author: Black :

text:
    Louis H. Pink, Superintendent of Insurance of the State of New York, as Liquidator of Lawyers Mortgage Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92383.
    Promulgated July 26, 1938.

      Morris Barasch, Esq., for the petitioner.

      F. B. Shearer, Esq., and J. G. Maddox, Esq, for the respondent.
   OPINION.

Black :

On December 2, 1937, the Commissioner of Internal Revenue mailed a deficiency notice to “Lawyers Mortgage Company, In Rehabilitation, C/o Mr. Ralph B. Romaine, Special Deputy Superintendent of Insurance of the State of New York.’5 In the deficiency notice' the Commissioner determined a deficiency of $19,116.20 for the calendar year 1934. On February 23, 1938, a petition was filed with this Board, captioned “Louis H. Pink, Superintendent of Insurance of the State of New York, as Liquidator of Lawyers Mortgage Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.” The petition, in alleging facts to show jurisdiction in the Board, as required by Rule 6 (b) of the Board’s rules of practice, among other things, alleges as follows:

1. (a) The petitioner is the Superintendent of Insurance of the State of New York, pursuant to appointment duly made, under which appointment he is now acting as Superintendent of Insurance of the State of New York, having duly qualified to act, and as Superintendent of Insurance of the State of New York, the petitioner is the liquidator of Lawyers Mortgage Company.
(b) At all times hereinafter mentioned, Lawyers Mortgage Company (hereinafter referred to as the “Company”) was a domestic corporation, duly organized and existing under the laws of the State of New York, with its principal office and place of business at 345 Madison Avenue, New York City, New York.
(c) From about May 4, 1031 to about May 10, 1035, George S. Van Schaick was Superintendent of Insurance of the State of New York, pursuant to appointment duly made, under which appointment he acted as Superintendent of Insurance of the State of New York, having duly qualified to act.
(d) On or about August 2, 1033, an order of the Supreme Court of the State of New York was duly made and entered in the office of the Clerk of the County of New York, wherein the said George S. Van Schaick and his successors in office, as Superintendents of Insurance of the State of New York, were authorized and directed to take possession of the property of the Company, conduct its business, rehabilitate the same pursuant to the provisions of Article XI of the Insurance Law of the State of New York and all other provisions of law applicable thereto, and deal with the property and business of the Company in its namS, and thereupon the said George S. Van Schaick, as Superintendent of Insurance, took possession of the property and business of the Company and proceeded to rehabilitate its affairs and deal with its property and business in its name, as Rehabilitator.
(e) Louis H. Pink, petitioner herein, duly became the Superintendent of Insurance of the State of New York on May 10, 1935, as successor to the said George S. Van Schaick, and by virtue of such appointment duly became the successor rehabilitator of the Company.
(f) On or about November 17, 1937, an order of the Supreme Court of the State of New York was duly made and entered in the office of the Clerk of the County of New York, wherein it was ordered, adjudged and decreed that the Company be placed in liquidation and that Louis H. Pink, the petitioner herein, or Ms successors in office, as Superintendents of Insurance of the State of New York, forthwith take possession of the property and liquidate the business of the Company, pursuant to the provisions of Article XI of the Insurance Law of the State of New York and all other provisions of law applicable thereto; and by said order the said Louis H. Pink, petitioner heroin, or his successors iu office, as Superintendents of Insurance of the State of New York, were duly vested with title to all property, contracts and rights of action of the Company and were directed to deal with the said property, contracts, rights of action and business of the Company in the name of the Superintendent of Insurance of the State of New York. The petitioner, as such Superintendent of Insurance, upon the entry of the said order, took possession of the property, contracts, rights of action, and business of the Company and proceeded to liquidate its affairs.
(g) The official office of the petitioner as Superintendent of Insurance of the State of New York is at Albany, New York; his office where he transacts most of his business as liquidator of the Company is at 345 Madison Avenue, New York City, New York.
(h) On or about November 17, 1037, the petitioner herein, Louis H. Pink, Superintendent of Insurance of the State of New York, duly appointed and designated Ralph B. Romaine, Special Deputy Superintendent of Insurance of the State of New York, to act as his Statutory Agent in the liquidation of the Company and the said Ralph B. Romaine has been ever since and now is in charge of the liquidation of the Company as Agent of the Superintendent of Insurance of the State of New York.
(i) The return for the period here involved was filed with the collector for the third district of New York.

The petition then assigns numerous errors to the action of the Commissioner in his determination of the deficiency and enumerates in several paragraphs the facts relied upon to support the errors assigned. Inasmuch as the question we now have to decide is one of jurisdiction, we are not presently concerned with these latter parts of the petition. The Commissioner has not filed any answer to the petition, hut on April 19, 1938, filed a written motion to dismiss the proceeding and as grounds therefor stated as follows :

The petitioner herein is Louis H. Pink, Superintendent of Insurance of the State of New York, as Liquidator of Lawyers Mortgage Company, who is now engaged in the liquidation of the said Lawyers Mortgage Company and has been so engaged since on or about November 17, 1937, when the Supreme Court of the State of New York duly made and entered an order wherein it was ordered, adjudged and decreed that the Lawyers Mortgage Company be placed in liquidation and that Louis H. Pink, the petitioner herein, or his successors in office, as Superintendents of Insurance of the State of New York, forthwith take possession of the property and liquidate the business of the company pursuant to the provisions of Article XI of the Insurance Law of the State of New York and all other provisions of law applicable thereto. By virtue of such order and Article XI of the Insurance Law, the petitioner, Louis H. Pink, Superintendent of Insurance of the State of New York, became in effect a receiver under the supervision of the State court and the property under his control became in custodia legis. The State court took possession of the property not later than November 17, 1937. No petition for any redetermination of a deficiency determined by the Commissioner in respect of an income tax liability for the year 1034 imposed upon the Lawyers Mortgage Company, which would give this Board jurisdiction, could be filed with this Board after the taking- of possession of the property of said Lawyers Mortgage Company by the State court. The petition herein was filed February 23, 1938.

Tlie Commissioner’s motion has been beard and both parties have argued the question of jurisdiction orally and in briefs which have been filed with the Board. Whether we have jurisdiction is controlled by the provisions of section 274 (a) of the Revenue Act of 1930, which is printed in the margin. This section is not a new provision. The same provision has been in prior revenue acts for many years, and has been several times construed by the Board. The parties are agreed that the Superintendent of Insurance of the State of New York, when he takes charge of an insurance company under article XI of the New York Insurance Law, either for rehabilitation or liquidation, is a statutory receiver. But petitioner does not admit that the receivership in such a case is one before any court of the State of New York. On the other hand, respondent contends that the liquidation of an insurance company by the Superintendent of Insurance of the State of New York is in effect a receivership under the supervision of a New York State court and the property of the insurance company in the possession of the Superintendent of Insurance becomes “in custodia legis.” Both parties cite our decision in French & Co., 10 B. T. A. 660, as laying down the correct rule to be followed, but they differ as to the interpretation to be given our opinion in that case when applied to the facts as disclosed in the instant case. In French & Co., supra, among other things, we said:

The statute does not require that the receiver shall he appointed by the court. It does specify that there shall be a receiver in a receivership proceeding before a court. In those instances where statutes provide that certain officials shall take over the duties of a receiver or liquidating agent, and at the same time grant to a court the authority to supervise and control such receiver, so that the property may be said to be in the custody of the court and the receiver may be said to be its officer, the mere fact that the court does not appoint the receiver seems unimportant. In such a case there has been a receiver appointed in a receivership proceeding before a court. Such a ease differs from the ordinary ease of receivership only in manner of the appointment of the receiver.

In the French & Co. case, supra, we held that the Superintendent of Banks of the State of Oregon, in taking over the affairs of French & Co. (bankers) for liquidation, was not an officer of any court, that the assets taken over came into his possession and not into the possession or custody of any court, and that Ms action in taking over the affairs of French & Co. did not initiate any proceeding in any state or Federal court. Of course if we could come to similar conclusions in the instant case, our decision would not be difficult. We would bold that we had jurisdiction and would deny respondent’s motion to dismiss. In view, however, of decisions which we shall subsequently discuss, we are unable to come to the conclusion that we have jurisdiction. Our jurisdiction is limited by section 274 (a), which we have already quoted in the margin.

The Superintendent of Insurance of the State of New York, in taking over the affairs of the Lawyers Mortgage Co., first for rehabilitation and later for liquidation, was acting under article XI of the Insurance Law of the State of New York, 27 McKinney’s Consolidated Laws of New York. Article XI contains many sections and from a reading of them it would seem that it could be plausibly argued that the superintendent of insurance in acting under the provisions thereof was strictly a statutory receiver and not acting under any receivership proceeding in a state court of New York. Such was the view taken by the United States District Court for the Northern District of New York in Farrell v. Stoddard, Superintendent of Insurance of New York, 1 Fed. (2d) 802. In that case the court, among other things, said:

An examination of section 63 of the Insurance Law of the state of New York makes it clear that the superintendent of insurance is a public officer in the executive department of the state government, and that he still retains his character as a public officer when he acts as liquidator of insurance companies under the provisions of this statute. His power to act as custodian of the res comes alone from the statute. The judicial power can not change or modify this statute, or affect his power in any respect whatever. True, the defendant must first apply to the court for an order to act as liquidator. That, however, merely means that the court must give the signal to start the machinery under which the superintendent, the agent of the executive power, acts. Thereafter, the defendant, as the representative of the executive power, pays no heed to the court or its mandates. His chart is the statute under which he acts.

In George S. Van Schaick, Superintendent of Insurance of the State of New York, 32 B. T. A. 736, we followed Farrell v. Stoddard, supra, and held that we had jurisdiction of the proceeding. Our decision in the Van Schaich case was affirmed by the Second Circuit on another point. See Commissioner v. Van Schaick, 83 Fed. (2d) 940. The case of Farrell v. Stoddard, supra, was followed by the same United States District Court for the Northern District of New York in Acken v. New York Title & Mortgage Co., 9 Fed. Supp. 521. This view was, however, reversed by the Second Circuit in Tolfree v. New York Title & Mortgage Co., 72 Fed. (2d) 702. See also the Second Circuit’s decision in Jacoby v. Bond & Mortgage Guarantee Co., 72 Fed. (2d) 420. The later case decided the identical question involved in the Tolfree case, and decided it in the same way.

The two above cited cases were decided August 7, 1934, and therefore had been decided prior to our decision in George S. Van Schaick, sufra, but were not called to our attention. Respondent has now called them to our attention and urges them as authority to support his motion to dismiss the petition for lack of jurisdiction and as authority to show that the Board was in error in holding that we had jurisdiction in the Van Schaich case. We think the two cases cited support respondent’s position. Those cases held that where the New York State Superintendent of Insurance by order of a state court had taken over the assets of a mortgage guarantee company and was administering them, the Federal court was without power, at a suit of holders of participation certificates in default, to appoint trustees of bonds and mortgages or to direct that property of a guaranteeing company be turned over to such trustee. In the Jacoby case, the court said:

* * * When the Superintendent, by order of the New York Supreme Court, took over the assets of the Bond and Mortgage Company, it took over a going business together with a right to administer the mortgages. By virtue of the order and Article SI of the Insurance Law, the Superintendent became in effect a receiver under the supervision of the state court, and the property under his control became in custodia legis (Citing cases). In such circumstances under established rules of law, the federal courts should not interfere with the possession of the state court. Lion Bonding Co. v. Karatz, 282 U. S. 77; O’Neil v. Welch, 245 Fed. 261. We can see no essential difference between the general character of the statute under which a department of state was appointed to manage and liquidate property in Lion Bonding Co. v. Karatz and O’Neil v. Welch, supra, and the statute involved in the present case, and we hold here that the District Court had no right to intervene.

Tbe court concluded its opinion in tbs Jacoby case with this language:

* * * In either event the Superintendent has taken over a business under an order of the state court and is exercising functions which he is authorized to exercise in such cases by the New York law. This fact, irrespective of the wisdom or even the validity of his acts, makes it necessary for dissident certificate holders to seek relief in the state court lolúch had assumed prior jurisdiction. [Italics ours.]

The opinion of the court in Tolfree v. New York Title & Mortgage Co., supra, is to the same effect.

Petitioner endeavors to distinguish these cases from the instant case by pointing out that in the Jacoby case and the Toljree case the Federal court was endeavoring to assume jurisdiction over property which was already in the hands of the superintendent of insurance under a New York State law, whereas in the instant case the Board of Tax Appeals is making no attempt to assume jurisdiction over property in the possession of the superintendent of insurance. That of course is true. But the significance of the court’s holding in the two above cited cases to us, to which we must give heed, is that part of the court’s holding which says that “By virtue of the order (order of tbe Supreme Court of New York), and Article XI of the Insurance Law, the Superintendent became in effect a receiver under the supervision of the state court and the property under his control became in custodia legis.” As we have already endeavored to point out, by reason of section 274 (a) we have no jurisdiction where, prior to the time of the filing of a petition with us, there has been the appointment of a receiver for the taxpayer in any receivership proceeding before any court of the United States or of any state or territory or of the District of Columbia. And while it is undoubtedly true that the Superintendent of Insurance of the State of New York in such a case as the instant case is a statutory receiver and not appointed by the court, nevertheless, as we pointed out in the French & Co. case, supra, “The statute does not require that the receiver shall be appointed by the court. It does specify that there shall be a receiver in a receivership proceeding before a court.” It seems clear from the court’s opinion in the Jacoby and Tolfree cases, supra, that in the instant case the allegations of the petition show that there is in effect a receivership proceeding before a New York State court and that petitioner is the receiver therein. It is, of course, true that the familiar doctrine of comity between courts of equal jurisdiction which was involved in the Jacoby case and in the Tolfree case is not involved in a proceeding before the Board of Tax Appeals. But the facts which brought the doctrine of comity between courts of equal jurisdiction into play in the Jacoby and Tolfree cases were that the Supreme Court of New York had assumed jurisdiction and that the proceeding was in effect a receivership pending in the proper state court having jurisdiction. This being true, and the petition having been filed subsequent to the appointment of the receiver, it follows that, because of the special limitations on our jurisdiction provided in section 274 (a), supra, we have no jurisdiction. Cf. Financial & Industrial Securities Corporation, 27 B. T. A. 989.

Our decision on the question of jurisdiction in George S. Van Schaich, supra, will no longer be followed. In the Van Schaich case we mentioned that the superintendent of insurance in that case was acting under section 68 of the Insurance Law of New York. That fact, however, is of no significance, as both parties herein are agreed that section 68 has been repealed and article XI, which has been substituted for it, is simply an extension and elaboration of section 63.

Reviewed by the Board.

Decision will be entered that the proceedAng be dismissed for lack of jurisdiction.

       SEC. 274. BANKRUPTCY AND RECEIVERSHIPS.
      (a) Immediate Assessment. — upon the adjudication of bankruptcy of any taxpayer in any bankruptcy proceeding or tbe appointment of a receiver for any taxpayer in any receivership proceeding before any court of tbe United States or of any State or Territory or of the District of Columbia, any deficiency (together with all interest, additional amounts, or additions to the tax provided for by law) determined by the Commissioner in respect of a tax imposed by this title upon such taxpayer shall, despite the restrictions imposed by section 272 (a) upon assessments be immediately assessed if such deficiency has not theretofore been assessed in accordance with law. * * * but no petition for any such redetermination shall be filed with the Board after the adjudication of bankruptcy or the appointment of the receiver.


source: Caselaw Access Project

author: StbRNi-iagen :

license: Public Domain

text:
    Yolande V. Perkins, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89905.
    Promulgated July 28, 1938.

      Charles M. Bogerson, Esq., for the petitioner.

      Hartford Allen, Esq., for the respondent.
   OPINION.

StbRNi-iagen :

The Commissioner determined deficiencies in the petitioner’s individual income tax of $227.67 for 1934 and $1,287.14 for 1935. The only issue raised for each year is whether income of a trust under the will of petitioner’s deceased husband is taxable to her. The facts were stipulated.

The will of petitioner’s deceased husband contained the following:

Fifth: All the rest, residue and remainder of my property, real and personal, of every nature and description and wherever situated, including any property over which I have any power of disposition, I give, devise, bequeath and appoint to my wife and said Boston Safe Deposit and Tbust Company, in Tbust, Nbvebtheless, and until the youngest of my children who shall live to reach the age of twenty-five (25) years shall have reached said age, or earlier die, the net income shall be paid at least' as often as quarterly to my wife, unless she shall otherwise request as hereinafter provided, and when the youngest of my children who shall live to reach the age of twenty-five (25) years, shall reach said age or shall earlier die, this trust shall cease and determine, and my Trustees shall pay the trust property at that time in their bands, in equal shares, to my children living at that time and to the issue living at that time of any deceased child, such issue to take the share their parent would have taken if living.
Sixth : My trustees shall, during the lifetime of my wife, pay to or apply for the education, maintenance, advancement and support of my issue, or shall accumulate for them or any of them, such sum or sums out of the income as my wife shall in writing request. If my wife shall die, * * *.

The trust income was paid to petitioner until October 1, 1934, and thereafter equally to the two children, one of whom was born February 14, 1913, and the other January 13, 1917. The payment to the children was by virtue of a written direction given by petitioner to the trustee on October 1, 1934, as follows:

In pursuance of the provisions of articles Fifth and Sixth of the Will of Frederick W. Perkins, you are hereby directed from and after this date to pay the net income from said Trust to my two daughters, Emily and Yolande, in equal shares.

Thus it appears that the petitioner is being taxed upon income which she did not receive and which she had no right to receive after her direction to tbe trustee to pay it to another. Tbe respondent defends this on the ground that the direction was revocable. But there was no reservation by her of a right to revoke and no qualification of her exercise of the power to direct payment to the children. The direction was beyond recall. After the direction of October 1, 1934, the power was extinguished and petitioner no longer had any control over the trust income either to direct it to herself or to anyone else. Cf. Lelia W. Stokes, 28 B. T. A. 1245; Ellen S. Booth, 36 B. T. A. 141 (on review C. C. A., 6th Cir.). Moreover, had there been doubt as to the intention that the direction of October 1, 1934, should have permanent effect, it was set at rest by a later confirmation in writing, dated December 11, 1936.

Tbe respondent cites no authority for the contention that petitioner was under any obligation for maintenance and support of the children, and the record does not show that the trust income was used for that purpose. Cf. Commissioner v. Yeiser, 75 Fed. (2d) 956; Martin F. Tiernan, Trustee, 37 B. T. A. 1048.

The petitioner was, after October 1, 1934, not a beneficiary of the trust, had no right to the trust income, and did not in fact receive it. The Commissioner was in error in including -it in her income, and the determination is reversed.

Judgment will "be entered under Bule 50.

       December 11, 1936
      Boston Safe Deposit and Trust Company and Yolande V. Perkins, Trustees under will of Frederick W. Perkins for the benefit of Yolande V. Perkins and others
      Deas Sms and Madam :
      In my directions to you of October 1, 1934, given in pursuance of the provisions of Articles 6 and 6 of the will of Frederick W. Perkins and directing you from and after that date to pay the net income of the trust to my two daughter's, Emily and Yolande, in equal shares, it was my intention that such direction should be final and complete, eliminating me as a beneficiary from that date forward and substituting as the beneficiaries under the will my two daughters in equal shares in accordance with the provisions of said will. This direction is in accordance with the provisions of the will and for the purpose of removing any doubt as to my intentions or as to the effect of said direction to you and so that said direction might have the full force and effect to that end and so that I might not hereafter or after said date of said earlier direction have any right to change, alter, revoke or amend said direction.
      Very truly yours,
      [Signed] Xouandh V. Pbukins


author: Leech :

text:
    T. G. Nicholson, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. T. G. Nicholson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 89892, 89893.
    Promulgated July 28, 1938.

      John, J. Finnorn, Esq., Edward Rightor, Esq., and John F. Hart-mann, G. P. A., for tbe petitioners.

      Harold Allen, Esq., for the respondent.
   OPINION.

Leech :

The petitioner, T. G. Nicholson, was at all times mentioned herein, an officer of the Gretna Trust & Savings Bank and president of that bank from 1921 through 1932. Since all- of the acts or omissions hereinafter detailed were those of the petitioner, T. G. Nicholson, he will be referred to as the petitioner.

In October 1927, the petitioner and his brother-in-law, B. W. Clopton, formed a partnership under the name of Melville Ferry Co., for tbe purpose of operating a ferry at Melville, Louisiana. Each was to have a 50 percent interest and the profits were to be divided equally after provision had been made for a salary of $200 a month to Clopton for his services as manager of the business. For the period, from October 1927 to October 1929 the ferry was operated by the partnership under a joint franchise, granted by the town of Melville and Point Coupee Parish. This franchise had been procured by these parties at a cost of $10,000, which sum they had borrowed, and, for the first year of operation, a considerable part of the earnings of the ferry were applied toward the payment of this indebtedness. In October 1929, the franchise expired and it was decided that it would not be renewed but that the Louisiana Highway Commission would operate it, by contract, as a free ferry. Petitioner and his partner, thereupon, secured a contract, under conditions later described herein, from the Louisiana Highway Commission to operate the ferry for a compensation of $80 per day, which contract terminated in the month of April 1932.

The operation of the ferry and collection and disbursement of the income were left wholly to B. W. Clopton, as petitioner’s home and place of business at Gretna, Louisiana, were approximately 130 miles away. Such books and records as the partnership maintained were kept by Clopton and cash remittances on account of petitioner’s share of partnership profits were made by Clopton to petitioner as follows:

1928_81,000.00

1929_11,815.46

1930_ 2,098.00

1931_ 11,350.00

1932 _ 17, 943. 67

Total_ 44,207.13

The contract for operation of the ferry for the Louisiana Highway Commission had been obtained by the partnership through the political influence of State Senator Jules G. Fisher, with whom the petitioner had made an arrangement under which Senator Fisher would receive one-third of the profits of the partnership for exerting his political influence toward the securing of the contract. Later, upon the expiration of the contract, when advertisement for bids was made by the Louisiana Highway Commission for the operation of the ferry for the following period, petitioner and his partner decided not to bid but obtained the services of Senator Fisher and the use of his political influence to have inserted in the conditions covering the bidding on the contract, that the successful bidder would be required to purchase the ferry equipment belonging to the partnership. This provision was favorable to the partnership. It was agreed that Senator Fisher should receive, in consideration of the use of his political influence, one-thircl of any profit resulting to the partnership from the sale of the equipment. Senator Fisher was successful in securing the insertion of this provision and the equipment of the partnership was sold to the successful bidder at a profit.

Out of the remittances listed above, received by this petitioner as partnership profits remitted to him by Clopton, payments, by petitioner on behalf of the partnership to Senator Fisher for exercising such political influence, were made at times and in amounts as follows:

1931_$2,500.00

1932_ 9,427. 80

Total_._ 11, 927. 80

The books and records of the Melville Ferry Co. were kept on a fiscal year basis ending September 30. The net income of the partnership for all the years mentioned herein, including profits from operation and from sale of assets, and the distributive shares of partnership income for each year before deduction of the payments to Jules G. Fisher, were as follows:

None of the income, consisting of petitioner’s distributive share of profits from the partnership, was reported by him, in the joint income tax returns filed by him and his wife for 1928 to 1930, inclusive, nor in the separate income tax returns filed on the community property basis by petitioner and his wife for the years 1931 and 1932. No partnership return was filed for any of the years mentioned herein.

The persona] income tax returns of B. W. Clopton for the years here in question were prepared by one Waterbury, who was the bookkeeper for the Palmetto Mercantile Co., in which business Clopton was a partner. Waterbury had no connection with the Ferry Co. and merely made a final computation of income resulting from its operations. This computation was made on the basis of the books and records as kept by Clopton during the year. The net income, as computed by Waterbury, was included in each year with income of Clopton from other sources and the entire income reported in Clopton’s return. Waterbury did this because he was ignorant of petitioner’s interest in the ferry partnership. It followed that Clopton reported the total income of the Melville Ferry Co. and paid income tax on the whole of that income, as set out above, including petitioner’s distributive share and without deduction of any amounts paid by the partnership to Senator Fisher. Neither Clopton nor Waterbury was familiar with income tax requirements and neither one was aware of the fact that the filing of a partnership return was required. The petitioner became aware of the fact that the total income of the partnership was being included in the return of Clopton in 1929 after the filing of the return for 1928. However, in the four succeeding years, he permitted this method of returning the income to be continued.

The contested deficiencies for the taxable years 1928, 1929, 1930, and 1931 are barred by the statute of limitations except those for such years for which the tax return was “false or fraudulent ⅜ * * with intent to evade tax.” Eevenue Act of 1928, sec. 276 (a).

If, and only if, either of petitioners’ returns for any of these years was within that prohibition, then a second issue of fraud is presented as to those years. That issue is whether any part of any one of those deficiencies “is due to fraud with intent to evade tax.” Eevenue Act of 1928, sec. 293 (b).

Since the deficiencies determined against both petitioners for 1932 are not barred by the statute of limitations, the latter issue of fraud is, alone, involved. And, as to such deficiencies the petitioner has the burden of showing error. Welch v. Helvering, 290 U. S. 111. In the fraud issues, respondent has the burden of proof. Eevenue Act of 1924, sec. 907 (a), as amended by the Eevenue Act of 1928, sec. 601. It must be established by clear and convincing evidence, not only that the return for any year was false but that it was filed “with intent to evade tax.” See Summerill Tubing Co., 36 B. T. A. 347; Charles J. Delone, 34 B. T. A. 1139; Drawoh, Inc., 28 B. T. A. 666.

Admittedly, all the returns for each year in question were false. Does the record disclose by clear and convincing evidence that petitioners, or either of them, filed any such returns “with intent to evade tax” ?

Petitioner is a highly intelligent person. His distributive share of the partnership income for 1928 was considerable. He was required to report that share as his income. Eevenue Act of 1928, sec. 54. He actually received $1,000 from the partnership in 1928. He did not report any partnership income because, he says, in effect, he did not know what the partnership income for 1928 was when he filed his return for that year. That is not unreasonable under the circumstances. The methods under which the partnership operated were very informal. He was not in close contact with the business or its finances. He did not receive a report of the results of the business for 1928 until January 27, 1932. His return for that year is not in evidence. But the notice of the determination of the deficiency indicates that he reported a net income of $13,643.41 for that year. It was the first year the partnership had operated the ferry. He knew they were indebted for funds borrowed for the business. He thought those obligations were all to be paid before any distribution was made and they had not all been paid during that year.

At most, the evidence is not clear and convincing that petitioner’s return for 1928 was filed “with intent to evade tax.” It follows that the deficiency for that year is barred. Bevenue Act of 1928, sec. 275 (a). The proposed fraud penalty therefor is denied.

But the picture involving the deficiencies for the following four years is different.

Petitioner admits that the omissions of partnership income in his returns for all these years were willful and that, at least for the last three years, were willfully illegal.

He testifies that, after he filed his return for 1928, he learned from Clopton that, because of inability to get in touch with petitioner before filing his return for that year, Clopton had reported all the income from the partnership for that year in his return and had paid the tax thereon.

It is evident that petitioner then realized his return for that year was false in 'failing to return his share of the partnership income. Yet, despite that knowledge, he not only failed to correct that return but permitted the error to be continued in his returns for the |four succeeding years. That was an unusual course of conduct, particularly in one in such a position as petitioner. He says, and the record corroborates him, that, from 1930, if not earlier, he feared the legal consequences of this procedure and intended to correct it. But it was not corrected.

Petitioner’s apparent position is that, if, when he filed the several returns, he intended that the Government should receive all the income taxes on the partnership income to which it would have been entitled had it been properly returned, it is immaterial who returned that income and paid those taxes. He testifies that, when the returns now under discussion were filed, he thought the Government was receiving as much tax on the partnership income, when reported entirely by .Clopton, as it would have received had he correctly returned his share. He says he reached that conclusion from the fact that the partnership income was all returned by Clopton and that the auditor of the bank with which he was connected so advised him, and that, since the matter was in such a “mess,” it was better to allow it to remain so.

If we assume the truth of petitioner’s testimony, the soundness of his legal position, and therefore the materiality of the advice from the auditor, the facts upon which that advice was predicated are not in evidence. How did the auditor know that the Government was receiving all the taxes on the partnership income to which it would have been entitled if that income had been correctly returned by the petitioner ? Surely, if the position of the petitioner were valid legally, neither his mere estimate of that result nor that of another would support the position. See Charles J. Delone, supra; M. Rea Gano, 19 B. T. A. 518. The net tax result to the Government on petitioner’s false returns is not shown. The question of counsel for respondent in the cross-examination of petitioner, asking “Don’t you recall that it was pointed out to you that the whole thing could have been straightened out by the filing of claims for return [refund] by Mr. Clopton before the statute ran on all the years, at a net cost of $41 and some odd cents?” and its negative answer do not establish anything. Of even less value here is the advice petitioner says he received after the returns for 1932 were filed, that he and his wife had paid $1,000 more taxes for the years in controversy than they would have been required to pay had they filed separate instead of joint returns for 1928, 1929, and 1930.

It is but a short step from gross negligence to fraud. M. Rea Gano, supra. Considering all the circumstances, we think the petitioner’s returns for each of the years 1929, 1930, 1931, and 1932 were more than grossly negligent. They were fraudulent.

Again, the pertinent words of the controlling statute are “with intent to evade tax.” This must mean the tax of the petitioner, T. G. Nicholson. He could evade no other tax. The term “tax” under the revenue acts has a very definite meaning. It is “an involuntary charge imposed by legislative authority for public purposes.” Bank of Mount Hope, 25 B. T. A. 542.

Clopton could not legally report petitioner’s share of the partnership income as petitioner’s agent. Revenue Act of 1928, sec. 54. Petitioner knew that. Whether there was an agreement between the partners that it should be so reported or that any proportion of the taxes paid by Clopton should be contributed by the petitioner, is immaterial here. When petitioner received the statements in January 1932, covering operation of the ferry from the preceding four years, he learned that Clopton had charged his partnership account and credited Clopton’s account with a proportion of the amount paid by Clopton as income taxes on the partnership income for each of those years. That proportion was fixed solely by Waterbury, who prepared tbe returns. There is nothing in the evidence indicating that either Clopton or petitioner intended that Clopton should report petitioner’s partnership income for these years as petitioner’s agent. The evidence is conclusive that Clopton reported it as his income and paid the taxes thereon. Petitioner knew this and intended it so. His contribution to Clopton of any amount, whether designated as tax, or otherwise, was not, in fact, petitioner’s tax on his income nor was it a “tax” at all. It was not “an involuntary charge on petitioner imposed by legislative authority for public purposes.”

Whether Clopton overstated his income for these years is not the issue. Our query is limited to whether petitioner understated his income for those years with intent to evade his tax. Admittedly, he never returned his share of the partnership income for any of these years. Nor has he yet paid his tax on that income. That this was willful, is beyond question. He intended just that. The fact that his income was returned by Clopton and a tax paid on it deliberately and with petitioner’s knowledge when his returns, omitting that income, were filed, does not contradict that intent. The facts are that petitioner did not return his income or pay his tax on that .income. When the returns were filed he did not intend to do so. He intended not to return his income and not to pay his taxes.

We conclude from the record that petitioner’s returns for 1929, 1930, 1931, and 1932 were all false and fraudulent with intent to evade tax. The deficiencies determined against him are, therefore, not barred for any of those years.

As to the year 1932, the deficiency in tax, determined against each petitioner, is sustained. Petitioner contends now that, in computing the partnership income, the payments to Senator Fisher are deductible as ordinary and necessary expenses of the partnership. The record is convincing that these payments were not made for legitimate services rendered, but purely for the exercise of political influence possessed by Fisher as a state senator. In fact, the petitioners stipulated that the payments were made for political influence. As such they do not constitute expenses deductible in computing net income. Easton Tractor & Equipment Co., 35 B. T. A. 189; Oscanyan v. Arms Co., 103 U. S. 261; Crocker v. United States, 240 U. S. 74. Petitioner’s counsel has invited our attention to the recent reversal by the United States Circuit Court of Appeals for the Fifth Circuit of our decision in Alexandria Gravel Co., 35 B. T. A. 323. In that case we disallowed, as deductible expenses, payments made to a Louisiana state senator of commissions upon sales made by him of materials to certain state agencies. In reversing our decision in that case the Circuit Court did not approve payments made a state official for the use of Ms political influence, as deductible expenses, but held that the proof submitted in that case did not establish that the payments were made for such influence. The court held that the purchases were shown to have been made upon the basis of competitive bids submitted. In the present case no such showing is made, but the payments made to Senator Fisher are stipulated to have been made for the use of his political influence. As such, they are obviously of the character commonly known as “graft” and not deductible as ordinary and necessary business expenses.

Since there was no fraud in the return of the petitioner, T. G. Nicholson, for 1928, any deficiency against him for that year is barred. Eevenue Act of 1928, sec. 275 (a). As to all other years, no error has been established in the determination of any of the deficiencies, as adjusted by stipulation, except that against the petitioner, Mrs. T. G. Nicholson, for 1931, and those deficiencies, as so adjusted, are sustained.

Because these deficiencies were determined on petitioner’s omitted partnership income, it follows that part of each of such deficiencies determined against him was due to his fraud with intent to evade tax. Consequently, the proposed fraud penalties against him for these years are sustained. Eevenue Act of 1928, sec. 293 (b).

On brief, respondent says:

Deficiencies of $49.53 for 1931 and $116.31 for 1932 automatically result from the adjustments to her husband’s income hereinabove discussed, in as much as she had no separate income; although she filed separate returns for 1931 and 1932 the income reported was on a community basis.
No evidence of fraudulent intent on the part of Mrs. Nicholson, or evidence that she participated in or had knowledge of her husband’s financial transactions, being available, the charge of fraud in her case is not pressed.

In view of the statement contained in the last quoted paragraph, and the record generally, we think the respondent has not sustained his burden of proof in establishing either that the return of the petitioner, Mrs. T. G. Nicholson, for 1931, was false or fraudulent with intent to evade tax or that any part of the deficiencies determined against her for either 1931 or 1932 was due to her fraud. Consequently, the deficiency determined against her for 1931 is barred (see Harold B. Franklin, 34 B. T. A. 927), and the fraud penalty proposed against her for each of such years is denied.

Eeviewed by the Board.

Decisions will be entered v/nder Ride SO.


author: Leech:

text:
    L. A. Meraux, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. L. A. Meraux, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 82461, 82462.
    Promulgated July 28, 1938.

      William O. Orchard, Esq., and Robert 8. Link, Jr., Esq., for the petitioners.

      Harold Allen, Esq., for the respondent.
   OPINION.

Leech:

Petitioners have waived the bar of the statute of limitations to an assessment of deficiencies for both years involved. Thus, they have the burden of establishing error in the respondent’s determinations of those deficiencies. Welch v. Helvering, 290 U. S. 111. But, to sustain any of the fraud penalties, the respondent has the burden to establish, by clear and convincing evidence, that some part of the deficiency, to which a fraud penalty has been added, resulted from the fraud of the taxpayer with intent to evade income tax. Revenue Act of 1924, sec. 907 (a), as amended by section 601 of the Revenue Act of 1928. See also Drawoh, Inc., 28 B. T. A. 666.

Based on stipulations or failure of proof, we have found as facts that petitioners have not established error as to certain of respondent’s adjustments in their taxable income. No discussion about those findings seems necessary. Accordingly, respondent is affirmed therein.

As to the items contested by petitioners, on which, other specific findings have been made, only a few warrant further consideration here.

In his adjustment of the taxable income of the petitioner, L. A. Meraux, for 1930, as item 3, respondent increased the reported taxable income of the petitioner, L. A. Meraux, for 1930, by $2,880.98, as his community half of a payment of $5,761.96 received in 1930, consisting of the final installment in the purchase of land from this petitioner which had occurred in a prior year in the so-called Acme Land & Fur Co. deal. The. entire payment received in 1930 is treated by respondent as taxable gain to the petitioners in that year. It is stipulated that the property sold had a cost of $30,000 to petitioner and an associate, of which petitioner’s share was $15,000. The property was sold for $63,000 in 1927, at which time $25,500 was received in cash, together with a note for $37,500. Of the initial payment, $6,833.33 was received in that year by petitioner. During 1929, a payment of $25,000 was made on the note, of which petitioner received $12,500. The record does not reveal that this petitioner, in prior years, returned as gain, any portion of the payments made. He did not report the note thus received, covering deferred payments, as income in any amount. There is nothing in the evidence here to establish that such note had a fair market value on its receipt, which would have been taxable then and not later. Thus, it follows that the petitioner has failed to prove error in respondent’s determination that the entire $15,000 cost of his share in the property had been recovered by petitioner prior to 1930, and that all of the $5,761.96 received in the latter year, was community income and taxable to petitioners for 1931 as such. But the inclusion of this item twice, in petitioner’s income was error, as has been found.

The evidence is conclusive that the item of $2,480, which was a part of the sum by which respondent increased the income of the petitioner, L. A. Meraux, for 1930 under item 1, entitled “Fees, salaries, rentals, etc.”, consisted of a deposit in bank, during that year, of contributions of individuals to a political organization. This money was not the property of the petitioner, nor was it received as such, but was handled by him as a mere conduit in its transmission, immediately after its receipt, to the organization to which it belonged. The addition of this item to income has therefore been disapproved. Corliss v. Bowers, 281 U. S. 376.

Under item 5 of respondent’s adjustments to the income of the petitioner, L. A. Meraux, for 1931, he included as income $2,400 deposited in bank during that year by Meraux. The evidence here leaves no doubt, in our judgment, that this deposit consisted of collections of poll tax, remitted the following day by check to his official account as sheriff of the parish. He was a mere conduit. He collected it only for the purpose of so remitting it. The inclusion of this item in income was erroneous. Corliss v. Bowers, supra. Included also in the increase to the income of the petitioner, L. A. Meraux, for 1931, under item 5, were note liabilities, totaling $8,500, paid by this petitioner in cash during that year. Respondent says that the source of the cash used to make these payments is not disclosed and that it can not be identified with cash receipts included by petitioner in reported income or with proceeds of withdrawals from banks. As to this item this petitioner testified that $500 of the cash thus used was received by him in the repayment of a loan made in prior years to one Langlois. His testimony about the receipt of this payment is substantiated by Langlois and the draft with which it was paid. He testifies that other payments on account of this total indebtedness, but how much he does not say, were made from money paid to him in that year by one Stander, to whom he had loaned $2,000 in prior years. The evidence of this loan was corroborated by Stander. He was a deputy sheriff employed in this petitioner’s office for nine months of the year at a salary of $150 a month, and spent the remaining three months trapping muskrats. He has a large family and his entire salary is used for its support. Stander testified that petitioner loaned him $2,000 in cash in 1929 for the purchase of a boat and that he repaid this loan in cash to this petitioner during 1931.

Although this transaction with Stander is unusual, it is established by the uncontradicted testimony of these two witnesses that petitioner did thus receive $2,000 in cash from Stander and $500 from Langlois. We think the payment of that portion of the note liabilities is thus explained as from funds other than taxable income.

A $7,000 loan, paid in cash, is explained by this petitioner with a statement about a transaction with two parties named Meraux and Nolan. It is somewhat confusing in its detail. However, the substance of this testimony is that he borrowed $7,000 from a bank to loan to these parties and that such loan to them was repaid by their payment of petitioner’s note at the bank. Although we have only petitioner’s testimony, which shows that other parties had full knowledge of this transaction, none of whom testified, petitioner’s categorical statement that he did not pay this loan stands uncontradicted. And that statement is not unreasonable in view of the witness’s obvious informal manner of conducting business transactions. It is also noted that this petitioner, in his testimony on the payment of this loan, indicated there was a witness present under subpoena in the case who knew all the details of the transaction. This witness was the cashier of a bank at Arabi, Louisiana, where petitioner lived and where he carried an account. This witness later testified, as a witness for this petitioner, in regard to other items. He was not questioned either on direct or cross-examination as to this loan or its payment. Admissible testimony of this witness corroborating this petitioner would undoubtedly have disposed of the item in question as being improperly included in petitioner’s income by respondent. However, in view of the entire situation, and the feet that the respondent did not attempt to examine the witness on this transaction on cross-examination or, as his own witness, on direct examination, and offered no other evidence contradicting this petitioner, we think the presumption of correctness attaching to the respondent’s determination that this item constituted unreported income is overcome, and have so found. Its elimination from contested income follows.

Under item 18 of respondent’s adjustments to the income of the petitioner, Mrs. L. A. Meraux, for 1931, he disallowed a claimed deduction for a casualty loss resulting from the wreck of her automobile in 1931. Respondent supported this action on the ground that the automobile had been purchased several years previous to its wreck in 1931 and that its cost had then been fully depreciated. But the basis for determining the amount of such deductible loss is the cost of the property less allowable depreciation. Here the automobile was in personal and not business use so no depreciation was allowable thereon and no portion of the cost could have been recovered through proper deductions therefor. Since, therefore, the cost of the destroyed car to this petitioner was, at least, $1,800, and its value when destroyed was $1,800, it follows that she has sustained her right to the deduction of that amount for 1931. Helvering v. Owens, 95 Fed. (2d) 318; Helvering v. Obici, 97 Fed. (2d) 431.

In the recomputation of the taxable income of the petitioner, Mrs. L. A. Meraux, under this opinion, the disposition therein of adjustments to community income and deductions pertinent thereto, will be controlled by the disposition herein of the same adjustments to the taxable income of the petitioner, L. A. Meraux.

This leaves for consideration the penalties proposed by respondent. In so far as the petitioner, Mrs. L. A. Meraux, is concerned, the proof is wholly insufficient to establish that any part of the deficiencies determined against her for either of the two years in question was caused by her fraud with intent to evade tax. The correctness of this conclusion is admitted by respondent upon brief.

As to the petitioner, L. A. Meraux, the deficiencies for the two taxable years, as determined by respondent, total $1,011.01. The recom-putation under this opinion will reduce them.

The notices of these deficiencies are dated September 18, 1935. Fraud penalties were not originally asserted by respondent. Not until December 16, 1937, after the proceedings had been regularly calendared for hearing, did he move to add the fraud penalties.

The record shows that this petitioner is a prominent and respected citizen in his community, lie was and is sheriff of the parish in which he lives. He is a general practitioner of medicine. He has many interests. His activities are varied and his income is drawn from numerous sources. He accounted for almost $40,000 in his return for 1930 and about $33,000 in his return for 1931. A large proportion of the income received in both of the taxable years was nontaxable. His substantial bank accounts, in a considerable part, consisted of the proceeds of loans to him.

It is clear that he was without any adequate system of accounting for receipts and expenditures. He must suffer the consequences of that condition in so far as its existence prevents his establishing error in the determination of his tax liabilities. Bishoff v. Commissioner, 27 Fed. (2d) 91; Pottash Brothers, 12 B. T. A. 190. But it is hardly evidence of fraud in the present circumstances. The record discloses not only that he failed, in several instances, to claim deductions, or their full amounts, to which he was entitled in his returns for the taxable years, but respondent agrees that this is so in his computation of the deficiencies. Thus, as this Board said in Oscar G. Joseph, 32 B. T. A. 1192:

⅜ * * His very inconsistency and indifference to the result indicate negligence and carelessness rather than fraudulent intent. * * *

The deficiencies resulted from respondent’s disallowance of deductions taken on the petitioner’s returns for the two pending years, or his determination that petitioner received taxable income, during that time, which was not reported.

We have sustained respondent in his action on many of these items in both categories. In most instances, if not all, this was because petitioner either did not contest those items of adjustment or failed to prove error in them. Thus, the disallowance of many of the deductions results, wholly, from petitioner’s failure to establish the expenditures supporting them. But that such expenditures were made and the evidence to sustain them was destroyed in a fire which admittedly occurred, or is unavailable in the circumstances, is not so unreasonable as to support an allegation of fraud. The situation is substantially similar as to the items of income which respondent determined petitioner had received during the taxable years but did not report. The adjustments supported by such alleged omissions are approved hero only because of the failure of the taxpayer to identify such alleged omitted items of income, consisting of deposits in bank or the payment of liabilities in cash, with any specific portions of the income reported. But these items lack the essential proof that such income was actually received and, if so, was not reported in the return. The inability to identify such income is sufficient, of course, to sustain its inclusion as additional income not reported. Likewise, petitioner’s failure to contest the disallowance of losses or his failure to overcome the presumption of correctness attaching thereto, warrants our approval of such disallowances. But, such evidence falls short of the clear and convincing proof necessary to sustain a finding of fraud. Oscar G. Joseph, supra.

Whether there are other instances of adjustment, the propriety of which are supported by any affirmative evidence, it is difficult to determine from this record. But, if there are such other instances, they involve items so trivial that, when considered in the light of petitioner’s standing in his community, his informal business methods and his categorical statement that, if errors occurred in his returns for the taxable years they resulted from innocent mistakes and were not intentional or for the purpose of evading tax — the evidence as to such items is even less convincing of fraud.

The record is not satisfactory. However, the evidence considered as an entirety is not sufficient to sustain respondent’s statutory burden of proof that any part of any of the deficiencies was due to fraud with intent to evade tax. But, it is equally clear that petitioners’ errors in all their returns for both years, resulting in understatement of income or overstatement of deductions, were negligent. The fraud penalties proposed under the Revenue Act of 1928, section 293 (b), are, therefore, disapproved, and the negligence penalties proposed under section 293 (a) of the same revenue act, as to all deficiencies recomputed under this opinion, are sustained. Oscar G. Joseph, supra; Edmond A. Hughes, 27 B. T. A. 1022; Thomas J. Avery, 11 B. T. A. 958; American Packing Co., 3 B. T. A. 195.

Reviewed by the Board.

Decisions will he entered v/nder Bule 50.


text:
    Manasse Karger, the Sole Heir and Proper Representative of Marks Karger, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent. Manasse Karger, Petitioner, v. Commissioner of Internal Revenue, Respondent. Stella Karger, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 70659, 70661, 71758, 86632, 86633, 86634.
    Promulgated July 28, 1938.

      Hugh M. Wilhinson, Esq., and Harry Nowalslcy, O. P. A., for tbe petitioners.

      Harold Alien, Esq., for the respondent.
   OPINION.

Leech : Because of the timely determination of the deficiencies for 1930 and for 1931, the assessment of none of the deficiencies for these years is barred by the statute of limitations. Revenue Act of 1928, secs. 275 (a) and 276 (b). But the deficiencies for 1929 are barred by section 276 (a) of the Kevenue Act of 1928 except those determined against taxpayers whose returns for such year were “false or fraudulent * * * with intent to evade tax.” As to any of the deficiencies not so barred, the taxpayer, in each, has the burden of establishing error in the respondent’s determination of the deficiency. Welch v. Helvering, 290 U. S. 111; Old Mission Portland Cement Co. v. Helvering, 293 U. S. 289. The propriety of the proposed imposition of each of the fraud penalties raises another fraud issue. That is, whether any part of one or more of the deficiencies is due to fraud with intent to evade tax. Sec. 293 (b), Revenue Act of 1928. See Charles J. Delone, 34 B. T. A. 1139.

In neither issue will fraud be presumed. The burden of proof is on the respondent. Revenue Act of 1924, sec. 907 (a), as amended by the Revenue Act of 1928, sec. 601. Its existence must be established by clear and convincing evidence. See Drawoh, Inc., 28 B. T. A. 666,

Both fraud issues are present in connection only with, the deficiencies for 1929. The same evidence applies largely to both. Since the fact of fraud of Manasse Karger and Marks Karger, in filing their returns for 1929, has been found, we leave the discussion of both fraud issues until later and proceed to a consideration of the deficiencies. Have the petitioners, or any of them, met that burden as to any part of one or more of the deficiencies?

Manasse Karger and Marks Karger, from 1905 to the time of the death of the latter, were engaged in the gambling business at New Orleans, Louisiana. With the exception of a short period subsequent to 1931, they were equal partners in all their gambling ventures. These consisted of the operation of handbooks on horse races, booking operations at the New Orleans race tracks, and in later years, including those under review, the operation of gambling houses with dice, faro, roulette, and other games. For many years prior to 1924, the petitioner, Manasse Karger, was an officer and stockholder in a tobacco manufacturing business at New Orleans, receiving therefrom a salary, together with dividends upon his stockholdings. He sold his interest in this business in 1924. All three of these taxpayers filed returns for the calendar years 1929, 1930, and 1931 with the collector of internal revenue at New Orleans, Louisiana, reporting net income as follows:

Later, in 1932, the petitioner, Manasse Karger, learning that a tax investigation of the operations of certain New Orleans gambling houses was contemplated, called upon the collector of internal revenue at New Orleans and asked that an examination of his returns be made. At the suggestion of the collector Manasse Karger, Stella Karger, and Marks Karger, now deceased, brought their records, consisting of a memorandum book and certain bank statements, to his office. The collector assigned a revenue agent to examine these records. This agent did so and obtained additional information from the petitioners about other property owned by them. As a result of this investigation amended returns were filed by each petitioner for each of the three years, reporting income as follows:

The tax computed on all these returns, both original and amended, was paid.

Following this, respondent made another investigation of the tax liability of these three taxpayers and the deficiencies here in dispute were determined.

In his determination of these deficiencies respondent has increased the net income reported in each amended return. He did this by computing the total net income of each taxpayer for each year and deducting therefrom the income already returned upon which the tax had been paid. The computation of the gross income of each taxpayer for each of such years was made by determining the increase in so-called net worth of each petitioner during each of such years, to which amounts were added the aggregate expenditures in those years by each petitioner which were not shown to have been made from capital or reflected in the assets increasing net worth. This method may not reflect income exactly; but it seems to do so with sufficient accuracy to warrant its use here, since no records were kept from which such income could be more exactly determined. We know of no better means available. Certainly, the petitioners have shown us none. The use of this method here is necessary solely because of petitioners’ failure to keep such records, the consequences of which they, and not the respondent, must now suffer. Its use is approved here. See Revenue Act of 1928, sec. 54; Bishoff v. Commissioner, 27 Fed. (2d) 91; Pottash Bros., 12 B. T. A. 190; Russell C. Mauch, 35 B. T. A. 611; McAnelly Hardware Co., 9 B. T. A. 361.

The correctness of their respective expenditures and increases in so-called net worth, during the taxable years, is not contested. Nor are the allowable deductions in dispute. Petitioners’ position is that respondent erred here, in adding to gross income their stipulated annual expenditures and increases in so-called net worth, because, they allege, those expenditures and so-called net worth increases were made from money which they had earned before and owned at the close of 1928.

The items, as stipulated, supporting the computation of the annual increases in the so-called net worth of the petitioners, are cash in bank, bonds, real estate, and other property, but include no money except that on deposit in bank. The premise of fact upon which the petitioners support their position is that, in addition to the property stipulated as owned by them at the close of 1928, they, Manasse ICarger and Marks Karger, deceased, then owned $300,000 in cash, which was then in a safe deposit box rented by them in a New Orleans bank, and that such amount had been reduced to $250,000 by the close of the year 1929, to $220,000 by the end of 1930, and $200,000 by the end of 1931. Clearly, not only the fact of these petitioners’ possession of this cash, but its annual reduction, and in amounts not less than the annual outlays for assets and expenditures reflected in increased so-called net worth, is a necessary factual premise for this position. Therefore, the validity of that position here rests, primarily, upon whether the record does establish these facts.

On this question of fact there is the testimony of two individuals who state that this bank box, on two dates, contained a large sum of money. Neither of these witnesses attempted to fix its amount. One of them, an acquaintance of Manasse Karger, testified that he secured a loan of $20,000 from the latter, in November 1928, and, on that occasion, went with this petitioner to the bank, where the money was taken from the bank box and delivered to the witness in $1,000 bills. He said this money was taken out of an envelope containing other bills and that the figure $200,000 was marked on the envelope.

This witness stated that he had known the petitioner, Manasse Karger, for many years, and that they had often borrowed from each other in the course of gambling operations when either needed funds.

The other witness had been an employee of this petitioner for a number of years in his gambling operations and was in his employ at the time of the hearing. He testified that this petitioner was accustomed to carrying a large amount of money in his bank box. He said he knew this because he had gone with this petitioner on several occasions to the box to secure money necessary in petitioner’s gambling operations and that, in July 1929, he accompanied petitioner to the bank and saw him count $190,000 or $192,000 from the box.

The testimony of these two witnesses is of little, if any, value in determining either the amount of cash in this bank box at the close of 1928 or the sum, if any, by which it was reduced during 1928, 1929, or 1930.

In addition to the testimony of these two witnesses is that of the petitioner, Manasse Karger. He testified that his bank box contained the stated amounts of cash on the several dates set out, that this cash belonged to him and his brother and was the so-called “bank roll” used by them in the operation of their gambling business. To accept such self-serving evidence — particularly when its necessity arises, as here, because of this petitioner’s unjustified failure to keep proper records of his assets and income upon which to premise a proper income tax return which the law demands — requires, at least, that such evidence be convincing and not discredited. Here, such testimony was vacillating and unconvincing.

At least of passing significance, in considering the credibility of this petitioner on this important point, is his testimony about the source of the large sum in cash which he says he had in his bank box at the close of 1928. From 1913 to 1916, inclusive, this petitioner filed no returns whatever until after the close of the last of these years when this fact was called to his attention and returns demanded, which were then filed. These returns reported no tax, and a nominal penalty was paid. Following this, returns were filed by this petitioner for each year and income taxes paid as follows:

1917-$89.84 1925_$37.21

1918_214.11 Do Additional assessment_ 14.13

1919_ 199.50 Do Penalty- .71

1920_ 305149 1926_ 52.85

1921_ 83.59 1927- 44.38

1922_,_ 84.49 1928-No tax

1923_109.65

1924___ 38.00

Do Additional assessment_ 237.86

Do Penalty_ 11.89

Manasse Karger says that the $330,000 in cash, which he testifies he had in their safe deposit box at the close of 1928, was acquired over the period from 1904 to the significant year, here, 1913, in the operation of handbooks and in booking horses at the race tracks. His testimony is that this was used from 1913 to the period now in controversy, in the continuous operation of handbooks and other gambling ventures. But his record of earnings, as reflected in the tax paid over these years, would tend to indicate that he and his brother had realized little or no gain in this gambling, since, during this period to 1924, this petitioner was enjoying a substantial income as an officer and stockholder of the People’s Tobacco Co. Of interest in this connection, also, is the testimony of one of the former employees of that company that, between 1919 and 1924, Manasse Karger frequently allowed his credit balances with the company to accumulate until they amounted to substantial sums, and that he made large loans to the company to finance operations in purchasing tobacco. This witness estimates these loans to have been as high as $40,000 at one time. This petitioner, himself, testifies that his loans to the company at times reached a figure of $60,000 or $75,000, and that he sold his stock in the company at a profit in 1924.

The credibility of Manasse Karger is also weakened by another circumstance. In 1933, when the investigation of his income tax returns, resulting in the contested deficiencies, was begun, this petitioner denied information to, respondent about his so-called “bank roll.” The special agent making the investigation testified to that fact and it was not denied by this petitioner. During the investigation, this petitioner was asked about his property. He accompanied a special agent to the bank for the purpose of inspecting the contents of Ms bank box and inventorying Ms securities. TMs petitioner states that he there took his stocks and bonds from his bank box and submitted them to the agent and assistant for listing but that, at that time, he had money in the box but did not show it to the agent because he thought that only his securities were to be inventoried and did not wish the agent to know about his having the money. This petitioner is intelligent. He must have known that an inventory of property of a taxpayer, under such circumstances, which failed to include the capital used in his business operations, would be wholly inadequate. But this agent testifies that he made an inventory of the contents of the box and that there was no currency in it then. His statement is reasonable, since a complete investigation of the contents of the box and the ascertainment of all the property it contained was the only purpose of his visit.

Without discussing the record further, it is, at least, doubtful whether the presumption of correctness attaching to respondent’s disputed determinations of deficiencies, has been overcome. However, comment on other evidence seems appropriate. The petitioner, Manasse Karger, and the decedent, Marks Karger, were separately indicted in the United States District Court for the Eastern District of Louisiana at the term of court for November 1935, for the offense of willfully, knowingly, and feloniously attempting to defeat and evade their income tax liabilities for 1929, 1930, and 1931, by understating the taxable income of each for each such year. The amount of such understatement and consequent liability of each petitioner for each year was set up in a separate count in those indictments. On May 8, 1936, after originally pleading not guilty, each petitioner voluntarily appeared before the court, withdrew his plea, and, after pleading guilty to the entire indictment, was sentenced to and paid a fine of $1,000. One of the conditions then imposed upon these petitioners was that they deposit, in the registry of the court, sums of money to protect the United States in the collection of each of the deficiencies now in question, including that proposed against Stella Karger, together with the penalties added thereto. The decedent., Marks Karger, thereupon deposited the sum of $9,942.39, and the petitioner, Manasse Karger, $8,487.69. These deposits were made with the express reservation to petitioners of their rights to contest the correctness of the tax alleged in the indictment to be due from these three petitioners, and the right of the Government of increasing such deficiencies by proper proof.

The contested deficiencies and penalties involve the very taxes, to be adjusted as stipulated here, to the felonious attempt to evade which the petitioner, Manasse Karger, and decedent, Marks Karger, pleaded guilty. Therefore, such pleas are evidence in these civil proceedings. They are admissions against interest but as such, as this Board said in Thomas J. McLaughlin, 29 B. T. A. 247, “* * * they may be explained and the circumstances given under which they were made, in order to throw light upon the force that should be given to them. Swan v. Philleo, 190 N. W. 406; Russ v. Good (Vt.), 102 Atl. 481; Oregon-Washinglon R. & Nav. Co., 78 Ore. 355; 153 Pac. 470.”

Manasse Karger explains these pleas by testifying that, although he and his brother were innocent of the criminal charges, they decided to plead guilty if such action would entail only the imposition of fines. He says that he was induced to do this by his brother, who was ill and wished to see the matter closed. He testified that an agreement was made by his attorney with the United States District Attorney that, on a plea of guilty, a fine without imprisonment or with a suspended, sentence would be imposed. His attorney corroborates this testimony about that agreement.

We are not impressed by this explanation, particularly when examined in the light of this illuminating record. It is difficult to realize how this petitioner, whose record was unblemished by a conviction or even a charge of law violation, to which fact he testified with obvious pride, would plead guilty to the commission of a serious offense against the criminal laws of his country and pay a substantial fine, merely because he was requested to do so by his innocent brother who had been similarly indicted. The explanation of the petitioner, Manasse Karger, is even more unreasonable in view of the fact that the pleas of guilty were entered against the advice of their attorney and in the face of his opinion that the Government would be unable to convict them.

Whatever may have been the motivating reason that prompted Manasse Karger and Marks Karger to enter pleas of guilty to these indictments, there is nothing, in our judgment, in the explanation for that action in this record which deprives those formal admissions of guilt of their normal effect as clear and convincing evidence of fraud here.

These pleas thus constituted unconditional and unqualified admissions of the decedent, Marks Karger, and the petitioner, Manasse Karger, that all of the income tax returns which each filed for 1929, 1930, and 1931, the years here involved, were false or fraudulent with intent to evade tax. And, although, under the circumstances, such pleas were ineffective as admissions of deficiencies in any particular amounts, we think their reasonable effect may well be to admit the existence of deficiencies in each year in some amount. However, we do not answer that question. In any event, since determinations of deficiencies against each pleader for each of the years 1929, 1930, and 1931 are approved here, such pleas are now similar admissions that part of each of such deficiencies resulted from the fraud of the respective pleader. Cf. Swummerill Tubing Co., 36 B. T. A. 347. And, since the petitioners deny any fraud here, those pleas practically eliminate any remaining weight to which the unsupported testimony of Manasse Karger might be here entitled.

We have, therefore, found that petitioners have failed to establish any error in any of the deficiencies determined by respondent as adjusted under stipulations in the record, except as to the deficiency against Stella Karger for 1929. It is directed that, in the recom-putation of those deficiencies under this opinion, effect be given to the stipulations affecting the amounts of those respective deficiencies.

Petitioners argue that, in sustaining such deficiencies, we must find that Manasse Karger and Marks Karger, now deceased, operated their gambling ventures without cash in a substantial amount. That contention, of course, is not sound. We decide, only, that the record here does not establish any error in the contested deficiencies, as adjusted under stipulation. We reach this conclusion because the evidence does not establish that such cash, if Manasse Karger and Marks Karger did have it as contended, was the source of any of their stipulated expenditures or so-called net worth increases, upon the basis of which their gross incomes for the taxable years were computed by respondent.

A consideration of the entire record leads us inevitably to the conclusion, and we have therefore found, that the returns of Manasse Karger and Marks Karger, now deceased, for 1929 were false or fraudulent, with intent to evade tax.

Likewise constrained, we have also found that part of the deficiencies determined against Marks Karger and Manasse Karger for each of the years 1929,1930, and 1931 was due to fraud with intent to evade tax. But respondent, because of his death before the hearing, claims no fraud penalties against Marks Karger. Accordingly, the 50 percent penalty which respondent has added to each of such deficiencies is sustained, except as to those here redetermined against Manasse Karger as the personal representative of Marks Karger, deceased.

.The pleas of guilty to the indictments charging fraudulent evasion of income taxes for those years by the decedent, Marks Karger, and the petitioner, Manasse Karger, together with the imposition of fines and their payment, do not preclude the imposition of the fraud penalties here. Helvering v. Mitchell, 303 U. S. 391. As to the petitioner, Stella Karger, respondent, on brief, says:

No evidence of individual fraudulent intent on tlie part of Mrs. Karger, or evidence that she participated in or had knowledge of her husband’s financial transactions, is available. The charge of fraud against her therefore is not pressed.
Notwithstanding these facts, in as much as the returns filed by her were false and fraudulent with intent to evade tax, as reporting materially less than half her husband’s income in each year, the statute of limitations has not run against assessment and collection of the resulting deficiency for 1929, under the provisions of Section 276 (a), Eevenue Act of 1928, (45 S'tat. 791, 857).

In view of the statement contained in tbe first paragraph just quoted and the entire record, in our opinion, the respondent has not sustained his statutory burden of proof of establishing either that the return of the petitioner, Stella Karger, for 1929, was false or fraudulent with intent to evade tax, or that any part of any of the contested deficiencies, against her was due to her fraud. We have so held. It follows that the assessment of any deficiency against her for 1929 is barred (Eevenue Act of 1928, sec. 275 (a)), and all of the fraud penalties proposed against her are denied. Revenue Act of 1928, sec. 298 (b). See Harold B. Franklin, 34 B. T. A. 927.

Reviewed by the Board.

Decisions wül he entered under Rule 50.


author: Kern :

text:
    Continental Illinois National Bank and Trust Company of Chicago, Executor of the Last Will and Testament of Fred B. Jones, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87203.
    Promulgated July 29, 1938.

      Harry Thom, Esq., for the petitioner.

      R. F. Staubly, Esq., for the respondent.
   OPINION.

Kern :

Petitioner’s testator, by his will, made numerous bequests to corporations operated exclusively for religious, charitable, scientific, literary, or educational purposes within the meaning of section 303 (a) (3) of the Eevenue Act of 1926, set out in the margin. The testator died in 1933 and his will was admitted to probate in the Probate Court of Cook County, Illinois. Thereafter, certain heirs at law of the testator, who were not beneficiaries under his will, filed a complaint in the Circuit Court of Cook County, Illinois, contesting the validity of his will. In 1936 the beneficiaries under the will effected a compromise with the contestants of the will, whereby they agreed to pay the contestants the sum of $75,000, to which sum the beneficiaries contributed ratably in proportion to their legacies, including the trustee to whom testator had bequeathed the residue of his estate under a charitable trust, and whereby the contestants released all claims against the estate or the assets thereof. This compromise agreement was approved by the Circuit Court of Cook County in a consent decree which found that there was no equity in contestants’ complaint and that the will contested was the last will and testament of the testator and confirmed its probate. It is conceded that the estate of testator is entitled to deduction pursuant to section 303 (a) (3) of the Revenue Act of 1926, supra, in the amount of the bequests to the charitable and educational legatees, but it is contended by respondent that the amount of such deductions should be reduced by the sum of $75,000 which was contributed by the charitable and educational beneficiaries and was ultimately paid to and enjoyed by certain of testator’s heirs at law as to whom no such deduction would be allowable.

In our opinion, this contention is without merit.

The rights of a beneficiary under a will are property rights and a determination of them by a state court of competent jurisdiction is decisive as to their extent and character. Freuler v. Helvering, 291 U. S. 35; Blair v. Commissioner, 300 U. S. 5.

Whether property is received by way of inheritance or otherwise depends upon the law of the jurisdiction under which the taxpayer receives it. Uterhart v. United States, 240 U. S. 598; Lyeth v. Hoey, 96 Fed. (2d) 14 (C. C. A., 2d Cir., Apr. 11, 1938).

Under the law of Illinois, an agreement of compromise such as was involved in the instant case does not constitute a modification of the will, the payments incident to the compromise being considered as made and received pursuant to the agreement and not under the will or the intestate laws of the state. People v. Union Trust Co., 255 Ill. 168; 99 N. E. 377; People v. Upson, 338 Ill. 145; 170 N. E. 276.

The contestants in the instant case, the heirs at law of petitioner’s testator, did not receive the payments to them in compromise of their claims against the estate as a bequest or inheritance, but by purchase from those who acquired title under the allowed will. Their rights were contractual and not testamentary. Lyeth v. Hoey, supra; Bernard O. Kearney, 31 B. T. A. 935. The case of Magruder v. Segebade, 94 Fed. (2d) 177 (C. C. A., 4th Cir., Jan. 4, 1938), cited by respondent, does not persuade us to the contrary. The court in that case considered this question but cited as the sole authority for its conclusion the case of Lyeth v. Hoey, 20 Fed. Supp. 619, the decision in which was later reversed by the Circuit Court of Appeals for the Second Circuit in Lyeth v. Hoey, supra.

To hold, as we have done, that the contestants did not receive the payments involved herein under the will of petitioner’s testator or the intestate laws of Illinois, would seem to dispose of the question presented in this proceeding, since the respondent does not contend that the deduction allowed under section 303 (a) (3) of the Revenue Act of 1926 is limited to that portion of the legacy which is ultimately received and enjoyed by such beneficiary after the payment of expenditures incident to its acquisition. Such a contention would be futile in view of the authorities holding contra. Edwards v. Slocum, 264 U. S. 61; Howard K. Walter et al., Executors, 2 B. T. A. 453; John Aspinwall Hadden, Jr., 10 B. T. A. 741. It is respondent’s contention that, in fact even if not in form, the contestants here received $75,000 which belonged to the testator’s estate prior to the distribution to the beneficiaries and received this sum because they were heirs, and, therefore, this sum was not a proper deduction. Although the contestants here may have received the payment ’because they were heirs at law of the testator, they did not receive it as heirs or from the estate pursuant to the will. As we have pointed out, the payment was made by the beneficiaries out of legacies which were proper deductions under the revenue act, pursuant to a compromise agreement which, under the law of the State of Illinois, did not constitute a modification of the will of petitioner’s testator, and, therefore, will not diminish the amount of the deductions properly taken pursuant to section 303 (a) (3) of the revenue act.

It is stipulated by the parties that if we hold, as we have held, that the deduction otherwise allowable for bequests to charities should not be diminished by the amount of $75,000, then the deficiency in the estate tax is the sum of $147.99.

Decision will be entered that there is a deficiency in the sum of $11$.99.

       Shc. 303. For the purpose of the tax the value of the net estate shall be determined—
      (a) In the case of a resident, by deducting from the value of the gross estate—
      * * * * ⅞ * 9
      (3) The amount of all bequests, legacies, devises, or transfers, to or for the use of the united States, any State, Territory, any political subdivision thereof, or the District of Columbia, for exclusively public purposes, or to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, or to a trustee or trustees, or a fraternal society, order, or association operating under the lodge system, but only if such contributions or gifts are to be used by such trustee or trustees, or by such fraternal society, order, or association, exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals. The amount of the deduction under this paragraph for any transfer shall not exceed the value of the transferred property required to be included in the gross estate: * » *