Emilie Furnish Funk
v.
Comm'r of Internal Revenue

Tax Court of the United States.Nov 20, 1957
29 T.C. 279 (U.S.T.C. 1957)

Docket Nos. 51401 51402 51416 51417.

1957-11-20

EMILIE FURNISH FUNK (FORMER WIFE OF RICHARD D. FURNISH), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.RICHARD DOUGLAS FURNISH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Dermot R. Long, Esq., for the petitioner in Docket Nos. 51401 and 51402. Murray M. Chotiner, Esq., for the petitioner in Docket Nos. 51416 and 51417.


Dermot R. Long, Esq., for the petitioner in Docket Nos. 51401 and 51402. Murray M. Chotiner, Esq., for the petitioner in Docket Nos. 51416 and 51417.

Mark Townsend, Esq., for the respondent.

1. Petitioner, a physician, did not keep an accurate set of books. The Commissioner's determination of income was based upon an audit of patient history cards maintained by petitioner and his office staff, which disclosed treatment and charges. Petitioner sought to have his income determined by the net worth method which showed substantial amounts of unreported income over a 10-year period, but not as much, in the aggregate, as determined by the Commissioner by using the patient history cards, adding to the amounts disclosed thereon specific known items such as dividends, interest, rents, and gains on sales of property, and subtracting allowable deductions appearing on the returns as well as other deductions found upon investigation of petitioner's affairs. Held, although the net worth method is an acceptable method of determining income, it is less accurate in the circumstances of this case than the method adopted by the Commissioner.

2. Held, further, a part of the deficiency for each of the years 1939-1948 was due to fraud with intent to evade tax; fraud not proved for 1949.

3. None of the deficiencies is barred by limitations.

4. Petitioner's wife, subsequently divorced, signed each of the returns for the years 1939-1942 in blank. He completed the returns and added his own signature. In the caption of each return his name alone appeared. She filed no separate return, although the parties lived in a community property State where half of his earnings were treated as belonging to her. In each return the maximum personal exemption available to both spouses in a joint return was taken. Held, the returns were joint returns and the wife is jointly and severally liable with her former husband for the deficiencies determined as well as additions to tax for fraud, notwithstanding that she was wholly innocent, and was in fact a victim of her husband's fraud. This result is required by law and the Tax Court has no equitable powers to grant her any relief.

The respondent determined deficiencies in income tax and additions to tax for fraud for the years 1939-1942 against each petitioner as follows:

+--------------------------+ ¦Year¦Deficiency ¦Addition ¦ +----+-----------+---------¦ ¦ ¦ ¦to tax ¦ +----+-----------+---------¦ ¦1939¦$507.38 ¦$253.69 ¦ +----+-----------+---------¦ ¦1940¦1,907.96 ¦953.98 ¦ +----+-----------+---------¦ ¦1941¦10,624.34 ¦5,317.17 ¦ +----+-----------+---------¦ ¦1942¦22,244.90 ¦11,122.45¦ +--------------------------+

For the year 1943 he determined a deficiency in income and Victory taxes against Richard Douglas Furnish in the amount of $25,063.13 plus an addition to tax for fraud in the amount of $12,531.56. His determination for 1943 with respect to Emilie Furnish Funk was in somewhat different amounts, but he now concedes that there is no deficiency against her for that year. He also determined that for the years 1944-1949 petitioner Richard Douglas Furnish was liable for deficiencies in income tax and additions to tax for fraud as follows:

+--------------------------+ ¦Year¦Deficiency¦Addition ¦ +----+----------+----------¦ ¦ ¦ ¦to tax ¦ +----+----------+----------¦ ¦1944¦$60,406.88¦$30,203.44¦ +----+----------+----------¦ ¦1945¦40,150.23 ¦22,156.92 ¦ +----+----------+----------¦ ¦1946¦76,138.65 ¦38,069.33 ¦ +----+----------+----------¦ ¦1947¦49,179.52 ¦24,589.76 ¦ +----+----------+----------¦ ¦1948¦40,980.63 ¦20,490.32 ¦ +----+----------+----------¦ ¦1949¦5,577.02 ¦2,788.51 ¦ +--------------------------+

The foregoing determinations were not based upon the net worth method. However, petitioner Richard Douglas Furnish relies upon a net worth statement that shows even greater amounts of unreported income for the years 1939-1943 than those upon the basis of which the Commissioner had determined the deficiencies. Accordingly, the Commissioner, by amended answer, now claims in the alternative additional deficiencies and additions to tax for fraud for the years 1939-1943 in the event that the Court should adopt the net worth method as the basis for determining income for the years in controversy.

The questions presented are:

1. Did the Commissioner err in determining unreported income for each of the years 1939-1949?

2. Did the Commissioner err in determining that a part of the deficiency for each of the years 1939-1949 was due to fraud with intent to evade tax?

3. Apart from fraud, is the assessment of deficiencies for the years 1939-1949 barred by limitations?

4. Were the returns filed for the years 1939-1942 the joint returns of the petitioners or were they the separate returns of petitioner Richard Douglas Furnish?

FINDINGS OF FACT.

Some of the facts have been stipulated and are incorporated herein by this reference.

Petitioner Richard Douglas Furnish resides in Hollywood, California. During the years involved he was a doctor of medicine and practiced in Los Angeles, California. Petitioner Emilie Furnish Funk resides in Arcadia, California; she is the former wife of Furnish. Except when otherwise indicated, the word ‘petitioner’ will refer to him. The returns for the years involved were filed with the then collector of internal revenue for the sixth district of California.

The petitioners were married in 1923 at Omaha, Nebraska, while Furnish was a medical student. Four children were born of the marriage. He interned in Florida in 1925 and practiced medicine there until 1931. Internal Revenue records in Florida reveal that he filed no returns for 1925, 1926, 1927, 1930, or 1931, and that he filed returns for 1928 and 1929 showing no tax due. In 1931 one of his automobiles was repossessed. He and his family then moved to Scobey, Montana, where he practiced for approximately 2 years.

In 1933, Emilie moved to Los Angeles, and petitioner followed shortly thereafter. During the following 2 years, he traveled extensively around the country, engaging in the business of promoting and selling a serum for the injection treatment of hernia, imported from Spain, and two other products, one from Canada and one from Japan. He was away from his family except at Christmas. During this period his wife supported herself and the children in Los Angeles selling medicine we have reached on the narrow question presented to us, we do not pass on the which she bought out of a small inheritance from her father. She lived in inexpensive quarters that were furnished with secondhand furniture. She was unable to keep up the payments on this furniture, which was repossessed. Petitioner then joined his family in Los Angeles and they moved to a furnished 2-bedroom apartment which was rented for $35 a month. They lived in that apartment for several years, until petitioner purchased a house at 121 Highland Avenue. He had to borrow $1,000 in order to make the downpayment. Title was taken in the name of his cousin.

Petitioner began to practice medicine in Los Angeles in 1936. Since he was not a member of the Los Angeles County Medical Association, he had difficulty in obtaining hospital facilities for his patients. In 1942 and 1943 he finally acquired interests in two hospitals. He devoted long hours to the practice of medicine in Los Angeles.

Emilie was granted an interlocutory decree of divorce from petitioner in 1944. For the years 1943-1949, inclusive, he filed individual income tax returns. For each of the years 1939-1942, inclusive, a return was filed that was signed by both petitioners. The returns for 1939 and 1940 had been destroyed and were not available at the time of trial. The 1941 and 1942 returns were presented in evidence. The signatures of both petitioners appear at the bottom right hand corner of the first page of these two returns immediately over the following printed instruction: ‘If this is a joint return (not made by agent), it must be signed by both husband and wife.’ However, in the caption at the top of the first page of these returns there appears only the name ‘Richard Douglas Furnish’ over the printed instructions to the following effect: '(Use given names of both husband and wife, if this is a joint return).' The wife is not listed as a dependent on these returns and exemptions were claimed in the 1941 and 1942 returns in the amounts of $1,500 and $1,200, respectively, the maximum amounts that were allowable to both husband and wife for those years. The wife filed no separate returns for the years 1939-1942, inclusive, and she had no separate income during such years.

The return for each of the years 1939-1942 was signed in blank by the wife at the husband's request, and he thereafter filled it out. She did not know of the contents of the return, nor was she aware of the fact that her husband had received unreported income. Petitioners were living together as husband and wife during this period.

In connection with the divorce proceedings petitioners entered into a property settlement agreement on October 27, 1944, in which the husband agreed to pay the wife $10,000 at once plus an additional $40,000 at the rate of $400 a month. He also transferred to her his interest in a Pontiac automobile and certain household objects. He concealed from her the full extent of his assets.

Petitioner was secretive in his financial transactions, and followed the practice of taking title to property in the names of nominees. Among the reasons for such secretiveness was the state of his relationship to his wife and his fear of lawsuits.

Herman Duelke was petitioner's business manager from November 1, 1945, until May 1947. At petitioner's instructions, Duelke purchased the Hinton Arms apartment house at Sixth and Hobart Streets, Los Angeles, for petitioner, taking title in his (Duelke's) name. The money to purchase the property was given to Duelke by petitioner, and Duelke was required to give him a quitclaim deed ‘signed in blank.’

Following petitioner's instructions, Duelke purchased property at 5718 Hollywood Boulevard for him, taking title in his own (Duelke's) name. He gave petitioner a quitclaim deed to the property ‘signed in blank.’ Petitioner turned over to Duelke cash in the amount of approximately $25,000 to consummate the transaction; such cash was in bills of small denominations.

Petitioner also owned an interest in property located at 57th and Hoover Streets, although title was held in the name of his aunt, R. (Rene) M. Scanlan. This interest was sold to Boris Levin in September 1946 for a consideration of $7,525, with expense of sale of $193.13. Duelke represented petitioner at the escrow proceedings on the sale of this property. The proceeds from the sale of this property were paid by check drawn to the order of R. (Rene) M. Scanlan and turned over to her. This same check, endorsed by her, was later given to Duelke by petitioner to pay for architectural work done on the 5718 Hollywood Boulevard property owned by him. Although the property at 57th and Hoover Streets was owned by him and he eventually received the proceeds from its sale, he failed to report the gain on such sale on his income tax returns. The cost of such property to him was $3,938.83.

Petitioner acquired property at 401 North Vermont in April 1944. The funds used to purchase this property were advanced by or for him through Gideon Ramseyer and title was placed in Ramseyer's name at the start of the escrow. Petitioner had Ramseyer sign a quitclaim deed. The total purchase price for such property was $42,195.15. Before the close of the escrow, title was transferred on petitioner's behalf to Elodia Sullivan.

Title to the 401 North Vermont property was still held in the name of Elodia Sullivan when the property was sold in May 1948 for the contract price of $131,500. The cost of such sale was $6,879.70.

Elodia Sullivan had known petitioner since 1931 when she was his nurse in Montana. Although she moved to California, she did not thereafter work for him. In 1944 she married a man named Douglas, but was divorced in 1949. She was acting for and under petitioner's instructions in taking title to the property in her name and receiving the proceeds from its sale in 1948. She received $37,120.30 in currency and a note in the amount of $87,500 secured by a trust deed. The note, including interest, was paid in January 1949, when approximately $90,000 was received.

In 1947, acting under petitioner's instructions, Elodia had purchased for him in her name 1,000 shares of Thomas Steel Company common stock. In 1948, following his instructions, she purchased for him in her name an additional 1,000 shares of Thomas Steel Company common stock for $19,953.65 from the proceeds of the sale of the 401 North Vermont property. He gave her, by permitting her to keep, the dividends paid upon the shares of the Thomas Steel Company stock while they remained in her name.

Elodia filed two income tax returns for 1948. One was filed under the name of E. Kathryn Douglass. This return listed her correct address, 3807 West Sixth Street (the Hinton Arms), Los Angeles, and reported the dividends paid on the Thomas Steel Company stock, together with a small amount of other income. The other return was filed under the name of Elodia Sullivan, and listed as her home address 1715 Micheltorena, Los Angeles. She had never lived at that address, which was the home address of Eugene Scanlan, a patient and a relative through marriage of petitioner. In that return she reported an $80,000 gain upon the sale of the 401 North Vermont property which was identified therein merely as ‘Unimproved lots.’ The only other item reported in that return was interest in the amount of $2,592 applicable to the mortgage note received upon the sale of the 401 North Vermont property. Furnish did not report that interest or the gain on the sale of that property in his own return.

Petitioner had also caused the titles to his property referred to above as the Hinton Arms at Hobart and Sixth Streets and the property at 5718 Hollywood Boulevard to be transferred to Elodia. After being interrogated by the Internal Revenue Service in November 1949, she transferred title to these properties as well as title to the Thomas Steel Company stock to petitioner. In March 1952 she filed a claim for refund of the income taxes that had been paid in connection with the 1948 return which she had filed in the name of E. Kathryn Douglass.

Petitioner received part of the proceeds of the sale of the 401 North Vermont property in the following manner, using a man named Lazard Lippman as an intermediary: Petitioner caused Elodia to draw two checks dated March 2, 1949, in the amounts of $45,000 and $20,000 on her account in the California Bank where the proceeds of the sale had been deposited. Such checks were made payable to Bernard Lippman, a brother to Lazard. Petitioner gave the checks to Lazard; Lazard gave them to Bernard; and they were deposited in Bernard's San Pedro bank account on March 15, 1949. On March 24, 1949, Bernard drew a check on his account for $65,000 payable to Lazard, who cashed it in San Pedro, receiving currency in $20 denominations, which was then delivered to petitioner. The Lippmans participated in this transaction solely as an accommodation to petitioner, who wanted the checks cashed out of town and the proceeds paid over to him in small denominations. He had told Lazard that he did not want the checks to be traced to him, because he was allegedly involved in some lawsuits.

The major portion of the proceeds from the sale of 401 North Vermont, amounting to approximately $127,000 in currency, was distributed to Elodia at petitioner's instructions as follows:

$45,000.00 (check to Bernard Lippman)

20,000.00 (check to Bernard Lippman)

1,837.52 (State income tax on sale of 401 North Vermont as reported by Elodia)

17,953.45 (Federal income tax on sale of 401 North Vermont as reported by Elodia)

19,953.65 (purchase of 1,000 shares of Thomas Steel Company common stock)

10,000.00 (loan to Gideon Ramseyer)

Petitioner acquired real property at Florence Avenue and Crenshaw Boulevard, Los Angeles, in 1944 at a cost of $25,737.31. The purchase negotiations were handled by a friend, John LeGrand, and title to the property was taken in the name of C. T. Scanlan and his wife, and petitioner paid C. T. Scanlan in cash for the amount of tax due by reason of including such sale in Scanlan's return. In March 1952 Scanlan and his wife filed claim for refund of 1948 income taxes, based on a recomputation of net income which omitted the gain on sale of this property.

By the use of nominees to report the gains derived from the sales of the 401 North Vermont and the Florence and Crenshaw properties, petitioner evaded substantial amounts of income tax. The amount of taxes paid by such nominees with respect to those gains was substantially less than the amount of taxes that petitioner would have had to pay, had he included those gains in his returns.

John LeGrand purchased stock of the Suburban Hospital for petitioner in 1943 and 1944, receiving currency in small denominations from him for the purchase. Title to this stock was taken in the name of C. T. Scanlan.

Petitioner acquired stock in the Parkview Hospital in 1942. This stock was placed by him in the name of G. E. Flowers, one of his former employees. The following dividends were paid on the stock of Parkview Hospital to petitioner or his nominee:

+------------+ ¦1944¦$2,000 ¦ +----+-------¦ ¦1946¦2,500 ¦ +----+-------¦ ¦1947¦250 ¦ +------------+

Petitioner failed to report these dividends in the returns filed for such years.

Petitioner followed the practice of sending patients' checks to his sister in Kansas City where she cashed the checks and accumulated the currency for him. Sometime prior to 1946 the accumulated currency, amounting to approximately $25,000, was transmitted to him by express. He continued the practice of sending patients' checks to his sister to be converted into currency, and in the latter part of 1947 his sister personally transmitted an additional $25,000 in accumulated currency to him.

Petitioner consistently followed the practice of carrying his bank accounts in the names of employees or relatives. The accounts carried in the name of Herman Duelke bore a designation after his name of either ‘business manager’ or ‘trustee,‘ without, however, identifying petitioner as the owner of the accounts; petitioner's business address was used as the address of Duelke. Petitioner also maintained some small accounts in the names of relatives.

At the start of the investigation of petitioner by agents of the Internal Revenue Service in January 1949, he stated to a special agent of the Intelligence Division of the Internal Revenue Service that he had never bought or sold any real estate in California at any time, nor had he asked anyone else for the use of his name in the purchase or sale of a parcel of real estate. In fact, petitioner had engaged in numerous real estate transactions buying and selling property through nominees, and at the time of the interview owned three pieces of property held in the names of nominees. His 1946 tax return showed a sale of real property known as the Bonnie Brae Medical Building.

During the same interview, when confronted with his 1946 income tax return showing income from rents from the Hinton Arms apartment house, petitioner stated to the special agent that he did not own that building, that it was the property of his business manager, Duelke, and that he had leased it from Duelke. In fact, petitioner was the real owner of the Hinton Arms and Duelke was merely his nominee.

Duelke tried to install an accurate record system for petitioner, who would not allow him to do so and inquired as to how, ‘with 130,000,000 people,‘ he could be checked by the Bureau of Internal Revenue.

During the year 1946 petitioner told Duelke that he had been previously investigated by the Bureau of Internal Revenue at his office, and had removed some of his records from his office to his home.

No set of books adequately reflecting income was maintained by petitioner. In the initial stages of the investigation leading up to the present proceedings, the revenue agents attempted to determined his correct income from payments disclosed by patient history cards maintained in his office. It became apparent to the agents that not all the cards were made available to them. When questioned concerning this, he stated to the agents that certain files were lost in moving his office. Subsequently he hired an attorney. In August 1949, at the office of the Intelligence Division, this attorney stated that it was to the interest of his client to cooperate with the Government, that there would be no longer a claim of lost files, and that they were going to have an audit made of his patient record cards to determine the amount of income he had received and would present this audit to the Government. All of the patient record cards were then made available to the investigating agents.

Petitioner's attorney employed a certified public accountant, Harry K. Hill, to make an audit for the purpose of determining as nearly as possible the amount of gross income received by petitioner from his patients over the years 1939-1948, inclusive, as disclosed by the patient record cards maintained in his office. A typical patient record card contained the name of the patient, and the amounts and dates of payments made by the patient. These cards were used by petitioner's office staff as the basis of preparing bills sent out to the patients.

In making his audit Hill examined all the patient record cards. Whenever he could not reasonably determine from his examination of any cards the amount paid or year of payment those cards were segregated. The segregated cards were then worked over separately with Irma Wheeler or Ruby Saunders, office employees of petitioner. Any cards which could not be explained by them were submitted to the petitioner for clarification. Irma Wheeler had been employed by petitioner since 1942 for general office work, with duties which included making entries on the patient record cards and billing patients. Ruby Saunders was employed from the latter part of 1948 until 1952 with similar duties. She installed a new system of making entries on the cards, but she had to be familiar with the old system in order to bill patients for charges incurred prior thereto.

Upon the completion of the Hill audit in June 1950, it was turned over to the Internal Revenue Service by petitioner's attorney. A special agent checked Hill's work papers with the transcript he had made from approximately 3,000 patient record cards which had been made available to him in the initial stages of the investigation. The special agent also took the work papers to petitioner's office to make test checks against patient record cards which had not previously been made available to the Government. The special agent consulted with Irma Wheeler, Ruby Saunders, or petitioner whenever there was an ambiguity in a particular card. Of approximately 3,900 cards checked by the special agent against the Hill audit only a few discrepancies were noted, and these were of a comparatively minor character and generally were in favor of petitioner.

In making test checks of the Hill report against the cards previously withheld, the special agent in general made samplings based upon an arbitrary selection of certain letters of the alphabet. Thus, in transfer file No. 1 he checked 75 cards in the letters A and B, of which there were 700, and did not check the rest of the alphabet; in transfer file No. 2 he checked 200 cards in the letter P, of which there were 1,200, and did not check the rest of the alphabet; in transfer file No. 3 he checked 200 cards in the letters A and C, of which there were 600, and did not check the rest of the alphabet; in transfer file No. 4 he checked 150 cards at random, of which there were between 1,200 and 1,300; in transfer file No. 4A he checked 50 cards at random, of which there were between 900 and 1,000; in transfer file No. 5 he checked 75 cards at random, of which there were 500.

The gross receipts derived by petitioner from his medical practice for the years 1939-1948, as reported in his income tax returns, and the gross receipts disclosed by the patient record cards according to the Hill audit were as follows:

+--------------------------+ ¦ ¦Gross ¦Gross ¦ +----+----------+----------¦ ¦Year¦receipts ¦receipts ¦ +----+----------+----------¦ ¦ ¦reported ¦per Hill ¦ +----+----------+----------¦ ¦ ¦ ¦audit ¦ +----+----------+----------¦ ¦ ¦ ¦ ¦ +----+----------+----------¦ ¦1939¦(1) ¦$17,720.88¦ +----+----------+----------¦ ¦1940¦(1) ¦27,734.16 ¦ +----+----------+----------¦ ¦1941¦$20,826.00¦48,685.06 ¦ +----+----------+----------¦ ¦1942¦25,642.00 ¦66,252.56 ¦ +----+----------+----------¦ ¦1943¦21,374.46 ¦106,558.90¦ +----+----------+----------¦ ¦1944¦26,521.50 ¦107,230.58¦ +----+----------+----------¦ ¦1945¦41,188.31 ¦93,621.83 ¦ +----+----------+----------¦ ¦1946¦55,493.08 ¦141,542.82¦ +----+----------+----------¦ ¦1947¦32,831.11 ¦110,695.16¦ +----+----------+----------¦ ¦1948¦57,330.03 ¦81,892.84 ¦ +----+----------+----------¦ ¦ ¦ ¦ ¦ +--------------------------+

The actual gross receipts from patients were not less than those shown by the Hill audit.

In determining the deficiencies for the years 1941-1948, inclusive, the Commissioner included in gross income the gross receipts from patients as shown in the Hill audit, and unreported dividends, interest, and gains from the sale of properties. From these receipts he deducted claimed expenses and such unclaimed expenses as were found in the course of the examination of the income tax returns, and thus arrived at net income. For the years 1939 and 1940, since claimed expenses could not be ascertained because returns and expense records were not available, net income was determined by applying to gross receipts for these 2 years shown in the Hill report the average percentage of net income from profession to gross receipts from profession based on the 2 succeeding years, 1941 and 1942.

In determining the deficiency for the year 1949, the respondent added to the net income reported by petitioner $2,936.85 for unreported dividends, $863.15 for unreported interest, $5,655.59 for understatement of net profit from profession, and $100 for a disallowed tax deduction. He allowed additional deductions of $67.58 for interest paid and $120 because of a mathematical error in the return.

The amounts of net income as reported for the years 1939-1949 and as determined by the Commissioner are as follows:

+--------------------------------+ ¦ ¦ ¦Net income ¦ +----+-------------+-------------¦ ¦ ¦Net income ¦determined ¦ +----+-------------+-------------¦ ¦Year¦reported ¦by the ¦ +----+-------------+-------------¦ ¦ ¦ ¦Commissioner ¦ +----+-------------+-------------¦ ¦ ¦ ¦ ¦ +----+-------------+-------------¦ ¦1939¦1 $4,555.56¦$12,681.05 ¦ +----+-------------+-------------¦ ¦1940¦1 5,615.83 ¦20,093.99 ¦ +----+-------------+-------------¦ ¦1941¦7,632.84 ¦35,137.76 ¦ +----+-------------+-------------¦ ¦1942¦8,477.53 ¦48,753.90 ¦ +----+-------------+-------------¦ ¦1943¦6,884.68 ¦2 49,174.25¦ +----+-------------+-------------¦ ¦1944¦12,134.10 ¦94,601.66 ¦ +----+-------------+-------------¦ ¦1945¦19,950.18 ¦80,225.42 ¦ +----+-------------+-------------¦ ¦1946¦18,212.16 ¦126,627.00 ¦ +----+-------------+-------------¦ ¦1947¦115.81 ¦84,342.75 ¦ +----+-------------+-------------¦ ¦1948¦17,828.99 ¦97,874.95 ¦ +----+-------------+-------------¦ ¦1949¦35,950.50 ¦45,318.51 ¦ +----+-------------+-------------¦ ¦ ¦ ¦ ¦ +--------------------------------+

A net worth statement purportedly reflecting assets, liabilities, and nondeductible expenses of petitioner for the years 1939-1948 was prepared by another accountant employed by him. That net worth statement was presented in evidence on behalf of petitioner as correctly disclosing net income for those years as follows:

+----------------+ ¦1939¦$30,773.28 ¦ +----+-----------¦ ¦1940¦58,541.04 ¦ +----+-----------¦ ¦1941¦55,529.22 ¦ +----+-----------¦ ¦1942¦56,770.86 ¦ +----+-----------¦ ¦1943¦55,685.22 ¦ +----+-----------¦ ¦1944¦19,728.82 ¦ +----+-----------¦ ¦1945¦53,847.59 ¦ +----+-----------¦ ¦1946¦50,666.92 ¦ +----+-----------¦ ¦1947¦74,389.45 ¦ +----+-----------¦ ¦1948¦73,922.44 ¦ +----------------+

At the trial it was admitted on behalf of petitioner that certain adjustments were required in the net worth statement prepared by the accountant, and the foregoing table reflects those adjustments. However, if the net worth method is to be employed in determining net income, additional adjustments would also be required that would result in increased income for the years 1941, 1944, and 1948, as follows:

As to 1941. An upward revision of $500 is necessary because petitioner made a gift in 1941 of a Ford automobile which had cost him $500, and the net worth statement does not give proper effect to such gift.

As to 1944. Two items are not properly reflected in the net worth statement. First, it fails to take into account the fact that he transferred a Pontiac automobile which cost him $900 to his wife under the property settlement agreement. This should have been treated as a nondeductible expenditure. Second, the net worth statement improperly reduces net income for 1944 by deducting $10,800 representing cash payments to petitioner's wife under the property settlement agreement. The net worth statement reflects this disbursement by reducing the cash on hand at December 31, 1944, by this amount, and the additional deduction of $10,800 on the net worth statement is therefore a duplication. As a result of these two items, the net income for 1944 as shown in the net worth statement, if otherwise correct, would have to be increased by $11,700.

As to 1948. The net worth statement fails to reflect petitioners' gift to Elodia of the $2,592 in dividends on the Thomas Steel Company stock. That amount shall be added to his nondeductible expenditures for 1948, thus increasing net income in the same amount.

The accountant who prepared the net worth statement made an extensive search to determine all of the investments made by petitioner, and received some help from him. All items of property discovered by him or the Government agents are included in the net worth statement. However, the amount of cash on hand shown on the net worth statement is based, at least as of January 1, 1939, and as of the end of the years 1939, 1940, and 1941, upon statements made to him by petitioner. The net worth statement showed cash on hand as follows:

+----------------------+ ¦Jan. 1, 1939 ¦$46,000¦ +--------------+-------¦ ¦Dec. 31, 1939 ¦71,000 ¦ +--------------+-------¦ ¦Dec. 31, 1940 ¦111,000¦ +--------------+-------¦ ¦Dec. 31, 1941 ¦142,943¦ +--------------+-------¦ ¦Dec. 31, 1942 ¦175,443¦ +--------------+-------¦ ¦Dec. 31, 1943 ¦184,143¦ +--------------+-------¦ ¦Dec. 31, 1944 ¦106,943¦ +--------------+-------¦ ¦Dec. 31, 1945 ¦125,163¦ +--------------+-------¦ ¦Dec. 31, 1946 ¦96,563 ¦ +--------------+-------¦ ¦Dec. 31, 1947 ¦2,063 ¦ +--------------+-------¦ ¦Dec. 31, 1948 ¦36,649 ¦ +----------------------+

The Commissioner's method of determining net income is more accurate than the net worth method in the circumstances of this case; the Commissioner's determinations of net income for the years involved are correct.

Petitioner filed income tax returns for 1944, 1945, 1948, and 1949 on March 15, 1945, March 15, 1946, March 15, 1949, and May 15, 1950, respectively. He or his duly authorized representative filed consents extending the 5-year statute of limitations for 1944 and 1945 to June 30, 1954, and extending the 3-year statute of limitations for 1949 to June 30, 1954. The notice of deficiency for 1944, 1945, 1948, and 1949 was mailed on September 11, 1953. In his return for each of the years 1944, 1945, and 1948, petitioner omitted gross income received by him during such year that was in excess of 25 per cent of the gross income stated in the return.

After a plea of nolo contendere, petitioner was convicted by the District Court, Southern District of California, Central Division, on two counts for violation of section 145(b) I.R.C. 1939, such counts representing the years 1947 and 1948.

The returns of the petitioners for the years 1939-1942, inclusive, and the returns of petitioner Furnish for the years 1943-1948, inclusive, were false and fraudulent with intent to evade tax, and a part of the deficiency determined for each of the years 1939-1948, inclusive, is due to fraud with intent to evade tax. Such fraud was that of petitioner Furnish alone.

OPINION.

RAUM, Judge:

The Commissioner's determinations of deficiencies for the entire period 1939-1949 are founded upon income earned solely by Richard Douglas Furnish. His former wife, Emilie Furnish Funk, is involved for the years 1939-1942 because of the Government's position that she filed joint returns with him and is therefore jointly and severally liable for the deficiencies. Unless otherwise indicated he will be referred to as the petitioner.

Return unavailable.

The returns for the years 1939 and 1940 were not available. Respondent's records showed that no tax was paid by petitioners for 1939 and that an income tax of $63.99 was paid for 1940. On the basis of these facts he made a computation which indicated that the maximum net income which petitioners could have realized consistent with the returns was $4,555.56 for 1939 and $5,615.83 for 1940.

She filed a separate return for 1943, but the Government concedes that there was no fraud with respect thereto, and since that year is otherwise barred, it concedes that the deficiency proposed against her for that year was improperly determined.

1. Petitioner challenges at the outset the Commissioner's determination of the correct taxable income for all the years, 1939-1949, inclusive. However, as to the year 1949, petitioner presented no evidence, and the Commissioner's determination of net income for that year must therefore be approved.

As to the remaining years, 1939-1948, petitioner does not contend that the income as reported was correct. Indeed, the aggregate net income reported for this period was $101,407.68, and petitioner admits that he received net income totaling $529,854.84 during these years, which was computed by his accountant using the net worth method. Petitioner challenges the Commissioner's determination, which discloses an aggregate net income of $649,512.73 for this period. The issue is whether the Commissioner's action was correct, or whether the method urged by petitioner more accurately reflects the income actually received. Of course, if we should accept the net worth method, there would have to be certain adjustments (resulting in additions to net income) in the aggregate amount of $14,792, as spelled out in our findings; and there would also have to be a further adjustment increasing income by $46,000, the amount of alleged accumulated cash as of January 1, 1939, since we did not believe the evidence that he had any such accumulation of cash or any accumulation of cash at all at that time. The end result of these adjustments would be that if we accepted petitioner's method there would be an aggregate of $590,646.84 net income for the years 1939-1948 as contrasted with reported income of $101,407.68 for that period. In our view, the Commissioner correctly determined petitioner's net income, and his method more accurately reflects the true state of affairs than the method proposed by petitioner.

Victory tax net income determined at $49,667.02.

Petitioner, on brief, concedes the correctness of these further adjustments to the extent of $3,992, representing the gifts of the two automobiles costing $1,400, and the 1948 Thomas Steel Company dividends in the amount of $2,592.

The Commissioner's determination is based in large part upon receipts from patients reflected upon the patient record cards, as shown in the audit of those cards made by petitioner's accountant, Hill. The Hill audit was made for the specific purpose of determining petitioner's income from the practice of medicine, and it was submitted to the Government by petitioner's attorney. Plainly, it was at least an admission by petitioner or by his attorney on his behalf that he had received the fees shown on that audit. In making the audit, Hill had the cooperation of petitioner's office staff to help him interpret the cards whenever such interpretation was necessary. The audit was an extensive one, and, taking into account the fact that it was made by an agent of petitioner and presented to the Government on behalf of the petitioner, we must conclude that it is highly reliable evidence that petitioner's fees from patients during the years in question were no less than the amounts shown on the audit. Certainly, it furnished strong support for the Commissioner's determination. But the Commissioner did not let the matter rest there. His agent, in turn, made a spot check of the Hill report against the cards themselves. Not only did the agent find comparatively few errors, but such errors were generally in favor of the petitioner. The agent also had the assistance of petitioner's office staff, and, at times, of petitioner himself, in interpreting the cards whenever any clarification was required. In these circumstances, the Hill report is powerful evidence that petitioner received at least the amount of fees shown therein. Petitioner now contends that both Hill and the Government agent did not properly interpret the cards, and undertakes to construct an argument based upon the use of certain symbols or words in the cards which, he says, were at least ambiguous and not understood by Hill or the Government agent. Some evidence was presented to us in this connection, the net effect of which was not wholly clear. Although there may have been occasional errors, some of the errors were in petitioner's favor, and it appears reasonable to conclude that, at worst, they neutralized each other. In any event, we do not believe that, with the continuous assistance of petitioner's office staff and, at times, with the assistance of petitioner himself, both Hill and the Government agent misinterpreted the cards, and we have found as a fact that the actual gross receipts from patients were not less than those shown by the Hill audit.

In determining net income for the years 1941-1948, the Commissioner included in gross income the receipts from patients, unreported dividends, interest, and gains upon sale of properties, and he deducted not only claimed expenses but also such unclaimed expenses as were found in the course of the examination of the returns. Petitioner has suggested that the Commissioner's method fails to take into account fees which he paid to other doctors for sending patients to him. However, the record does not show that he ever made any such payments to other doctors.

A somewhat different method, based upon the Hill audit, was used for the years 1939 and 1940, where the returns were not available, but petitioner does not appear to challenge that method, if it is otherwise proper for the years 1941-1948.

We are fully satisfied that the net worth method, although acceptable as a means of showing income where other, more precise methods are unavailable, is less accurate in the present case than the method used by the Commissioner. We find as a fact and hold that the net income determined by the Commissioner for each of the years in controversy is correct.

2. The Commissioner determined that part of the deficiency for each year was due to fraud with intent to evade tax. Except for the year 1949, which will be separately discussed below, the record contains clear and convincing evidence that the returns for 1939-1948 were false and fraudulent.

The net income received was more than 6 times the net income reported over the 10-year period 1939-1948; and even if we accept petitioner's present position as to the amount of income received it would be more than 5 times the amount reported. When viewed against the background of his method of handling his financial affairs, it is plain that such wide discrepancies were not the result of innocent mistake but were part of a calculated plan to defraud the Government. That he may also have intended to defraud his wife or other creditors does not detract from the fact that he knowingly understated his income on the returns with intent to evade tax. Cf. Jack M. Chesbro, 21 T.C. 123, 130, affirmed 225 F.2d 674 (C.A. 2), certiorari denied 350 U.S. 995; Morris Lipsitz, 21 T.C. 917, 937, affirmed 220 F.2d 871 (C.A. 4), certiorari denied 350 U.S. 845.

The amounts omitted were too large and the practice of underreporting extended over too long a period to have been the products of mere error. Cf. Harber v. Commissioner, 249 F.2d 143 (C.A. 6). The record is replete with evidence corroborating this conclusion. In the first place, petitioner himself admitted to a Government agent that he may have been guilty of evasion, but sought to exculpate himself with the unilluminating explanation that ‘it was for my patients.’ He resorted to various devices to conceal ownership of bank accounts, real estate, investments, and income that he realized upon the sale of property. During at least part of the period he would send patients' checks to a sister in Kansas City, who cashed them, and after accumulating substantial amounts of cash would transmit it to him. His attempts to explain the use of dummies in his various transactions upon the ground that he wanted to conceal his assets from his wife and from undisclosed judgment creditors hardly explain his consistent failure to report very substantial amounts of income over the 10-year period. Again, when his business manager, Duelke, tried to induce him to install an adequate record system so that income could be checked by the Bureau of Internal Revenue, he dismissed the recommendation by inquiring how, ‘with 130,000,000 people.‘ he could be checked. He lied to Government agents in general about real estate and other transactions and in particular when he told them that he did not own the Hinton Arms. He also falsely told them that some of his files had been lost.

The foregoing are but some of the circumstances of record pointing to fraud. In the aggregate, they afford strong and powerful proof that the returns for the years 1939-1948 were false and fraudulent and that at least a part of the deficiency for each year was due to fraud with intent to evade tax.

The situation with respect to the year 1949 is different. The Commissioner did not undertake to present evidence showing petitioner's income for that year. We, of course, approved the basic deficiency for that year, since the burden was upon the petitioner to prove that the deficiency was in error. As to the addition for fraud, however, the burden was upon the Government. Accordingly, the so-called fraud penalty cannot be sustained merely on the ground that petitioner failed to carry his burden with respect to the basic deficiency. Although the deficiency in tax for 1949 must be approved, the addition for fraud cannot stand on this record. The additions to tax for fraud with respect to the remaining years, 1939-1948, are sustained.

3. The limitations issue may readily be disposed of on the basis of our findings and the stipulation of the parties. Apart from fraud, the year 1949 is open under the 3-year statute of limitations, because the deficiency notice was sent within that period as extended by consent. The years 1944, 1945, and 1948 are open under the 5-year statute, since petitioner's omissions from gross income for each of those years exceeded 25 per cent of the gross income reported, and the deficiency notice was sent within the 5-year period as extended by consents. The deficiency notices with respect to the remaining years were sent after the 5-year periods had expired, but those years are nevertheless open as a result of our finding of fraud.

4. The remaining question involves the returns filed for the years 1939-1942, inclusive. Petitioner Emilie Furnish Funk contends that these returns were not joint returns and that she is not liable for any part of the deficiencies and additions to tax for fraud found to be due for those years.

Under section 51(b) of the 1939 Code, if a joint return is filed by a husband and wife living together, they are jointly and severally liable for the full tax liability. Such liability covers not only the basis tax but also any addition to the tax on account of fraud, notwithstanding that the wife may have signed the return in blank and that she was innocent of the fraud; indeed such liability extends to the wife with respect to a joint return even where she failed to sign it, provided that it was intended to be a joint return. Joseph Carroro, 29 P.T.A. 646, 650; Mryna S. Howell, 10 T.C. 859, 866, affirmed 175 F.2d 240 (C.A. 6); W. L. Kann, 18 T.C. 1032, 1/44, affirmed 210 F.2d 247 (C.A. 3), certiorari denied 347 U.S. 967; Dora s. Hughes, 26 T.C. 23, 28-29; Arthur N. Dellit, 24 T.C. 434; cf. Jack Douglas, 27 T.C. 306, 314, but cf. at 315. Cf. also Muriel Heim, 27 T.C. 270.

Internal Revenue Code of 1939.SEC. 51. INDIVIDUAL RETURNS.(b) HUSBAND AND WIFE.— In the case of a husband and wife living together the income of each (even though one has no gross income) may be included in a single return made by them jointly, in which case the tax shall be computed on the aggregate income, and the liability with respect to the tax shall be joint and several. * * *

The returns filed for the years 1939-1942, inclusive, were signed by both spouses. It is quite true that the name of the husband only appeared in the caption of each return over the printed words, ‘Use given names of both husband and wife, if this is a joint return.’ But in each return his wife's signature as well as his own appeared over the printed words, ‘If this is a joint return * * *, it must be signed by both husband and wife.’ The returns were prepared by the husband after the wife had signed them in blank. On each return credits for four dependent children and for personal exemption for husband and wife were claimed. The income shown on the returns represented earnings of the petitioner from his medical practice. Such earnings constituted community property under the laws of California where petitioners resided. See Marjorie Hunt, 22 T.C. 228, 230. This community income could be reported in its entirety in a joint return, or in separate returns, each spouse reporting one-half. Petitioners filed only one return for each of the years in question. If Emilie Furnish Funk deemed these returns to be separate returns of her husband, she should have filed separate returns for each year reporting her one-half of the community income. She did not do so.

We are convinced that the returns filed for the years 1939-1942, inclusive, were intended to be and were in fact joint returns of the petitioners, unless there is merit to the wife's contention that she signed the returns under duress. A signature made under duress is considered an involuntary act which may be viewed as never having occurred. She asks us to find that she signed the returns in blank because she was ‘in fear of violence if she refused.’ The principal evidence before us in that connection is the following testimony given by her in response to questions asked by her attorney:

Q. Mrs. Funk, you testified that you did sign these returns in blank?

A. I did.

Q. Now, can you explain the circumstances surrounding that signing of the return in blank? How did it happen and where was it, at home, in the office, or how?

A. It was at home. The Doctor never got home before about 2:00 a.m., and he would come in with his forms and say, ‘Oh, I have to make these out tonight and it will take me most of the night. Just sign here and go up to bed.’

Q. Did he say it in a nice way or in a harsh manner?

A. Well, most of the time he was very harsh.

Q. Then you would sign the return and go up to bed, is that correct?

A. Yes, sir.

Q. Mrs. Funk, did you sign these returns in blank because you were afraid of Dr. Furnish?

A. Yes, sir, I was.

Q. Had there been some prior difficulties in your marriage which made that fear reasonable?

A. There certainly were.

Q. Many incidents?

A. Many.

This testimony does not establish that she signed each or any one of the four returns under duress. It is not enough for her to say in general terms in response to leading questions that she was ‘afraid’ of petitioner and that ‘many incidents' had occurred in her marriage that made this fear reasonable. She may or may not have been reluctant to sign these returns, but we think she has hardly established by such general testimony that she acted under duress or that her acts of signing were not of her own free will. We cannot find on this record that the ‘incidents' which caused her to be ‘afraid’ of her husband were of such character as to produce a state of mind that would prevent the exercise of her free will. Fear that would justify a decision that a signature on a return was made in circumstances which destroyed the free will of the signer must have a sound basis in fact, and that basis must be shown. It has not been shown here. Cf. Estate of Merlin H. Aylesworth, 24 T.C. 134. We hold, therefore, that the returns of petitioners and that each of them is filed for the years 1939-1942, inclusive were joint returns of petitioners, and that each of them is jointly and severally liable for the deficiencies and additions to tax for fraud determined by the respondent for those years.

We reach this conclusion with great reluctance, because it is plain upon this record not only that the wife was not guilty of fraud but that she, along with the Government, was a victim of the very fraud that has tolled the running of the statute of limitations against her and furnished the basis for the imposition of the so-called fraud penalty. The result is highly in equitable, but it appears to be required by the plain language of section 51(b) and the cases applying it. To reach a contrary result with respect to her we would have to find that the returns were not in fact joint returns— a finding not committed to this Court the powers of a court of equity.

Decisions will be entered for the respondent in Docket nos. 51401, 51416, and 51417 (with the exception of the addition to tax for fraud for 1949). Decision will be entered for petitioner in Docket No. 51402.