Opinion · United States Tax Court
Lias v. Commissioner
Lias v. Comm’r, 24 T.C. 280 (T.C. 1955)
- Type
- Opinion
- Court
- United States Tax Court
- Jurisdiction
- Federal
- Date
- 1955-05-26
- Topic
- general
OPINION. LeMiRe, Judge: These proceedings involve income taxes and penalties of the petitioner for the years 1942 to 1947, inclusive, and of the petitioner and his wife for the year 1948, in the aggregate amount of $2,012,222.18. The deficiencies were determined by the respondent under the net worth expenditures method, the use of which is approved by the Supreme Court in cases of the character here under scrutiny. Holland v. United States, 348 U.
Citator
UpLaw has not yet analyzed Lias v. Commissioner. The absence of a flag is not a finding that it is good law.
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LIAS v. COMMISSIONER OF INTERNAL REVENUE,24 T.C. 280(1955)
WILLIAM G. LIAS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE,
RESPONDENT.
WILLIAM G. LIAS AND ALICE B. LIAS, PETITIONERS, v. COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT.
Docket Nos. 27264, 27762.
United States Tax Court.
Filed May 26, 1955.
1. Petitioner's net income for the taxable years in question was properly computed on the net worth expenditures basis.
2. The 50 per cent addition to the tax for fraud in each of the taxable years 1942 to 1948, inclusive, approved.
3. The 6 per cent penalty for substantial understatement of tax in petitioner's declaration of estimated tax for the years 1943 to 1947, inclusive, approved.
4. Petitioner owned certain bank accounts in the names of his wife and children, and the interest thereon is taxable to him in the years 1944 and 1945.
5. The rents from two properties collected and retained by petitioner in 1945, after the properties were deeded to Laconia, Inc., are taxable to him as dividends to the extent of the available earnings of the corporation.
6. Petitioner owned the Aul Shively and Musee properties, and the rents therefrom in the years 1943 to 1946, inclusive, and the capital gain on their disposition in 1946 are taxable to him, and the interest paid on the deeds of trust on such properties is deductible by him.
7. Petitioner has failed to establish that the sum of $10,000, representing salary from Wheeling Downs Racing Association, was not constructively received in the year 1946.
8. Petitioner has failed to show that he sustained any individual gambling loss in the taxable year 1943.
Year Deficiency 50 per cent 6 per cent penalty penalty
1942 ............................ $33,325.45 $16,662.73 1943 ............................ 161,770.79 80,885.39 $10,921.25 1944 ............................ 303,360.57 151,680.29 19,201.25 1945 ............................ 554,837.86 277,418.93 33,895.27 1946 ............................ 49,020.92 24,510.46 3,399.75
Docket No. 27762 involves deficiencies in income tax and penalties of William G. Lias for the year 1947, and against William G. Lias and Alice B. Lias for the year 1948, as follows:
1942 ............................ $33,325.45 $16,662.73 1943 ............................ 161,770.79 80,885.39 $10,921.25 1944 ............................ 303,360.57 151,680.29 19,201.25 1945 ............................ 554,837.86 277,418.93 33,895.27 1946 ............................ 49,020.92 24,510.46 3,399.75
Year Deficiency 50 per cent 6 per cent penalty penalty
1947 ........................... $166,562.75 $83,718.88 $14,556.61 1948 ........................... 17,662.02 8,831.01
The issues presented are whether (1) the petitioner sustained a gambling loss in 1943 of $20,710; (2) petitioner owned certain bank accounts in the names of his wife, Alice B. Lias, and his two children, so that the interest thereon in 1944 and 1945 is taxable to him; (3) the rents from two properties collected and retained by petitioner in 1945 after the properties were deeded to Laconia, Inc., are taxable to him as dividends to the extent of available earnings of the corporation; (4) the salary from Wheeling Downs Racing Association, paid in 1947, was constructively received by petitioner in 1946; (5) petitioner owned the Aul Shively and Musee properties so that the rents therefrom in the years 1943 to 1946, inclusive, and the capital gains resulting from the disposition thereof in 1946 are taxable to him, and that the interest paid on the deeds of trust on such properties prior to their disposition is deductible by him; (6) the petitioner's net income for the taxable years in question is properly computed on a net worth expenditures basis; (7) the respondent properly imposed the 50 per cent addition to the tax for fraud, under section 293 (b) of the Internal Revenue Code of 1939, and the 6 per cent penalty for substantially understating in his declaration of estimated tax for the years 1943 to 1947, inclusive, under section 294 (d) (2) of the Internal Revenue Code of 1939; and (8) the deficiencies determined for the years 1942, 1943, and 1944, are barred by the statute of limitations.
1947 ........................... $166,562.75 $83,718.88 $14,556.61 1948 ........................... 17,662.02 8,831.01
For convenience and clarity the following references are noted:
William G. Lias will be referred to as the petitioner. Although petitioner and his wife, Alice B. Lias, filed a joint return for the year 1948 she will be referred to either as petitioner's wife or Alice B. Lias.Page 282
Automatic Cigarette Sales Company will be referred to as Automatic; Wheeling Downs, Inc., as Wheeling Downs; Wheeling Downs Racing Association as Racing Association; Zellers Steak House, Inc., as Zellers; Point Pleasant Amusement Company as Point Pleasant; Fulton Bank and Trust Company as Fulton Bank; Half Dollar Trust Savings Bank as Half Dollar; Security Trust Company as Security Trust; Union Federal Savings and Loan Association as Union Federal; and Koutroumanos as Manos.
The Lias Group consists of the following individuals: William G. Lias, the petitioner; John Lias, his brother; Alice B. Lias; petitioner's wife; Mary Koutroumanos, mother of Alice B. Lias; Gregory Koutroumanos and William Koutroumanos, brothers of Alice B. Lias; and the two children of petitioner, George B. Lias and Antoinette Lias.
FINDINGS OF FACT.
The stipulated facts are found accordingly.
Petitioner and his wife, Alice B. Lias, were residents of Wheeling, West Virginia. They were married on February 14, 1935, and are the parents of two children, George B. Lias and Antoinette Lias. The petitioner, William G. Lias, filed individual returns for the years 1934 to 1947, inclusive, and a joint return with his wife for the year 1948. The returns for the taxable periods involved were filed with the collector of internal revenue for the district of West Virginia, at Wheeling.
During the taxable years the petitioner received income from seven partnerships.
Lias Brothers is a partnership in which petitioner and his brother, John Lias, were partners. This partnership had interests in partnerships operated under the names of Acorn Club, Market Street Club, Point Pleasant Amusement Company, Club Paddock, and Pirate Cafe.
The Acorn Club was formed in 1939 to operate a horse book and gambling establishment in Bridgeport, Ohio. The earnings were distributed 50 per cent to Lias Brothers and 50 per cent to Andrew Vuskey. These gambling activities continued throughout the taxable years.
Point Pleasant Amusement Company operated slot machines in and around Point Pleasant, West Virginia. State police confiscated and destroyed the machines in January 1943. The earnings of this business belonged to Lias Brothers, but G. C. Greiner and Pete Dallas received a share of the earnings.
Club Paddock operated a nightclub, restaurant, bar, and gambling casino in Wheeling, West Virginia, from 1937 to 1944. Lias Brothers, Theodore Prossis, and Spiro Petrakis held interests in this partnership.Page 283
Market Street Club operated a horse book and gambling casino on the second floor of a building in Wheeling, West Virginia, the first floor of which was occupied by Zeller's Steak House, Inc. The gambling activities included three crap tables, a chuck-a-luck, or hazard game, a roulette wheel, and a blackjack game. Lias Brothers owned a two-thirds interest and Zellers a one-third interest during the years 1942 to 1944, inclusive, and shared the profits in the same proportion. In 1942, August Berklas received $6,000 out of Lias Brothers' share in that year. In the taxable years 1945 through 1948, Gregory Manos received 15 per cent of the profits of Market Street Club. During the taxable years 1945 through 1948, Lias Brothers owned a 56 2/3 interest and Zellers a 28 1/3 interest in Market Street Club, and shared the profits in that proportion.
Pirate Cafe operated a restaurant, bar, and gambling establishment in South Wheeling, West Virginia. It was owned during the years 1942 through 1948 by Lias Brothers and Nick Miller. This ownership commenced July 25, 1940. John Curry shared in the profits in the years 1942 to 1944, inclusive; Dominick Cerra in 1942 and 1943; George Seibert in 1943, 1945, and 1946; Anthony Perrati in 1944, and Mele Vosvick in 1946.
During the taxable years the petitioner received income from the following corporations, to wit: Automatic Cigarette Sales Company; Zeller's Steak House, Inc.; Reuther's, Inc.; Greiner's, Inc.; Laconia, Inc.; Wheeling Downs, Inc.; and Wheeling Downs Racing Association.
Automatic Cigarette Sales Company is a West Virginia corporation organized December 9, 1936, with an authorized capitalization of $25,000. Its capitalization was increased at various times so that its authorized total was $250,000 on February 24, 1942, the stock having a par value of $100 per share. This corporation owned and operated coin vending machines, music machines, and slot machines.
The corporate records do not disclose the number of slot machines operated during the period 1942 to November 1944. Automatic kept its depreciation schedules on the basis of cost rather than the number of units purchased.
Commencing in about December 1941 the municipal authorities of the City of Wheeling, West Virginia, adopted a policy of noninterference with the illegal operation of slot machines, but imposed and collected periodically a fine on the number of machines which its police officers were able to locate at the time checkups were made and the fines imposed. In November 1944 the operation of slot machines was prohibited and Automatic sold part of its slot machines in 1944 and the remainder in 1945. In 1943 and 1944 Automatic purchased several pieces of real estate from which it thereafter received rents.
Zeller's Steak House, Inc., a West Virginia corporation, was organized May 15, 1941, with an authorized capital of 500 shares of the parPage 284value of $100 per share. This corporation operated a restaurant in Wheeling, West Virginia. It occupied the first floor of the same building in which the Market Street Club operated its gambling establishment. The restaurant and the Club were each accessible by connecting stairways.
Reuther's, Inc., is a West Virginia corporation organized in 1945 and was originally financed by the Market Street Club. It operated a horse book and a restaurant known as Reuther's Royal Bar, in Wheeling, West Virginia. On October 8, 1945, the authorized capital was increased from 100 to 250 shares of the par value of $100 per share.
Certificate No. 5, dated August 28, 1945, for 40 shares, and certificate No. 6, dated October 15, 1945, for 50 shares, were issued in the name of Joseph Samuels. Dividends thereon were paid to petitioner on January 15, 1946, and July 20, 1946, and included in his income reported for 1946. Dividends of $2,000, declared in 1947 but unpaid as of December 31, 1947, were paid January 14, 1948.
Greiner's, Inc., a West Virginia corporation, was organized in 1944 with a capitalization of 250 shares with a par value of $100 per share. The corporation commenced business on February 1, 1946, and was liquidated in December 1948. It operated a retail store handling radios, records, and electrical appliances. The capital stock on December 31, 1947, was owned as follows:
William G. Lias ........................ 150 shares David S. Goldberg ...................... 50 shares G. C. Greiner .......................... 50 shares
The business was under the management and control of G. C. Greiner and was unsuccessful. In January 1946 the petitioner loaned $5,000 to Greiner's, Inc., and upon its liquidation in December 1948 the petitioner received the amount of $5,000 in liquidation of his loan.
Laconia, Inc., is a West Virginia corporation organized December 9, 1944, for the purpose of dealing in real estate. It had authorized capital stock of 2,500 shares of the par value of $100 per share. On May 15, 1946, its authorized capitalization was increased to $600,000. Among its acquired assets were the Firestone Building, the Community Apartments, and the Aul Shively and Musee Buildings.
Wheeling Downs, Inc., a West Virginia corporation, was organized on November 14, 1945, with an authorized capitalization of 5,000 shares of the par value of $100 per share. It acquired the grounds, building, and equipment of the racetrack known as Wheeling Downs, located on Wheeling Island, Wheeling, West Virginia. The racetrack premises are rented to Wheeling Downs Racing Association, which conducts races.
Wheeling Downs Racing Association, a West Virginia corporation, was organized April 1, 1946, with an authorized capitalization of 2,500 shares of the par value of $100 per share. It operates a racePage 285track, known as Wheeling Downs, under a lease from Wheeling Downs, Inc. Its tax returns were filed on the basis of fiscal years ended April 30. During the taxable years involved the operation was under the direct supervision of the West Virginia Racing Commission.
Petitioner at an early date was engaged in bootlegging, continuing in this activity until about 1930. In connection with these activities he was convicted, sentenced, and fined in four cases in the United States District Court for the Northern District of West Virginia for violation of the National Prohibition Act. On January 9, 1923, he received a 6 months' sentence and was fined $1,000; on January 24, 1924, he was fined $750; on May 12, 1926, he received a 16 months' sentence and a fine of $5,500; and on November 12, 1930, he received a 2-year sentence and was fined $10,000. On appeal from the latter conviction the United States Court of Appeals for the Fourth Circuit affirmed (Liasv.United States,51 F.2d 215; affd.284 U.S. 584). During petitioner's bootlegging activities the governmental authorities seized and confiscated considerable quantities of illicit liquor and transportation equipment.
On December 12, 1930, petitioner began a numbers business in Wheeling, West Virginia, and in nearby Ohio and Pennsylvania towns, in partnership with George Seibert and Mike Russell. Seibert was brought into the partnership because of his influence and money. Petitioner originally invested $5,000 and Seibert was to invest a similar amount, but it was not necessary for him to do so. In 1931 the petitioner's only source of income was from the numbers business.
On December 16, 1931, Seibert, Russell, and petitioner had an accounting of their numbers partnership. At that time the profit in that business was approximately $27,000. The partners agreed to draw $900 each from the partnership. The petitioner and Seibert each withdrew his share and Russell loaned his share to the petitioner, who was leaving to commence his sentence and needed some money.
From December 17, 1931, to April 18, 1932, the petitioner was confined in the Federal Reformatory Camp in Petersburg, Virginia, when in connection with the conviction on November 12, 1930, he was transferred to the Federal penitentiary in Atlanta, Georgia, until his release on July 23, 1933. His interest in the numbers partnership continued during his confinement in the penitentiary.
When petitioner, in 1931, learned that he would be required to serve the sentence imposed on November 12, 1930, he persuaded his brother, John, to come to Wheeling to look after petitioner's interest in the numbers partnership. John did not receive any compensation until January 1, 1933, when he was paid $50 per week.
In 1934 the partnership between Seibert, Russell, and the petitioner was terminated. Thereupon, petitioner and his brother, John Lias, formed a new partnership under the name of Wheeling Book Company,Page 286which partnership continued until late 1937, when the numbers business was outlawed.
On January 18, 1935, the United States District Court for the Northern District of West Virginia issued afieri facias,under which the United States marshal seized money and property of petitioner, realizing the sum of $3,808.70, which was applied to the unpaid fines theretofore imposed under the National Prohibition Act. The balance due on these fines was not paid until December 24, 1946.
While petitioner was confined in the penitentiary he wrote to his wife under date of February 3, 1933, directing her to borrow $500 from friends. His explanation of this transaction was that it was an accommodation for a friend whose identity could not be disclosed.
Prior to the year 1933 the petitioner filed no Federal income tax returns. Sometime in 1932 he learned that income derived from illegal enterprises was subject to tax.
In 1933 Special Agents Maloney and Hauk were assigned to investigate petitioner's income tax liability for the years 1929, 1930, and 1931. In an interview which petitioner had with Maloney on August 18, 1933, the petitioner stated that he had never filed tax returns because he was always broke; that he had made money in the past but had spent it as fast as he made it; that the overhead in the liquor racket, as well as attorney fees, was heavy; and that his records had been burned or destroyed because of the prohibition raids — but certain records were produced in the criminal trial held in 1935.
On September 2, 1933, petitioner took a trip to California. To enable him to make the trip the petitioner borrowed $2,000 from his sister, Catherine Caravasios.
Petitioner was interviewed on October 31, 1933, by Special Agents Maloney and Hauk, at which time he stated that he had been advised not to discuss his business with them unless he was granted immunity from prosecution and that they would never learn the true facts unless he explained them. Petitioner also stated that if the special agents were interested only in determining the amount of his tax he would co-operate and pay whatever tax was determined, even if he had to borrow the money.
Petitioner stated he had no business and no source of income. In the course of their investigation the agents had learned of the two fictitious accounts in the names of Joe Dayten and Joe Nighten which pertained to the numbers business. Petitioner denied any connection with the fictitious accounts or the numbers business. At this time petitioner did not tell the agents of any fictitious accounts in the names of Joe Barrel or Joe Steam.
On July 30, 1934, a preliminary 30-day letter was sent to petitioner asserting deficiencies and penalties for 1928 through 1931, totalingPage 287$45,675.15. At the request of petitioner, conferences were had on October 29, 1934, and December 17, 1934. The petitioner was not present but was represented by George W. Oldhan, an accountant, and an employee of Oldhan, David S. Goldberg, and the respondent was represented by Special Agents Henry M. Sorrell and Edward Hauk, Jonas M. Smith, a special attorney in the Penal Division of the Chief Counsel's office, and Frank A. Tully, an auditor in the division.
Petitioner's income for the years 1928, 1929, and 1931 had been determined on a basis of analysis of three bank accounts in the name of the petitioner and the fictitious accounts in the names of Joe Dayten and Joe Nighten. Petitioner's representatives stated that the fictitious accounts belonged to Theodore Russell, and further stated that the petitioner was not in the numbers business but had done some gambling. At the conference held on December 17, 1934, it was contended that the fictitious accounts belonged to Theodore Russell, a nephew of petitioner, and that the appearance of petitioner's name in some instances was explained by stating that petitioner was backing his nephew. It was also represented that the petitioner was broke and cited the borrowing of $2,000 from his sister as proof of such fact.
In the year 1934 a mortgage of $6,000 which petitioner had placed on his home was foreclosed and the property was sold to satisfy the loan. The purchaser at the sale was petitioner's brother, John Lias.
On April 26, 1935, jeopardy assessments were made for the 1928, 1929, and 1931 deficiencies. On May 10, 1935, a notice of deficiency was sent to the petitioner. On July 19, 1935, a petition was filed with The Tax Court of the United States1putting in issue the aforementioned deficiencies, Docket No. 80812.
On April 10, 1935, the petitioner was indicted for willfully attempting to defeat and evade income taxes for 1931 in the sum of $122,000. Petitioner was tried on that indictment but was acquitted on July 27, 1935.
On his 1935 income tax return petitioner claimed the sum of $36,250.50 as a deduction for expenses incurred in defending against the aforesaid indictment, but claims that the actual disbursements were in excess of the amount claimed.
Just prior to the criminal trial in 1935, the petitioner admitted his connection with the numbers business and claimed for the first time that he had only a one-third interest in the business. George Seibert, one of the alleged partners, objected to his name and share appearing on the 1934 partnership return and had not admitted to the revenue agents his interest in the numbers business.
On November 30, 1937, an offer in compromise of petitioner's civil and criminal liabilities was filed. The offer expressed his belief thatPage 288it represented the true and actual sum of all tax, penalty, and interest due for all years prior to January 1, 1934.
By power of attorney dated January 10, 1938, the petitioner empowered David S. Goldberg to appear before the Bureau of Internal Revenue and this Court with respect to his tax matters for the year 1917 to the date thereof.
In connection with the aforementioned offer in compromise, Goldberg forwarded a check for $1,000 to the Department of Justice and expressed petitioner's intention to send further payments until the full tax liability was discharged. He also expressed petitioner's regret that he could not send more and stated that general business conditions made it impossible to do so; that should the petitioner attempt to pay the entire amount it would entirely deplete his working capital; that petitioner's liability for 1934 and 1935 taxes was pending; and that his 1937 taxes were coming due that month. The Department of Justice suggested that since the petitioner was not able to pay the $10,400 tentatively agreed upon, an installment offer in compromise be executed and filed. Under date of March 24, 1938, Goldberg sent a letter enclosing an installment offer in compromise dated March 22, 1938. In this new offer it was stated that petitioner believed it represented his true tax liability for the years prior to January 1, 1934. In explanation of the failure of petitioner to meet his original offer, it was stated that petitioner had been unable to obtain the money, partly from George Seibert and partly from a $5,000 deposit in a Pennsylvania bank, as he had planned when he made his first offer. Goldberg further advised that aside from these two sources petitioner did not have cash to pay and was obligating himself to the fullest extent. Goldberg further advised that what cash the petitioner had at that time was his only working capital and was extremely necessary for the operation of his business.
On each of the dates March 22, May 4, and May 17, 1938, the petitioner paid $1,000 upon the compromise offer.
In Docket No. 80812, pursuant to a stipulation filed May 4, 1938, this Court entered a decision for deficiencies and penalties, as follows:
Year Deficiency 50 per cent 25 per cent Total penalty penalty
1928 ................... $838.88 $419.44 $209.72 $1,468.04 1929 ................... 74.68 37.34 18.67 130.69 1931 ................... 1,659.38 829.69 414.85 2,903.92
On June 6, 1938, Goldberg wrote a letter to the Department of Justice stating that William Lias requested him to advise the Department that he was unable to send the $500 payment due June 1 because of recent heavy losses sustained by him.Page 289
1928 ................... $838.88 $419.44 $209.72 $1,468.04 1929 ................... 74.68 37.34 18.67 130.69 1931 ................... 1,659.38 829.69 414.85 2,903.92
On August 4, 1938, Goldberg again wrote to the Department of Justice that he had taken up with William Lias the matter of unpaid payments due and advised that petitioner was unable to make any of the monthly payments and could not state definitely just when he would be able to do so because his business had been and was very bad and that he could not see any change for the near future. Goldberg further advised that he had done everything in his power to effect a settlement of Lias' tax liability and suggested it might be better to contact petitioner directly.
A deputy collector charged with enforcing collection of original income taxes for 1937 contacted petitioner in August 1938, and was advised by him that he was unable to pay but would make every effort to do so within 60 days. After several telephone calls the deputy collector again contacted petitioner between Thanksgiving and the end of 1938, and was advised that petitioner had no money, could not obtain any, and at that time was not making any in his business.
Petitioner having defaulted in his payments under his offer, Special Agent Hauk interviewed the petitioner and Goldberg on November 16, 1939, for the purpose of determining petitioner's ability to pay. Petitioner at that interview advised he was unable to pay the amount of the offer because practically everything he had was tied up in Automatic, and he was putting all money back into the business as it came in. Agent Hauk was given a balance sheet and a profit and loss statement of Automatic as of October 31, 1939, showing a net worth of $94,453.28, a net profit before depreciation of $6,748.10 and $7,867.87, and a net profit after depreciation of $4,446.62 and $4,960.93, for September and October, respectively.
On November 15, 1939, petitioner's brother, John Lias, placed a mortgage of $5,300 on property he had acquired in 1927 and 1934.
On November 16, 1939, at the suggestion of Agent Hauk, the petitioner delivered to him 13 postdated checks of Automatic, payable to the collector of internal revenue, and agreed that such checks would be paid on presentation. The first check dated January 5, 1940, was for $1,400 and the remaining 12 were for $500 each, the last being payable January 6, 1941. On November 21, 1939, the collector of internal revenue was advised of the arrangement and was informed that the postdated checks, together with monthly payments required on other accounts, would make the petitioner's total payments to the collector for January 1940 the sum of $1,700, and for each of the 12 succeeding months the sum of $800.
Petitioner's returns for the years 1934 and 1935 were investigated and a notice of deficiency was issued April 12, 1938. A petition was filed with this Court, Docket No. 94649. On July 14, 1939, Goldberg advised the technical staff of the Bureau of Internal Revenue that thePage 290petitioner was not in a financial position to pay the expenses of a trip to Washington by his representatives. Again, on July 29, 1939, Goldberg sent another letter to the Bureau in which he advised that the petitioner would be unable to proceed with the case pending before this Court, as his present financial condition was such that he was unable to pay any tax or the costs of a trial.
On April 29, 1940, Goldberg wrote a letter to the internal revenue collector at Parkersburg, West Virginia, in which he stated that petitioner would appreciate it if collection of the next 2 monthly installments of $300 each was deferred to enable him to meet the $500 postdated checks. He further stated that business had been bad and the burden of meeting monthly payments of $800 would be too much for the next few months.
On April 1, 1941, Goldberg sent a letter to the collector of internal revenue enclosing an offer in compromise on behalf of petitioner dated March 31, 1941. No remittance or financial statement accompanied the offer and it was returned by the collector. The offer provided for payment of $2,500 in compromise of the unpaid deficiencies for 1934 and 1935 and for the 1937 tax returned. The offer was based on inability to pay because of financial difficulties, and stated that petitioner had paid such large income taxes in the past several years that he was unable to meet his obligation without either borrowing the full amount or depleting his working capital to the danger point, so that he would be unable to meet business obligations, including heavy current year's taxes.
On May 16, 1941, the petitioner wrote to the collector of internal revenue enclosing a check for $50 to apply on his income taxes for past years, and expressing regret that circumstances did not permit him to send more at that time.
Between May 20, 1935, and January 1, 1945, 13 warrants were issued for petitioner's delinquent taxes. Ten warrants were issued prior to May 27, 1941. One warrant issued January 21, 1942, was paid April 1, 1942, and two issued on January 1, 1945, for additional taxes were paid promptly.
In July 1939 petitioner told the deputy collector he could not pay the $4,500 due. In September 1939 he arranged for consecutive monthly payments of $300. He defaulted the December 1939 payment; made payment in January 1940 and again defaulted in April 1940; resumed payments in May and defaulted again in August 1940; made payment in September 1940; but made no payments thereafter, although repeatedly contacted by the deputy collector. In November 1942, petitioner gave a check for approximately $5,500 in full settlement of the balance due.Page 291
During the period 1938 to 1941, inclusive, the collector made repeated efforts to locate assets out of which collections could be made, but without avail.
Examinations of petitioner's income tax returns for 1940 and 1941 were made and a deficiency notice was sent under date of October 5, 1943. A petition contesting the deficiencies was filed with this Court on November 19, 1943, Docket No. 3464. Pursuant to stipulation a decision was entered on October 28, 1944, for deficiencies of $577.58 and $5,063.78, respectively.
The revenue agent started an examination of petitioner's returns for the years 1942 to 1944, inclusive, in October 1946. As subsequent returns for the years 1945 to 1948, inclusive, were filed the examination was extended to cover such years.
In 1936 petitioner employed David S. Goldberg as a certified public accountant, and not as a bookkeeper, in connection with the enterprises of petitioner. The books and records of such businesses were kept by bookkeepers employed by the organizations. Goldberg did not make any of the original records concurrently with the transaction, but his record was prepared from some primary record made by the employee of the particular organizations. Goldberg was not engaged in any of the activities of the legal or illegal businesses of the petitioner and could not be certain whether the information supplied to him from such sources was complete or accurate. On the basis of such information and such limited verification as he could make, Goldberg prepared weekly or monthly statements and working papers, from which he made up the tax returns. As part of his employment, Goldberg also prepared the individual returns of the Lias Group. Goldberg was a stockholder in Greiner's, Inc., the only investment he had in any enterprise of petitioner.
Petitioner did not record his numerous transactions in permanent personal books of accounts or records. However, numerous personal accounts of the petitioner and his wife were kept in the records of Automatic and Zellers.
Goldberg prepared the tax returns involved herein from information taken from the books of the corporations and partnerships in which petitioner had an interest; from receipts, canceled checks, and check stubs of bank accounts of petitioner and his wife; statements of stockholders and purchase and sales slips; information as to interest on bank accounts, beginning in 1946, of petitioner and his wife; information from petitioner's wife as to rents; information as to purchase and sale of real estate from real estate brokers, sellers, or purchasers whose names were furnished by petitioner's wife; and from information given to him orally by the petitioner, usually near the close of the year.Page 292
When the revenue agents were making an examination of petitioner's returns in 1946 they were given Goldberg's work papers and were told petitioner had some canceled checks. By November 1946 the agents had acquired sufficient information as to assets in the names of petitioner and his wife, and had observed the numerous expenditures recorded in the books of Automatic, to indicate that petitioner's expenditures were in excess of his reported income.
When questioned as to an item of $35,000 appearing as slot machine receipts on his 1942 return, petitioner variously described it as proceeds of sale divided half to Wheeling Book or Wheeling Novelty; collections from coin machines brought out of the flood area in 1942; gambling winnings; or it could have come from many sources — the exact source he was unable to give.
Petitioner stated that he had income from gambling but said it was impossible to keep a record and that he was unable to recall the occasions. On his 1943 return petitioner claimed a deduction of $20,710 as a gambling loss sustained personally in that year, which was denied.
Petitioner used cash in transactions involving large amounts throughout the taxable years in question. Even when checks were received they were cashed and not deposited.
Petitioner refused to supply the revenue agents with a net worth statement, and refused to make any statement as to the amount of cash on hand as of January 1, 1942.
The revenue agents made an extensive investigation from all available sources for the purpose of building up a net worth statement.
When the agents inquired of petitioner about assets, the evidence of which had been ascertained by searching public records, canvassing banks, from books and records of the various enterprises, and in many other ways, they were repeatedly informed, as to each asset in the names of members of the Lias Group, that such assets were the property of petitioner to do with as he saw fit.
A comparison of income reported with taxes, personal expenditures, and assets acquired, indicated no cash on hand other than cash in banks in the amount of $2,847.53. The agents were unable to verify petitioner's statements of cash hoards he had at various times between 1926 and 1938.
The petitioner disclosed to the agents two safe-deposit boxes, one at the National Bank of West Virginia and one at the Commonwealth Bank in Detroit. When the boxes were opened in the presence of the agents in 1947, the first was empty and the latter contained $1,500 in currency and some miscellaneous papers. Petitioner did not disclose any safe-deposit box at the Colonial Trust Company in Pittsburgh, Pennsylvania.Page 293
A bank account in the names of petitioner and his brother, John, was closed out in September 1945 by transferring $51,316.08 to the Commonwealth Bank savings account in the names of petitioner and his wife, after $49,000 had been withdrawn and used in the purchase of the Firestone Building in Pittsburgh, Pennsylvania.
Dividend payments of some of the corporations controlled by petitioner were not made according to record ownership of the stock. A dividend of Automatic paid December 20, 1940, was paid to Mary Manos on the basis of 40 shares, whereas, the record ownership of such shares was in the name of petitioner's wife. Dividends accruing in 1941 were paid by Automatic to Mary Manos in May 1942 on the basis of 20 shares, when the record ownership of such shares was in the name of petitioner's wife. Dividends were paid by Automatic in December 1943, February 1945, and February 1946, to stockholders of record as of December 31, 1941, although 25 shares in the name of petitioner's wife had been transferred in 1942, 15 shares having been transferred to Gregory Manos, and 10 shares to William Manos.
The 1943 and 1945 dividends were returned by the respective individuals in accordance with the amounts paid. The revenue agents examining the returns of petitioner adjusted the dividends taxable to each on the basis of ownership as of December 31, 1946, because they were advised by both petitioner and Goldberg that the transfer of stock on December 18, 1946, was for the purpose of putting the record ownership in the names of the true owners. Although the February 1946 dividend was paid on the basis of record ownership as of December 31, 1941, the payments were reported on the returns of petitioner and the other stockholders on the basis that the record ownership at December 31, 1946, was the true ownership of the stock at the time of payment.
A dividend paid by Zellers in 1946 on one share was paid to petitioner's wife, although the record ownership was in the name of G. C. Greiner.
Dividends on 90 shares of capital stock of Reuther's, Inc., in the record name of Joseph Samuels, were paid on January 15, 1946, July 20, 1946, and January 1, 1948, to petitioner and were included in his income tax returns.
On October 18, 1949, Racing Association paid a dividend to stockholders of record as of December 31, 1947, by three checks which were not produced, although their production was repeatedly demanded. In the light of a memorandum attempting to change the fact of payment to stockholders of record on December 31, 1947, to make it appear that such dividends were paid to stockholders of record as of December 31, 1948, the endorsements on such checks were important and material.
The transfers of stock on December 18, 1946, to conform record ownership with the true ownership, were accepted by respondentPage 294because the income reported, plus gifts, substantially coincided with the stock ownership after the transfer.
On February 17, 1947, petitioner filed Federal gift tax returns for the years 1942, 1944, 1945, and 1946, which were prepared by Goldberg. The specific exemption was claimed on the 1942 return; no specific exemption was claimed or allowable on the returns for the other years. The 1942 gift tax return reported a gift to petitioner's wife of a lot and building (Community Building) of a value of $35,000. The 1944 return reported a gift to petitioner's wife of a one-half interest in the Firestone Building, Pittsburgh, Pennsylvania, of the value of $100,000. The return for 1945 reported three gifts of life insurance premiums, as follows:
$8,098.95 paid for Alice B. Lias 17,962.32 paid for George B. Lias 14,133.17 paid for Antoinette Lias
The return for 1946 reported three gifts of capital stock of Laconia, Inc., as follows: 100 shares each to Alice B. Lias, George B. Lias, and Antoinette B. Lias, of the aggregate value of $30,000.
Donee Federal gift tax returns for the aforesaid years were filed on April 8, 1947.
On January 1, 1942, petitioner owed Automatic $8,666.07 and Zellers $15,844.61; his wife owed Zellers $23.45; and John Lias owed Zellers $15,000.
On January 1, 1942, John Lias owned corporate stock consisting of 50 shares of Briggs Manufacturing Company and 300 shares of Federal Motor Truck Company at an estimated cost of $5,000; Warwood Avenue real estate having a cost of $3,425; Washington Street real estate having a cost of $19,180, subject to a mortgage of $3,383.78 placed thereon in 1939; and an account receivable of $12,500.
On January 1, 1942, there were bank deposits as follows:
Name Bank Amount
John G. Licos (Lias) ........... Bridgeport National ........ $255.03 Mary Manos ..................... Half Dollar ................ 60.65 Potetsa Pappas or John Lias .... Half Dollar................. 104.85 Alice B. Lias .................. National Bank, W. Va. ...... 2,427.00 -------- Total ...................... ............................ $2,847.53
Nine new bank accounts were opened in 1942, 1 in 1943, 4 in 1944, 5 in 1945, and 3 in 1946. Three bank accounts were closed in 1943, 7 in 1945, 3 in 1946, and 4 in 1947. There were no sizable balances in these accounts except in 1944, 1945, and 1946. Petitioner variously described the money deposited in those accounts as "Lias money," "John's money," "family money," and "group money."Page 295
John G. Licos (Lias) ........... Bridgeport National ........ $255.03 Mary Manos ..................... Half Dollar ................ 60.65 Potetsa Pappas or John Lias .... Half Dollar................. 104.85 Alice B. Lias .................. National Bank, W. Va. ...... 2,427.00 -------- Total ...................... ............................ $2,847.53
On January 1, 1942, shares of stock of Automatic were owned as follows:
Stockholder Shares Cost
William G. Lias ............................ 540 $54,000 Alice B. Lias .............................. 164 16,400 John Lias .................................. 75 7,500 Gregory Manos .............................. 30 3,000 William Manos .............................. 20 2,000 ---- ------- Total ................................... 829 $82,900
On January 1, 1942, the capital stock of Zellers was owned as follows:
William G. Lias ............................ 540 $54,000 Alice B. Lias .............................. 164 16,400 John Lias .................................. 75 7,500 Gregory Manos .............................. 30 3,000 William Manos .............................. 20 2,000 ---- ------- Total ................................... 829 $82,900
Stockholder Shares Cost
William G. Lias ............................ 150 $15,000 John Lias .................................. 150 15,000
The above shares of Zellers stock were paid for in November 1943 by checks of Automatic and charged to petitioner's account.
William G. Lias ............................ 150 $15,000 John Lias .................................. 150 15,000
On January 1, 1942, Automatic had on its books accounts accrued for dividends and salaries as follows:
Name Dividend Salary
William G. Lias ......................... $1,800 $10,000.00 Alice B. Lias ........................... 11,400 John Lias ............................... __________ 4,197.50 Gregory Manos ........................... 2,300 2,500.00 William Manos ........................... 680 2,500.00 Mary Manos .............................. 400 ---------- ------------ Total ............................... 16,580 19,197.50
On January 1, 1942, the partnership of Lias Brothers had investments as follows:
William G. Lias ......................... $1,800 $10,000.00 Alice B. Lias ........................... 11,400 John Lias ............................... __________ 4,197.50 Gregory Manos ........................... 2,300 2,500.00 William Manos ........................... 680 2,500.00 Mary Manos .............................. 400 ---------- ------------ Total ............................... 16,580 19,197.50
Acorn Club ................................ $505.09 Pirate Cafe ............................... 7,118.23
Petitioner purchased with cash United States Series "E" Bonds in his and his wife's names, as follows:Year Cost
1942 ..................................... $14,775.00 1943 ..................................... 11,268.75 1944 ..................................... 34,125.00 ---------- Total ................................ $60,168.75
The interest on the above bonds was reported on petitioner's return for the year 1946. John Lias purchased 2 bonds in 1942 at a cost of $150. The proceeds on the surrender of the bonds in 1946, in thePage 296amount of $62,206.50, were applied on the purchase of the Laconia Building. In 1942 the petitioner purchased, for cash, the Community Apartments in his wife's name at a cost of $32,430. In 1944 improvements cost $4,482.37. In 1945 this property was transferred to Laconia, Inc., for 350 shares of its capital stock. In 1947 petitioner filed a gift tax return covering the transfer of the property to his wife in 1942. The balance in the bank account in which the rents were deposited was transferred to the petitioner's account in the same bank.
In 1942 the petitioner on behalf of the partnership, Lias Brothers, invested $5,000 in Point Pleasant Amusement Company, which ended business in 1943.
Alice B. Lias purchased real estate at 20th and Main Streets in Wheeling, West Virginia, at a cost of $8,000, giving a purchase money mortgage of $4,100. This property was sold in 1943.
In 1942 the petitioner purchased a garage in Wheeling, West Virginia, at a cost of $7,000. This property was sold in 1946.
The petitioner purchased, with cash, United States Treasury bonds in his name and the name of his wife and others, as follows:Year Cost
1943 ..................................... $74,000 1944 ..................................... 75,000 1945 ..................................... 75,000
The interest on these bonds for the years 1946 and 1947 and the profit on the sale of the bonds in 1947 were reported on petitioner's return for 1947 and were not changed in the deficiency notice. The interest for 1944 and 1945 was not reported by petitioner for those years but was included in petitioner's income in the notice of deficiency and no issue is here raised with respect thereto.
The petitioner could not identify the source of the funds used to purchase the United States Treasury and "E" bonds, but stated they were redeemed and sold to provide funds to pay for the racetrack.
In November 1943 the petitioner's account with Automatic was charged with a $100 check which was applied in payment of 1 share of the capital stock of Zellers which was issued in the name of G. C. Greiner.
During 1943 petitioner purchased, with cash, securities in a brokerage account with Masten Company, which was in his wife's name at one time and his wife's and mother-in-law's names at another time. The securities cost $88,012.13 and there was a credit balance of $1,999.75. The petitioner reported the dividends on all except 3 of the securities. In the deficiency notice the dividends and the gain on the disposition of the 3 securities were included in petitioner's income for 1943 and 1944. The dividend on 1 of the securities in 1943Page 297and on 3 of the securities in 1944 were reported in the returns of Alice B. Lias. Mary Manos, petitioner's mother-in-law, had no interest in the security account.
On March 15, 1943, the petitioner purchased the Aul Shively and Musee Buildings in the name of Mary Manos at a cost of $25,000. A purchase money mortgage for $10,000 was executed. Additional improvements, costing $2,500, were made in 1944, $7,357.94 in 1945, and $4,580.55 in 1946. The losses of $390.11 for 1943 and $853.14 for 1944, and the income of $1,883.57 for 1945 and $546.12 for 1946, were included in petitioner's income in the deficiency notice. Mary Manos had no property and was claimed as a dependent by her sons in 1937 and 1939 to 1942, inclusive. This property was transferred to Laconia, Inc., for 320 shares of the capital stock, valued at $32,000, issued in the name of Mary Manos, which was transferred in 1946 to the benefit of petitioner's two children.
On August 14, 1943, petitioner purchased a lot in Wheeling, West Virginia, from Frank J. and Eva L. Emblem, in the name of his wife, at a cost of $2,100. The profit on the sale in 1947 was included in petitioner's return.
On October 30, 1944, the petitioner purchased the Firestone Building for cash, at a cost of $200,000, placing title in the name of his wife. In 1947 a gift tax return was filed covering the transfer to his wife. In 1945 this property was transferred to Laconia, Inc., for 2,000 shares of its capital stock, 1,000 shares of which were issued to petitioner and 1,000 shares to his wife.
In 1945 petitioner purchased from William J. Zellers 150 shares of the capital stock of Zellers, paying $8,000 in cash and issuing a check of Automatic for $12,000, which was charged to petitioner's account. This check was endorsed to Zellers and applied against a note of William J. Zellers. Petitioner then received a check from Zellers which he endorsed to Automatic, and his account with Automatic was credited.
In 1945 petitioner subscribed for 150 shares of the capital stock of Greiner's, Inc., at a cost of $15,000, which was paid for in 1946. In 1946 he advanced $5,000 in cash. The company was liquidated in December 1948 and petitioner received a check for $5,000 in liquidation of the cash advanced and $6,600 for stock held.
In 1945 stock of Laconia, Inc., having a cost of $235,194.98 (including the stock issued for the Community and Firestone Buildings), was issued to petitioner and his wife. In 1945 petitioner advanced $69,679.34 to Laconia on open account. In 1946 stock of Laconia, charged against cash advanced by petitioner, was issued as follows:Page 298
William G. Lias .............................. $39,700 John Lias .................................... 35,000 Alice B. Lias ................................ 10,000 George W. Lias ............................... 10,000 Antoinette Lias .............................. 10,000
Of the above amounts advanced by petitioner to Laconia, $30,000 came from Union Federal Bank accounts in the names of petitioner's wife and children. The stock issued in their names was returned as a gift in a gift tax return filed in 1947. Interest on these 3 accounts was reported on petitioner's tax returns for 1946, 1947, and 1948.
On August 31, 1946, 2,500 shares of stock of Laconia, at a cost of $250,000, were issued to petitioner for cash advanced, making a total investment in Laconia, Inc., as of December 1946, of $621,894.98.
During 1945 petitioner borrowed $25,000 and in 1947 he borrowed $68,000, and his wife borrowed $1,250 in 1946. In 1947 loans of petitioner from Grace Seibert of $50,000; from Wilson Seibert of $17,500; from Nick Miller of $37,500; and from Theodore Prossis of $5,000, were paid by Wheeling Downs, Inc., and charged to his account.
On March 12, 1945, the petitioner and his wife purchased a residence in Detroit, Michigan, for a consideration of $46,000. A deposit of $1,000 was applied to the purchase price and the balance was paid with 2 checks for $9,000 and $36,000, respectively, drawn on the checking account of William or Alice B. Lias with the Commonwealth Bank of Detroit, Michigan. The property was still owned on December 31, 1948.
On December 18, 1946, capital stock of Wheeling Downs, Inc., was issued against cash previously advanced by petitioner to John Lias, in the amount of $115,000 and to petitioner in the amount of $150,000. On November 1, 1948, 1,000 shares of the stock of Wheeling Downs, Inc., of the value of $100,000, were issued to petitioner for cash previously advanced to that corporation.
At the end of 1946 petitioner was indebted to Racing Association for $12,784.23 cash withdrawn by him.
During 1946 petitioner loaned to John S. Gaynor, Sr., on a note, the sum of $2,250.
During 1947 petitioner borrowed $75,000 on a note from George W. Lewis.
On March 10, 1947, Racing Association issued $15,000 of its capital stock to petitioner and $5,000 to Gregory Manos for services rendered, and $5,000 to petitioner's wife for cash.
Schedule 1, which follows, shows how assets and liabilities of the Lias Group increased and decreased during the taxable years 1942 to 1948, inclusive. The decrease in assets and liabilities is shown by figures in parentheses:Page 299
SCHEDULE 11
1942 1943 1944
Automatic Cigarette Sales Co.: Accounts receivable ............ ($25,499.38) $7,598.44 ($30,570.73) Dividends received ............. (16,580.00) Accrued salaries ............... 1,250.00 (12,160.74) 2,500.00 Greiner's: Stock .......................... ____________ ____________ ____________ Accounts receivable ............ ____________ ____________ ____________ Laconia: Stock .......................... ____________ ____________ ____________ Accounts receivable ............ ____________ ____________ ____________ Reuther's: Stock .......................... ____________ ____________ ____________ Accounts receivable ............ ____________ ____________ ____________ Dividends received ............. ____________ ____________ ____________ Wheeling Downs, Inc.: Stock .......................... ____________ ____________ ____________ Accounts receivable ............ ____________ ____________ ____________ Wheeling Downs Racing Association: Stock .......................... ____________ ____________ ____________ Accounts receivable ............ ____________ ____________ ____________ Zeller's Steak House: Stock .......................... 100.00 Accounts receivable ............ 46,148.86 (14,730.75) (12,467.10) Acorn Club ...................... 233.23 574.78 1,827.05 Market Street Club .............. 18,613.15 40,347.00 (8,950.50) Pirate Cafe ..................... (1,013.53) 4,498.16 (3,213.24) Point Pleasant Amusement Co. .... 5,000.00 (5,000.00) Cash in banks ................... 48,895.82 (10,491.79) 132,334.06 E Bonds ......................... 14,925.00 11,268.75 34,125.00 Treasury bonds .................. 74,000.00 75,000.00 Masten Co.: Stocks ......................... 88,012.13 (88,012.13) Credit balance ................. 1,999.75 (2,199.75) Accounts receivable ............. ____________ ____________ ____________ Accounts payable ................ ____________ ____________ ____________ Deeds of trust .................. (2,522.81) (4,787.86) 1,670.63 Aul Shively Building .......... 14,625.00 1,937.50 Musee Building .................. 9,650.00 (466.67) Community Apartments ............ 32,430.00 (840.00) 3,642.37 Firestone Building .............. 199,444.46 Filling station ................. (905.45) (905.45) (908.45) 90-92 Washington Street ......... (420.00) (420.00) (420.00) 54 Warwood Avenue ............... (325.00) (325.00) (325.00)Page 300Adding machine .................. ____________ ____________ ____________ 20th and Main Streets ........... $8,000.00 ($8,000.00) Garage .......................... 7,000.00 Triadelphia lot ................. 2,100.00 Detroit residence ............... ____________ ____________ ____________ ------------ ------------ ------------ Total ....................... $135,229.89 $197,112.42 $304,947.50
1945 1946 1947
Automatic Cigarette Sales Co.: Accounts receivable ............ $25,182.15 $60,581.50 $38,011.40 Dividends received ............. ____________ ____________ ____________ Accrued salaries ............... (3,286.76) (7,500.00) Greiner's: Stock .......................... 15,000.00 Accounts receivable ............ (15,000.00) 20,000.00 Laconia: Stock .......................... 235,194.98 386,700.00 Accounts receivable ............ 69,679.34 (58,889.34) 34,120.00 Reuther's: Stock .......................... 9,000.00 Accounts receivable ............ (4,000.00) 4,000.00 Dividends received ............. 2,000.00 Wheeling Downs, Inc.: Stock .......................... 265,000.00 Accounts receivable ............ 167,500.00 (152,517.87) 569,973.33 Wheeling Downs Racing Association: Stock .......................... 25,000.00 Accounts receivable ............ (12,784.23) Zeller's Steak House: Stock .......................... 20,000.00 Accounts receivable ............ (18,213.28) (14,471.52) 15,155.36 Acorn Club ...................... 1,293.45 2,687.33 2,960.76 Market Street Club .............. (736.12) (46,243.73) 7,469.33 Pirate Cafe ..................... (5,352.77) 263.77 (322.90) Point Pleasant Amusement Co. .... ____________ ____________ ____________ Cash in banks ................... 177,401.49 (270,342.99) (72,402.98) E Bonds ......................... (60,168.75) Treasury bonds .................. 75,000.00 224,000.00 Masten Co.: Stocks ......................... ____________ ____________ ____________ Credit balance ................. 200.00 Accounts receivable ............. 2,250.00 (2,000.00) Accounts payable ................ (25,000.00) (1,250.00) (116,750.00) Deeds of trust .................. 689.33 8,334.49 Aul Shively Building .......... 6,732.94 (23,295.44) Musee Building .................. (466.67) (8,716.66) Community Apartments ............ (35,232.37) Firestone Building .............. (199,44.46) Filling station ................. (905.45) (4,772.73) 90-92 Washington Street ......... (420.00) (17,500.00) 54 Warwood Avenue ............... (325.00) (325.00) (325.00) Adding machine .................. $84.41 ($9.04) ($75.37) 20th and Main Streets ........... ____________ ____________ ____________ Garage .......................... (7,000.00) Triadelphia lot ................. 2,100.00 Detroit residence ............... 46,000.00 ------------ ------------ ------------ Total ....................... $540,575.21 $64,029.79 $276,713.93
1948
Automatic Cigarette Sales Co.: Accounts receivable ............ $5,038.51 Dividends received ............. ____________ Accrued salaries ............... ____________ Greiner's: Stock .......................... (15,000.00) Accounts receivable ............ (5,000.00) Laconia: Stock .......................... ____________ Accounts receivable ............ (53,910.00) Reuther's: Stock .......................... ____________ Accounts receivable ............ ____________ Dividends received ............. (2,000.00) Wheeling Downs, Inc.: Stock .......................... 100,000.00 Accounts receivable ............ (164,969.80) Wheeling Downs Racing Association: Stock .......................... ____________ Accounts receivable ............ 12,184.23 Zeller's Steak House: Stock .......................... ____________ Accounts receivable ............ 6,575.48 Acorn Club ...................... 1,407.13 Market Street Club .............. (7,126.71) Pirate Cafe ..................... (833.63) Point Pleasant Amusement Co. .... ____________ Cash in banks ................... (521.40) E Bonds ......................... ____________ Treasury bonds .................. ____________ Masten Co.: Stocks ......................... ____________ Credit balance ................. ____________ Accounts receivable ............. ____________ Accounts payable ................ 68,000.00 Deeds of trust .................. ____________ Aul Shively Building .......... ____________ Musee Building .................. ____________ Community Apartments ............ ____________ Firestone Building .............. ____________ Filling station ................. ____________ 90-92 Washington Street ......... ____________ 54 Warwood Avenue ............... (325.00) Adding machine .................. ____________ 20th and Main Streets ........... ____________ Garage .......................... ____________ Triadelphia lot ................. ____________ Detroit residence ............... ____________ ------------ Total ....................... ($56,481.19)
Page 301
1942 1943 1944
Automatic Cigarette Sales Co.: Accounts receivable ............ ($25,499.38) $7,598.44 ($30,570.73) Dividends received ............. (16,580.00) Accrued salaries ............... 1,250.00 (12,160.74) 2,500.00 Greiner's: Stock .......................... ____________ ____________ ____________ Accounts receivable ............ ____________ ____________ ____________ Laconia: Stock .......................... ____________ ____________ ____________ Accounts receivable ............ ____________ ____________ ____________ Reuther's: Stock .......................... ____________ ____________ ____________ Accounts receivable ............ ____________ ____________ ____________ Dividends received ............. ____________ ____________ ____________ Wheeling Downs, Inc.: Stock .......................... ____________ ____________ ____________ Accounts receivable ............ ____________ ____________ ____________ Wheeling Downs Racing Association: Stock .......................... ____________ ____________ ____________ Accounts receivable ............ ____________ ____________ ____________ Zeller's Steak House: Stock .......................... 100.00 Accounts receivable ............ 46,148.86 (14,730.75) (12,467.10) Acorn Club ...................... 233.23 574.78 1,827.05 Market Street Club .............. 18,613.15 40,347.00 (8,950.50) Pirate Cafe ..................... (1,013.53) 4,498.16 (3,213.24) Point Pleasant Amusement Co. .... 5,000.00 (5,000.00) Cash in banks ................... 48,895.82 (10,491.79) 132,334.06 E Bonds ......................... 14,925.00 11,268.75 34,125.00 Treasury bonds .................. 74,000.00 75,000.00 Masten Co.: Stocks ......................... 88,012.13 (88,012.13) Credit balance ................. 1,999.75 (2,199.75) Accounts receivable ............. ____________ ____________ ____________ Accounts payable ................ ____________ ____________ ____________ Deeds of trust .................. (2,522.81) (4,787.86) 1,670.63 Aul Shively Building .......... 14,625.00 1,937.50 Musee Building .................. 9,650.00 (466.67) Community Apartments ............ 32,430.00 (840.00) 3,642.37 Firestone Building .............. 199,444.46 Filling station ................. (905.45) (905.45) (908.45) 90-92 Washington Street ......... (420.00) (420.00) (420.00) 54 Warwood Avenue ............... (325.00) (325.00) (325.00)Page 300Adding machine .................. ____________ ____________ ____________ 20th and Main Streets ........... $8,000.00 ($8,000.00) Garage .......................... 7,000.00 Triadelphia lot ................. 2,100.00 Detroit residence ............... ____________ ____________ ____________ ------------ ------------ ------------ Total ....................... $135,229.89 $197,112.42 $304,947.50
1945 1946 1947
Automatic Cigarette Sales Co.: Accounts receivable ............ $25,182.15 $60,581.50 $38,011.40 Dividends received ............. ____________ ____________ ____________ Accrued salaries ............... (3,286.76) (7,500.00) Greiner's: Stock .......................... 15,000.00 Accounts receivable ............ (15,000.00) 20,000.00 Laconia: Stock .......................... 235,194.98 386,700.00 Accounts receivable ............ 69,679.34 (58,889.34) 34,120.00 Reuther's: Stock .......................... 9,000.00 Accounts receivable ............ (4,000.00) 4,000.00 Dividends received ............. 2,000.00 Wheeling Downs, Inc.: Stock .......................... 265,000.00 Accounts receivable ............ 167,500.00 (152,517.87) 569,973.33 Wheeling Downs Racing Association: Stock .......................... 25,000.00 Accounts receivable ............ (12,784.23) Zeller's Steak House: Stock .......................... 20,000.00 Accounts receivable ............ (18,213.28) (14,471.52) 15,155.36 Acorn Club ...................... 1,293.45 2,687.33 2,960.76 Market Street Club .............. (736.12) (46,243.73) 7,469.33 Pirate Cafe ..................... (5,352.77) 263.77 (322.90) Point Pleasant Amusement Co. .... ____________ ____________ ____________ Cash in banks ................... 177,401.49 (270,342.99) (72,402.98) E Bonds ......................... (60,168.75) Treasury bonds .................. 75,000.00 224,000.00 Masten Co.: Stocks ......................... ____________ ____________ ____________ Credit balance ................. 200.00 Accounts receivable ............. 2,250.00 (2,000.00) Accounts payable ................ (25,000.00) (1,250.00) (116,750.00) Deeds of trust .................. 689.33 8,334.49 Aul Shively Building .......... 6,732.94 (23,295.44) Musee Building .................. (466.67) (8,716.66) Community Apartments ............ (35,232.37) Firestone Building .............. (199,44.46) Filling station ................. (905.45) (4,772.73) 90-92 Washington Street ......... (420.00) (17,500.00) 54 Warwood Avenue ............... (325.00) (325.00) (325.00) Adding machine .................. $84.41 ($9.04) ($75.37) 20th and Main Streets ........... ____________ ____________ ____________ Garage .......................... (7,000.00) Triadelphia lot ................. 2,100.00 Detroit residence ............... 46,000.00 ------------ ------------ ------------ Total ....................... $540,575.21 $64,029.79 $276,713.93
1948
Automatic Cigarette Sales Co.: Accounts receivable ............ $5,038.51 Dividends received ............. ____________ Accrued salaries ............... ____________ Greiner's: Stock .......................... (15,000.00) Accounts receivable ............ (5,000.00) Laconia: Stock .......................... ____________ Accounts receivable ............ (53,910.00) Reuther's: Stock .......................... ____________ Accounts receivable ............ ____________ Dividends received ............. (2,000.00) Wheeling Downs, Inc.: Stock .......................... 100,000.00 Accounts receivable ............ (164,969.80) Wheeling Downs Racing Association: Stock .......................... ____________ Accounts receivable ............ 12,184.23 Zeller's Steak House: Stock .......................... ____________ Accounts receivable ............ 6,575.48 Acorn Club ...................... 1,407.13 Market Street Club .............. (7,126.71) Pirate Cafe ..................... (833.63) Point Pleasant Amusement Co. .... ____________ Cash in banks ................... (521.40) E Bonds ......................... ____________ Treasury bonds .................. ____________ Masten Co.: Stocks ......................... ____________ Credit balance ................. ____________ Accounts receivable ............. ____________ Accounts payable ................ 68,000.00 Deeds of trust .................. ____________ Aul Shively Building .......... ____________ Musee Building .................. ____________ Community Apartments ............ ____________ Firestone Building .............. ____________ Filling station ................. ____________ 90-92 Washington Street ......... ____________ 54 Warwood Avenue ............... (325.00) Adding machine .................. ____________ 20th and Main Streets ........... ____________ Garage .......................... ____________ Triadelphia lot ................. ____________ Detroit residence ............... ____________ ------------ Total ....................... ($56,481.19)
Alice B. Lias filed no Federal income tax return for any of the years 1913 through 1936, 1938, and 1939. She filed returns for 1937 and 1940 through 1947. The incomes reported or adjusted by revenue agents' reports for the years prior to 1942 are as follows:
1937 .................................. $7,929.18 1940 .................................. 2,750.00 1941 .................................. 11,347.50
For the year 1942 the net loss, as adjusted, amounted to $581.85. For the years 1945 and 1947 refunds of income taxes to Alice B. Lias, in excess of taxes paid, totaled $5,136.20 for 1945 and $3,509.89 for 1947.
John Lias filed no Federal income tax return for any of the years 1913 through 1923, 1927, and 1929 through 1931. He filed returns for 1924, 1925, 1926, and 1928. The income reported or adjusted for those years was as follows:
1924 .................................. $2,337.50 1925 .................................. 2,048.67 1926 .................................. 2,305.53 1928 .................................. 2,780.00
The total income reported or adjusted for the years 1932 to 1941, inclusive, was $157,155.90.
Gregory Manos filed no Federal income tax return for any of the years 1913 through 1936, 1938, and 1944. He filed returns for 1937, 1939, 1940 through 1943, and 1945 through 1948. The income reported or as adjusted for the years prior to 1942 was as follows:
1937 .................................. $4,696.94 1939 .................................. 4,475.00 1940 .................................. 3,043.86 1941 .................................. 8,849.75
William Manos filed no Federal income tax return for any of the years 1913 through 1936 and 1944 through 1947. He filed returns for each of the years 1937 through 1943 and in 1948. The income reported or adjusted for the years prior to 1942, in which he filed returns, was as follows:
1937 .................................. $3,083.61 1938 .................................. 2,167.50 1939 .................................. 3,320.00 1940 .................................. 2,592.01 1941 .................................. 7,170.04
Mary Manos filed no income tax return for any of the years 1913 through 1942, and 1946. She filed a return for each of the years 1943 through 1945. The income and losses reported or adjusted are as follows:Page 302
Year Income Loss
1943 .................................. $36.00 1944 .................................. 290.41 1945 .................................. $2,409.06
For the year 1945 a refund of income tax of Mary Manos, in excess of tax paid, was made in the amount of $53.38.
1943 .................................. $36.00 1944 .................................. 290.41 1945 .................................. $2,409.06
The net income, as adjusted, for each of the years 1928 to 1941, inclusive, on which petitioner has paid Federal income taxes, is as follows:Year Amount
1928 ........................................ $20,195.03 1929 ........................................ 10,343.30 1930 ........................................ 1,862.50 1931 ........................................ 27,500.00 1932 ........................................ 22,102.17 1933 ........................................ 15,403.51 1934 ........................................ 31,676.89 1935 ........................................ 14,108.91 1936 ........................................ 14,378.04 1937 ........................................ 39,434.31 1938 ........................................ 8,340.42 1939 ........................................ 13,949.98 1940 ........................................ 20,661.89 1941 ........................................ 36,102.12
The above amounts do not reflect the nontaxable portion of the capital gain for 1937 of $1,329.77, the nondeductible portions of the capital loss for 1938 of $2,106.88, nor the amounts paid by petitioner, as follows:
1934 — Paid to sister ..................... $6,000.00 1934 — Political contributions ............ 5,733.72 1934 — Paid to various individuals ........ 1,782.02 1935 — Legal fees, etc. ................... 36,250.50 1937 — Paid to recover stolen property .... 1,000.00
Federal income and gift taxes for the years 1942 to 1948, inclusive, were paid as follows:
1942 1943 1944 1945Income Taxes
William G. Lias .. $13,046.38 $62,538.06 $58,449.49 $54,772.84 John Lias ......... 7,158.51 39,979.07 42,431.16 40,711.83 Alice Lias ........ 2,098.78 7,895.40 8,500.00 (5,136.20) Gregory Manos ..... 339.10 4,691.12 William Manos ..... 723.31 2,242.44 Mary Manos ........ 153.38 100.00 (53.38)Gift Taxes
William G. Lias ... ___________ ___________ ___________ ___________ ----------- ----------- ----------- ----------- $23,366.08 $112,808.35 $109,480.65 $94,986.21
1946 1947 1948
William G. Lias .. $70,083.26 $42,641.54 $78,142.38 John Lias ......... 73,680.51 35,000.00 17,525.86 Alice Lias ........ 10,166.00 (3,509.89) 537.37 Gregory Manos ..... 30,260.05 12,628.03 10,094.98 William Manos ..... 4,051.06 Mary Manos ........ 534.00Gift Taxes
William G. Lias ... 32,288.21 ------------ ------------ ----------- $184,723.82 $119,047.89 $110,351.65
Petitioner paid insurance premiums as follows:Year Amount
William G. Lias .. $13,046.38 $62,538.06 $58,449.49 $54,772.84 John Lias ......... 7,158.51 39,979.07 42,431.16 40,711.83 Alice Lias ........ 2,098.78 7,895.40 8,500.00 (5,136.20) Gregory Manos ..... 339.10 4,691.12 William Manos ..... 723.31 2,242.44 Mary Manos ........ 153.38 100.00 (53.38)Gift Taxes
William G. Lias ... ___________ ___________ ___________ ___________ ----------- ----------- ----------- ----------- $23,366.08 $112,808.35 $109,480.65 $94,986.21
1946 1947 1948
William G. Lias .. $70,083.26 $42,641.54 $78,142.38 John Lias ......... 73,680.51 35,000.00 17,525.86 Alice Lias ........ 10,166.00 (3,509.89) 537.37 Gregory Manos ..... 30,260.05 12,628.03 10,094.98 William Manos ..... 4,051.06 Mary Manos ........ 534.00Gift Taxes
William G. Lias ... 32,288.21 ------------ ------------ ----------- $184,723.82 $119,047.89 $110,351.65
1942 ..................................... $2,288.02 1943 ..................................... 11,903.67 1944 ..................................... 1,031.88 1945 ..................................... 41,088.35 1946 ..................................... 74.31Page 303
The nontaxable portion of capital gains and the nondeductible portion of the capital losses are as follows:
Year Item Petitioner Alice B. Totals Lias
1943 ... 20th Main Sts ............. _________ $1,300.00 $1,300.00 1944 ... Masten a/c stocks $2,348.75 _________ 2,348.75 ========== 1945 ... Firestone Bldg .............. 486.11 486.10 972.21 Community Apts ............. _________ 88.70 88.70 ---------- 1,060.91 ========== 1946 ... A. S. M. buildings ........ _________ _________ __________ Filling station and garage .. 1,761.56 _________ 1,761.56 1947 ... Treasury bonds and lot ...... 2,881.48 _________ 2,881.48 1948 ... Various stocks .............. _________ _________ ($7,135.43)
The nondeductible personal expenditures of petitioner and his wife for the years 1942 to 1948, inclusive, are as follows:
1943 ... 20th Main Sts ............. _________ $1,300.00 $1,300.00 1944 ... Masten a/c stocks $2,348.75 _________ 2,348.75 ========== 1945 ... Firestone Bldg .............. 486.11 486.10 972.21 Community Apts ............. _________ 88.70 88.70 ---------- 1,060.91 ========== 1946 ... A. S. M. buildings ........ _________ _________ __________ Filling station and garage .. 1,761.56 _________ 1,761.56 1947 ... Treasury bonds and lot ...... 2,881.48 _________ 2,881.48 1948 ... Various stocks .............. _________ _________ ($7,135.43)
1942 .................................... $41,885.66 1943 .................................... 58,566.06 1944 .................................... 86,192.50 1945 .................................... 109,381.47 1946 .................................... 91,996.73 1947 .................................... 32,348.74 1948 .................................... 21,305.51
The income reported, or as adjusted, by the individual named and for the years shown is as follows:
Year John Lias Alice B. Lias Gregory William Manos Manos
1942 ................ $36,678.10 (581.85) $11,299.48 $14,479.06 1943 ................ 72,009.18 13,392.17 12,632.00 14,562.00 1944 ................ 70,449.44 8,475.14 1945 ................ 77,937.07 13,472.87 30,567.60 1946 ................ 104,996.96 1,763.75 46,831.92 1947 ................ 66,955.74 3,252.96 31,034.77 1948 ................ 11,467.17117,413.19 12,550.44
The income reported by petitioner for the years 1942 to 1947, inclusive, and in the joint return of petitioner and his wife for 1948, is as follows:Year Income
1942 ................ $36,678.10 (581.85) $11,299.48 $14,479.06 1943 ................ 72,009.18 13,392.17 12,632.00 14,562.00 1944 ................ 70,449.44 8,475.14 1945 ................ 77,937.07 13,472.87 30,567.60 1946 ................ 104,996.96 1,763.75 46,831.92 1947 ................ 66,955.74 3,252.96 31,034.77 1948 ................ 11,467.17117,413.19 12,550.44
1942 .................................. $98,283.74 1943 .................................. 81,023.26 1944 .................................. 86,109.59 1945 .................................. 76,336.18 1946 .................................. 135,429.68 1947 .................................. 127,773.13 1948 .................................. (17,928.71)1Page 304
For the year 1948 accounting fees and expenses were paid to the firm of Frazer and Torbet, in the amount of $37,945.51, and attorneys' fees in the amount of $11,274.78.
On April 26, 1948, petitioner was indicted for willfully and knowingly attempting to defeat and evade Federal income taxes for the years 1942 to 1946, inclusive. On November 9, 1948, petitioner, in the United States District Court for the Northern District of West Virginia (No. A-6068), pleaded guilty to the fifth count involving the year 1946 and the first four counts were dismissed. Petitioner was sentenced to 5 years and fined $10,000. On January 21, 1949, petitioner moved to withdraw his guilty plea, which motion was granted, and the sentence and fine were vacated.
On May 10, 1949, petitioner was reindicted, pleaded not guilty, and after jury trial was acquitted on July 2, 1949.
The record ownership of stock, bonds, bank accounts, and brokerage accounts was no indication of true ownership. Petitioner took the funds of the Wheeling Book partnership, in which he and John Lias were partners, to set up Automatic, in which no interest appeared for them. He used funds of Automatic to set up Zellers, Market Street Club, Pirate Cafe, and Point Pleasant (with interests to outsiders), and Globe Amusement Company, with no interest in John Lias and an interest given to August Berklas.
It was not possible to segregate the assets of each member of the Lias Group, as the assets were in the names of others than the true owners. The revenue agents endeavored to determine petitioner's individual net worth but the assets were shifting from one name to another from year to year. Money was intermingled and not earmarked and there was no record as to how much belonged to each member of the family. Petitioner was not able to identify the source of funds he used in the purchases of the Firestone and Community Buildings. Petitioner either refused or was unable to give definite information as to the amounts, location, or the businesses in which he invested the money he claimed to have had on various dates.
During the taxable years in question the petitioner did not receive any money or property either by gift or inheritance.
The combined taxable net income of the petitioner, his wife, his brother, John, and his brothers-in-law Gregory Manos and William Manos, was determined by taking the increase in their combined net worth, deducting therefrom Federal income and gift taxes, insurance premiums, and personal expenses paid during each year, and making adjustments for capital gains and losses. From such combined taxable net income there was deducted the income reported or adjusted for John Lias, Gregory Manos, William Manos, and Alice B. Lias, leaving the net taxable income of the petitioner.Page 305
The following, Schedule A, sets forth in composite form the consolidated net worth of petitioner, his wife, John Lias, Gregory Manos, and William Manos, as of December 31 of the years 1941 to 1948, inclusive, and Schedule B sets forth the required additions and deductions necessary to project the corrected consolidated net income of the family group, from which has been deducted the net income, as reported or adjusted, of John Lias, Alice B. Lias, Gregory Manos, and William Manos, to determine the corrected net income of the petitioner. We find the facts and figures therein contained to be correct. The net income of petitioner, as reported, has then been deducted to determine the amount of unreported income of the petitioner for each of the taxable years.Page 306
SCHEDULE A
12/31/41 12/31/42 12/31/43 12/31/44
Automatic Cigarette Sales Co.: Stock .............. $82,900.00 $82,900.00 $82,900.00 $82,900.00 Accts. rec. ........ (8,666.07) (34,165.45) (26,567.01) (57,137.74) Div. rec. .......... 16,580.00 Acc. salaries ...... 19,197.50 20,447.50 8,286.76 10,786.76 Greiner's, Inc.: Stock .............. ___________ ___________ ___________ ___________ Accts. rec. ........ ___________ ___________ ___________ ___________ Laconia, Inc.: Stock .............. ___________ ___________ ___________ ___________ Accts. rec. ........ ___________ ___________ ___________ ___________ Reuthers: Stock .............. ___________ ___________ ___________ ___________ Accts. rec. ........ ___________ ___________ ___________ ___________ Div. rec. .......... ___________ ___________ ___________ ___________ Wheeling Downs, Inc.: Stock .............. ___________ ___________ ___________ ___________ Accts. rec.......... ___________ ___________ ___________ ___________ Wheeling Downs Racing Association: Stock .............. ___________ ___________ ___________ ___________ Accts. rec. ........ ___________ ___________ ___________ ___________ Zellers Steak House, Inc.: Stock .............. 30,000.00 30,000.00 30,100.00 30,100.00 Accts. rec ......... (30,868.06) 15,280.80 550.05 (11,917.05) Partnerships: Acorn Club ......... 505.09 738.32 1,313.10 3,140.15 Market Street Club ............... 18,613.15 58,960.15 50,009.65 Pirate Cafe ........ 7,118.23 6,104.70 10,602.86 7,389.62 Point Pleasant Amuse .............. 5,000.00 Cash in banks ........ 2,847.53 51,743.35 41,251.56 173,585.62 Series "E" Savings Bonds .............. 14,925.00 26,193.75 60,318.75 Treasury bonds ....... 74,000.00 149,000.00 Stocks — Masten Co. 88,012.13 Cr. balance with Masten Co. ..... 1,999.75 (200.00) Other stocks in name of John Lias ....... 5,000.00 5,000.00 5,000.00 5,000.00 Accounts receivable .. 12,500.00 12,500.00 12,500.00 12,500.00 Accounts payable ..... ___________ ___________ ___________ __________ Deeds of trust ....... (3,383.78) (5,906.59) (10,694.45) (9,023.82) Aul and Shively Building ........... 14,625.00 16,562.50 Musee Building ....... 9,650.00 9,183.33 Community Apartments . 32,430.00 31,590.00 35,232.37 Firestone Building ... 199,444.46 Filling station and equipment .......... 8,397.53 7,492.08 6,586.63 5,678.18 90-92 Washington Street property .... 19,180.00 18,760.00 18,340.00 17,920.00Page 30754 1/2 Warwood Avenue property ........... 3,425.00 3,100.00 2,775.00 2,450.00 Adding machine (John Lias) .............. ___________ ___________ ___________ __________ 20th and Main Street property ........... 8,000.00 Garage ............... 7,000.00 7,000.00 7,000.00 Lot — Tridelphia District ........... 2,100.00 2,100.00 2,100.00 Personal residence — Detroit, Mich. .. 46,000.00 ----------- ----------- ----------- ---------- Total assets ... $164,732.97 $299,962.86 $497,075.28 $802,022.78
12/31/45 12/31/46 12/31/47 12/31/48 Automatic Cigarette Sales Co.: Stock .......... $82,900.00 $82,900.00 $82,900.00 $82,900.00 Accts. rec. .... (31,955.59) 28,625.91 66,637.31 71,675.82 Div. rec. ...... ___________ ___________ ___________ ___________ Acc. salaries . 7,500.00 Greiner's, Inc.: Stock .......... 15,000.00 15,000.00 15,000.00 Accts. rec. .... (15,000.00) 5,000.00 5,000.00 Laconia, Inc.: Stock .......... 235,194.98 621,894.98 621,894.98 621,894.98 Accts. rec. .... 69,679.34 10,790.00 44,910.00 (9,000.00) Reuthers: Stock .......... 9,000.00 9,000.00 9,000.00 9,000.00 Accts. rec. .... (4,000.00) Div. rec. ...... 2,000.00 Wheeling Downs, Inc.: Stock .......... 265,000.00 265,000.00 365,000.00 Accts. rec...... 167,500.00 14,982.13 584,955.46 419,985.66 Wheeling Downs Racing Association: Stock .......... 25,000.00 25,000.00 Accts. rec. .... (12,784.23) (12,784.23) (600.00) Zellers Steak House, Inc.: Stock .......... 50,100.00 50,100.00 50,100.00 50,100.00 Accts. rec ..... (30,130.33) (44,601.85) (29,446.49) (22,871.01) Partnerships: Acorn Club ..... 4,433.60 7,120.93 10,081.69 11,488.82 Market Street Club ........... 49,273.53 3,029.80 10,499.13 3,372.42 Pirate Cafe .... 2,036.85 2,300.62 1,977.72 1,144.09 Point Pleasant Amuse .......... ___________ ___________ ___________ ___________ Cash in banks .... 350,987.11 80,644.12 8,241.14 7,719.74 Series "E" Savings Bonds ............ 60,318.75 150.00 150.00 150.00 Treasury bonds ... 224,000.00 224,000.00 Stocks — Masten Co. ............. ___________ ___________ ___________ ___________ Cr. balance with Masten Co. ... ___________ ___________ ___________ ___________ Other stocks in name of John Lias ........... 5,000.00 5,000.00 5,000.00 5,000.00 Accounts receivable ...... 12,500.00 14,750.00 12,750.00 12,750.00 Accounts payable (25,000.00) (26,250.00) (143,000.00) (75,000.00) Deeds of trust . (8,334.49) Aul and Shively Building ....... 23,295.44 Musee Building .. 8,716.66 Community Apartments ...... ___________ ___________ ___________ ___________ Firestone Building ....... ___________ ___________ ___________ ___________ Filling station and equipment .. 4,772.73 90-92 Washington Street property 17,500.00 54 1/2 Warwood Avenue property 2,125.00 1,800.00 1,475.00 1,150.00 Adding machine (John Lias) .... 84.41 75.37 20th and Main Street property ___________ ___________ ___________ ___________ Garage .......... 7,000.00 Lot — Tridelphia District ....... 2,100.00 2,100.00 Personal residence — Detroit, Mich . 46,000.00 46,000.00 46,000.00 46,000.00 ------------- ------------- ------------- ------------- Total assets $1,342,597.99 $1,406,627.78 $1,683,341.71 $1,626,860.52
12/31/41 12/31/42 12/31/43 12/31/44
Automatic Cigarette Sales Co.: Stock .............. $82,900.00 $82,900.00 $82,900.00 $82,900.00 Accts. rec. ........ (8,666.07) (34,165.45) (26,567.01) (57,137.74) Div. rec. .......... 16,580.00 Acc. salaries ...... 19,197.50 20,447.50 8,286.76 10,786.76 Greiner's, Inc.: Stock .............. ___________ ___________ ___________ ___________ Accts. rec. ........ ___________ ___________ ___________ ___________ Laconia, Inc.: Stock .............. ___________ ___________ ___________ ___________ Accts. rec. ........ ___________ ___________ ___________ ___________ Reuthers: Stock .............. ___________ ___________ ___________ ___________ Accts. rec. ........ ___________ ___________ ___________ ___________ Div. rec. .......... ___________ ___________ ___________ ___________ Wheeling Downs, Inc.: Stock .............. ___________ ___________ ___________ ___________ Accts. rec.......... ___________ ___________ ___________ ___________ Wheeling Downs Racing Association: Stock .............. ___________ ___________ ___________ ___________ Accts. rec. ........ ___________ ___________ ___________ ___________ Zellers Steak House, Inc.: Stock .............. 30,000.00 30,000.00 30,100.00 30,100.00 Accts. rec ......... (30,868.06) 15,280.80 550.05 (11,917.05) Partnerships: Acorn Club ......... 505.09 738.32 1,313.10 3,140.15 Market Street Club ............... 18,613.15 58,960.15 50,009.65 Pirate Cafe ........ 7,118.23 6,104.70 10,602.86 7,389.62 Point Pleasant Amuse .............. 5,000.00 Cash in banks ........ 2,847.53 51,743.35 41,251.56 173,585.62 Series "E" Savings Bonds .............. 14,925.00 26,193.75 60,318.75 Treasury bonds ....... 74,000.00 149,000.00 Stocks — Masten Co. 88,012.13 Cr. balance with Masten Co. ..... 1,999.75 (200.00) Other stocks in name of John Lias ....... 5,000.00 5,000.00 5,000.00 5,000.00 Accounts receivable .. 12,500.00 12,500.00 12,500.00 12,500.00 Accounts payable ..... ___________ ___________ ___________ __________ Deeds of trust ....... (3,383.78) (5,906.59) (10,694.45) (9,023.82) Aul and Shively Building ........... 14,625.00 16,562.50 Musee Building ....... 9,650.00 9,183.33 Community Apartments . 32,430.00 31,590.00 35,232.37 Firestone Building ... 199,444.46 Filling station and equipment .......... 8,397.53 7,492.08 6,586.63 5,678.18 90-92 Washington Street property .... 19,180.00 18,760.00 18,340.00 17,920.00Page 30754 1/2 Warwood Avenue property ........... 3,425.00 3,100.00 2,775.00 2,450.00 Adding machine (John Lias) .............. ___________ ___________ ___________ __________ 20th and Main Street property ........... 8,000.00 Garage ............... 7,000.00 7,000.00 7,000.00 Lot — Tridelphia District ........... 2,100.00 2,100.00 2,100.00 Personal residence — Detroit, Mich. .. 46,000.00 ----------- ----------- ----------- ---------- Total assets ... $164,732.97 $299,962.86 $497,075.28 $802,022.78
12/31/45 12/31/46 12/31/47 12/31/48 Automatic Cigarette Sales Co.: Stock .......... $82,900.00 $82,900.00 $82,900.00 $82,900.00 Accts. rec. .... (31,955.59) 28,625.91 66,637.31 71,675.82 Div. rec. ...... ___________ ___________ ___________ ___________ Acc. salaries . 7,500.00 Greiner's, Inc.: Stock .......... 15,000.00 15,000.00 15,000.00 Accts. rec. .... (15,000.00) 5,000.00 5,000.00 Laconia, Inc.: Stock .......... 235,194.98 621,894.98 621,894.98 621,894.98 Accts. rec. .... 69,679.34 10,790.00 44,910.00 (9,000.00) Reuthers: Stock .......... 9,000.00 9,000.00 9,000.00 9,000.00 Accts. rec. .... (4,000.00) Div. rec. ...... 2,000.00 Wheeling Downs, Inc.: Stock .......... 265,000.00 265,000.00 365,000.00 Accts. rec...... 167,500.00 14,982.13 584,955.46 419,985.66 Wheeling Downs Racing Association: Stock .......... 25,000.00 25,000.00 Accts. rec. .... (12,784.23) (12,784.23) (600.00) Zellers Steak House, Inc.: Stock .......... 50,100.00 50,100.00 50,100.00 50,100.00 Accts. rec ..... (30,130.33) (44,601.85) (29,446.49) (22,871.01) Partnerships: Acorn Club ..... 4,433.60 7,120.93 10,081.69 11,488.82 Market Street Club ........... 49,273.53 3,029.80 10,499.13 3,372.42 Pirate Cafe .... 2,036.85 2,300.62 1,977.72 1,144.09 Point Pleasant Amuse .......... ___________ ___________ ___________ ___________ Cash in banks .... 350,987.11 80,644.12 8,241.14 7,719.74 Series "E" Savings Bonds ............ 60,318.75 150.00 150.00 150.00 Treasury bonds ... 224,000.00 224,000.00 Stocks — Masten Co. ............. ___________ ___________ ___________ ___________ Cr. balance with Masten Co. ... ___________ ___________ ___________ ___________ Other stocks in name of John Lias ........... 5,000.00 5,000.00 5,000.00 5,000.00 Accounts receivable ...... 12,500.00 14,750.00 12,750.00 12,750.00 Accounts payable (25,000.00) (26,250.00) (143,000.00) (75,000.00) Deeds of trust . (8,334.49) Aul and Shively Building ....... 23,295.44 Musee Building .. 8,716.66 Community Apartments ...... ___________ ___________ ___________ ___________ Firestone Building ....... ___________ ___________ ___________ ___________ Filling station and equipment .. 4,772.73 90-92 Washington Street property 17,500.00 54 1/2 Warwood Avenue property 2,125.00 1,800.00 1,475.00 1,150.00 Adding machine (John Lias) .... 84.41 75.37 20th and Main Street property ___________ ___________ ___________ ___________ Garage .......... 7,000.00 Lot — Tridelphia District ....... 2,100.00 2,100.00 Personal residence — Detroit, Mich . 46,000.00 46,000.00 46,000.00 46,000.00 ------------- ------------- ------------- ------------- Total assets $1,342,597.99 $1,406,627.78 $1,683,341.71 $1,626,860.52
SCHEDULE B
1942 1943 1944 1945
Increase in net worth .............. $135,229.89 $197,112.42 $304,947.50 $540,575.21 Add: Federal income and gift taxes paid ............. 23,366.08 112,808.35 109,480.65 94,986.21 Insurance premiums paid ............. 2,288.82 11,903.67 1,031.88 41,088.35 Nondeductible portions of capital loss .. ____________ ___________ ____________ ___________ Other personal items ............ 41,885.66 58,566.06 86,192.50 109,381.47 ------------ ----------- ----------- ----------- 202,770.45 380,390.50 501,652.53 786,031.24 Less: Nontaxable portion of capital gain ............... (1,300.00) (2,348.75) (1,060.91) ------------ ----------- ----------- ----------- Corrected consolidated net income ......... 202,770.45 379,090.50 499,303.78 784,970.33 ------------ ----------- ----------- ----------- Less net income reported or adjusted: John Lias ......... 36,678.10 72,009.18 70,449.44 77,937.07 Alice B. Lias ..... (581.85) 13,392.17 8,475.14 13,472.87 Gregory Koutroumanos ..... 11,299.48 12,632.00 30,567.60 William Koutroumanos 14,479.06 14,422.00 ------------ ------------ ----------- ----------- Total net income reported or adjusted 61,874.79 112,455.35 78,924.58 121,977.54 ------------ ----------- ----------- ----------- Corrected net income of William G. Lias . 140,895.66 266,635.15 420,379.20 662,992.79 Less: Net income reported by William G. Lias ............ 98,283.74 81,023.26 86,109.59 76,336.18 ----------- ----------- ------------ ----------- Unreported income ... $42,611.92 $185,611.89 $334,269.61 $586,656.61
1946 1947 1948 Increase in net worth ................... $64,029.79 $276,713.93 ($56,481.19) Add: Federal income and gift taxes paid ............ 184,723.82 119,047.89 110,351.65 Insurance premiums paid 74.31 Nondeductible portions of capital loss ....... 7,135.43 Other personal items ... 91,996.73 32,348.74 21,305.51 ----------- ------------- ---------- 340,824.65 428,110.56 82,311.40 Less: Nontaxable portion of capital gain (1,761.55) (2,881.48) ----------- ------------- ---------- Corrected consolidated net income .............. 339,063.10 425,229.08 82,311.40 ----------- ------------- ---------- Less net income reported or adjusted: John Lias .............. 104,996.96 66,955.74 11,467.17 Alice B. Lias .......... 1,763.75 3,252.961Gregory Koutroumanos ... 46,831.92 31,034.77 17,413.19 William Koutroumanos ... 12,550.44 ---------- ------------ ---------- Total net income reported or adjusted .... 153,592.63 101,243.47 41,430.80 ---------- ------------ ---------- Corrected net income of William G. Lias ...... 185,470.47 323,985.61 40,880.60 Less: Net income reported by William G. Lias ................. 135,429.68 127,773.13 (17,928.71) ---------- ------------ ----------- Unreported income ........ $50,040.79 $196,212.48 $58,809.31
Page 308
1942 1943 1944 1945
Increase in net worth .............. $135,229.89 $197,112.42 $304,947.50 $540,575.21 Add: Federal income and gift taxes paid ............. 23,366.08 112,808.35 109,480.65 94,986.21 Insurance premiums paid ............. 2,288.82 11,903.67 1,031.88 41,088.35 Nondeductible portions of capital loss .. ____________ ___________ ____________ ___________ Other personal items ............ 41,885.66 58,566.06 86,192.50 109,381.47 ------------ ----------- ----------- ----------- 202,770.45 380,390.50 501,652.53 786,031.24 Less: Nontaxable portion of capital gain ............... (1,300.00) (2,348.75) (1,060.91) ------------ ----------- ----------- ----------- Corrected consolidated net income ......... 202,770.45 379,090.50 499,303.78 784,970.33 ------------ ----------- ----------- ----------- Less net income reported or adjusted: John Lias ......... 36,678.10 72,009.18 70,449.44 77,937.07 Alice B. Lias ..... (581.85) 13,392.17 8,475.14 13,472.87 Gregory Koutroumanos ..... 11,299.48 12,632.00 30,567.60 William Koutroumanos 14,479.06 14,422.00 ------------ ------------ ----------- ----------- Total net income reported or adjusted 61,874.79 112,455.35 78,924.58 121,977.54 ------------ ----------- ----------- ----------- Corrected net income of William G. Lias . 140,895.66 266,635.15 420,379.20 662,992.79 Less: Net income reported by William G. Lias ............ 98,283.74 81,023.26 86,109.59 76,336.18 ----------- ----------- ------------ ----------- Unreported income ... $42,611.92 $185,611.89 $334,269.61 $586,656.61
1946 1947 1948 Increase in net worth ................... $64,029.79 $276,713.93 ($56,481.19) Add: Federal income and gift taxes paid ............ 184,723.82 119,047.89 110,351.65 Insurance premiums paid 74.31 Nondeductible portions of capital loss ....... 7,135.43 Other personal items ... 91,996.73 32,348.74 21,305.51 ----------- ------------- ---------- 340,824.65 428,110.56 82,311.40 Less: Nontaxable portion of capital gain (1,761.55) (2,881.48) ----------- ------------- ---------- Corrected consolidated net income .............. 339,063.10 425,229.08 82,311.40 ----------- ------------- ---------- Less net income reported or adjusted: John Lias .............. 104,996.96 66,955.74 11,467.17 Alice B. Lias .......... 1,763.75 3,252.961Gregory Koutroumanos ... 46,831.92 31,034.77 17,413.19 William Koutroumanos ... 12,550.44 ---------- ------------ ---------- Total net income reported or adjusted .... 153,592.63 101,243.47 41,430.80 ---------- ------------ ---------- Corrected net income of William G. Lias ...... 185,470.47 323,985.61 40,880.60 Less: Net income reported by William G. Lias ................. 135,429.68 127,773.13 (17,928.71) ---------- ------------ ----------- Unreported income ........ $50,040.79 $196,212.48 $58,809.31
On April 8 or 9, 1949, a fire occurred in Zeller's Steak House.
On November 1, 1948, petitioner, John Lias, Gregory Manos, and William Manos, entered into a written agreement purporting to be a settlement between them as of that date. That agreement (petitioner's Ex. 193) is incorporated herein by reference.
On September 27, 28, and 29, 1951, mutilated monies in the respective amounts of $45,000, $35,000, and $29,000, were delivered by an employee of Racing Association to the Half Dollar Bank for deposit or exchange. In November 1951, $15,000 in mutilated money was turned over to petitioner by an employee of Market Street Club and sent to the United States Treasury for redemption. The amount allowed as redemption was credited to petitioner's tax liabilities.
The petitioner has failed to show that he sustained a gambling loss in the year 1943.
The account in the Fulton Bank in the name of Alice B. Lias, in the Half Dollar in the name of Mary Manos, in the National Bank in the name of William G. or Alice B. Lias, and in the Security Trust and Union Federal Banks in the names of Alice B. Lias and Alice B. Lias, trustee for George W. Lias and Antoinette Lias, children of the petitioner, were properties of the petitioner in the years 1944 and 1945.
The rents belonging to Laconia, Inc., collected and retained in 1945 by petitioner and his wife, who were stockholders, to the extent of available earnings of the corporation, represent the distribution of earnings and profits taxable to them as dividends.
Petitioner constructively received salary of $10,000 in 1946 from Racing Association which was actually received in 1947.
Petitioner acquired and thereafter owned, during 1943 through 1945, the Aul Shively and Musee Buildings.
Petitioner did not keep or maintain personal books of account or other records adequate to enable the respondent to establish the amount of gross income and deductions and other matter required to be shown on a return for the purpose of enabling the respondent to determine the correct amount of income subject to tax.
The computation of petitioner's income for the taxable years involved on the net worth expenditures basis clearly reflects his income.
Petitioner for each of the taxable years 1942 to 1947, inclusive, and the petitioner and his wife, for the year 1948, filed a false and fraudulent return with intent to evade tax; at least a part of the deficiency for each of such years is due to fraud.
The gross income stated in the return filed for each of the years 1944 and 1945 was understated in an amount in excess of 25 per cent.
Petitioner substantially understated his tax on his declaration of estimated tax for each of the years 1943 to 1947, inclusive.Page 309
OPINION.
Before discussing the specific issues presented, a brief summary of the petitioner's background and activities prior to the taxable years is essential to a proper understanding of the matters hereinafter presented.
Petitioner William G. Lias has continuously engaged in illicit enterprises. Between 1923 and 1930 he was convicted of violating the National Prohibition Act on 4 occasions, for which he received 3 prison sentences ranging from 6 months to 2 years in addition to fines. Even while serving his last sentence he continued his interest in a partnership engaged in the numbers business. Dating from his release from the penitentiary in 1933, and continuing through the taxable periods in question, the petitioner has maintained varying interests in partnerships and corporations, most of which derived their income from gambling activities embracing many forms. Those enterprises in existence in the taxable years are set forth in our findings and will be referred to hereinafter only as necessity requires.
The most important question raised is the method used by the respondent to compute the taxable income of petitioner for the years involved. The petitioners challenge the respondent's use of the combined net worth of the family group, rather than the individual net worth of William G. Lias, as arbitrary and unauthorized.
During the course of the examination of petitioner's returns for the years 1942 to 1946, inclusive, the revenue agents ascertained that the investments and the expenditures were greatly in excess of the income reported. Many large transactions were carried out with the use of cash, involving listed stocks, real estate, United States bonds, bank accounts, and the income therefrom, as to which no records were kept by the petitioner.
When the agents made inquiry of petitioner as to specific assets which had been discovered, he stated repeatedly that all assets, regardless of whether they were in the names of his wife, brother, mother-in-law, or brothers-in-law, were his to do with as he saw fit. Petitioner was unable to identify the source of funds used to acquire various assets. He had no permanent books of account or records from which the agents could determine the amount of his income subject to tax.Page 310
Petitioner refused to furnish the agents with a net worth statement. In endeavoring to compare reported income with the increase in net worth, the agents were met with the difficulty of identifying the ownership of assets. Corporate dividends were not paid in accordance with stock record ownership. Bank accounts were shifted from the name of one of the group to the name of another and stocks of record were not in the names of the true owners. Assets other than cash were shifting from the nominal ownership of one of the group to another. The petitioner handled the money of the family group. Much of the property at the beginning of the taxable period 1942 to 1948, inclusive, was in the name of petitioner's wife.
During the investigation made by the revenue agents, corporate stock was transferred on December 18, 1946, to conform the record ownership with the true ownership, and in 1947 petitioner filed gift tax returns for the same purpose. With these recorded transfers the record ownership of stock conformed substantially with the income reported, plus gifts of the individual members of the group.
Confronted with this confused state of the affairs of petitioner and the members of the family group, the agents determined that it was impossible to compute the individual net worth of the petitioner without reference to the entire group and were compelled to compute the consolidated net worth of the Lias family in order to compute the individual net worth of the petitioner. The combined taxable net income of the petitioner, his wife, his brother, and brothers-in-law, was determined by taking the increase in their combined net worth during each year, adding Federal income taxes, insurance premiums, and personal expenses paid during each year, and making proper adjustments for capital gains and losses. From such combined taxable net income there was deducted the income reported or adjusted for the other members of the family group, leaving the taxable net income of the petitioner.
The petitioner argues that if the consolidated net worth of the family is resorted to, the assets of the individuals rather than the income reported or as adjusted should be deducted in determining his taxable net income. The argument so simply stated appears ingenious. When considered in the light of the above facts and circumstances we think it lacks sincerity. The petitioner so conducted his own affairs and those of the Lias Group as to make it impossible to identify the individual ownership of assets. We are not persuaded that the petitioner did not create this confused situation deliberately and with purposeful design. The fact that no members of the family group, except petitioner and Gregory Manos, were sworn as witnesses in these proceedings is not without significance. In his testimony Gregory Manos made no claim to any assets or indebtedness of petitioner toPage 311him. The testimony of the petitioner will be discussed later in connection with other phases of the net worth computation.
It is to be further noted that after the revenue agents prepared the consolidated net worth statement as a basis for the respondent's determination, the existence of the amount of $124,000 of mutilated currency was revealed. At least a part of such funds appears rather convincingly to have been income earned in the taxable period which has not been reflected in such computation. The Government is not powerless to collect its due. A taxpayer may not be heard to complain where by his own conduct he has rendered it impossible to ascertain his taxable net income by the methods ordinarily employed. While the consolidated family net worth technique does not appear to have been resorted to heretofore, we think its use is permissible as embraced within the scope of the net worth technique in civil cases of the character under consideration and involving the complexities and unprecedented circumstances presented. In our opinion no substantial injury results to the petitioner. Extraordinary situations require the adoption of unusual methods to resolve them. Mindful of the pitfalls inherent in any net worth method, we approve the respondent's use of the consolidated net worth method in the instant proceedings. Cf.Beardv.United States,(C. A. 4, 1955)222 F.2d 84.
A second challenge to the net worth statement is that it discloses no cash on hand of the petitioner and other members of the family unit at the beginning of the taxable period involved. This attack is particularly commonplace where the source of income is from illicit and gambling activities. It is essential that the opening net worth be established with reasonable certainty, since the subsequent calculations are dependent on its accuracy.
The petitioner claims that on January 1, 1942, the beginning of the net worth period, he alone had between $850,000 and $950,000 cash reserves on hand. He testified that in June 1926 he had $219,000 in concealed currency, and by June 1936 it had increased to $620,000. Assuming for purposes of argument the existence of the amount of $219,000 in 1926, the total amount of net income reported by petitioner for the period 1928 to 1935, inclusive, amounted to $143,192.31, which, if added to the $219,000 cash reserve, would aggregate only $362,192.31 as of December 31, 1935. If the cash reserve of $620,000 as of June 1936 is accepted, it is obvious that the petitioner had not reported his correct taxable income in the period 1928 to 1935, inclusive.
For the period 1936 to 1941, inclusive, the petitioner reported net income of $132,866.76, which, if added to the assumed amount of $362,192.31 as of December 31, 1935, the cash reserve as of December 31, 1941, would aggregate $495,059.07. Petitioner testified that thePage 312expenses and attorneys' fees incurred in the defense in 1935 of the criminal charge of income tax evasion were approximately $100,000. The record discloses that for the years 1934 to 1941, inclusive, petitioner paid Federal income taxes of $18,128.09. Petitioner testified that his living expenses for the period 1926 to 1941, inclusive, varied between $6,500 and $12,000 annually. Applying the minimum of $6,500, the living expenses for the 15-year period would aggregate $97,500. By December 31, 1941, the visible assets acquired totaled $164,732.97. The above-mentioned expenditures aggregated $380,361.06. If that amount is deducted from the assumed cash reserve as of December 31, 1941, $495,059.07, it gives a resultant figure of $114,698.01, which would be the cash reserve as of January 1, 1942, if the existence of the amount of $219,000 in currency in June 1926 is accepted as a fact. It may be also noted that the foregoing figures do not take into account the expenses and attorneys' fees incurred in the trial and appeal from the petitioner's conviction in 1930 for a violation of the National Prohibition Act, nor the large amount of illicit whiskey and equipment which the petitioner testified was confiscated about that time, the value of which is not revealed.
Despite the testimony of petitioner, the record discloses a great deal of credible evidence which negates the existence of any secreted currency as of January 1, 1942.
Upon petitioner's return from the penitentiary in September 1933, he borrowed $2,000 to take a trip to the West Coast. In 1934, a mortgage placed on his home in 1929 to raise money to start the numbers business was foreclosed. In 1937 the petitioner submitted an offer to pay $10,400, stating that it represented his true and actual tax, penalty, and interest liability for all years prior to January 1, 1934, and that the full amount would be paid by February 28, 1938. On March 2, 1938, Goldberg, who had a power of attorney from petitioner, wrote a letter to the Tax Division of the Department of Justice, enclosing a check for $1,000 and stating that petitioner regretted he could not send more, but in view of business conditions he found it impossible to do so and that to pay his entire tax would deplete petitioner's working capital. On March 22, 1938, a new compromise offer was made by petitioner which provided for certain installment payments. Petitioner defaulted on the June 1 installment payment, and on June 6, 1938, Goldberg wrote a letter stating that he had been requested to advise that petitioner was unable to send the $500 due because of recent heavy losses. On August 4, 1938, Goldberg wrote a letter stating that petitioner was unable to make any of the monthly payments because business had been and was very bad, and petitioner did not foresee any change for the near future. On November 21, 1939, Goldberg wrote a letter stating that Special Agent Hauk had beenPage 313there to obtain a settlement of the taxes for 1928 to 1933, inclusive, and that petitioner had given him 13 postdated checks. On April 29, 1940, Goldberg wrote a letter to the collector requesting postponement of the two monthly installments of $300 each because business was bad. On May 16, 1941, petitioner wrote a letter enclosing $50 to apply on income taxes for past years and stating that circumstances at the present time did not permit sending more. From 1938 through 1941 the collector for the district of West Virginia endeavored, without success, to find property of petitioner. Petitioner did not pay his unpaid tax liability until November 1942. He did not pay the fines imposed on his convictions in 1926 and 1930 for violations of the Prohibition Act until December 1946.
The record contains other evidence tending to negate the existence of any cash reserve at the beginning of the net worth period, which is not specifically detailed here because of its cumulative character.
The petitioner testified that he had no records to support the existence of any cash reserves as of January 1, 1942, or for prior years.
If the petitioner and Goldberg in their communications to the Government during the period 1937 to May 16, 1941, were stating the truth as to the petitioner's then financial circumstances, the testimony given by the petitioner in these proceedings as to his reserve of cash is false. Goldberg was rather intimately associated as an accountant with petitioner's enterprises and his finances. We are unwilling to conclude that Goldberg was a voluntary party to any deception on the part of the petitioner in the communications to the Government respecting the petitioner's ability to pay his unpaid tax liability and prefer to accept those statements as representing the truth.
The petitioner was on the stand for several days, affording the Court an opportunity to observe his demeanor as a witness. He was evasive, contradictory, and unresponsive. As a result of his many litigations arising from his disregard of law, petitioner had evidently acquired a technique of evasiveness and confusion that made him a very difficult witness. Making due allowance for the petitioner's unfortunate position the Court, after a considered appraisal, is not disposed to give any credibility to his unsupported testimony.
Furthermore, the testimony of the revenue agents shows they made checks to verify petitioner's claims of cash reserves, without avail. The agents testified that the petitioner had stated he made considerable money in prior years from bootlegging and gambling activities but his expenses and overhead were very heavy. The term "overhead" when used in connection with illicit activities has a significance other than its ordinary meaning. The petitioner testified that he did not tell the agents what cash he had on hand as of January 1, 1942,Page 314the critical date involved. The agents were aware of petitioner's financial circumstances with respect to his unpaid tax liability, as disclosed in the aforementioned communications, and, therefore, appear to be justified in accepting petitioner's statement that the only cash on hand on January 1, 1942, was what he had in his pocket. It is an old maxim that he who deals with his Government must turn square corners. We are convinced that the petitioner has not sustained his burden with respect to the deficiencies of showing any amount of cash on hand at the beginning of the net worth period other than the bank deposit reflected in the net worth statement.
The petitioner further claims that the net worth statement is arbitrary because it fails to credit any cash on hand at the critical date belonging to the other members of the Lias family unit. A search of the record does not disclose any testimony as to cash on hand at the opening of the taxable period belonging to members of the family other than the cash reserve claimed by William G. Lias. Petitioner testified that he was the only one of the family unit who handled the money. If the other members had cash at the beginning of the taxable period they still had it at the close of the period. Outside of the petitioner, the only member of the Lias family to testify in these proceedings was Gregory Manos, who did not testify that he had any cash on hand on January 1, 1942. Although a deficiency and a fraud penalty are asserted against petitioner's wife, Alice B. Lias, for the taxable year 1948, she was not sworn as a witness, nor were William Manos, John Lias, or Mary Manos. Counsel for petitioner stated at the trial they were available to the respondent if the latter saw fit to call them. This is no valid excuse for petitioner's failure to do so.
The respondent was under no obligation to have them sworn. The inference may be drawn that, if called, their testimony would not have been favorable to petitioner's case. We think this contention of the petitioner is without substantial merit.
The petitioner further claims that the net worth computation is faulty for the reason that it does not reflect the petitioner's liability to John Lias of $118,000, which he gave the petitioner in 1931, the amount of $66,000 which his wife, Alice B. Lias, had in 1935, and the amount of $10,000 which Mary Manos brought into the family pool. While the petitioner testified that the above amounts were brought into the family pool there was no documentary proof or other substantiating evidence presented convincingly to establish such facts.
As to the claim that John Lias contributed $118,000 to the family pool in 1931, the petitioner's testimony indicates considerable uncertainty as to whether the amount was $115,000 or $118,000. The petitioner testified that he did not see the money but was told that it was given by John to petitioner's sister. There is some evidence that petitionerPage 315had executed, at some undisclosed date, a note to John for the sum of $100,000. Petitioner told the agents that the $100,000 note was given for money John loaned to him to make payment on the racetrack in 1945 and that it was paid by issuing 1,000 shares of stock to John.
The revenue agents made a check of the Federal income tax returns filed by John Lias for the years prior to 1932 to ascertain his possible cash reserve in 1931. Prior to 1932, John filed tax returns for the years 1924, 1925, 1926, and 1928 only. The total income reported or adjusted for those 4 years, as stipulated, was $9,471.70. For the year 1932, John reported income of $2,600, which represented his salary of $50 per week from the numbers business, and for the year 1933 his reported or adjusted income was $3,500, representing his salary of $75 per week from the same source. In the face of such undisputed evidence, and the fact that John was not a witness in these proceedings, the petitioner's claim respecting the sum of $118,000 appears to the Court to be incredible.
As to the claim that Alice B. Lias, in 1935, contributed to the pool the sum of $66,000, it is sufficient to note that the only testimony to support it is petitioner's. The record on the contrary indicates that such funds as Alice B. Lias had were furnished to her by petitioner.
In connection with the alleged contribution of $10,000 by Mary Manos, the petitioner testified that Mary Manos had purchased the Aul Shively and Musee Buildings for $25,000, putting in $10,000 and borrowing the balance. The mortgage placed thereon was for $10,000. Improvements of $14,438.49 were made, making the total cost $39,438.49. Revenue Agent Young testified that he was told by the petitioner that he had paid for the property and improvements and taken the deed in the name of Mary Manos. The interest on the mortgage was not deducted on the returns filed by Mary Manos. The losses from the operation of these properties of $390.11 and $853.14 for 1943 and 1944, and the income therefrom of $1,883.57 and $546.12 for 1945 and 1946, are included in the income of petitioner in the deficiency notice. Neither the rents nor the gain on disposition in the year 1946 were reported on any income tax return. In October 1947 the rental account of such buildings in the Half Dollar Trust and Savings Bank was transferred to Automatic. On May 11, 1946, the properties were transferred to Laconia, Inc., for 320 shares of its capital stock at a cost of $32,000. Laconia, Inc., paid the balance due on the mortgage of $8,099.47. Certificate No. 4, for 320 shares of Laconia stock, which was issued in the name of Mary Manos, was transferred in 1950 to trusts for the children of petitioner. Gregory Manos testified that he knew of no money or property received by his mother at his father's death. Mary Manos lived with her sons, and in the yearsPage 3161937, 1939, and 1940, she was claimed as a dependent by Gregory, and for the years 1941 and 1942 by William Manos.
The foregoing recital would appear to support the agent's testimony that petitioner stated he had purchased the buildings in question and tends to discredit the petitioner's claim, at the trial, that Mary Manos contributed $10,000 to the pool.
A further claim is made that a substantial part of the distributive partnership share of Zeller's Steak House, Inc., in the net income of Market Street Club was paid to the petitioner and would increase the fund available to him in the taxable years. The record does not show that petitioner actually received any part of such amount. If Zellers, a separate taxable entity, did not draw all of its distributive share from Market Street, it, and not the petitioner, had a receivable to that extent.
The petitioner assigns as error the inclusion in the year 1946 of the amount of $10,000 as salary from Wheeling Downs Racing Association and accrued on its book in 1946, which amount the petitioner did not receive until 1947. The respondent determined the amount was constructively received in 1946 and included it in income for that year, and eliminated that amount from income for 1947. No facts are set forth in the petition respecting this assignment of error. On brief, the petitioner mentions the amount of $10,000 as salary from Automatic but makes no argument other than that the respondent reversed his position on a similar item in the case of Gregory Manos upon protest. The respondent, on brief, merely refers to the amendment to his answer in Docket No. 27762, filed May 9, 1952, wherein it is alleged that if such salary was not constructively received in 1946 the adjustment should be made to conform with whatever action is taken for 1946 on this issue. In this posture of the record, and in the absence of any facts which would enable it to make a determination, the Court is of the opinion that the respondent's determination that the sum of $10,000 was constructively received in 1946 should be sustained, since the burden to show the contrary is upon the petitioner. Furthermore, we are not persuaded that the petitioner seriously presses the point. In this connection it may be observed that the amount of unreported income of petitioner, as shown by the net worth statement for the year 1946, is only $50,040.79, as against $196,212.48 for the year 1947. To add the sum of $10,000 to the latter year would have the effect of increasing the deficiency to the detriment of petitioner, since 1947 is the higher bracket year.
Petitioner also assigns as error the disallowance of $20,710 as a deduction claimed in 1943 for gambling losses personally sustained during that year. There is no evidence to support this claim and, therefore, the petitioner has failed to meet his burden of proof.Page 317
The petitioner further argues that it was error to include in his income small amounts of interest on bank accounts, rents from certain real property, and dividends on stock standing in the names of other members of the Lias family.
It was the practice of the petitioner to place bank accounts, real estate, and stock in the names of others than the true owners. See also Findings of Fact made by District Judge Harry E. Watkins in the case ofUnited Statesv.Lias,103 F. Supp. 341,344, affd.196 F.2d 90, which was an action to foreclose liens for income taxes assessed and outstanding against the petitioner for the years 1942 to 1947, inclusive.
We have found as a fact that the bank accounts, certain real estate, and the stock from which the income in question arises, belonged to the petitioner.
We, therefore, hold that the respondent's determination that the income from such sources was taxable to the petitioner in the years received has not been shown to be erroneous.
Petitioner relies heavily upon an agreement dated November 1, 1948, purporting to be an accounting between petitioner, John Lias, Gregory Manos, and William Manos.
The agreement was prepared by petitioner's attorneys, based upon certain schedules compiled by Richard Overmeier, a certified public accountant in the employ of Frazer and Torbet, who were retained by the petitioner in connection with his pending income tax matters. Overmeier was given directions to ascertain how much money had been invested by petitioner in his enterprises on behalf of the parties to the agreement so that transfers of the securities could be made.
The respondent contends that the agreement is a sham and without substance here. We are in accord with that view. Overmeier testified that there were no records to show that the amounts listed on the schedules attached were left in the Lias enterprises and that he relied upon the oral statements of the petitioner and John Lias that all monies reported as income were left with the petitioner for investment. There are no personal books of the petitioner or the others to establish the interfamily financial relationships. The only available records were some check stubs and canceled checks. A number of the checks were not produced or available to determine the endorsements thereon. Neither John Lias nor William Manos testified in these proceedings. We have heretofore observed that the testimony of the petitioner is not credible. Gregory Manos testified that he was not interested in a strict accounting; that when he signed the agreement no schedules were attached and that he was not familiar with nor consulted regarding his interest.Page 318
We are of the opinion that the real purpose of the agreement of November 1, 1948, was an attempt by petitioner to establish ownership of the stocks listed therein to others, whereas the entire record convinces us that the petitioner was the actual owner thereof. The attempted transfers were without consideration and they are determined to be without validity against the respondent. We are not here concerned with its legal effect as between the individuals themselves. Attention is also directed to the able opinion of Judge Watkins in the case ofUnited Statesv.Lias, supra.
We have discussed at some length the various contentions of petitioner to the effect that the net worth statement is arbitrary and unauthorized and find that they possess no substantial merit.
The petitioner makes no claim of having received any money or property by gift or inheritance. Nor has any claim been advanced that the visible assets listed on the net worth statement were not acquired in the taxable period involved.
On the basis of the net worth statement set forth in our Findings of Fact, which is supported by the entire record, we hold that the petitioner's unreported income for the taxable years in question is as follows:Year Amount
1942 ..................................... $42,611.92 1943 ..................................... 185,611.89 1944 ..................................... 334,269.61 1945 ..................................... 586,656.61 1946 ..................................... 50,040.79 1947 ..................................... 196,212.48
and that for the year 1948, in which year the petitioner and his wife, Alice B. Lias, filed a joint return, the unreported income was in the amount of $58,809.31.
We next consider the question of the propriety of the imposition of the 50 per cent addition to the tax for fraud. As to this issue the burden is upon the respondent.
The repeated understatement of income in each of the taxable years by percentages ranging from a minimum of 137 per cent in 1946 to a maximum of 488 per cent in 1944 establishes a prima facie case of fraud.
We, therefore, weigh the arguments advanced by the petitioner in support of his position that the fraud penalties are not justified. These may be briefly summarized as: (a) The respondent has pointed to no source of income other than those sources reported by the petitioner; (b) the only source of petitioner's income was from the Lias enterprises and the respondent has recognized the books and records of such enterprises as properly reflecting income, and thatPage 319the returns filed were in conformity therewith; and (c) the petitioner was prosecuted criminally for willfully and knowingly attempting to defeat and evade income taxes for the years 1942 to 1946, inclusive, and the jury found him not guilty.
We find no merit in the claim that the respondent has not shown any source of income that would account for the increase in the petitioner's net worth. In view of the very large discrepancy between the net income, as reported, and the cost of assets acquired, plus the nondeductible expenses, we think it was not incumbent upon the respondent to show any specific amounts of income omitted from petitioner's returns.Kitev.Commissioner,217 F.2d 585, affirming on this issue a Memorandum Opinion of this Court filed August 15, 1953. This record reveals likely sources of unreported income. By his own admission the petitioner was a gambler, and in the taxable year 1943 claimed a loss of approximately $20,000 from his individual gambling activities. Petitioner held substantial interests in partnerships and owned controlling interests in certain corporations whose only source of income was from gambling operations. Considerable evidence was presented by the respondent respecting the aggregate amount of $124,000 of mutilated money which was turned in by the petitioner and the Wheeling Downs Racing Association in September and November 1951. One package contained $15,000 in currency which the petitioner caused to be sent direct to the United States Treasurer for redemption. The petitioner testified that the $15,000 was money stolen in 1946 by an employee of the Market Street Club, was hidden in a cabinet file which went through a fire in Zeller's Steak House in April 1949, and was discovered in 1951 when the file cabinet was removed. Treasury officials examined the currency to determine how much was redeemable and recorded the serial numbers thereon. Their testimony is to the effect that the $15,000 was buried and not burned currency, that many of the serial numbers were consecutive, and their records disclosed that some of the currency had not been issued until 1947. This evidence discredits the petitioner's claim that it was part of the bank roll of the Market Street Club stolen by an employee in 1946, and that the currency was in the fire of 1949.
Also, in September 1951, three separate packages of mutilated currency, aggregating $109,000, were delivered by an employee of the Wheeling Downs Racing Association to the Half Dollar Bank for deposit or exchange. The petitioner claims that this mutilated currency was taken in at the parimutuel windows and was not in usable condition. Witnesses from the redemption divisions of the Government testified that some of the $109,000 was buried currency and had a bad odor. Many of the serial numbers which were listed by thePage 320officials were consecutive, indicating a strong unlikelihood that such currency had been turned in by various bettors at the parimutuel windows. The mutilated monies referred to above are not reflected in the net worth statement. While we are unable to find from the record in what year the mutilated currency was earned, or its true ownership, the testimony is referred to as indicating a possible source of unreported income and as refuting petitioner's contentions.
Nor do we find any substance in the claim that the Lias enterprises kept proper books and records and that the respondent accepted the returns as conforming to such records with only minor adjustments. The record shows that certain underlying records were not available so as to enable the revenue agents to make an audit and for that reason the books and work papers were adopted as the best evidence. The respondent does not admit that such records establish the correct income of the Lias enterprises. Goldberg testified that witnesses Berklas, Kartsimas, and McGill, who were charged with making some of the primary records, were not qualified bookkeepers. Other individuals who kept primary records of some of the enterprises in which petitioner had an interest were not sworn as witnesses.
The record also shows that on its returns for 1942, 1943, and 1944, Automatic reported as its income the respective amounts of $35,000, $60,000, and $50,000, which petitioner took without any record having been made. These amounts were recorded on Automatic's books by Goldberg as year-end adjustments based on oral statements of the petitioner. If petitioner could take such amounts without records having been made, we can only surmise what other amounts he may have similarly taken. The petitioner's history of wanton disrespect for observance of the law and his conflicting testimony under oath do not commend credence in his oral statements.
Automatic owned and operated various coin machines, including slot machines. The number of slot machines operated during the period 1942 to 1944, inclusive, has not been definitely shown. Estimates of witnesses indicate the number was at times between 250 and 350. Automatic kept its depreciation records on a cost rather than on a unit basis. Since the slot machines which Automatic operated were subject to a Federal license fee and to a fine imposed by the City of Wheeling, West Virginia, where most of the slot machines were installed, it is not unlikely that Automatic preferred not to record the number of units it had in operation and for that reason adopted the cost basis. The net worth statement shows that the largest amounts of unreported income were in the taxable years 1944 and 1945.
The record discloses that, beginning in about December 1941, the governing authorities of the City of Wheeling adopted a policy ofPage 321noninterference with gambling activities and, instead, imposed fines quarterly on slot machines and various paraphernalia used in gambling operations. The Lias enterprises were the beneficiaries of not only the freedom to engage in gambling activities in the City of Wheeling but of the prosperity of the war years. Such favorable conditions could readily have produced greater revenue than that shown by the visible assets listed on the net worth statement. The expenditures of petitioner kept pace with the increased income. In November 1944 the city authorities changed their policy and prohibited the operation of slot machines, but continued collecting fines upon other gambling equipment used by the Lias enterprises. The record indicates that after such change in policy the petitioner's income and expenditures greatly declined. Since the Lias enterprises and the petitioner himself continuously handled very large amounts of cash the opportunity for concealment was great and, presumably, the temptation was the more impelling.2
The final contention of the petitioner that the jury found him not guilty of willful attempt to evade income taxes for the years 1942 to 1946, inclusive, which cover a part of the years before us, requires no extended discussion. InHelveringv.Mitchell,303 U.S. 391, the Supreme Court held that an acquittal of a taxpayer on a charge of willful attempt to evade or defeat income tax was no bar to a collection of the 50 per cent addition to the tax for fraud.
For the year 1948 the petitioner and his wife, Alice B. Lias, filed a joint return which was prepared by Goldberg. The record furnishes no direct evidence that Alice B. Lias had knowledge or was involved in the Lias enterprises except as a stockholder in some of the corporations. It does not appear that the revenue agents contacted her in determining the net worth statement against the petitioner. Alice B. Lias was not a witness in these proceedings. Under the circumstances, we think, the respondent has not clearly established that Alice B. Lias filed a false and fraudulent return in 1948 with intent to evade tax. However, having filed a joint return she is jointly and severally liable for the deficiency and addition to the tax for fraud herein determined.Howellv.Commissioner,175 F.2d 240.
In our opinion, this record convincingly establishes that the petitioner filed false and fraudulent returns and that a part of the deficiency for each of the taxable years 1942 to 1948, inclusive, was due to fraud. We, therefore, hold that the respondent properly imposed the 50 per cent addition to the tax for fraud in each of the taxable years in question.Page 322
The next question presented is whether the petitioner understated his tax in his declaration of estimated tax for each of the years 1943 to 1947, inclusive, by more than 20 per cent. The burden is upon the petitioner to show error in the respondent's determination. The petitioner, on brief, makes no argument with respect to this issue. If the petitioner has not abandoned the issue, we hold that he has failed to carry his burden of showing that the 6 per cent penalty provided by section 294 (d) (2) of the 1939 Code should not be added and, therefore, sustain the respondent on this issue.
The final question presented is whether the deficiencies for the years 1942, 1943, and 1944, are barred by the statute of limitations. The issue is of substance only where fraud is not established. Since we have determined that the petitioner is liable for the 50 per cent addition to the tax for fraud for each of the taxable years involved, this issue is mooted.
It may properly be noted that the transcript of the testimony covers approximately 7,150 pages, the exhibits are in excess of 400, and the briefs are 600 pages in length. The magnitude of the record indicates to some degree the Court's task in endeavoring to present its determination in a concise and lucid manner. A more detailed discussion of the evidence would, we think, tend to confuse rather than enlighten. Much of the evidence presented has no decisive bearing on the issues. The fact that all of the evidence has not been specifically discussed does not mean that its materiality and importance has not been fully considered and evaluated by the Court in arriving at its determination of the issues.Decisions will be entered under Rule 50.
- Assets of petitioner, Alice Lias, John Lias, Gregory Manos, and William Manos increased and liabilities decreased as shown by figures without parentheses; assets decreased and liabilities increased as shown by figures in parentheses. ↩
- Joint return. ↩
- Joint return. ↩
- Joint return. ↩
- Formerly the United States Board of Tax Appeals. ↩
- This appears fully in the testimony adduced inAutomaticCigarette Sales Corporation,T. C. Memo. 1955-15, which, by stipulation, is part of the instant record. ↩