ON APPEAL FROM THE DECISION OF THE UNITED STATES TAX COURT (Docket No. 7035-72).
Aldisert and Garth, Circuit Judges and Barron P. McCune,*fn* District Judge
Appellant Andrew Gerardo appeals from a decision of the United States Tax Court determining deficiencies in income tax due for the taxable years 1966 and 1967 based upon unreported income from illegal gambling activity in Newark, New Jersey. Specifically, we are called upon to determine whether the evidence supports the Tax Court's finding that Gerardo received income from a lottery operation from April 4, 1966 through February 3, 1967, and whether the Tax Court erred in upholding the Commissioner's decision to assess appellant on the entire income of the gambling operation. Although we uphold the Commissioner's issuance of alternative deficiency assessments*fn1 for the total tax due, we have determined that no evidence supports the Tax Court's finding that Gerardo was involved in the lottery operation during the entire period covered by the deficiency assessment. We therefore reverse.
During the years in issue, Andrew Gerardo was the controlling officer of two related corporations engaged in trucking and excavation activities. He maintained no checking account and dealt almost exclusively in cash.
From August 5, 1966 through February 3, 1967, the Internal Revenue Service conducted an undercover investigation of an illegal lottery operation in the north Newark area. Surveillance activities focused on various small, retail establishments as well as on persons who frequented such establishments. In addition, Special Agent Germano of the Internal Revenue Service, posing as a bettor, frequented the Ben Thomas luncheonette where he observed the workings of the operation, and where he gained the confidence of Joe Cipriano, a member of that organization.
The Tax Court, in its opinion, made the following findings (among others), all of which are supported by the evidence:
In the course of his undercover surveillance, respondent's agent [Germano] frequented a certain dining establishment known as the Ben Thomas luncheonette, a frequent meeting place of several of the conspirators. There respondent's agent placed bets regularly, with Joseph Cipriano, a convicted co-conspirator who accepted and recorded bets for the organization.*fn3
Respondent's agent gained the confidence of Cipriano who freely discussed the operation with the agent and told him that petitioner [Gerardo] was third in the chain of the organization's command. Cipriano further informed the agent that the organization was extremely prompt in paying winning bettors, that petitioner was responsible in this capacity and could be consulted should a problem arise.
Petitioner was a regular visitor to the luncheonette and was observed there by respondent's agent on at least thirteen occasions. Respondent's agent placed bets with Cipriano in petitioner's presence. Petitioner was frequently observed as party to discussions concerning wagering operations. On one occasion respondent's agent overheard petitioner inform the alleged chief of the operation that "the heat was on," and "they [the authorities] are going to give it their raid treatment."
On February 2 and 3, 1967, Special Agents of the Intelligence Division of the Internal Revenue Service obtained search warrants and conducted searches of five residences allegedly used as lottery "offices" or meeting places of the conspirators. A number of automobiles were also searched at this time.
During the raids, respondent's agents seized gambling paraphernalia in the form of betting slips comprising the recorded daily tallies of each of the group's bet recorders for three days' operation.
An analysis of the seized slips revealed a correlation showing that slips seized from the several different locations were ...