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finding that a spouse intended to file a joint return notwithstanding a lack of her signature where the return was prepared in a similar manner to those of prior years
Summary of this case from Edwards v. Comm'rOpinion
Docket Nos. 2540-68 2831-68.
1971-04-6
ESTATE OF RALPH B. CAMPBELL, DECEASED (MABEL W. CAMPBELL, ADMINISTRATRIX), AND MABEL W. CAMPBELL, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Charles R. Hembree, Dan E. Fowler, and Philip E. Wilson, for the petitioners. Juandell D. Glass, for the respondent.
Charles R. Hembree, Dan E. Fowler, and Philip E. Wilson, for the petitioners. Juandell D. Glass, for the respondent.
1. Certain ‘service stock’ was unrestricted when first acquired by promoter; it was later placed in escrow and subjected to certain restrictions. Held, gain thereafter realized by promoter upon subsequent sales of his rights in such escrowed stock was capital gain rather than ordinary income.
2. Held, petitioners failed to carry burden of proving error in Commissioner's determination that an item of $8,217.91 represented unreported income.
3. Held, in the light of a history of filing joint returns over a period of years and of the wife's reliance upon her husband in their financial affairs, that a return purporting to be the joint return of both spouses for 1964 was in fact intended to be a joint return notwithstanding that the wife's signature was not in her handwriting.
4. Addition to tax for negligence determined by Commissioner under sec. 6653(a), I.R.C. 1954, approved in the absence of evidence showing that the Commissioner erred.
The Commissioner made the following determinations of deficiencies and addition to tax in the petitioners' income tax:
+------------------------------------+ ¦ ¦ ¦Addition to tax sec.¦ +----+----------+--------------------¦ ¦Year¦Deficiency¦6653 (a), I.R.C. ¦ +----+----------+--------------------¦ ¦ ¦ ¦1954 ¦ +----+----------+--------------------¦ ¦1963¦$4,150.77 ¦$207.54 ¦ +----+----------+--------------------¦ ¦1964¦8,299.09 ¦ ¦ +------------------------------------+
Four issues remain for decision:
(1) Whether Ralph B. Campbell realized ordinary income or capital gain from the sale of his rights in certain shares of stock in The Oaks, Inc., in 1963 and 1964; (2) whether h received unreported compensation in the amount of $8,217.91 in 1963 from The Oaks, Inc.; (3) whether petitioner Mabel W. Campbell filed a joint income tax return with her husband, Ralph B. Campbell, for 1964; and (4) whether petitioners are liable for the section 6653(a) addition to tax for 1963.
A fifth issue relating to a nonbusiness bad debt loss has been abandoned by petitioners.
FINDINGS OF FACT
The parties have filed a stipulation of facts which, together with accompanying exhibits, is incorporated herein by this reference.
Petitioner Mabel W. Campbell (hereinafter sometimes referred to as Mabel, or Mrs. Campbell, or petitioner) and her husband, Ralph B. Campbell (hereinafter sometimes referred to as Ralph, Campbell, or Mr. Campbell), resided at 316 Mariemont Drive, Lexington, Ky., during the taxable years 1963 and 1964. Ralph died on July 20, 1967, and Mabel was appointed administratrix of his estate. She has continued to reside at the foregoing address at least up to the time of the filing of the petitions herein.
Mr. and Mrs. Campbell filed a joint Federal income tax return for 1963 with the district director of internal revenue at Louisville, Ky. They had previously filed joint returns at least for the years 1960, 1961, and 1962, and they continued to file joint returns for the years 1965 and 1965; A 1964 Federal income tax return— in the name of ‘Ralph B. and Mabel W. Campbell’—was also filed with the district director of internal revenue at Louisville. That return was signed ‘Ralph B. & Mabel W. Campbell’; no part of that signature was in Mabel's handwriting. the 1964 return purported to be a joint return. A check (‘X’) was placed in the box beside ‘Married filing joint return (even if only one had income).’ Exemptions were taken for both spouses and one child. Mrs. Campbell had no separate income in 1964; however, the return claimed itemized deductions in the aggregate of $5,667.02 and the record fails to establish that no portion thereof was allocable to her. During the audit of the 1964 return Mrs. Campbell did not raise the issue with the examining agent that she had not signed the return. Mr. Campbell handled all of the couple's financial affairs. Accordingly, Mrs. Campbell did not participate in preparing any of the returns filed for the years 1960-66. Although she knew what she was doing when she signed the joint returns for each of the years 1960, 1961, 1962, 1963, 1965, and 1966, she did not examine any of them before signing and she knew nothing about the income tax returns. She accepted her husband's preparation of all the returns, and at least tacitly approved or acquiesced in the filing of a joint return for 1964. She intended to file a joint return with her husband for that year.
At some undisclosed time prior to the fall of 1961, Mr. Campbell, who had a background in the restaurant and motel business, conceived the idea of establishing a luxury or resort-type hotel in a suburban area near Lexington, Ky. With that end in view he obtained an option in October 1961 to purchase a tract of some 20 acres of land that was thought to be suitable for that purpose. Two persons named Grissom and Pessin were associated with him in the project. With the assistance of Frank Gilliam, a Lexington lawyer, a Kentucky corporation named ‘The Oaks, Inc.’ (hereinafter sometimes referred to as The Oaks) was formed, and articles of incorporation therefor were filed by Campbell, Grissom, and Pessin as incorporators with the secretary of state of Kentucky on or about November 8, 1961. Although the articles of incorporation provided for 10,000 shares of authorized stock, no certificates evidencing shares of stock were formally issued at that time or at any other time prior to August 1, 1962, as hereinafter set forth.
Grissom and Pessin's interest in the venture was terminated in May or June 1962, when they transferred all their rights therein to Campbell. Meanwhile a group of other persons began to render services in connection with the project, particularly in respect to obtaining financing therefor, and Campbell reached an understanding with them as to an ‘apportionment of rights' in the corporation to reflect the interest of each of these persons in the corporation for services rendered. Thereafter, on August 1, 1962, Campbell, as the ‘sole stockholder,‘ held ‘The first meeting of the sole stockholder’ of The Oaks at Gilliam's office, and he passed a resolution providing for the issuance of 1,250 shares. Such shares were to be issued to himself and the various members of the foregoing group as follows:
+---------------------------------------+ ¦ ¦Number of shares ¦ +--------------------+------------------¦ ¦Ralph B. Campbell ¦615 ¦ +--------------------+------------------¦ ¦W. Russell Campbell ¦125 ¦ +--------------------+------------------¦ ¦James A. Clark ¦100 ¦ +--------------------+------------------¦ ¦Rick Wolfinbarger ¦125 ¦ +--------------------+------------------¦ ¦G. Frank Vaughan, Jr¦100 ¦ +--------------------+------------------¦ ¦Frank G. Gilliam ¦125 ¦ +--------------------+------------------¦ ¦Delio Vega ¦60 ¦ +---------------------------------------+
These shares represented ‘service’ stock and were allotted for services rendered. Certificates for such shares were actually issued at that time on blank forms that had not been specially printed for The Oaks; the name of the corporation and other pertinent data were ‘type(d) in,‘ and the forms were signed by Campbell and Gilliam as president and secretary, respectively. The 615 service shares received by Campbell were not reported as ordinary income in any of the returns filed for 1962, 1963, or 1964. He regarded them as being ‘of nominal if any value’ at the time of receipt.
Various attempts to obtain private financing for the venture had proved unsuccessful prior to August 1, 1962, and consideration was being given to the possibility of obtaining financing through a public issuance of stock. It was to that end that Campbell ‘determined’ at the foregoing ‘first meeting of the sole stockholder’ that the number of authorized shares should be increased to 1 million, of which 400,000 would be offered to the public at $5 per share less a commission of $1 a share to two persons named Leroy Eckley and Gary Rose, with whom Campbell had been conducting negotiations in this connection.
It was also determined at the foregoing August 1, 1962, meeting that when the number of authorized shares was increased, the number of shares to be issued to the person named above would be increased proportionately (with an exception hereinafter noted) as follows:
+---------------------------------------+ ¦ ¦Number of shares ¦ +--------------------+------------------¦ ¦Ralph B. Campbell ¦61,250 ¦ +--------------------+------------------¦ ¦W. Russell Campbell ¦12,500 ¦ +--------------------+------------------¦ ¦James A. Clark ¦10,000 ¦ +--------------------+------------------¦ ¦Rick Wolfinbarger ¦12,500 ¦ +--------------------+------------------¦ ¦G. Frank Vaughan, Jr¦10,000 ¦ +--------------------+------------------¦ ¦Frank G. Gilliam ¦12,500 ¦ +--------------------+------------------¦ ¦Delio Vega ¦6,000 ¦ +--------------------+------------------¦ ¦William S. Black ¦250 ¦ +---------------------------------------+
The exception related to the 250 shares allocated to William S. Black, which were to be ‘issued out of’ Campbell's portion. Black was associated in the practice of law with Gilliam, and at that meeting, Campbell, Black, and Gilliam were ‘elected’ as directors.
It was understood that the certificates for the original 1,250 shares would be endorsed back by the shareholders and they were to receive in return at some time later certificates representing the increased number of shares to which they were to be entitled as a result of the anticipated 100-fold increase in the number of authorized shares.
The first meeting of the board of directors of The Oaks was also held on August 1, 1962. The board noted and approved the action at the first stockholders meeting to increase the number of authorized shares of stock from 10,000 to 1 million and obligated the corporation to issue 125,000 of the new shares to the current stockholders. By resolution the board also authorized Campbell to pursue negotiations with Eckley and Rose concerning the public issue of 400,000 shares in The Oaks.
The articles of incorporation were amended on September 11, 1962, to provide for 1 million shares of authorized stock. However, the record does not show that any new or substitute certificates of stock (reflecting the 100-for-1 split) were issued prior to December 18, 1962. Also on September 11, 1962, The Oaks entered into an agreement with Eckley and Rose whereby Eckley and Rose became the exclusive agents for the public sale of 400,000 shares of the corporation's stock for $5 a share at a commission of $1 a share.
Both Campbell and Gilliam were aware that the contemplated public issue was subject to approval by the Kentucky Division of Securities, and that under section 292.380 of the Kentucky Revised Statutes (Securities),
the director of the Division of Securities ‘may require as a condition of registration by qualification * * * that * * * any security issued within the past three years, or to be issued, to a promoter for a consideration substantially different from the public offering price, or to any person for a consideration other than cash, be delivered in escrow.’ The statute provided further that until certain dividend requirements have been met, the securities must remain in escrow and the owners thereof are not entitled to sell or transfer them.
Sec. 292.380 General provisions regarding registration of securities.(2) The director may require as a condition of registration by qualification or coordination that (a) the proceeds from the sale of the registered security be impounded until the issuer receives a specified amount or (b) any security issued within the past three years, or to be issued, to a promoter for a consideration substantially different from the public offering price, or to any person for a consideration other than cash, be delivered in escrow to him or to some other depository satisfactory to him under an escrow agreement that the owners of such securities shall not be entitled to sell or transfer such securities or to withdraw such securities from escrow until all other stockholders who have paid for their stock in cash shall have been paid a dividend or dividends aggregating not less than six percent of the initial offering price shown to the satisfaction of the director to have been actually earned on the investment in any common stock so held. The director shall not reject a depository solely because of location in another state. In case of dissolution or insolvency during the time such securities are held in escrow, the owners of such securities shall not participate in the assets until after the owners of all other securities shall have been paid in full.
On September 24, 1962, The Oaks filed an application with the Kentucky Division of Securities for the registration of 400,000 shares of its stock for public sale. Thereafter, on September 25, 1962, pursuant to ‘an order of the Director of the Division of Securities,‘ Campbell executed an ‘Escrow Agreement’ purporting to cover 125,000 shares of stock in The Oaks, Inc. The escrow agreement was filed with the Division of Securities on September 27, 1962. It was on a printed form which provided as follows:
The said certificates of stock being hereby deposited with said Director in escrow to be held by him in trust for me and upon the following conditions:
That he shall retain the possession of said securities and the owners of such securities shall not be entitled to sell or transfer such securities or withdraw them from escrow until all other stockholders who have paid for their stock in cash shall have been paid a dividend, or dividends aggregating not less than six (6) per cent of the initial offering price, shown to the satisfaction of the Director to have been actually earned on the investment in any common stock so held, * * * Under the escrow agreement the director of the Division of Securities was also given the right to vote the 125,000 shares during the time they remained in escrow. The shares were escrowed in Campbell's name and he alone executed the escrow agreement. However, the following typewritten words were inserted in the printed form: ‘Said shares to be held in escrow and, upon release, delivered to the persons at the addresses and in the number of shares (as per attached schedule).’ The schedule referred to reflected the same shareholders and same holdings as the second list in the minutes of the August 1, 1962, stockholders meeting set forth above. Although the escrow agreement represented that the stock certificates were being contemporaneously deposited into escrow, the stock certificates were not in fact deposited at that time.
An ‘Impounding Agreement’ was executed by Campbell and Gilliam, as representatives of The Oaks, also on September 25, 1962, and accepted by the impounding agent, Citizens Union National Bank & Trust Co., Lexington, Ky., on September 27, 1962. This impounding agreement was entered into pursuant to the provisions of section 292.380, Ky. Rev. Stat. (Securities),
and provided for impounding part of the proceeds from the public sales of securities in order to insure completion of the undertaking.
See fn. 2, supra, p. 5.
On October 3, 1962, officers of the Division of Securities notified Gilliam that a registration certificate for the public issue of stock in The Oaks had been granted on September 28, 1962. In the letter accompanying the registration certificate the following reference was made to the escrow agreement filed by Campbell:
The Escrow Agreement which was notarized September 25, 1962, escrowing 125,000 shares of stock in the name of Ralph B. Campbell, to later be distributed as per attached schedule to the Escrow Agreement, names the Director of Securities as the Escrow Agent. Therefore, since you kept one copy of the Agreement and sent us one copy, this area is complied with until the service stock is issued. At the time of issuance, send the Stock Certificates to the attention of the Director of Securities and they will be escrowed in accordance with the terms of the Agreement.
By this letter the Division of Securities requested that the stock certificates covered by the escrow agreement be forwarded into escrow ‘At the time of issuance.’ In this and subsequent correspondence, the Division of Securities regarded the 125,000 shares of The Oaks stock as being issued initially to Campbell and only distributed out of escrow to the other persons mentioned in the minutes of the August 1, 1962, stockholders meeting, and in the escrow agreement.
The public sale of stock by Eckley and Rose did not meet expectations, and at a special meeting of the board of directors of The Oaks on November 1, 1962, a resolution was adopted in which the agreement for public sale by Eckley and Rose (referred to in the resolution as the ‘contract with Gary Rose’) was declared to be ‘cancelled and * * * void for all purposes,‘ and in which it was stated that the public sale of the stock would be continued by the corporation itself through two of its directors as agents for that purpose.
On December 10, 1962, the Division of Securities wrote to Gilliam reiterating its request in prior correspondence that ‘immediately upon issuance of the 125,000 shares of service stock to Mr. Ralph Campbell * * * we will expect such shares to be placed in escrow with this office.’ Gilliam had been experiencing difficulties in gathering up the original certificates issued at the stockholders meeting of August 1, 1962, so that certificates representing the increased number of shares might be issued in lieu thereof. It was not until December 18, 1962, that stock certificates representing the 125,000 shares were finally forwarded to the Division of Securities in accordance with the escrow agreement.
Campbell devoted considerable time and effort to The Oaks project in 1963. He sold stock, helped manage the sales office, engaged in planning, and represented the corporation in dealings with the contractor that was working on the foundation for the building. At a meeting of the board of directors on August 8, 1963, it was agreed that Campbell ‘was to go on salary in the amount of $1,500 per month, retroactive as of June 15, 1963, and to continue until 30 days before equipment goes in.’
The completion of the hotel project was impeded in various respects. Although some financing had been obtained from a corporation known as Insurance Investors Trust Co. (IITC), The Oaks had insufficient funds with which to pay its bills. Substantial amounts were due to the contractor, the architect, and others. A meeting of the board of directors was held on November 27, 1963, to deal with the situation. A deputy for the Kentucky Division of Securities was present at the meeting, and he advised that unless something were done to clear up the indebtedness, he could not permit further sale of stock. It was agreed that executive authority of the corporation would be conferred on a person named Ralph Higgins, who was interested in IITC, to bring about the completion of the project. A resolution was approved at that meeting which provided, among other things, that Campbell's $1,500 per month salary would become subject to approval by Higgins. A readjustment of the 125,000 service shares was also agreed to at that meeting, whereby 97,300 shares were allocated to IITC. Campbell's service stock was reduced to 18,850 shares.
At some undisclosed time during 1963, Campbell sold his rights in 1,000 shares of The Oaks stock (then in escrow) for $5,000 to a person named Tom Borders. This transaction was not reported on the 1963 tax return. The 1963 return claimed a ‘capital loss carryover to 1963’ in the amount of $13,560.29. In determining the deficiency for 1963 the Commissioner has treated the $5,000 proceeds of the foregoing sale as ordinary income. The petitioners do not dispute that the entire $5,000 represents income received in 1963 but contend that it must be classified as long-term capital gain.
On May 20, 1964, Campbell sold his remaining rights in the escrowed service stock to IITC for $40,000. A long-term capital gain of $33,183 reflecting this transaction was reported in the 1964 tax return. The record contains no explanation of the $6,817 basis that was subtracted in computing that gain, and the Commissioner does not contest the amount of the gain. However, the Commissioner has rejected the treatment of that amount as capital gain and has classified it as ordinary income in his determination of deficiency.
The service stock of The Oaks, including the shares in respect of which Campbell sold his interests, remained in escrow with the Kentucky Division of Securities until at least November 29, 1967.
The 1963 joint tax return filed by Mr. and Mrs. Campbell reported ‘Commissions' of $7,500 received by Campbell from The Oaks. In connection with $7,500 commissions thus reported a deduction of $902.50 was claimed for ‘auto expense.’ The return also reported an additional amount of $234.09 received from The Oaks on line 1, which asked for ‘Wages, salaries, tips, etc., and excess of allowances over business expenses.’ That item was also reported in the information return (Form 1099) filed by The Oaks for 1963 in a column captioned ‘Salaries, fees, commissions, prizes, awards, or other compensation.’ The Campbells' 1963 joint return did not report any income from The Oaks other than the two foregoing items. One question on the 1963 tax return inquired as follows: ‘Did you receive an expense allowance or reimbursement, or charge expenses to your employer?’ To this question the answer ‘No’ was checked (‘X’).
The 1963 return failed to report $8,217.91 additional income received from The Oaks by Campbell in 1963.
The Commissioner determined that an addition to tax should be assessed under section 6653(a), I;R.C. 1954, for underpayment of tax in 1963 ‘due to negligence or intentional disregard of rules and regulations.’ Petitioners have failed to carry their burden of proof in respect to this issue.
OPINION
RAUM, Judge:
1. Sales of interest in service stock.— There is no dispute between the parties that Campbell received his stock in The Oaks initially as compensation for services, and that such stock may properly be classified as ‘service stock.’ However, it is petitioners' position that such stock had only a negligible value when Campbell first became entitled to it, that it was completely unrestricted when he received it, that it became restricted only at a later time when it was placed in escrow or committed to be placed in escrow, and that the sale of his interest therein must be regarded as the sale of a long-term capital asset. The Government doesn't challenge the fact that the stock was held for more than 6 months, or that the stock otherwise qualified as a capital asset (apart from its contention that the stock was restricted when Campbell received it and that the sales of his rights to such restricted service stock resulted in the realization of ordinary income in accordance with regulations section 1.61-2(d)
Sec. 1.61-2 Compensation for services, including fees, commissions, and similar items.(d) Compensation paid other than in cash— * * *(5) Property transferred subject to restrictions. Notwithstanding any other provision of this paragraph, with respect to any property, other than an option to purchase stock or property, which is transferred by an employer to an employee or independent contractor as compensation for services, and which is subject to a restriction which has a significant effect on its value, the rules of paragraph (d)(2) of Sec. 1.421-7 shall be applied in determining the time and the amount of compensation to be included in the gross income of the employee or independent contractor. * * *
We hold for petitioners on this issue.
Sec. 1.421-7 Options to which section 421 does not apply.(d) Options without a readily ascertainable fair market value. * * *(2)(i) If the option is exercised by the person to whom it was granted but, at the time an unconditional right to receive the property subject to the option is acquired by such person, such property is subject to a restriction which has a significant effect on its value, the employees realizes compensation at the time such restriction lapses or at the time the property is sold or exchanged, in an arm's length transaction, whichever occurs earlier, and the amount of such compensation is the lesser of—(a) The difference between the amount paid for the property and the fair market value of the property (determined without regard to the restriction) at the time of its acquisition, or(b) The difference between the amount paid for the property and either its fair market value at the time the restriction lapses or the consideration received upon the sale or exchange, whichever is applicable.
The Government argues that Campbell first acquired an interest in the stock on December 18, 1962, when it was subject to escrow and therefore was ‘subject to a restriction which (had) a significant effect on its value’ within the terms of the regulations. Alternatively, it contends that even if August 1, 1962, be regarded as the date of acquisition, the stock was similarly burdened by reason of the plans and expectations to go forward with a public offering of The Oaks stock that would result in like restrictions on Campbell's shares. We reject these arguments as unsound. In the first place, under Kentucky law, Campbell became a stockholder as early as November 8, 1961, when he, together with Grissom and Pessin, as incorporates, filed the articles of incorporation with the secretary of state of Kentucky. Under Kentucky law, not only is an incorporator required to subscribe to at least one share of stock at the time of incorporation, Ky. Rev. Stat. sec. 271.035, but, upon issuance of the certificate of incorporation, those persons who have subscribed for shares prior thereto ‘shall be shareholders in the corporation,‘ Ky. Rev. Stat. sec. 271.065. Moreover, we have recognized that ‘Generally, the issuance of a certificate is not necessary to constitute one a stockholder.’ Wesley H. Morgan, 46 T.C. 878, 890. And we stated further in that case (p. 890):
Also, the date of delivery of the certificate is not controlling as to the date a subscriber becomes a stockholder. The stock certificate is merely the documentary evidence of membership in a corporate organization and an attestation of the stockholder's ownership of shares of interest therein. * * * See also John E. Byrne, 54 T.C. 1632, 1639. The case law in Kentucky is consistent with these views.
Harlan National Bank v. Carbon Glow Coal Co., 289 S.W.2d 200, 202 (Ky. App.); Swaim v. Martin, 302 Ky. 381, 388-389, 194 S.W.2d 855, 859; In re Penfield Distilling Co., 131 F.2d 694, 698 (C.A. 6); cf. Sargent v. Whitfield & Co., 226 Ky. 754, 760, 11 S.W.2d 926, 929; and Charles v. Hopkins, 217 Ky. 842, 845, 290 S.W. 720, 721.
In our view, not only did Campbell become a stockholder as early as November 1961, but he became the sole stockholder no later than the day in May or June 1962 when Grissom and Pessin assigned all their rights in the corporation to him. It was after those assignments that Campbell negotiated the ‘apportionment of rights' with the persons with whom he had become associated in seeking private financing for the project. His and their rights thus became fixed prior to August 1, 1962, when the first stockholders meeting was held and when that ‘apportionment’ was formally recognized in the corporate minutes. Moreover, the ‘apportionment of rights' to these other persons flowed from Campbell's incomplete ownership of all rights in the corporation, and resulted merely in a decrease of his rights to stock therein, all of which he became entitled to before the plan for a public issue displaced the efforts to obtain private financing. In short, we find that Campbell's rights to the 615 shares of stock (out of the original authorization of 10,000 shares) that were formally allocated to him in the minutes of the August 1, 1962, meeting had been acquired by him at an earlier date free and clear of any restrictions. In such circumstances, the entire foundation for the Government's position collapses, and we must conclude that the 1963 and 1964 sales of Campbell's rights in the stock were capital transactions that did not result in the receipt of ordinary income in accordance with the regulations relied upon by the Government.
However, even if August 1, 1962, be regarded as the date when Campbell acquired his rights to the stock in question, we must still conclude that his shares were not then burdened with any restrictions. True, a public issue was then contemplated, but we cannot find that there was any commitment at that time for any such public issue. Rather the record indicates that private financing was still regarded as more desirable and would be employed, rather than public financing, if it should become available. It was only on September 11, 1962, that the contract with Eckley and Rose was executed, and it was also on that day that the articles of incorporation were amended to increase the number of authorized shares of capital stock to 1 million. Perhaps of even greater significance are the facts that the application for registration of the issue for public sale was filed as late as September 24, 1962, that the escrow agreement was executed and filed thereafter, and that the registration certificate was issued still later, on September 28, 1962. Plainly, Campbell's shares of stock were not restricted on August 1, 1962, the latest day on which, in our view, he could possibly have acquired his shares. We reject as wholly unsound the contention that he received them for the first time on December 18, 1962, when the reissued certificates, reflecting the 100-for-1 split, were sent to the Kentucky Division of Securities.
2. Receipt of $8,217.91 unreported income from The Oaks in 1963.— The 1963 joint return of the Campbells disclosed two items of income from The Oaks: (a) ‘commissions' in the amount of $7,500 against which a $902.50 deduction for ‘auto expense’ was claimed, leaving a net of $6,597.50; and (b) ‘wages, salaries * * * ‘ in the amount of $234.09. The Commissioner determined that in addition to the foregoing items Campbell received unreported income in the amount of $8,217.91 from The Oaks. The burden of proof is, of course, upon petitioners to show error in that determination, and in our judgment that burden has not been met.
Petitioners contend, relying upon a Memorandum Opinion of this Court, Estate of Matthew J. Nasdeo, T.C. Memo. 1968-60, that their burden of proving that Campbell did not receive the income determined by the Commissioner ‘is much less than it would be in the case of a living taxpayer with the burden of proving a positive fact.’ Without entering upon any discussion as to what extent, if any, the burden may be lessened, it is plain that a burden nevertheless remains, and in our judgment the evidence presented on this issue was so unsatisfactory that we cannot find that the burden has been met however much the requirements of proof might be thought to be relaxed. Moreover, there was no showing that the books and records of The Oaks were unavailable; and it is quite conceivable that they might have cast considerable illumination upon this item.
The record in respect of this item is both skimpy and murky. There was no convincing showing that Campbell did not receive any such funds from The Oaks, although petitioners seem to suggest if such funds were received they merely represented reimbursements of expenses incurred by Campbell on behalf of The Oaks. No such conclusion is reasonably possible on this record. We note not only that a $902.50 deduction for ‘auto expense’ was claimed on the return, but also that the Campbells gave a ‘No’ answer to the question ‘Did you receive an expense allowance or reimbursement, or charge expenses to your employer?’ The testimony of Campbell's accountant, who signed the return as preparer, to the effect that the ‘No’ box was erroneously checked by a junior in his office had a hollow ring.
Whether Campbell had actually incurred any such expenses, the amounts thereof or the time or times when they were incurred, or whether he in fact made the type of itemized accounting therefor to The Oaks as required by section 1.162-17(b)(1) and (4), Income Tax Regs., so as to relieve him of the duty of reporting reimbursements for the expenses—all these remain a mystery to use on this record. We can conclude only that there has been a complete failure of proof. The Commissioner's determination must be sustained in respect of this item.
Moreover, having answered ‘No’ to the question concerning whether they received an ‘expense allowance or reimbursement,‘ the taxpayers left blank the next question on the return: ‘If ‘Yes,‘ did you submit itemized accounting of all such expenses to your employer?’
3. The 1964 income tax return.— The Commissioner determined that the 1964 income tax return signed and filed in the names of ‘Ralph B. and Mabel W. Campbell’ was a joint return. Accordingly, he determined that petitioner Mabel W. Campbell, as well as the estate of her late husband, was liable for the deficiency in the tax computed on the basis of that return. Petitioner contends that the 1964 return was not a joint return and that therefore she is not liable for the deficiency in question. She emphasizes that she did not sign the return and urges that she did not authorize anyone to sign the return on her behalf. We uphold the Commissioner's determination.
We have found that petitioner did not sign the 1964 return. Nevertheless, it has long been settled that where an income tax return is intended by both spouses as a joint return, the absence of the signature of one spouse does not prevent their intention from being realized. See, e.g., Myrna S. Howell, 10 T.C. 859, 866, affirmed per curiam 175 F.2d 240 (C.A. 6); W. L. Kann, 18 T.C. 1032, 1045, affirmed 210 F.2d 247, 251 (C.A. 3), certiorari denied 347 U.S. 967; Irving S. Federbush, 34 T.C. 740, 757, affirmed per curiam 325 F.2d 1 (C.A.. 2); Gertrude Abrams, 53 T.C. 230, 234; O'Connor v. Commissioner, 412 F.2d 304, 309 (C.A. 2), affirming on this issue a Memorandum Opinion of this Court, certiorari denied 397 U.S. 921.
The question of the spouses' intentions is one of fact. O'Connor v. Commissioner, 412 F.2d at 309; Federbush v. Commissioner, 325 F.2d at 2; Joyce Primrose Lane, 26 T.C. 405, 408; Elsie S. Bour, 23 T.C. 237, 239-240. On the basis of the record before us, we conclude that the Campbells intended the 1964 return to be a joint return. We note in particular that the Campbells customarily filed a joint return for each year other than 1964 from at least 1960 through 1966. Mrs. Campbell did not examine such returns, she simply accepted her husband's preparation of the returns and signed them. Like the others, the 1964 return was filed as a joint return. The only significant difference was the absence of Mrs. Campbell's signature on the 1964 return.
Viewed in this context, the absence of her signature is hardly of overriding importance. Her signature on prior and subsequent returns appears to have been little more than a formal ritual as far as she was concerned. She left the responsibility for preparation and filing of the returns to her husband. She intended the returns to be filed as he chose. We conclude that Mrs. Campbell intended the 1964 return to be filed in the same manner as was each of the others: as a joint return.
Petitioner has relied primarily on Elsie Januschke, 48 T.C. 496, and Alma Helfrich, 25 T.C. 404. The facts of each of those cases are only superficially similar to those now before us. In neither case was there a finding that the wife customarily left the responsibility for making financial decisions to her husband or a finding that there had been a history of filing joint returns. Indeed, where there was a history of filing joint returns, it has been held that even a wife's outright refusal to sign in the particular circumstances did not preclude the return from qualifying as a joint return, Irving S. Federbush, 34 T.C. 740, 756-757, 758, affirmed per curiam 329 F.2d 1 (C.A. 2):
The significance of a custom of permitting one spouse to make financial decisions on behalf of the other, coupled with a history of filing joint returns, was noted in Philip R. Simms, 27 T.C.M. 1570, 1573, 1578, affirmed per curiam 422 F.2d 340 (C.A. 4), and in Elizabeth J. Harris, 20 T.C.M. 1676, 1680.
Sylvia did not participate in the management and operation of the Federbush Company nor, according to the testimony, in any other business transactions. Irving looked after all such matters, and when he brought papers and documents to her for signature, it was, according to her testimony, her practice to sign them, ‘whether they were income tax returns or any other papers;’ * * *
The facts relating to the making and filing of the 1944 return are different, in that Irving signed Sylvia's name as well as his. * * * The record indicates that the 1944 return was prepared as a joint return in the same manner as the returns for other years. It so happened that when Irvin presented the return to Sylvia for her signature they were experiencing some personal difficulties and she had refused to sign several other documents. She also refused to sign the return, and since the refusal was on the last day for the filing of the return, Irving signed her name to the return in her stead. There is no indicate of record, even in Sylvia's own testimony, that her refusal to sign the return was because she did not wish to file a joint return or that she did not intend for it to have effect as a joint return * * * Here, it has not even been suggested that petitioner refused to sign the 1964 return. Indeed, petitioner has offered no evidence whatever of a reason of any kind for not filing a joint return in 1964. Far from suggesting marital difficulties, the record indicates that after 1964 the spouses continued to live together, filing joint returns and enjoying the benefits of their economic community until Mr. Campbell's death in 1967. Compare Jack Douglas, 27 T.C. 306, 313, affirmed sub nom. Sullivan v. Commissioner, 256 F.2d 4 (C.A. 5).
We note also that petitioner did not raise this objection with the examining agent during the audit of the 1964 return. In the context of this case; her subsequent attempt to discredit the 1964 return appears to us to be merely an afterthought. Cf. Irving S. Federbush, 34 T.C.at 755.
4. Addition to tax under section 6653(a).— The Commissioner determined that an addition to tax should be assessed under section 6653(a), I.R.C. 1954, for underpayment of tax in 1963, ‘due to negligence or intentional disregard of rules and regulations.’ The burden of proof on this issue is upon petitioners. Marcello v. Commissioner, 380 F.2d 499, 506-507 (C.A. 5); Logan Lumber Co. v. Commissioner, 365 F.2d 846, 853 (C.A. 5); Terry C. Rosano, 46 T.C. 681, 688; Byron H. Farwell, 35 T.C. 454, 473. We have found that the burden was not carried.
While it is true that the failure to report the $5,000 received on the sale of rights to The Oaks stock did not result in any underpayment,
the situation is otherwise as to the $8,217.91 item of unreported income received from The Oaks. To be sure, we were left in the dark as to the precise nature of this item and were compelled to conclude that it represented taxable income in the absence of any satisfactory showing to the contrary. The burden nevertheless remains upon petitioners to establish error in the Commissioner's determination, and we cannot find on this record that he erred in respect of imposing the so-called negligence penalty under section 6653(a) to the extent that it related to this item.
Since we have concluded that this item is to be classified as long-term capital gain and since there was an unused long-term capital loss carryover from a prior year that was more than sufficient to absorb this $5,000 gain, no underpayment of tax resulted from failure to report it.
Decision will be entered under Rule 50.