Opinion · United States Tax Court

Jones v. Commissioner

29 T.C. 601

Type
Opinion
Court
United States Tax Court
Jurisdiction
Federal
Date
1957-12-30
Topic
general

How later courts describe this case

  • wilful evasion of tax may be inferred when a taxpayer had made "numerous and comparatively large deposits in a bank account, the sources and nature of which are not recorded or accounted for in any books of account * * *."

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UpLaw has not yet analyzed Jones v. Commissioner. The absence of a flag is not a finding that it is good law.

Cited by
37 opinions
JONES v. COMMISSIONER OF INTERNAL REVENUE,29 T.C. 601(1957)
THOMAS B. JONES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE,
RESPONDENT.
THOMAS B. JONES AND MARGARET A. JONES, PETITIONERS, v. COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT.
Docket Nos. 44126, 44127.
United States Tax Court.
Filed December 30, 1957.
1. The respondent determined deficiencies in income tax and additions to tax for fraud against the petitioners for the years 1943, 1944, 1945, 1946, and 1947 on the basis of bank deposits, the source or sources of which were not shown by petitioners' books or records. As to the years 1943, 1944, and 1945, the statute of limitations has run against the respondent, unless the returns filed by the petitioners for those years were false and fraudulent with intent to evade tax.Held,that the respondent has failed to carry his burden of proving that the 1943, 1944, and 1945 returns were false and fraudulent with intent to evade tax. As to the years 1946 and 1947,held,that the petitioners have failed to prove that the deposits in controversy did not constitute unreported income, and the respondent's determinationsPage 602of deficiencies for those years are approved.Held, further,that the respondent has failed to prove that any part of the deficiency for either 1946 or 1947 was due to fraud with intent to evade tax, and his determination of additions to tax for fraud is rejected.

2. The respondent's determination of net operating loss for 1948 is similarly sustained, in the absence of proof by the petitioners that determination was in error.
J. G. Williamson, Esq.,for the petitioners.John P. Higgins, Esq.,for the respondent.
The respondent determined deficiencies in income tax and additions to tax for fraud against the petitioners as follows:
Docket No. Petitioner Year Deficiency Addition to tax

{ 1943 $21,501.06 $10,923.74 { 1944 17,383.97 8,691.99 44126 ....... Thomas B. Jones .... { 1945 11,186.05 5,905.18 { 1946 5,157.94 8,106.91144127 ....... Thomas B. Jones and 1947 1,313.67 656.84 Margaret A. Jones
The questions for decision are (1) whether the assessment and collection of the deficiencies for the years 1943, 1944, and 1945 are barred by the statute of limitations; (2) whether bank deposits in the years 1943 through 1948, not shown on any books of account and not accounted for or explained by petitioners in their reporting of income for the said years, reflect the receipt of unreported income in those years; and (3) whether any part of the deficiency, if any, for each of the years involved was due to fraud with intent to evade tax. With respect to the year 1948, the question is as to the amount of net operating loss carryback.
FINDINGS OF FACT.
Some of the facts have been stipulated and are found as stipulated.

The petitioners are husband and wife, and reside in North Little Rock, Arkansas. During the years herein, they operated, as a sole properietorship, a soft-drink bottling company in North Little Rock. Individual income tax returns purporting to cover the income from the said bottling business were filed as follows: 1943, Argenta Bottling Co., T. B. Jones, Prop.; 1944, T. B. Jones, d/b/a Argenta Bottling Co.; 1945, T. B. Jones, d/b/a Argenta Bottling Company; 1946, T. B. Jones; 1947, T. B. and Margaret A. Jones; 1948, Thomas B. and Margaret A. Jones. For the years 1944, 1945, and 1946, individual returns were also filed by Margaret A. Jones, in each of which shePage 603reported $3,000 as compensation received as an employee of the Argenta Bottling Company. All of the returns were filed with the collector of internal revenue for the district of Arkansas.

Margaret Jones was the daughter of William and Magdalena Beschorner. William Beschorner was born in Alsace-Lorraine, and in 1881, when a small child, came with his family to Morrilton, Arkansas. Magdalena Beschorner was born in Luxembourg. She came with her family to St. Paul, Minnesota, in 1882, moving later to Morrilton. The Beschorners had two children, Elnora, born in 1903, and Margaret, born in 1906. Elnora died in 1909. In 1912 they adopted Vergie Hall, renaming her Elizabeth Beschorner.

In 1905, the Beschorners moved to North Little Rock, where William, with his brother, Paul Beschorner, established a soft-drink bottling business, under the name of Argenta Bottling Company. The family home of the Beschorners in North Little Rock was in the same building which housed the bottling business. Paul died in 1919, and William became the sole proprietor of the business and continued as such until his death.

William acquired and owned a rather small combination safe which stood on rollers and was kept in his bedroom. In this safe, he kept some, if not all, of his accumulated cash.

Upon the death of her uncle, Paul Beschorner, Margaret Beschorner received the proceeds of a life insurance policy in the amount of $2,500. From the fall of 1923, after her graduation from high school, and into 1929, she was continuously employed in Little Rock, working for about 1 year on one job at around $75 per month, and for the rest of the time on a second job at approximately $125 per month. She knew the combination to her father's safe and kept her money in a drawer therein.

Thomas B. Jones was born in Lonoke, Arkansas, in 1904, and moved to Little Rock in 1927. He began working for William Beschorner at the Argenta Bottling Company. Jones and Margaret were married on November 7, 1928. As a wedding present, William purchased the furniture for their apartment and gave Margaret $2,500, which she put in the above safe, with other money she had there. After their marriage, Jones also kept money in the family safe.

William Beschorner died on April 23, 1929. He left Margaret a bequest of $100 and $2,500 in insurance. A $100 bequest was also made to Elizabeth, the adopted daughter, with the remainder of the estate, including the bottling business, some stock and bonds, and the cash William had in the safe, going to his widow. An Arkansas inheritance tax return, purporting to cover the estate of William Beschorner, as filed in the office of the Arkansas commissioner of revenues, listed as the assets of the estate: Cash, $4,000; business machinery andPage 604bottling plant, $2,000; and one-half interest in four lots, $1,500. The liabilities reported were: Administration fees, $330, and monument, $200. A net estate of $6,970 was shown.

Elizabeth Beschorner married Thomas R. Davis on May 21, 1929, approximately 1 month after William Beschorner's death. Elizabeth's marriage so soon after her adopted father's death was looked on with disfavor by Magdalena Beschorner.

During the summer of 1929, Magdalena Beschorner gave Elizabeth between $1,000 and $1,500 to go into a gas station and cafe business. After a few months of operating the business, Elizabeth had lost her investment and in addition had incurred debts, which Magdalena assumed and paid. Elizabeth and her husband then came to live with the petitioners and Mrs. Beschorner, and remained there until 1935. During that period Elizabeth had three children. Davis was unemployed during most of that time.

About July 1929, Magdalena Beschorner received from the estate of her father between $500 and $1,000 in cash and the homeplace in Morrilton, which she sold within 2 years for $3,000 to $3,500.

On July 30, 1929, Magdalena Beschorner purchased a lot in a residential section of North Little Rock, and had a duplex residence constructed thereon. The duplex was completed in or about November of that year, with Magdalena Beschorner paying some, if not all, of the costs during construction and upon completion. At or shortly thereafter, she procured a loan of $4,800, which was secured by a mortgage on the duplex. She invested a substantial part, if not all, of the loan proceeds in building and loan company stock. A young family friend who was selling building and loan stock had convinced her that such a course was desirable, in that such stock would pay a good return on her investment, and since the petitioners were living in one side of the duplex, they should assume repayment of the loan. The loan was taken out on December 13, 1929, and was finally paid off by the petitioners on June 1, 1942.

Shortly after the move to the duplex, the money which had been kept in the office safe was moved to a smaller home safe in Mrs. Beschorner's bedroom closet. The key to the safe was kept in a concealed drawer in the dining room furniture.

The Jones family, the Davis family, and Magdalena Beschorner lived as one family in the duplex. Magdalena Beschorner paid a substantial portion of the household expenses. In addition, she made clothes for Margaret and her children.

Magdalena Beschorner died on May 23, 1937. On May 1 preceding, she had conveyed the bottling business, worth at that time approximately $10,000, to Margaret. At no time during her life had Magdalena Beschorner ever filed a Federal gift tax return, and no giftPage 605tax return was prepared and filed on her behalf after her death. Her will had been executed under date of June 6, 1929. It was filed for probate in the Probate Court of Pulaski County, Arkansas, on October 4, 1940, and admitted to probate the following day. Under the will, the bottling business, known as the Argenta Bottling Company, was bequeathed to Margaret. All moneys, stocks, and bonds were bequeathed to Elizabeth. The real estate was bequeathed two-thirds to Margaret and one-third to Elizabeth. Margaret was named as executrix under the will. On February 18, 1942, Elizabeth, by a quitclaim deed, conveyed her one-third interest in the duplex to Margaret for a stated consideration of $10.

Margaret, as executrix of her mother's estate, filed an Arkansas inheritance tax return on January 9, 1941, which return purported to cover the assets of her mother's estate. The assets listed were: 5 shares of Arkansas Power Light Company stock, $500; duplex, $5,000; 10 acres of land at Geyer Springs, Arkansas, $150; and a lot in Success Addition to North Little Rock, $50. The liabilities of the estate were shown as: Mortgage on duplex, $4,224; funeral expenses, $475; and medical expenses, $150. A net estate of $851 was reported. On January 9, 1942, Margaret filed a "petition" in the Probate Court, requesting an order transferring the 5 shares of Arkansas Power Light Company stock from her mother's name to her name, the stated purpose of the transfer being to reimburse Margaret for money advanced to pay her mother's debts. The order requested was entered.

From the death of William Beschorner in 1929, to that of Magdalena Beschorner in 1937, Thomas Jones managed the Argenta Bottling Company for 50 per cent of the profits. He drew $35 to $50 per week through a drawing account, the withdrawals being applied against his share of the profits. The amounts drawn in any one year never differed more than $500 from his share of the profits. Where his share of the profits exceeded the amount drawn, he was paid the difference. On a few occasions, it appeared that he was overdrawn, but in no such instance was he obliged to repay the overdraft. Margaret also worked some portion of the time in the bottling business, her recompense being approximately $25 per week. The petitioners, during the period of Magdalena Beschorner's ownership of the business, were able to accumulate some savings, which they kept in the family safe. They would also take money from the safe at times for personal uses.

After Magdalena Beschorner's death, the petitioners continued to operate the bottling business as a family enterprise. No partnership was ever formed or contemplated by them.

On December 6, 1939, and at a rate of interest not shown, the petitioners borrowed $16,000 from the Twin City Bank of North Little Rock, for use in the construction of a new building for the bottlingPage 606business. $836.32 was paid on the loan in 1940, $891.12 in 1941, and $1,240.84 in 1942. The remainder was paid in 1943, $6,000 on January 6; small payments in each of the months of February, March, April, May, June, and July; and a final payment of $6,330.79 on July 6.

On January 18, 1940, shortly after the petitioners borrowed the $16,000, and relative to the said loan, Thomas Jones, for the Argenta Bottling Company, executed the following net worth statement for the Twin City Bank:
Assets: Cash on hand ..................... $751.97 Bills receivable ................. 3,647.55 Merchandise on hand .............. 1,500.00 Real estate: Plant .......................... 23,500.00 Home ........................... 10,000.00 Machinery and fixtures ........... 18,300.00 12,000 cases at $1.25 ............ 15,000.00 trucks and bodies ................ 8,563.00 ---------- Total assets ............................ $81,262.52 Liabilities: Bills payable for merchandise .... $1,200.00 Bills payable to own banks ....... 500.00 Morgage and liens: Mixing machine ................. 950.00 House .......................... 3,600.00 Plant .......................... 16,000.00 Total liabilities ........................ 22,500.00 ----------- Net worth .................................... 58.762.52
From January 2, 1941, through March 18, 1944, Thomas B. Jones, or Thomas B. Jones, d/b/a Argenta Bottling Company, borrowed money in the amounts and for the purposes shown, as follows:
Date Amount Purpose of loan

Jan. 2, 1941 $803.67 1941 Oldsmobile sedan. Feb. 10, 1941 958.60 Chevrolet one-half ton truck. May 19, 1941 416.00 Chevrolet one-half ton truck. June 11, 1941 5,614.92 Warehouse receipts, 1,200 sacks sugar. July 2, 1941 500.00 Thoma B. Jones Nov. 1, 1941 3,923.28 Warehouse receipts, 800 sacks sugar. Dec. 30, 1941 3,906.15 Warehouse receipts, 800 sacks sugar. Mar. 24, 1942 3,029.52 Warehouse receipts, 800 sacks sugar. Mar. 18, 1944 8,000.00 90-day note.
The first two loans were paid off by December 31, 1942. The loans made on May 19, 1941, through March 24, 1942, were paid off by September 24, 1942. The loan for $8,000, on March 18, 1944, was extended on June 14, 1944, and was retired on September 7, 1944.Page 607

Prior to 1942 the only books of account maintained for the bottling business were single-entry books. Since 1942 a double-entry set of books has been kept and maintained for the business by J. A. Scroggin Company, a firm of public accountants. These books were made up from a cashbook, purchase invoices, canceled checks, check stubs, and other original-entry memoranda. The original records of sales of merchandise were daily route sheets or check sheets, on which were recorded the merchandise, bottles, and cases taken out on a particular day by a particular driver and his returns on that day of merchandise, empty bottles, and cases, and cash and check collections made and amounts charged to customers. In the case of sales at the plant, an invoice was made, which sales may have likewise been entered on the route sheet of a driver, where the purchaser was normally served by such driver.

The books of the bottling business did not reflect any assets of the petitioners which were not used in or related to the business, or any of their financial transactions which were not related to the bottling business.

Prior to 1943 the petitioners' only bank account was that in the name of Argenta Bottling Company. This account was used mainly for transactions related to the bottling business, but it was used at times to pay out-of-town bills of a nonbusiness nature.

Thomas Jones suffered heart attacks in 1942 and 1943, and his doctor warned him that the attacks were serious.2He went home and talked the matter over with Margaret, telling her that the thing for them to do was "to get that money into something tangible, with some equity, so that there would not be all cash." At his insistence, a checking account was opened in the joint names of the petitioners in June 1943, with the Twin City Bank. Thereafter cash deposits were made periodically, often in odd amounts. At some undisclosed date, possibly in 1946, a trust account for the children of the petitioners was opened, also with the Twin City Bank.

During the years 1943 through 1948 the petitioners made deposits to their various bank accounts, the origin or disposition of which was not reflected on the books of the bottling business, or on any other books. No books of account were ever kept for the petitioners, either individually or jointly, other than the books kept by J. A. Scroggin Company to cover the bottling business operations.

During 1943, 18 deposits were made in the personal bank account, amounting in the aggregate to $39,378.95, of which $38,617.48 wasPage 608in cash, in amounts ranging from $254 to $10,000. There were 5 checks, in a total amount of $761.47.

In 1944, 19 deposits to the personal bank account were made, amounting in the aggregate to $45,532.58. Cash was deposited on 17 occasions, in amounts ranging from $180 to $15,700, in a total amount of $32,926.94 The checks deposited were in a total amount of $12,392.63. $210.30 was described as bond coupons, and $2.71 as sundry.

There were 12 deposits in 1945, in the aggregate amount of $67,209.88. Of this amount, $55,000 represented the proceeds from the redemption of bonds, and $480.05 represented the interest and interest coupons thereon. There were 2 checks, amounting to $1,326.58. The remainder represented 8 deposits of cash, ranging from $100 to $6,500, in a total amount of $10,403.25.

In 1946, 30 deposits were made to the personal bank account, in a total amount of $31,290.80. Of this amount, $10,000 represented the proceeds from the redemption of bonds, and $43.26 the interest thereon. In all, 24 checks were included in the deposits made, amounting in the aggregate to $1,736.54. The remainder, amounting to $19,511, consisted of 30 cash items, ranging from $170 to $1,678.

In 1947, 17 deposits were made to the personal bank account, in a total amount of $38,712.21. Of this amount, $26,339.75 represented the proceeds from the redemption of bonds, including interest thereon.3There were 15 checks, amounting in the aggregate to $5,172.46. The remainder of $7,200 was made up of 12 deposits of cash, ranging from $250 to $1,200.

In 1948, 9 deposits were made to the personal bank account, in a total amount of $13,500.21. Of that amount, $11,500 represented the proceeds from bank loans. There were 8 checks, amounting in the aggregate to $1,254.71. The remaining $745.50 was cash, representing 4 items ranging from $135 to $300.

In 1946, 1947, and 1948, deposits of $550, $225, and $990.80, or a total of $1,765.80, were made to the trust account of the children of the petitioners with the Twin City Bank.

In 1946, a deposit of $9,350 in currency was made to the bank account of the Argenta Bottling Company. This amount was entered on the books of the bottling business as an addition to the capital account. The currency so deposited was not traceable to the personal bank account, nor to any other previously recorded source.Page 609

The income tax returns filed by petitioners for the years herein were prepared by J. A. Scroggin Company from the books kept by it for the bottling business. The returns so prepared and filed fairly and reasonably reported the income as reflected by the books of the bottling business. The petitioners did not supply the Scroggin Company with facts and data relating to the personal bank account.

Pursuant to an examination of the petitioners' records and an investigation by revenue agents, the respondent, in his determination, increased petitioners' sales for 1943 by $39,378.95, the total of the deposits made in that year to the personal bank account. For 1944, he similarly increased petitioners' sales by the total of the deposits made in the personal bank account for that year, or $45,532.58. For 1945 he increased sales by $15,959.88, $12,209.88 of which represented total deposits in the personal bank account in that year of $67,209.88, less $55,000, representing the proceeds from bonds redeemed. The remaining $3,750 by which sales were increased was described as cash used for the purchase of United States bonds during 1945. For 1946 he increased petitioners' sales by $31,190.80, which amount represented the total of the deposits in the personal bank account, the trust account, and the $9,350 in currency deposited in the bottling business bank account in that year, less $10,000, representing the proceeds from bonds redeemed in 1946. For 1947 he increased sales by $17,262.21, representing $38,937.21 as the total of the deposits in the personal bank account and the trust account in that year, less $21,675 described as proceeds from bonds redeemed during 1947. For 1948 he increased sales by $2,991.01, which was represented by $14,491.01, being the total of the deposits made in the personal bank account and the trust account during the year, less $11,500, representing proceeds from bank loans.

A check for $212.20 deposited in the personal bank account on September 10, 1943, and a check for $240.30 deposited in the said account on March 17, 1944, were checks received for merchandise by the bottling business from one of its distributors. The amounts of these checks were entered on the books of the bottling business and were taken into account in computing the income reported for those years.

In 1944, the petitioners paid from the personal bank account a total of $5,689.60 for syrup for the use of the bottling business. As the syrup was used, the personal bank account was reimbursed by the bottling business at cost. The same procedure was followed in 1947, when sugar purchases in the amount of $3,519.96 were paid for from the personal bank account.4Page 610

Because of the shortage of materials due to the war, it became difficult to procure bottle caps or crowns for use in the bottling business. Jones learned of a quantity of caps to be had in Chicago, and made a purchase of such caps in 1944, paying $6,120 for them from the personal bank account. The caps had been stamped from empty lard cans, and it developed that they were too heavy for satisfactory use in the machine of the bottling business. Sales of a substantial portion of the caps were made to two bottling companies, one in Malvern, Arkansas, and the other at Fort Smith. The sales of the caps were made at cost. The caps remaining after these sales were junked by the petitioners.4

$1,407.60, being the amount of a check deposited in the personal bank account in 1944, represented the redeposit of proceeds drawn from the bank account in the preceding month as the initial premium on life insurance Jones had applied for, but which had been rejected by the insurance company.5

A check for $1,265.73, deposited in the personal bank account in 1945, represented a refund of overpayment of 1944 Federal income tax paid pursuant to a declaration of estimated tax.5

A deposit of $205.80, made in 1946, represented a check on the bottling business bank account drawn in favor of Margaret A. Jones, as salary to her.5

At one time, the petitioners had planned to build a plant in Pine Bluff, Arkansas, and made a deposit with the Liquid Carbonic Corporation for equipment. The plans were abandoned and the deposit was refunded. $4,000 of the amount deposited had been drawn from the personal bank account and when the deposit was refunded in 1947, the $4,000 was redeposited in the said personal bank account.5

The petitioners purchased the soft drink concentrate used in their bottling business from the Grapette Company, the Double-Cola Company, the National NuGrape Company, and the Julep Company. If all of the concentrate so purchased during the years 1942 through 1948 had been made into bottled drinks, according to the formula of each of such manufacturers, 655,680 cases of 6-ounce drinks and 633,556 cases of 12-ounce drinks, or a total of 1,289,236 cases, would have been the maximum of such drinks which could have been produced.

At the rates at which sales were actually made, the total possible gross receipts from the sale of 1,289,236 cases of maximum possible production, as set forth above, would have been $1,108,651.88. Petitioners' actual sales for the period amounted to $1,073,902.99. The excess of total maximum sales over actual sales, or $34,748.89, wouldPage 611not exceed the amount of loss which would reasonably be anticipated in the processing of the above quantities of concentrate and distributing and selling the bottled drinks produced therefrom. Such losses usually result from the wastage or loss occasioned by the cleaning of lines and changing of flavors in the course of operations and from mechanical failures, rejects due to dirty or chipped bottles, breakage, consumption by employees, sampling, donations, and thefts.

The Grapette Company maintained a quality-control program whereunder samples of the bottled goods would be picked up, without warning, from retailers served by the bottling business and from other miscellaneous sources, and from November 1945, the bottling business maintained the standards of quality required by the Grapette Company.6

The books and records of the bottling business show the purchase of 2,142,296 pounds of sugar during the years 1942 through 1947, which was 137,482 pounds less than the amount needed to make the bottled drinks according to the formulas of the manufacturers out of the concentrate stipulated to have been purchased. The petitioners had purchased 160,000 pounds of sugar in 1941, in anticipation of the war.

On their joint return for 1948, the petitioners reported a net operating loss of $22,721.77. The respondent in his determination herein determined a net operating loss for that year of $19,730.76. For 1949 the petitioners, on their joint return, reported a net operating loss of $11,338.20.

In 1950, at a conference with the revenue agents in the course of their investigation for the years herein, the petitioners' representative, in the presence of the petitioners, delivered to the agents a statement designed to show that in addition to the amounts reflected by the books of the bottling business, they had "Cash and Bonds" on hand at January 1, 1940, in a total amount of $71,600, as follows:
CASH AND BONDS
Insurance from uncle (1929) ............. $2,500 Wedding present (1928) .................. 2,500 Insurance on Mr. Beschorner (1929) ...... 2,500 Savings — Mrs. Jones ................... 3,500 Money received from time to time ........ 36,100 Sale of pressing shop (1927) ............ 12,500 Savings by Mr. and Mrs. Jones ........... 12,000
Page 612

For the years 1939 through 1942, the petitioners, on their income tax returns, reported net income and depreciation as follows:
Year Net income Depreciation

1939 ...................... $4,696.64 $709.53 1940 ...................... 1,445.51 2,686.75 1941 ...................... 8,409.64 4,423.21 1942 ...................... 21,413.52 4,658.52 --------- --------- Total ................... 35,965.31 12,478.01
For the years 1921 through 1929, the records of the district director of internal revenue for the State of Arkansas show that Federal income tax was paid by William Beschorner, as follows:
1921 ................................. $1.77 1923 ................................. 3.28 1924 ................................. .55 1925 ................................. 11.68 1926 ................................. .95


There is no showing that returns were filed for either 1927 or 1929. For 1922 and 1928 no tax was reported.

In the case of Magdalena Beschorner, income tax returns showing no tax due were filed for the years 1929 through 1936. For 1934, however, the internal revenue records do show the payment of $14.03, including interest, under date of May 25, 1936. There is no record that any return was filed for 1937, or for the period ending with the date of her death. There is no record of a gift tax return filed by or on behalf of Magdalena Beschorner for any year.

In the case of Thomas B. Jones, the internal revenue records do not show the filing of a Federal income tax return for any of the years 1929 through 1938. With Margaret Jones, he filed joint nontaxable returns for 1939 and 1940. For the years 1941 and 1942, he filed individual income tax returns under the name "Argenta Bottling Company, T. B. Jones, Prop." A tax of $602.64 was reported on the 1941 return, and a tax of $6,161.43 on the 1942 return. With respect to 1941, the internal revenue records show the payment of additional tax in the amount of $98.08, under date of March 29, 1943.

In the case of Margaret A. Jones, the internal revenue records do not show the filing of a Federal income tax return for any of the years 1929 through 1937 or for 1941 and 1942. They do show the filing of a return for 1938, on which no tax was reported.

The petitioners did not report for any of the years 1944 through 1947 the interest received upon the redemption of Government bonds, which interest was deposited in the personal bank account, and did not appear in the books of account kept for the bottling business.

Aside from the bottling business and any additional sources of income reflected by the bottling business books of account, the recordPage 613fails to show that the petitioners had any sources of income for the years herein except the items of interest referred to in the preceding paragraph.
OPINION.
TURNER,Judge:
Since much of the petitioners' opening brief is directed to the proposition that the respondent's determination was in error, in that it changed the method of accounting regularly employed by the petitioners, contrary to the provisions of section 41 of the Internal Revenue Code of 1939, it might be well to point out that the question we have here is not a question as to the proper method of accounting for and reporting income, within the purview of section 41, but is whether the petitioners received income which they did not account for and report under any method of accounting. SeeDavisv.Commissioner,239 F.2d 187, affirming T. C. Memo. 1955-87;Herman J. Romer,28 T.C. 1228; andHarry Gleis,24 T.C. 941.

By reason of the fact that the petitioners in 1943 opened a personal bank account in which, for the years 1943 through 1948, they made substantial deposits, chiefly in cash, the source of which was not shown by any of the petitioners' books or records, and by reason of the further fact that some of the deposits were found to have been receipts from the sale of soft drink concentrate and bottle caps, which were supplies of a character used in a soft-drink bottling business, the respondent determined that such portions of the deposits for the said years not verified to his satisfaction as nonincome items, such as the proceeds of loans and bond redemptions, represented unrecorded and unreported sales by the petitioners during the years herein. Similarly treated were the deposits made in 1946, 1947, and 1948 to the bank account of the trust for petitioners' children and the $9,350 in currency deposited in 1946 in the bank account of the bottling business. On the basis of that conclusion, he determined the deficiencies herein, and further that the failure to report such unrecorded sales was due to fraud with intent to evade tax. Making allowance for some further items which have been stipulated and now conceding the four additional items, one for each of the years 1944 through 1947, as shown in our Findings of Fact, it is the respondent's position, on brief, that deposits of $39,378.95 for 1943, $32,315.38 for 1944, $10,944.15 for 1945, $30,985 for 1946, $6,029.75 for 1947, and $2,991.01 for 1948, remain unidentified and unexplained, and represent unreported income.

Where, as here, a taxpayer has made numerous and comparatively large deposits in a bank account, the sources and nature of which are not recorded or accounted for in any books of account, the Commissioner's determination of income and of deficiencies in tax thereon by reference to such deposits has been approved in numerous cases. ItPage 614is, of course, true that the existence of bank deposits, although not explained or accounted for in a satisfactory manner, does not of itself show that the sums deposited were or were not income. But where the Commissioner has determined that they were, the taxpayer has the burden of showing that the determination was wrong.Goev.Commissioner,198 F.2d 851, certiorari denied344 U.S. 897;Hallev.Commissioner,175 F.2d 500;Hague Estatev.Commissioner,132 F.2d 775, certiorari denied318 U.S. 787, affirming45 B. T. A. 104;Hoeflev.Commissioner,114 F.2d 713;Mauchv.Commissioner,113 F.2d 555;Herman J. Romer, supra;andJoseph L. Calafato,42 B. T. A. 881, affirmed per curiam 124 F.2d 187.

Largely by their own testimony, the petitioners have undertaken to carry that burden. They do not dispute the amounts of the deposits, but contend that, by proof of record, they have shown that except for some small amounts of interest and a few amounts claimed to have been redeposits, in addition to those previously allowed or now conceded by the respondent, the said deposits represented cash received by them through gifts and savings over a period of 20 years or more prior to 1943, and do not represent income for any of the years herein. On the basis of that contention, they further deny that any of their returns for the said years were false and fraudulent with intent to evade tax, and such being the case, the statute of limitations on the assessment and collection of any further tax for the years 1943, 1944, and 1945 has run against the respondent.

It was the testimony of the petitioners that prior to 1943 they had kept their savings and accumulations of cash in a family safe, as had the parents of Margaret Jones during their lifetime, and that it was the cash so accumulated, not current income, which made up those portions of the deposits remaining in dispute. Admittedly, the petitioners made and maintained no record of the cash they placed in or took from the safe and they knew of no such record having been kept by William or Magdalena Beschorner. It was also admitted that the money was not counted at the time of the opening of the personal bank account in 1943. Margaret did not remember making any of the deposits in question, leaving the matter to Jones, who, according to her testimony, would remove the money from the safe for the purpose of deposit when and in the amounts suitable to him. The petitioners did testify with particularity, however, as to the receipt of specified amounts, the years or periods of receipt, and the occasions therefor. They gave further testimony relating to their living costs and spending habits, the purport of which would tend to support the conclusion that very little of the cash, once placed in the safe, was removed therefrom, until their first purchase of Government bonds and the opening of the personal bank account in 1943. In explanation of the financing of the construction of the new building at thePage 615plant in 1939, the testimony was that they "thought about going ahead and paying for it," but decided to borrow instead, in order to establish a credit rating for the bottling business.

As related by the petitioners in their testimony, the currency placed in the safe, and which accounted for the accumulations of cash from which the deposits in question are claimed to have been made, included $2,500 received by Margaret Jones in 1919, as the proceeds of an insurance policy on the life of her uncle; $2,500 she and Jones received from her father as a wedding gift at the time of their marriage in 1928; a bequest of $100 at the death of her father in 1929, and an additional $2,500, representing the proceeds of an insurance policy on his life; "about" $75,000 received as a gift from her mother in 1930; and $12,000 to $12,500, being the proceeds from the sale by Thomas Jones of a pressing shop in Lonoke, Arkansas. It was the further testimony of Margaret that upon leaving high school she worked for about 1 year at $75 a month, and for a period of approximately 4 years, ending with her father's death, at about $125 a month, during which periods of time she had saved about two-thirds of her salary and had placed such savings in the safe. It was her further testimony that from the death of her father in 1929, until the death of her mother in 1937, she had worked almost continuously in the bottling business and had received for her services $25 a week, the import of such testimony being that this also accounted for some of the currency in the safe. As indication of a further source of cash accumulated in the safe, it was recited that from the death of William Beschorner in 1929 to the death of his widow in 1937, Thomas Jones had managed the bottling business, for 50 per cent of the profits, and that his savings therefrom were also kept in the safe.

In explanation of her testimony that she had saved approximately two-thirds of her salary received prior to her father's death, Margaret testified that she lived with her parents and as a consequence had no living expenses, and further, that she bought little, if any, of her own clothes. As a part of their testimony that they had substantial savings from the compensation received by them from the bottling business from the date of William Beschorner's death to that of Magdalena Beschorner, both petitioners testified that in addition to the wedding present of $2,500 in cash, William Beschorner had bought all of the furniture for their apartment and that after William Beschorner's death Magdalena Beschorner had not only paid most of the household expenses but had made most of the clothes of Margaret and her children.

Also the argument is made on brief that there is basis of record for concluding that the petitioners could also have had some further savings of cash during the years 1939 to 1942, inclusive, and in supportPage 616thereof reference is made to the taxable net income as reported by them on their income tax returns for the said years, plus the depreciation deductions taken for those years, amounting in all to $49,025.68.

Jones also testified that a further sum of $10,950 represented redeposits of three items in the personal bank account, which have not been conceded or allowed as such by the respondent.

While at no point in their testimony were the petitioners willing to state or admit to any definite amount as being the sum of money in the safe at the time the withdrawals began, they did, as noted above, testify with definiteness as to the sources of such money and, except with respect to savings from their personal earnings and the slight qualification as to the amount claimed to have been received from Magdalena Beschorner in 1930, they were also specific as to original amounts. They did admit to the taking or receiving of money from the safe, from time to time, but the import or implication was that the money so taken was in small amounts and did not materially reduce the amount of money in the safe. On that basis, it is claimed that the sources of all their bank deposits have been accounted for, and except for the small amounts of interest, claimed as having been inadvertently omitted from their returns, none of the deposits in question represented income for any of the years herein.

We are satisfied from the record that the petitioners, in the years prior to 1943, did accumulate and keep cash in the family safe, and beginning in 1943 they did make deposits of such cash in their newly opened bank account. But the evidence does not, in our opinion, permit or justify an affirmative finding that the money so accumulated in the safe was sufficient in amount to cover and account for all of the deposits in question herein. In short, it is our conclusion that the petitioners have failed to bear their burden of showing that the deposits did not in some substantial part represent income and that the respondent's determination that such deposits did represent income was wrong.

The largest single item of cash cited and relied on by the petitioners as showing that the deposits in question were from the cash accumulated prior to the taxable years, is the "about" $75,000 claimed to have been received by Margaret Jones as a gift from Magdalena Beschorner in 1930, the purported source of most, if not all, of such sum being cash accumulated by William in his lifetime and left to Magdalena at his death. It is not possible to determine how much cash Margaret received, or may have received, by way of gift from her mother in 1930, or at other dates. But whatever the amount, the record before us does not permit a finding that any sum even approaching $75,000 was received by Margaret from her mother at the time of the purportedPage 617gift in 1930. As a matter of fact, Margaret disclaimed any counting of the money or any direct or personal knowledge of the amount when the claimed gift was made, but testified only that her mother had told her that the amount was about $75,000. In contrast, William Beschorner's net estate at April 23, 1929, as reported for Arkansas inheritance tax purposes, was only $6,970, and the only reported assets were $4,000 in cash, $2,000, representing the net value of the bottling business, and $1,500, representing the value of his interest in four lots. With respect to the inheritance tax return, the argument of the petitioners, on brief, is that they were not responsible for and never had anything to do with the preparation of the inheritance tax return and that the uncontradicted evidence of record here is that the return was erroneous.

Whatever the truth may be as to the correctness or incorrectness of the inheritance tax return, there is other evidence strongly tending to contradict any claim that Magdalena Beschorner had received "about" $75,000 on the death of William Beschorner, and had such sum on hand in 1930. On June 6, 1929, less than 2 months after William's death, Magdalena executed a will, which was the will probated after her death in 1937. Under the terms of the will, Margaret was to receive the bottling business and a two-thirds interest in the real estate. Elizabeth was to receive one-third of the real estate and all of Magdalena's moneys, stocks, and bonds. Aside from any significance that might attach to the fact that Margaret was Magdalena's natural daughter, whereas Elizabeth was an adopted daughter, the petitioners in the course of their testimony painted a rather vivid picture of strained relations between Magdalena and Elizabeth prior to and after the date on which the will was executed. In the circumstances, it would not in our opinion be realistic or reasonable to conclude that Magdalena on June 6, 1929, would have executed a will under which "about" $75,000 in cash would go to Elizabeth, plus a one-third interest in the duplex residence and other real estate, while at the same time making provision for Margaret only to the extent of the bottling business, having a reported net value as of a date less than 2 months preceding of only $2,000 and which even at Magdalena's death in 1937 was estimated by Margaret at $10,000, plus the two-thirds interest in the duplex and other real estate.

Assuming, however, that Margaret did receive "about" $75,000 as a gift from her mother in 1930, representations made by petitioners to revenue agents prior to the trial herein indicate that only about one-half of such a gift could, in reason, have been available in the taxable years as a source of the bank deposits in controversy. According to the evidence, the petitioners' representative, in early 1950 and in the presence of petitioners, delivered to the revenue agents a statementPage 618designed to show the amount of cash on hand at January 1, 1940, not shown by the books of the bottling business or any other records kept by petitioners. Seven items, amounting in the aggregate to $71,600, were listed, of which six, on the basis of their designations, could not have had their origin in gifts from Magdalena Beschorner, leaving only an item of $36,100, described as "[m]oney received from time to time," which could have represented the claimed gift. It would thus appear that if there was a gift in 1930 as now claimed, only about one-half thereof was still in possession of petitioners at January 1, 1940.

Another item claimed as one source of the said deposits was $12,000 to $12,500 represented as being the proceeds of the sale of a cleaning and pressing shop which had been owned by Thomas Jones when a high school boy in Lonoke, which amount, it is claimed, was placed in the Beschorner family safe after he and Margaret were married in 1928. The account of the purchase of the shop for $1,500 or $2,000, the operation of the business for approximately 2 years, and its sale to his brother for $12,500, when business in Lonoke was "fair" but "not too good," made an intriguing story as related by Jones in the course of his testimony. But after listening with attention to the details of the story as it was being told and considering all of its facets thereafter, suffice it to say, for the purposes here, that if Jones did have $12,000 to $12,500 in savings and profits at the date of his marriage, we are satisfied and convinced that at least in major part it did not represent the proceeds from the sale of the said cleaning and pressing business. In short, we do not know what amount of premarital savings and profits, if any, Jones may have had in the family safe.

We are thus of the view that the petitioners have failed to prove that the deposits in controversy did not in substantial part represent current income not reported in their returns. See and compareHague Estatev.Commissioner, supra,and the other cases heretofore cited. The respondent does not deny, however, that the statute of limitations has run for the years 1943, 1944, and 1945, unless the returns for those years were false and fraudulent with intent to evade tax, and the burden to show that such was the case was on him, not the petitioners. See. 1112, I. R. C. 1939; sec. 7454 (a), I. R. C. 1954. He has not, in our opinion, carried that burden.

According to the notices of deficiency, it was the respondent's determination that the deposits in controversy represented unreported sales. The record shows that the revenue agents, in making their investigation, had found that certain checks included in the said deposits were such as to indicate that they could have represented bottling business receipts, and, finding no explanation satisfactoryPage 619to themselves of the funds making up the deposits, they concluded that bottling business profits were being deposited in the personal bank account, thereby bypassing the bottling business books and the income tax returns filed. Contrary to that conclusion, however, the proof of record is quite convincing that, aside from some adjustments, not in issue and which have no bearing on the question of fraud, the income from the bottling business was fairly and fully accounted for and reported.

Some of the deposits in controversy did include proceeds from the sale of soft drink syrup and bottle caps, both of which were items related to the bottling business, but the respondent now concedes that no profits were realized on such sales and that the deposits of the sales checks therefore in the personal bank account did not reflect the receipt of unreported income. Where the syrup paid for by checks drawn on the personal bank account was used in the bottling business, such syrup was accounted for on the bottling business books at cost, and the respondent now concedes that there was no distortion or underreporting of income with respect thereto. In short, the respondent's proof is that the petitioners, during the years 1943, 1944, and 1945, did have in their possession and did deposit in their personal bank account amounts of money which if they were current income would provide some support for his determination that the petitioners in their returns for the said years fraudulently understated their income and that the returns were false and fraudulent with intent to evade tax. As noted above, however, the existence of bank deposits, although not explained or accounted for in a satisfactory manner, does not of itself show that the sums deposited were or were not income. And just as the petitioners failed to show that the deposits in controversy did not in some substantial part represent income, the respondent has similarly failed to prove that the amounts in question were income, and the mere showing on his part that there was a failure to report as income items which insofar as shown by the evidence could in some part have been either income or nonincome items does not establish that, by reason of the omission of such items, the returns were false and fraudulent with intent to evade tax. It is true, and the petitioners now concede, that $210.30 in 1944 and $480.05 in 1945, representing interest on Government bonds, was deposited in the personal bank account and was not reported as income in their returns for those years. The record being as it is, however, we are unable to say that the omission of those items of income was not inadvertent, as the petitioners contend. By reason of the respondent's failure to bear his burden of proof, the statute of limitations issue as to the years 1943, 1944, and 1945 is decided for the petitioners.Page 620

For the years 1946 and 1947, there is no question of the running of the statute of limitations, and the issues are whether or to what extent the petitioners have proven that the respondent's determination of deficiencies was in error, and whether the respondent has borne his burden of proving that any of the deficiencies for those years was due in part to fraud with intent to evade tax. Whatever the amount of the unreported cash the petitioners did have on hand at January 1, 1943, the proof, for the reasons discussed above, does not justify the conclusion that any part thereof did account for the deposits in 1946 and 1947 determined by the respondent to have represented income. Subject to the proper allowances for net operating loss carrybacks from 1948 and 1949, the respondent's determination of deficiencies for 1946 and 1947 is sustained, for failure of proof.

Similarly, for reasons heretofore stated, we conclude and hold that the respondent has failed to show that any part of the deficiency for either 1946 or 1947 was due to fraud with intent to evade tax. For such failure of proof on his part, his determination of additions to tax for such years for fraud is rejected.Sidney Cohen,27 T.C. 221.

We do not understand that the amount of the net operating loss carryback from 1949 is in dispute. For 1948, as indicated by our findings of fact, the respondent did make a comparatively small downward adjustment in his determination of the net operating loss claimed for that year. For the reasons stated in sustaining the respondent's determination of deficiencies for 1946 and 1947, the respondent is similarly sustained in his determination of the amount of the net operating loss for 1948.Decisions will be entered under Rule 50.
  1. The amount of this addition to tax for fraud is 50 per cent of the income tax deficiency as determined without benefit of the net operating loss carryback from 1948. ↩
  2. It was the testimony of Margaret that the doctor told Jones "he had better get his house in order, as he might drop dead at any time." According to Jones, the doctor said, "If you are going to act up like this, you had better start getting your house in order." ↩
  3. Of this amount, petitioners ask for a finding that $130.50 represented interest. The respondent's proposed finding is that the interest amounted to $452.25. According to a Joint exhibit, however, only $25,387.50 represented bond redemption proceeds, which would indicate that the interest was $952.25, being the difference between $26,339.75, shown on the petitioners' exhibit as the total amount received in the redemption of bonds, including interest, and the $25,387.50 shown on the joint exhibit as proceeds from bonds redeemed. ↩
  4. The respondent, by a joint exhibit and on brief, has reduced sales as determined by him by the amounts of the syrup and cap purchases. ↩
  5. The respondent, by a joint exhibit and on brief, has reduced sales as determined by him by the amounts of the syrup and cap purchases. ↩
  6. The respondent now concedes that these four items do not represent undisclosed sales, and are to be eliminated. ↩
  7. This finding is from the testimony of the chief chemist for the Grapette Company, and though the program had been in existence prior thereto, his testimony as to the maintenance of standard related only to the period of his service, which began on November 12, 1945. There is some general testimony from Margaret Jones tending to indicate that the other producers of concentrates also maintained a quality-control program. ↩