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OF THE STATE OF CALIFORNIA )
OF THE STATE OF CALIFORNIA
In the Matter of the Appeal of
)
)
GEORGE R. WICXHAM AID ESTATE OF >
)VESTA B. WICK&%X
Appearances:
.
:
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For Appellants:
Walter M. Campbell
Attorney at Law
For Respondent:
Israel Rogers
Associate Tax Counsel
NION
-OPI
- - - - -
,
This appeal is made pursuant to section 18594 of
the Revenue and Taxation Code from the actionof the Franchise
Tax Board on the protest of George R. Wickham and the Estate
of Vesta 13. Wickham against proposed assessments of fraud
penalties in the amounts of $72.35, $308.59, $431.33, $232.76
and $825.87 for the years 1947, 1948, 1949, 1950 and 1951,
respectively. The personal income tax deficiencies on which
these penalties are based are not contested.
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*LO
For conveniencej George R.-.Wickham will be referred
hereafter as if he were the only appellant.
..The primary question raised by this appeal concerns
the propriety of the fraud penalties proposed to be assessed.
A second issue is whether appellant was improperly denied'an
oral hearing before respondent on his protest.
0
.
Appellant is a lawyer and,. since 1948, has served
as a city councilman, including two years as mayor. During
the years in question, the majority of appellant's income
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Appealof George R. Uickham and Estate of Vesta B. Wickham
was derived from oil,and.mining leases. In
addition,
earned a relative,ly small amount'of income from practicing
law.
he
,
During the period involved, appellant kept very
disorganized records of his income and expenses in the form
of bank statements, cancelled checks, vouchers, invoices,
receipts and other memoranda. For the year 1947, he did not
file an income tax return with respondeat. He prepared and
filed timely joint returns for the years 1948 through'1950.
i?or 1951, he filed a tentative return, indicating that an
amended return would be filed .when income for that year was
determined.
L ,
Early in 1952, before appellant filed his tentative.
1951 return with respondent, the Internal Revenue Service
commenced an audit o,f his federal income tax returns for the
years 1947 through 1951. Because of the poor state of his
records, appellant had a set of books prepared for those years.
All the accumulated data was turned over to a pub.1i.c accounting,
fi-rm, In July 1956, after several years of work, the accountant who set up appellant's books .prepared amended returns for'
the years 1948 through 1951, and these were filed with
respondent. In 1961, at respondent's request, a return was
filed for 1947, showing no tax due. A comparison of the
gross and net income reported in the original and'amended
state returns is as follows:
Gross Income
Gross Income
Original Ret. Amended Ret.
1947
1948
1949
1950
1951
$21,173.94
(untimely)
30,416.83
3W39.93
39,720.05
Jt entative
return)
$38,947.06
.57,891.26
41,718.04
60,283.99
’.
Net Income*
Net Income*
OriginaLRet. Amended Ret.
.
$ 4,579*41 -.
(untimely)
.-: 9,538.49 : $20,272.98
7,563.64
20,924.03
11,887.42
9,550.56
(tentative
29,045.42
return)
9cAfter business expense deductions and itemized'deductions.
; After receiving amended federal returns from appellant, 'the Internal Revenue Service made an extensive examination
and increased the reported net income by adding income in. the
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Appeal of George R. Wickham and Estate of Vesta B. Wickham
form of oil lease royalties and by disallowing many business,
expenses, some itemiz,ed deductions and certain. bad debts and
other losses claimed. These adjustments resulted in annual
net income figures from two to six times greater than appelFor each year, the
’ lant reported in his original returns.
Internal Revenue Service asserted an additional tax, a fraud
p e n a l t y , and a penalty for failure to file timely declarations
~of estimated tax. The total,amount of taxes and penalties
thus asserted was $81,394.57. Appellant 'contested this.
determination.
.
.
.o
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On April 7, 1961, respondent issued notices of
proposed assessment's based on the federal adjustments.
.Appellant filed a protest on April 13, 1961, and .further action
was deferred awaiting the outcome of the federal contest.
Appellant's protest did not contain a request for an oral
hearing.
Before the federal case came to trial in the Tax
Court, a settlement was reached by appellant and the Internal
Revenue Service.
In 1963, pursuant to the agreement of the
parties, a -stipulated judgment was entered against appellant
for tax and penalties, including a fraud penalty, for each
of the years 194.7 through 1951. The taxes and penalties
:
totaled $43,026. A statement signed by appellant was made
a part of the Tax Court record. In that declaration he
stated that he did not admit having perpetrated any fraud
against the government and thathe was consenting to the,
imposition of the fraud penalties in order to close the case.
Respondent reduced its proposed assessments in
accordance with the federal determination. Since the settlement did not specify the income on which it was based,
respondent reconstructed an amount of income which'would
result in the agreed amount of tax exclusive of penalties.
Adjusting for differences in federal and .state exemptions .
and deductions, a corresponding state taxable income figure
was determined, and tax was computed thereon. The revised
taxable'income figures., compared with amounts reported
on the original and amended California returns, are as
follows:
;
.
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Appeal of George R. Wickham and Estateof Vesta B. Wickham
Taxable Incotie
Original Return
1947
1948
1949
1950
1951
($720.59)
(untimely)
$4,237.49
3,663,64
7,987.42
(tentative
return)
Taxable Income
Amended Return
Revised
Taxable Income
$12,234.46
$14,972.98
,17,024.0x
5;650.56
25J45.42
. -.
27,191.40
27,488.34
21,505.51
40,029.07
To the tax deficiency respondent added a 50 percent fraud
penalty for each year.
Respondent mailed its notices,of action revising
the proposed assessments on August 30, 1963. Appellant mailed
a letter on September 13, 1963, in which he requested an oral
hearing.
We shall deal first with the question of whether.
respondent improperly denied appellant an oral hearing on his
proZest.' Section 18592 of the Revenue and Taxation Code provides tha,t respondent.shall grant an oral hearing on a protest
against a proposed assessment, "if the taxpayer has so requested
in his protest.i' Appellant'did not request an oral hearing in
his protest against the .proposed assessments. No such request
was made until after the mailing of respondent's notices of
action revising the proposed assessments. T h e
only
course
then availab,le was to file an appeal to'this board. (Rev. &
*
.
Tax. Code, 9 18593.) Such an appeal was filed and an oral
hearing thereon was granted. We agree with respondent that .
it acted in accordance with the law and did not.improperly
deny appellant an oral hearing.
Proceeding toethe fraud issue, section 18685 of, the"
Revenue and Taxation Code provides for a 50 percent penalty
"If any part of a deficiency is due to -fraud with an intent to
evade .tax." Respondent has the burden of proving fraud by
.
clear and convincing evidence.
(Cal. Admin. Code. tit. 18.
$ 5036; Marchica v.- State Board of Equalization, 107 Cal. ’
App- 2d 501 1237 P.,2d 7251; Arlette Coat Co., 14 T.C. 751.)'
Becauseidirect evidence is seldom available to prove fraudulent
intent, it must generally be inferred from all the surrounding
circumstances.
(M. Rea Gano, 19 B.T.A. 518.)
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Appeal of George R, Wickham and Estate of Vesta B. Wickham
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0
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A taxpayer's unexplained and persistent failure to
keep records VJhich adequately show his income and expenses,
and which will enable him to prepare accurate tax returns may.
constitute evidence of an intent to evade tax.
(Merritt v.
Commissioner,,301 F.2d 484; Clarence‘ T. Slaughter,.T.C. Memo.,
Dkt, No. 44083, June 9, 1954.) ,In determining whether there
existed an intent to defraud, .an illiterate taxpayer with.only.
slight business experience will not be held to the same
standards as a successful professional man.
(Powell v.
Granquist, 252‘F.2d 56; E. S. Iley, 19 T,C. 631; Albert N.
Shahadi, 29 T.C. 1157, 1169, affsd, 266 F.2d 495.)
During the years in question, appellant derived
substantial income from various sources. He is an attorney,
a man of business affairs, and a publicofficial. His failure
to keep proper records and to properly report his income, or
to obtain professional assistance in doing so, cannot be
excused on the grounds of ignorance.
It is well established that consistent and substantial understatements of income or overstatements of deductions,,
without sat'isfactory explanation, are persuasive evidence of
fraud.
(Hollar;d vi United States, 348 U.S. 121 ,[99 L. Ed. 1501
,reh. denied,. 348 U.S. 932 [99 1;. Ed. 7311; Rogers v. Commissioner, 111 F.2d 987.)
Appellant consistently failed to report in his
original federal returns the bulk of his legal fees, omitting
from 60 percent to 97 percent of them each year in amounts
ranging from several hundred to several thousand dollars. T h
same omissions appear in his original state returns for 1948,
1949 and 19.50, the only original state returns that were timely
and purportedly complete.' He explained only the largest omission, in the amount of $3,600 for the, year 1948, which he
attributed to inadvertence.
’
e
,He'testified.that most of the,income added by the
Internal Revenue Service consisted of certain oil lease
royalties which he regarded as his son's income. These
royalties, amounting to several thousand dollars a year, : ‘.
were omitted from both his original and amended federal and state
returns. He stated that his‘son received the royalties for a
time and that when his son moved to Seattle during the war,
appel,lant's wife.received the payments pursuant to the son's
.
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Appeal of Geoae R. Wickham and Estate of Vesta B. Wickham
order and that, upon her death, appellant received them,
again at his sonss direction. He alleged that the money has
been accounted for between him and his son. In support of
his testimony, he submitted a copy of a'royalty agreement
dated in 1941, in which his son was designated as the owner
of an oil lease and the person to whom ro_yalties were to be
paid.
’
Each year appellant deducted thousands of dollars
for expenses incurred in taking moving pictures at resort
areas throughout the country, reporting receipts of $58.60
from this, activity. Appellant testified that these, costs
constituted the majority of the business expenses disallowed
by the Internal Revenue Service. He stated that he regarded
his activity as a business of making travelogues and that he
s sold some of his products after the years in question.
Although the circumstances .surrounding appellant's
motion picture operation make his deductions questionable,
’
it is conceivable that he did in fact regard the operation
It
is.also
conceivable
that
appellant
could
as a business.
have omitted a portion of his legal fees through inadvertence-.
The omission of the bulk of those fees year after year, however,
cannot be accounted for on that ground. Nor is it at all clear
why appellant's son should have ordered royalties paid to
appellant and his wife unless it was understood that appellant
and his wife were entitled to them. Placing property in the
name of another'is a common means of tax evasion. Without
further elaboration and corroboration, which should have readily
been obtainable from his son, appellant I.3 explanation concerning
the royalties is unsatisfactory.
Considering the record as _a whole, the discrepancies
cannot reasonably be attributed solely to negligence o.r mistake
of law, Appellant's.re&ords were maintained in a manner that
facilitated concealment of income; and there were in fact
- substantial and consistent omissions without adequate explanation. We cannot escape the conclusion that a considerable
-part of the deficiency for each year was attributable to fraud.
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Appeal of' George R. T,Jickham and Estate of Vesta B. 'dickham
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ORDER
---4Pursuant to the views expressed in the opinion of
@he board on file in .this proceeding, and good cause appearing therefor,
IT IS HEREBY ORDERED, ADJUDGED AND DECREED, pursuant
to section 1859'5 of the Revenue and Taxation Code, that the
action of the Franchise Tax Board.on the prorest of George R.
Hickham and .the Estate of Vesta 13; Wickham against proposed
assessments of fraud penalties in the amounts of $72.35,
$308.59, $431,.33‘, $232.76 and $825.87 for the years 1947,,
1948, 1949, 1950 .and 1951, respectively, be and the same is
hereby sustained,
02
Done at Sacramento , California, this 3d
day
ate
Board
of
Equalization.
,
1965,
by
the
St
August
‘.
[email protected]
Member
Member
Member
y
ATTE ST :
2
¶
Secretary
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,
.
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Member
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