">*1414 endorsed by the petitioner and others included 12 checks totaling $4,000, issued in 1929 and endorsed by the petitioner and the Gregg Tire Co. They were cashed by George R. Gregg at a bank in Topeka. Some of the above checks were cashed at other banks and were eventually returned to the issuing bank. In such cases they were endorsed by the bank where the check had been cashed.
Cashier's checks in the total amount of $3,879.55 had been purchased and cashed between January 31 and September 1, 1929. Cashier's checks outstanding and not cashed amounted to $7,422.50 at December 31, 1929, and $17,200 at December 31, 1930. Between January 2 and June 1, 1931, the petitioner cashed $8,000 of the cashier's checks which had been purchased during 1930. Of such checks, $4,500 were cashed in January and February 1931, a $2,000 check of the National Bank of North Kansas City was cashed on April 15, 1931, and $1,500 was deposited by the petitioner in a New Orleans bank on June 1, 1931.
During 1929 and 1930 the petitioner had personal checking accounts with the Baltimore Bank and the Home Trust Co. He drew upon those accounts from time to time for his personal needs. He made 26 deposits1941 BTA LEXIS 1407">*1415 in the said accounts between September 1929 and December 31, 1929, and 38 deposits during 1930, as follows:
| 1929 | 1930 | |
| Cash and miscellaneous checks | $10,474.71 | $13,885.00 |
| Cashier's checks | 3,000.00 | 5,000.00 |
| Total | 13,474.71 | 18,885.00 |
The balances in the said accounts were $1,362.61 on December 31, 1929, and $908.70 on December 31, 1930.
The petitioner drew a check for $2,000 on a personal checking account at the National Bank of North Kansas City on May 7, 1930, 43 B.T.A. 1100">*1104 which he used to pay for the cashier's check issued by that bank on May 7, 1930, referred to above.
Between January 1, 1931, when the Cuban Gardens closed, and May 25, 1931, the petitioner purchased over $30,000 of cashier's checks from the Baltimore Bank and the Home Trust Co. During that period he made nine deposits aggregating $6,577 in his personal checking accounts at those banks. The cashier's checks purchased during that period, except checks totaling $5,550 were cashed shortly after their purchase. The petitioner went to New Orleans on or about May 25, 1931, and at that time withdrew the balance of $2,660.38 from his personal checking accounts. On June 1, 1931, he1941 BTA LEXIS 1407">*1416 deposited in a New Orleans bank $5,550 of cashier's checks purchased between January 1 and May 25, 1931. Thereafter, he invested some money in a business in New Orleans. In 1930 or early in 1931, he loaned $2,500 to a bookmaker. This money was given to the latter in cashier's checks.
The petitioner did not keep any records of his income for the taxable years. In his 1930 return he reported $9,150 as income from commissions, claimed a personal exemption and credit of $3,900, and paid a tax of $73.13. That return was prepared by an accountant, upon facts furnished by the petitioner. The accountant's work sheets show that gross income was computed by taking the difference between $7,900 of cash on hand at December 31, 1930 and $1,750 of cash on hand at January 1, 1930, and adding thereto $3,000 as estimated living expenses.
The Commissioner, upon the basis of facts revealed by the dealings in cashier's checks and by the personal bank accounts, determined that the petitioner realized net income of $69,085.54 in 1929 and $120,935.24 in 1930. He treated the cashier's checks surrendered for new checks as having been exchanged for other cashier's checks and treated those endorsed1941 BTA LEXIS 1407">*1417 by the petitioner and others as having been used to discharge gambling losses and expenses, deducted the total thereof - $201,567.16 for 1929 and $329,403.53 for 1930 - from the total of all checks issued, and included in income the remainder of the checks issued which bore the sole endorsement of the petitioner, namely, $53,546.13 for 1929 and $106,756.09 for 1930. He also increased the 1929 income by the $4,000 of cashier's checks endorsed by the petitioner and the Gregg Tire Co., upon the ground that the proceeds constituted income received by the petitioner and loaned to George R. Gregg; and increased the income of the respective years by $1,065 and $1,161.15, representing cash received by the petitioner upon exchanges of checks. He also included in income $10,474.71 for 1929 and $13,018 for 1930 on account of unidentified deposits appearing in the 43 B.T.A. 1100">*1105 personal checking accounts. His computation, as set forth in the notice of deficiencies, is as follows:
| 1920 | 1930 | |||
| Cashier's checks purchased | $259,113.29 | $436,159.62 | ||
| Less cashier's checks exchanged for others | 123,690.18 | 179,054.93 | ||
| Net | 135,423.11 | 257,104.69 | ||
| Cash received on exchange of checks | $1,065.00 | $1,161.15 | ||
| Unidentified bank deposits | 10,474.71 | 11,539.71 | 13,018.00 | 14,179.15 |
| Gross income | 146,962.82 | 271,283.84 | ||
| Less: Gambling losses and expenses | 77,876.98 | 150,348.60 | ||
| Net income | 69,085.84 | 120,935.24 |
1941 BTA LEXIS 1407">*1418 The petitioner had a net income of not less than $19,969 during 1929 and not less than $41,497.31 during 1930. No Federal income tax return for the year 1929 was filed by the petitioner. The failure to file a return for 1929 under the circumstances herein constituted fraud. The return filed by him for the year 1930 was fraudulently made. Part of the deficiencies for both years was due to fraud with intent to evade tax.
OPINION.
ARNOLD: The petitioner's only source of income was gambling. While he received some money as salary for operating gambling games for Baughman and others and a substantial amount of cash passed through his hands in operating the casino, the issues relating to the correctness of the deficiencies are confined to two items, namely, the income charged to him as a result of the dealings in cashier's checks, and the income charged to him as unexplained bank deposits. The latter item involved deposits by petitioner in his own name with the Baltimore Bank and the Home Trust Co. The Commissioner treated $10,474.71 of the 1929 deposits and $13,018.00 of the 1930 deposits as income. The petitioner asks us to find that these deposits represented transactions1941 BTA LEXIS 1407">*1419 by him as agent for the Cuban Gardens, or for McNamee. However, he testified that the accounts were his own, that he deposited therein money which he won by gambling, and that he made withdrawals for his personal use. The ledger sheets of the banks show all deposits and withdrawals, but the petitioner was unable more definitely to identify any item except to state that on some occasions he had drawn checks in payment of items purchased for the Cuban Gardens, and that, when he did so, he replaced the money by depositing a cashier's check from the bank roll. He recalled that he had purchased a roulette wheel for $1,000. McNamee testified that the petitioner paid $1,900 for a heating plant in 1929, and was reimbursed. The deposit slips disclose that the petitioner deposited $3,000 43 B.T.A. 1100">*1106 in 1929 and $5,000 in 1930 in the form of cashier's checks, and the remaining deposits consisted of cash and personal checks. The ledger sheets disclose a deposit of $1,995 on October 17, 1929, and withdrawal of the same amount on October 18, 1829. The Commissioner treated this item as an unidentified deposit, but the evidence clearly shows it was not income of the petitioner. 1941 BTA LEXIS 1407">*1420 The Commissioner made allowance for the identified deposits of $3,000 in 1929 and $5,867 in 1930 - more than the amount of cashier's checks deposited. The evidence further shows that, when the petitioner left Kansas City in 1931, he withdrew the balances in these accounts, and there is no evidence that he accounted for any of the money to McNamee or any one else. We hold that $8,479.71 of the deposits of 1929, and $13,018 of the deposits of 1930 were profits from gambling, and constituted income of the petitioner in those years. ; ; ; .
The Commissioner reduced the total amount of cashier's checks purchased by amounts which he considered as having been used to acquire other cashier's checks or to pay gambling losses and expenses, and treated the remainder, together with minor amounts of cash received in the exchange of checks, as profits from gambling. The amount included in income as profits was $58,611.13 for 1929 and $107,917.24 for 1930. Several hundred checks were introduced in evidence. 1941 BTA LEXIS 1407">*1421 Many of them, in an amount exceeding the amount which the Commissioner, included in income, contained the endorsement only of the petitioner, and, in some instances, the endorsement of a bank other than the issuing bank at which the check was cashed. The Commissioner relies on this evidence, and the testimony of a revenue agent who made an audit of the checks and bank records, to support his determination. The petitioner makes no attempt to demonstrate error in the Commissioner's computation of the profits, but contends that no part of the money represented by the checks is taxable to him as income, because he was a mere money handler or agent for Lazia and McNamee, who contributed the capital and were the sole owners and operators of the Cuban Gardens.
The record shows conclusively that the petitioner was not the sole owner and operator of this enterprise, but that he was jointly interested with others, and was entitled to a portion of the profits. The petitioner was to share in the profits to the extent of 15 percent in 1929 and 25 percent in 1930. While McNamee testified that the petitioner was to participate in profits only after McNamee and Lazia had recovered their advances, 1941 BTA LEXIS 1407">*1422 the petitioner in his testimony placed no such limitation upon the agreement. McNamee and the petitioner 43 B.T.A. 1100">*1107 testified that the Cuban Gardens was not operated for a sufficient length of time to enable them to realize any profit, and that the petitioner did not in fact retain any of the funds entrusted to him or receive any payment as his share of the profits. They kept no written records of their daily receipts and expenses, and have not informed us of the amount thereof or the amounts advanced by McNamee in excess of $6,000.
It was the duty of petitioner to produce facts upon which we might make our own determination whether there were any profits. ; The documentary evidence shows not only that the operation of the Cuban Gardens was profitable, but also that a substantial part of the funds represented by the cashier's checks was in fact received and used by the petitioner. It also appears that the petitioner had a wide experience un handling enterprises of this character and that other gamblers paid him well for such services. His services and experience were an important and1941 BTA LEXIS 1407">*1423 necessary factor in the operation of the business, and it is unreasonable to suppose that he would give his entire time to it for over a year without sharing in the profits which passed through his hands from day to day. His testimony, together with the documentary evidence and the surrounding facts and circumstances, warrants the conclusion that he shared in all profits from the inception of the enterprise. Since his share was fixed at 15 percent in 1929 and 25 percent in 1930, it is obvious that the Commissioner erred in so far as he included any greater proportion of the profits in the petitioner's income.
The evidence indicates that not all of the amounts represented by the cashier's checks were funds of the Cuban Gardens. Some items may be segregated as individual profits of the petitioner, and, by charging the petitioner with 15 and 25 percent of the remainder of the profits as computed by the Commissioner, his income from the Cuban Gardens may be approximated as closely as is possible on this record. ; 1941 BTA LEXIS 1407">*1424 .
The severable items are as follows:
During 1929, and before the opening of the Cuban Gardens and the setting up of the initial bank roll of $6,000, the petitioner purchased and cashed $3,879.55 of cashier's checks. These clearly were not funds of the Cuban Gardens. They were acquired in July and August 1929, while the petitioner was operating for Baughman and Lazia. Baughman was paying him $10 per day and 10 percent of the profits. The record is silent as to such profits and as to any income received from Lazia. These checks with many others purchased after 43 B.T.A. 1100">*1108 September 12 were exhibited to the petitioner, who said they constituted funds of the Cuban Gardens. Under the circumstances, and in view of the petitioner's inability at any time to state facts concerning any particular check, we think the checks purchased prior to September 1929 constituted profits of the petitioner from gambling other than that conducted for Cuban Gardens, and that the Commissioner properly included them in income for 1929.
The petitioner asks us in his brief to find that a cashier's check for $2,000, issued by the National Bank1941 BTA LEXIS 1407">*1425 of North Kansas City on May 7, 1930, represented money loaned to him by one Donegan, who operated the restaurant, and that he repaid Donegan in 1931 when the check was cashed. His testimony is that he borrowed the money which went into this check from Baughman, for use in the petitioner's individual gambling operations, but that he never used it, and the check remained in his possession until April 15, 1931, when he cashed it and repaid Baughman. The records of the issuing bank show that the petitioner purchased the check with a check drawn on his personal bank account. The checking account at the Home Trust Co. discloses a withdrawal of $1,000 on May 7, 1930, while that at the Baltimore Bank discloses a balance on hand at that date of only $234.84. The inference is that the petitioner had a checking account at the National Bank of North Kansas City and the check was paid from that source. The petitioner made no attempt, upon being recalled, to explain the conflict between his testimony and the bank records. We are of the opinion that the money used to purchase this check represented profits of the petitioner from gambling other than that conducted for Cuban Gardens, and that1941 BTA LEXIS 1407">*1426 the Commissioner properly included the amount thereof in income for 1930.
The Commissioner included in the petitioner's income 12 cashier's checks issued in 1929, totaling $4,000, which were endorsed in the name of the petitioner and the Gregg Tire Co., and cashed at a Topeka bank by George R. Gregg. The evidence shows that Gregg is deceased, at the Cuban Gardens and won and lost money. Gregg is deceased, and the Commissioner sought to prove by his widow that Gregg borrowed this money from the petitioner. Mrs. Gregg denied any knowledge of such a transaction. Some of the checks were endorsed not by the petitioner but by McNamee. We are of the opinion that these checks came to the hands of Gregg as winnings from gambling. They should therefore be treated as gambling losses in computing petitioner's share of the profits from the Cuban Gardens.
The exclusion of the above items of $3,879.55 and $4,000 in 1929 and the item of $2,000 in 1930 from the profit from dealings in cashier's checks, as computed by the Commissioner, leaces $50,731.58 in 1929 43 B.T.A. 1100">*1109 and $105,917.24 in 1930 as the total profits realized by the Cuban Gardens and we hold that 15 percent of the former1941 BTA LEXIS 1407">*1427 and 25 percent of the latter amount constitutes taxable income of the petitioner.
The determination of the Commissioner that a profit was realized from the operation of the Cuban Gardens is supported by the huge amount of cashier's checks handled over a period of approximately one year and by the endorsements indicating that a substantial portion of them were cashed by no one other than the petitioner. It also appears that on some days the profits were as high as $8,000, and that during the first three and a half months they were sufficient to reimburse Lazia and McNamee to the extent of more than $18,500. The documentary evidence shows that the petitioner from time to time made deposits in his personal checking accounts varying from $500 to $1,500; that soon after the Cuban Gardens had closed and his arrangement with McNamee had been terminated, he received the proceeds of $6,000 of the cashier's checks purchased in 1930 and, in addition, that he purchased over $30,000 of cashier's checks; and that in 1931 he deposited $6,577 in his personal accounts. The record further shows that he loaned $2,500 to another gambler and that he took funds to New Orleans and invested an undisclosed1941 BTA LEXIS 1407">*1428 amount in some business. During all of this period he supported his family. In the light of these facts and the absence of proof of the actual receipts and disbursements, we are unable to give any credence to the testimony of the petitioner and McNamee that there were no profits and that the petitioner received none of the proceeds of the cashier's checks which passed through his hands or none of the profits from the operation of the Cuban Gardens.
We conclude that the petitioner received income in the taxable years from gambling activities in the following amounts:
| 1929 | 1930 | |
| Personal bank deposits | $8,479.71 | $13,018.00 |
| Personal dealings in cashier's checks | 3,879.55 | 2,000.00 |
| Percentage of profits from Cuban Gardens | 7,609.74 | 26,479.31 |
| Total | 19,969.00 | 41,497.31 |
The next issue is whether any part of the deficiencies is due to fraud with intent to evade tax. Sec. 293(b), Revenue Act of 1928. The statute imposes the burden of proof on the Commissioner. The evidence adduced shows that taxable income in substantial amounts was realized during both years. The nature of this evidence is indicated in our previous discussion and in our findings of fact. 1941 BTA LEXIS 1407">*1429 We have carefully weighed and considered the evidence and have given petitioner the benefit of the doubt as to certain disputed items. But 43 B.T.A. 1100">*1110 viewing petitioner's whole course of conduct, his various acts and transactions, together with the inferences to be drawn therefrom, it is our opinion that his failure to file any return of income for 1929 evidences a fraudulent intent, , and that the understatement of his income for 1930 was due to fraud with intent to evade tax. ; affd., . Respondent's determination of fraud for both years is therefore approved.
Since petitioner had taxable income for 1929 of not less than $19,969, and since he did not file a return for that year, the imposition of the 25 percent penalty under section 291 is mandatory, ; affd., ; certiorari denied, ; ; and constitutes a separate liability from the fraud penalty under section 293(b). 1941 BTA LEXIS 1407">*1430
Decision will be entered under Rule 50.
Footnotes
1. This check was issued on May 7, 1930, and was paid by the bank on April 15, 1931, after being endorsed "A. M. Slavin." ↩