Opinion
Docket Nos. 56542 56543.
1958-01-13
CHESTERFIELD TEXTILE CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. SAM NOVICK, PETITIONER, v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Vincent B. Lewin, Esq., for the petitioners. Martin D. Cohen, Esq., for the respondent.
Vincent B. Lewin, Esq., for the petitioners. Martin D. Cohen, Esq., for the respondent.
1. Returns filed by petitioners, held, on the facts, fraudulent with intent to evade tax, making statute of limitations inapplicable.
2. Deficiencies determined, held, on the facts, not shown to be improper.
3. Part of each deficiency for both petitioners, held, on the facts, due to fraud.
4. A document denominated ‘tentative return,‘ held, on the facts, not a proper return under section 51, I.R.C. 1939, and addition to tax for failure to file on time properly imposed.
Respondent determined the following deficiencies with respect to petitioner Chesterfield Textile Corporation, hereafter referred to as Chesterfield:
+-----------------------------------------------------------------------------+ ¦ ¦ ¦ ¦Additions ¦ ¦ ¦ ¦ ¦to ¦ +-------------------------+----------------------------+----------+-----------¦ ¦Taxable year ended June ¦Tax ¦Deficiency¦tax ¦ ¦30 ¦ ¦ ¦ ¦ +-------------------------+----------------------------+----------+-----------¦ ¦ ¦ ¦ ¦sec. 293 ¦ ¦ ¦ ¦ ¦(b) ¦ +-------------------------+----------------------------+----------+-----------¦ ¦ ¦(Income ¦$298.41 ¦$149.21 ¦ +-------------------------+----------------------------+----------+-----------¦ ¦1943 ¦(Declared value ¦6,492.31 ¦3,246.16 ¦ ¦ ¦excess-profits ¦ ¦ ¦ +-------------------------+----------------------------+----------+-----------¦ ¦ ¦(Excess profits ¦52,276.75 ¦26,138.38 ¦ +-------------------------+----------------------------+----------+-----------¦ ¦ ¦(Income ¦738.97 ¦369.49 ¦ +-------------------------+----------------------------+----------+-----------¦ ¦1944 ¦(Declared value ¦8,581.47 ¦4,290.74 ¦ ¦ ¦excess-profits ¦ ¦ ¦ +-------------------------+----------------------------+----------+-----------¦ ¦ ¦(Excess profits ¦65,878.97 ¦32,939.49 ¦ +-------------------------+----------------------------+----------+-----------¦ ¦ ¦(Income ¦215.40 ¦107.70 ¦ +-------------------------+----------------------------+----------+-----------¦ ¦1945 ¦(Declared value ¦6,076.16 ¦3,038.08 ¦ ¦ ¦excess-profits ¦ ¦ ¦ +-------------------------+----------------------------+----------+-----------¦ ¦ ¦(Excess profits ¦55,544.32 ¦27,772.16 ¦ +-----------------------------------------------------------------------------+
Respondent determined the following deficiencies with respect to the income tax of petitioner Sam Novick:
+-----------------------------------------+ ¦ ¦ ¦Additions to tax ¦ +----+----------+-------------------------¦ ¦Year¦Deficiency¦ ¦ ¦ +----+----------+------------+------------¦ ¦ ¦ ¦Sec. 293 (b)¦Sec. 291 (a)¦ +----+----------+------------+------------¦ ¦1943¦$6,767.22 ¦$3,383.61 ¦ ¦ +----+----------+------------+------------¦ ¦1945¦12,090.80 ¦6,045.40 ¦$3,282.85 ¦ +-----------------------------------------+
The issues in these consolidated proceedings are:
(1) Whether Chesterfield failed to report sales in its taxable years ended June 30, 1943, 1944, and 1945, of $42,284.66, $59,299.49, and $58,780.52, respectively.
(2) Whether Chesterfield overstated its purchases for its taxable years ended June 30, 1943 and 1944, by $1,150 and $2,208.36, respectively.
(3) Whether Chesterfield improperly deducted ‘commissions' for its taxable years ended June 30, 1943 and 1944, of $1,339.75 and $1,411.55, respectively.
(4) Whether Chesterfield improperly deducted ‘general expenses' for its taxable years ended June 30, 1943, 1944, and 1945, of $20,908.38, $20,692.31, and $15,061.10, respectively.
(5) Whether Chesterfield improperly deducted $10,000 for legal fees for its taxable year ended June 30, 1945.
(6) Whether respondent's determinations as to the foregoing were correct in spite of a journal entry on Chesterfield's books for its taxable year ended June 30, 1945, crediting sales $100,000, and debiting purchases $80,000, and loans to officers $20,000.
(7) Whether the statute of limitations precludes the determination of any deficiencies against Chesterfield for its taxable years ended June 30, 1943, 1944, and 1945.
(8) Whether Chesterfield is liable for additions to tax for fraud in each taxable year here involved.
(9) Whether Novick received a constructive dividend of $12,361.83 from Chesterfield in 1943, which he failed to report in his 1943 return.
(10) Whether Novick received a distribution of $23,161.66 from Chesterfield in 1945, representing capital gain to him, but which he failed to report in his 1945 return.
(11) Whether the statute of limitations precludes respondent's determinations of deficiencies as to Novick.
(12) Whether Novick is liable for additions to tax for fraud in each taxable year here involved.
(13) Whether Novick is liable for additions to tax for failure to file his 1945 return on time.
Except for the statute of limitations, petitioners agree to respondent's disallowance to Chesterfield of rental expense for 1945, and to his adjustments for 1942
and 1943 for Novick relating to additional ‘rental income’ and unallowable ‘deductible expenses.’ Adjustments to ‘medical expenses' of Novick for both 1943 and 1945 will be automatically computed in accordance with the disposition of other issues concerning him.
Decisions will be entered for the respondent. Involved here because of section 6, Current Tax Payment Act of 1943.
FINDINGS OF FACT.
Certain facts are stipulated and are hereby found.
Chesterfield was organized under the laws of the State of New York on July 6, 1937. At all times here material, Chesterfield carried on business as a jobber and converter of upholstery fabrics and certain related mercantile fabrics. It maintained an office and showroom at New York, New York.
Chesterfield filed its Federal income, declared value excess-profits, and excess profits tax returns on an accrual basis and for taxable years ended June 30. Chesterfield filed its returns for its taxable year ended June 30, 1943, on September 15, 1943, with the collector of internal revenue for the third district of New York. It field its returns for the year ended June 30, 1944, on September 15, 1944, with the collector for the second district of New York. It filed returns for the year ended June 30, 1945, on March 15, 1946, with the collector of internal revenue for the third district of New York, pursuant to extensions requested and granted.
Novick resided at Forest Hills, Long Island, New York. During the period here involved he filed separate individual income tax returns on a calendar year, cash basis with the collector of internal revenue for the first district of New York. He filed timely returns for 1942, 1943, and 1944. On March 15, 1946, he filed a document purporting to be a ‘tentative’ income tax return for 1945. He filed his 1945 return on March 15, 1947.
Alex Milgrom resided at Brooklyn, New York. At all times here material Novick served as president and Milgrom as secretary-treasurer of Chesterfield. Both were active in the business and exercised equal control in the management. Milgrom and Novick held all of Chesterfield's outstanding common stock in equal shares. Milgrom held the only outstanding preferred stock.
Chesterfield maintained its accounts receivable records by means of a machine bookkeeping system. During these years it recorded cash sales of at least $14,000 annually. Chesterfield invoiced all recorded sales, both credit and cash, by regular invoices running continuously from No. 8166 through No. 13688.
The last sale recorded on Chesterfield's books as made to Nelson Brothers of Wyoming, Pennsylvania, amounted to $3,030.79 on invoice Nos. 10883 to 10889, each dated January 12, 1943. On March 11, 1943, Chesterfield issued to Nelson Brothers its invoice Nos. 1478 through 1481 for merchandise totaling $3,172.58. On March 24, 1943, Chesterfield issued invoice No. 1475 to Nelson Brothers showing credits totaling $1,023.42 for certain items reflected in the invoices of March 11. On March 26, 1943, Morris Nelson, a partner of Nelson Brothers, drew a check for $2,072.27 to the order of Chesterfield as payment for invoice Nos. 1478 through 1481, less credits shown in invoice No. 1475, the discount for cash, and certain other minor adjustments. Chesterfield and its New York bank endorsed the check on March 27, 1943. Chesterfield and its New York bank endorsed the check on March 27, 1943. Chesterfield did not record on its books the March 1943 sales to Nelson Brothers of $2,072.27 or any other amount.
From about February until about November 1943, Warwick Furniture Manufacturing Corp.,
hereafter referred to as Warwick, a manufacturer of upholstered furniture, bought upholstery fabrics from Chesterfield. As Warwick received merchandise, a clerk entered its price upon a receiving report. In addition Warwick either received an invoice reflecting each purchase or in the absence of a true invoice, it made up a facsimile of an invoice. A bookkeeper made entries in an accounts payable ledger only after an invoice or facsimile had been submitted to him. Warwick purchased from Chesterfield $26,725.94 and $14,627.49 for fiscal 1943 and 1944, respectively. Warwick paid for some purchases directly by check. It paid for others in cash after drawing a check payable to cash. In each instance Warwick's president signed the check. As a further record of purchases, each Warwick check contained the date and net amount of each invoice being paid. For its purchases from Chesterfield, Warwick placed on each invoice, invoice facsimile, or receiving report, a receiving report number, the initials of the bookkeeper who checked the extensions, the president's initials signifying his approval, and the number of the ledger page to which the purchase was posted. Chesterfield recorded $8,530.61 of the $26,725.94 sales to Warwick in fiscal 1943 on its books, those sales covered by invoices between Nos. 8166 and 12357. For sales between February 27 and March 31, 1943, Chesterfield issued invoices and received in payment Warwick's checks which Chesterfield deposited to its bank account. Chesterfield did not invoice or record the cash transactions which constituted the balance of the sales made to Warwick during fiscal 1943. Cash is not customarily paid for upholstery materials in the furniture-manufacturing business. At Novick's demand, Warwick paid cash for purchases from Chesterfield in fiscal 1943 and for all purchases made from Chesterfield in fiscal 1944. Warwick paid cash to none of the numerous other firms from which it bought merchandise during the period in question. During fiscal 1944 Chesterfield made cash sales to Warwick of $14,627.49, none of which it recorded on its books. When Warwick paid Chesterfield cash for merchandise, its president drew a check to cash, which he then endorsed. Either he or some other Warwick employee cashed the check at the bank. Then, following a particular delivery, either Milgrom or Novick would receive the cash. Milgrom made some deliveries by car.
Stipulated as ‘Warwick Furniture Manufacturing Co., Inc.’
According to the Chesterfield records, during the period here involved, it made the following sales to Studios, Inc., Waltham, Massachusetts:
+-------------------------------+ ¦Date ¦Chesterfield ¦Amount ¦ +-------+-------------+---------¦ ¦ ¦invoice No. ¦ ¦ +-------+-------------+---------¦ ¦1943 ¦ ¦ ¦ +-------+-------------+---------¦ ¦Mar. 10¦11636/35 ¦$2,274.25¦ +-------+-------------+---------¦ ¦Dec. 8 ¦12809 ¦273.06 ¦ +-------------------------------+
Studios, Inc., paid for each purchase by separate check. On March 18, 1943, Studios, Inc., issued a check for $823.07 payable to Chesterfield for merchandise purchased as per Chesterfield invoice No. 1476 dated March 13, 1943, less discount for cash. Chesterfield did not record this transaction on its books.
Chesterfield's books of account contain no record of any sale to International Furniture Company, Chicago, Illinois, during fiscal 1943. Chesterfield made sales to International Furniture Company which were paid for during fiscal 1943 as follows:
+---------------------------------------------------+ ¦Chesterfield invoice ¦International check ¦ +-----------------------+---------------------------¦ ¦No. ¦Date ¦Net ¦Date ¦Amount ¦Deposited¦ +----+-------+----------+-------+---------+---------¦ ¦ ¦ ¦amount 1 ¦ ¦ ¦ ¦ ¦ +----+-------+----------+-------+---------+---------¦ ¦ ¦1943 ¦ ¦1943 ¦ ¦1943 ¦ +----+-------+----------+-------+---------+---------¦ ¦1458¦Mar. 25¦$46.85 ¦ ¦ ¦ ¦ ¦ +----+-------+----------+----+--+---------+---------¦ ¦1462¦Mar. 25¦6,654.36 ¦ ¦ ¦ ¦ ¦ +----+-------+----------+----+--+---------+---------¦ ¦1464¦Mar. 25¦1,878.99 ¦ ¦ ¦ ¦ ¦ +----+-------+----------+----+--+---------+---------¦ ¦ ¦ ¦8,580.20 ¦Apr.¦7 ¦$8,580.20¦Apr. 10 ¦ +----+-------+----------+----+--+---------+---------¦ ¦1470¦Mar. 25¦) ¦ ¦ ¦ ¦ ¦ +----+-------+----------+----+--+---------+---------¦ ¦1471¦Mar. 25¦) 4,382.36¦Apr.¦7 ¦4,382.36 ¦Apr. 10 ¦ +----+-------+----------+----+--+---------+---------¦ ¦1472¦Mar. 25¦) ¦ ¦ ¦ ¦ ¦ +----+-------+----------+----+--+---------+---------¦ ¦1446¦Apr. 14¦184.83 ¦Apr.¦23¦184.83 ¦Apr. 30 ¦ +----+-------+----------+----+--+---------+---------¦ ¦ ¦ ¦17,147.39 ¦ ¦ ¦13,147.39¦ ¦ +---------------------------------------------------+
+--------------------------------------------------------+ ¦FISCAL 1943. ¦ +--------------------------------------------------------¦ ¦ ¦ ¦ ¦ +-----------+----------------------------------+---------¦ ¦February 25¦R. Stein ¦$2,019.17¦ +-----------+----------------------------------+---------¦ ¦March 18 ¦Studios, Inc ¦823.07 ¦ +-----------+----------------------------------+---------¦ ¦March 25 ¦International Furniture Co ¦8,580.20 ¦ +-----------+----------------------------------+---------¦ ¦March 25 ¦International Furniture Co ¦4,382.36 ¦ +-----------+----------------------------------+---------¦ ¦March 26 ¦Nelson Bros ¦2,072.27 ¦ +-----------+----------------------------------+---------¦ ¦March 30 ¦Spear & Co ¦2,834.01 ¦ +-----------+----------------------------------+---------¦ ¦April 14 ¦International Furniture Co ¦184.83 ¦ +-----------+----------------------------------+---------¦ ¦ ¦Warwick Furniture Manufacturing Co¦18,195.33¦ +-----------+----------------------------------+---------¦ ¦ ¦ ¦ ¦ +----------------------------------------------+---------¦ ¦Total ¦39,091.24¦ +--------------------------------------------------------+
+----------------------------------------------------------+ ¦FISCAL 1944. ¦ +----------------------------------------------------------¦ ¦ ¦ ¦ ¦ +-------------+----------------------------------+---------¦ ¦November 1943¦Penn Furniture Co ¦6,000.00 ¦ +-------------+----------------------------------+---------¦ ¦May 1, 1944 ¦Penn Furniture Co ¦5,000.00 ¦ +-------------+----------------------------------+---------¦ ¦ ¦Warwick Furniture Manufacturing Co¦14,627.49¦ +-------------+----------------------------------+---------¦ ¦ ¦Sanbern, Inc ¦5,007.00 ¦ +-------------+----------------------------------+---------¦ ¦Total ¦ ¦30,634.49¦ +-------------+----------------------------------+---------¦ ¦ ¦ ¦ ¦ +----------------------------------------------------------+
+-------------------------------------------+ ¦FISCAL 1945. ¦ +-------------------------------------------¦ ¦ ¦ ¦ ¦ +----------------+-----------------+--------¦ ¦October 20, 1944¦Penn Furniture Co¦3,229.00¦ +----------------+-----------------+--------¦ ¦ ¦ ¦ ¦ +-------------------------------------------+
1945 November 9 Mayflower Industries 3,450.00 November 22 Mayflower Industries 1,848.76 November 22 Mayflower Industries 1,256.10 January 31 Mayflower Industries 5,632.26 Van Den Berg Brothers 26,000.00 March 3 Mayflower Industries 5,147.06 Penn Furniture Co 4,000.00 April 5 Bernard Fels, Inc 2,000.00 Sanbern, Inc 6,350.00 Total 58,913.18 Grand total 128,638.91
WITHEY, J., dissents.
FN After deducting 2 per cent discount for cash.
Chesterfield's books reflect sales to Spear & Company, Pittsburgh, Pennsylvania, during fiscal 1943, as follows:
+--------------------------------+ ¦Date ¦Invoice No. ¦Amount ¦ +----------+------------+--------¦ ¦1943 ¦ ¦ ¦ +----------+------------+--------¦ ¦May ¦15 ¦12157 ¦$709.88 ¦ +----+-----+------------+--------¦ ¦June¦2 ¦12271 ¦1,691.54¦ +----+-----+------------+--------¦ ¦June¦12 ¦12304 ¦1,761.81¦ +----+-----+------------+--------¦ ¦June¦18 ¦12332 ¦481.78 ¦ +----+-----+------------+--------¦ ¦ ¦Total¦ ¦4,645.01¦ +--------------------------------+
On April 22, 1943, Spear & Company drew its check for $2,834.01 payable to Chesterfield for sales described in Chesterfield invoice Nos. 1459, 1467, and 1968, issued on March 26 and March 30, 1943. Chesterfield did not record this latter transaction on its books of account.
The Chesterfield records show total sales to R. Stein & Company during fiscal 1943 of $17,924.81. On February 25, 1943, Chesterfield issued to R. Stein, Los Angeles, California, its invoice Nos. 1484 through 1486 for merchandise totaling $2,060.38. On March 29, 1943, R. Stein drew its check payable to Chesterfield for $2,019.17 for the merchandise itemized in the latter invoices less cash discount. Chesterfield did not record on its books of account the $2,019.17 transaction.
During the years herein involved Sanbern, Inc., manufactured upholstered furniture. Its principals, a man named Bernstein and his wife, both actively participated in the business at Trenton, New Jersey. Chesterfield's books of account reflect sales to Sanbern, Inc., for fiscal 1944 and 1945 of $7,021.04 and $4,231.91, respectively. All recorded sales were invoiced in the regular series of invoices and paid by check. Chesterfield made sales of $5,007 in fiscal 1944 and $6,350 in fiscal 1945 to Sanbern, Inc., for which Chesterfield demanded cash and refused to furnish invoices. In the latter transactions Bernstein drew a check to cash and brought the cash to Chesterfield. Although Sanbern, Inc., kept a single accounts payable ledger sheet showing all payments to Chesterfield for merchandise, at Novick's request the Bernsteins wrote up a substitute ledger sheet reflecting only invoiced purchases from Chesterfield.
The records of Chesterfield reflect the following sales to Penn Furniture Company, hereafter referred to as Penn, a furniture-reupholstering business at Altoona, Pennsylvania:
+-----------------------------------+ ¦Date ¦Invoice No.¦Amount ¦ +-------------+-----------+---------¦ ¦May 6, 1943 ¦12111 ¦$1,849.79¦ +-------------+-----------+---------¦ ¦May 12, 1943 ¦12133 ¦259.50 ¦ +-------------+-----------+---------¦ ¦May 14, 1943 ¦12134 ¦471.01 ¦ +-------------+-----------+---------¦ ¦May 1, 1944 ¦13155 ¦11,202.68¦ +-------------+-----------+---------¦ ¦Oct. 20, 1944¦13424 ¦7,469.68 ¦ +-------------+-----------+---------¦ ¦Mar. 8, 1945 ¦13674 ¦5,175.04 ¦ +-----------------------------------+
Although Chesterfield's invoice No. 13155 shows a sale to Penn amounting to $11,202.68, the actual sale totaled $16,202.68. To complete the transaction Penn paid Novick $5,000 cash at his request on May 1, 1944, in addition to a check for $11,202.68. Chesterfield's accounts receivable ledger shows that invoice No. 13424 represented a credit sale to Penn for $7,469.68. Penn paid Novick additional cash of $3,229. Penn made two additional cash payments of $6,000 and $4,000 in November 1943 and March 1945, respectively. In each instance Penn paid cash for merchandise at Novick's request. Because of Penn's need for fabrics, its principal did not ask Novick why cash was required, nor did Novick tell him. Chesterfield recorded no cash sales to Penn in its books of account.
About April 5, 1945, Bernard Fels, Inc., a manufacturer of upholstered furniture, bought fabrics from Chesterfield. It paid Chesterfield $979.39 by check and $2,000 in addition. Only the.$979.37 is shown on the Chesterfield records.
The Chesterfield records reflect the following three invoiced sales to VanDenBerg Brothers, Incorporated, a retail furniture store in Grand Rapids, Michigan:
+------------------------------+ ¦Date ¦Invoice No. ¦Amount ¦ +-------+------------+---------¦ ¦1945 ¦ ¦ ¦ +-------+------------+---------¦ ¦Jan. 10¦13640 ¦$8,928.93¦ +-------+------------+---------¦ ¦Jan. 10¦13641 ¦895.47 ¦ +-------+------------+---------¦ ¦Apr. 27¦13148 ¦529.57 ¦ +-------+------------+---------¦ ¦Total ¦ ¦10,353.97¦ +------------------------------+
In January 1945, VanDenBerg Brothers, Incorporated, purchased an additional $26,000 of fabrics from Chesterfield. Novick made it clear that the additional sale had to be for cash. To make the $26,000 cash available, John VnDenBerg's nephew drew on the bank account of Home Outfitters, Inc., a buying syndicate, the following three checks:
+----------------------------------+ ¦Date ¦Amount ¦Payee ¦ +-------+-------+------------------¦ ¦1945 ¦ ¦ ¦ +-------+-------+------------------¦ ¦Jan. 6 ¦$15,000¦Cash. ¦ +-------+-------+------------------¦ ¦Jan. 22¦6,000 ¦Cash. ¦ +-------+-------+------------------¦ ¦Jan. 26¦5,000 ¦Van Den Berg Bros.¦ +----------------------------------+
VanDenBerg turned over the $26,000 in cash to Novick who had Chesterfield transfer the merchandise involved. VanDenBerg Brothers, Incorporated, received no invoices from Chesterfield to cover the $26,000 purchase. Chesterfield sent to VanDenBerg Brothers, Incorporated, bills of lading covering the merchandise purchased with cash, giving VanDenBerg's name as consignor. Novick did not reveal why the $26,000 had to be in cash, but told VanDenBerg that ‘this would all be off the record.’
During fiscal 1945, Mayflower Industries, Asbury Park, New Jersey, purchased textile fabrics from Chesterfield. The amount, date, payee, pertinent explanatory notations appearing on the face, and dates of payment on each of five Mayflower checks are as follows:
+-----------------------------------------------------------------------------+ ¦Date ¦Amount ¦Payee ¦Notation ¦Date of ¦ +-----------+---------+----------------------+--------------------+-----------¦ ¦ ¦ ¦ ¦ ¦ ¦payment ¦ +----+------+---------+----------------------+--------------------+-----------¦ ¦Nov.¦2, ¦$3,450.00¦Cash (on a/c) ¦On a/c Chesterfield ¦Nov.¦9, ¦ ¦ ¦1944 ¦ ¦ ¦Fabrics ¦ ¦1944 ¦ +----+------+---------+----------------------+--------------------+----+------¦ ¦Nov.¦17, ¦1,848.76 ¦Cash (for a/c ¦For Chesterfield ¦Nov.¦22, ¦ ¦ ¦1944 ¦ ¦Chesterfield a/c) ¦Fabrics ¦ ¦1944 ¦ +----+------+---------+----------------------+--------------------+----+------¦ ¦Nov.¦21, ¦1,256.10 ¦Cash (on a/c ¦For Chesterfield ¦Nov.¦22, ¦ ¦ ¦1944 ¦ ¦Chesterfield a/c) ¦Fabrics ¦ ¦1944 ¦ +----+------+---------+----------------------+--------------------+----+------¦ ¦Jan.¦15, ¦5,147.06 ¦Cash (to apply on ¦To pay for invoice ¦Mar.¦3, ¦ ¦ ¦1945 ¦ ¦Chesterfield ¦12-27-44 ¦ ¦1945 ¦ +-----------------------------------------------------------------------------+
Fabrics a/c). Chesterfield Fabrics Corp. Jan. 30, 5,632.20 Cash (a/c Chesterfield Chesterfield Fabric Jan. 31, 1945 Fabrics) Co 1945
Chesterfield recorded none of the above transactions in its books of account.
On its tax returns Chesterfield reported none of the above-described cash sales.
After the fraud investigation of petitioners had begun, Novick attempted to contact a customer in Michigan to whom unrecorded sales were made.
A special agent with the Internal Revenue Service, Intelligence Division, visited Sanbern, Inc., directly without prior circularization. At first, that customer showed him an accounts payable ledger sheet in complete harmony with the Chesterfield accounts receivable ledger sheet covering sales to Sanbern, Inc. However, upon further inquiry, the Bernsteins produced another ledger sheet which showed the cash purchases from Chesterfield. Mr. Bernstein had replaced the ledger sheet disclosing the cash purchases from Chesterfield with the ledger sheet first shown after Novick had visited the Bernsteins and so requested.
On March 27, April 10, and April 30, 1943, Chesterfield endorsed and deposited in its bank account the following three groups of checks:
+---------------------------------------------------------------------+ ¦Amount ¦Date ¦Drawer ¦To pay Chesterfield¦ +---------+-------+-------------------------------+-------------------¦ ¦ ¦ ¦ ¦invoice No(s). ¦ +---------+-------+-------------------------------+-------------------¦ ¦ ¦1943 ¦ ¦ ¦ +---------+-------+-------------------------------+-------------------¦ ¦$2,072.27¦Mar. 26¦Nelson Brothers ¦1475, 1478-81. ¦ +---------+-------+-------------------------------+-------------------¦ ¦282.58 ¦Mar. 13¦Warwick ¦1477. ¦ +---------+-------+-------------------------------+-------------------¦ ¦912.49 ¦Mar. 12¦Warwick ¦1482. ¦ +---------+-------+-------------------------------+-------------------¦ ¦2,437.93 ¦Mar. 2 ¦Warwick ¦1491, 1495. ¦ +---------+-------+-------------------------------+-------------------¦ ¦361.67 ¦ ¦Unidentified ¦ ¦ +---------+-------+-------------------------------+-------------------¦ ¦1,949.93 ¦ ¦Unidentified ¦ ¦ +---------+-------+-------------------------------+-------------------¦ ¦823.07 ¦Mar. 18¦Studios, Inc ¦1476. ¦ +---------+-------+-------------------------------+-------------------¦ ¦8,839.94 ¦ ¦ ¦ ¦ +---------+-------+-------------------------------+-------------------¦ ¦8,580.20 ¦Apr. 7 ¦International Furniture Company¦1458, 1462, 1464. ¦ +---------+-------+-------------------------------+-------------------¦ ¦4,382.36 ¦Apr. 7 ¦International Furniture Company¦1470, 1471, 1472. ¦ +---------+-------+-------------------------------+-------------------¦ ¦817.61 ¦Apr. 6 ¦Warwick ¦1457. ¦ +---------+-------+-------------------------------+-------------------¦ ¦182.39 ¦ ¦Unidentified ¦ ¦ +---------+-------+-------------------------------+-------------------¦ ¦37.44 ¦ ¦Unidentified ¦ ¦ +---------+-------+-------------------------------+-------------------¦ ¦14,000.00¦ ¦ ¦ ¦ +---------+-------+-------------------------------+-------------------¦ ¦2,834.01 ¦Apr. 22¦Spear & Company ¦1459, 1467, 1468. ¦ +---------+-------+-------------------------------+-------------------¦ ¦2,019.17 ¦Mar. 29¦R. Stein & Company ¦1484, 1485, 1486. ¦ +---------+-------+-------------------------------+-------------------¦ ¦184.83 ¦Apr. 23¦International Furniture Company¦1446. ¦ +---------+-------+-------------------------------+-------------------¦ ¦23.98 ¦ ¦Unidentified ¦ ¦ +---------+-------+-------------------------------+-------------------¦ ¦38.01 ¦ ¦Unidentified ¦ ¦ +---------+-------+-------------------------------+-------------------¦ ¦5,100.00 ¦ ¦ ¦ ¦ +---------------------------------------------------------------------+
The checks could not be traced through Chesterfield's cash receipts book. The bank records showed that Chesterfield had simultaneously deposited and withdrawn $8,839.94 on March 27, 1943, $14,000 on April 10, 1943, and $5,100 on April 30, 1943. The three checks used to withdraw these amounts were not among the canceled checks shown by Chesterfield to the special agent. Chesterfield erased the deposits and withdrawals for March 27, April 10, and April 30, 1943, from its retained copies of its March and April 1943 bank statements. Although his firm had served Chesterfield since 1937 and he personally had supervised the preparation of Chesterfield's returns for fiscal 1943, 1944, and 1945, petitioners' accountant had not been advised by them of the bank statement erasures.
During the summer of 1945, after the revenue agent had completed his examination of Chesterfield's return for fiscal 1943, he advised Chesterfield's accountant that he would examine later years. The accountant concluded that more than a routine examination was being conducted. Novick and Milgrom thereupon disclosed to him that they had made unreported cash sales of which they had no records. On December 24, 1945, Chesterfield and Milgrom and Novick, as individuals, entered into a written agreement with a lawyer that he represent them before the Treasury Department for a fee of $12,500, $5,000 to be a retainer and $7,500 to be payable ‘upon termination of all proceedings now pending before said Departments.’ Chesterfield gave him a power of attorney dated December 24, 1945, with respect to taxes for fiscal 1943 and 1944. The lawyer received $5,000 by check from Chesterfield on January 2, 1946.
After discussions with the lawyer, prior to the filing of the corporate returns for fiscal 1945, Novick and Milgrom, after December 24, 1945, caused an entry to be placed in Chesterfield's general journal, intended to cover fiscal 1943, 1944, and 1945, but dated June 30, 1945, crediting sales for $100,000 and debiting purchases for $80,000 and loans to officers for $20,000, with the explanation, ‘to set up.’ The entire $100,000 was added to sales and the $80,000 to cost of goods sold in the tax return for fiscal 1945. At the foot of a schedule attached to the fiscal 1945 return appears the statement, ‘We have approximated and included all cash sales and cash purchases up to June 30, 1945.’ Milgrom and Novick did not furnish sufficient detail to enable the accountant to file amended returns for fiscal 1943 and 1944. The accountant added $80,000 to cost of goods sold on the representation of Novick and Milgrom that they purchased the merchandise involved in the $100,000 unrecorded sales for cash and on his conclusion that a gross profit percentage of 20 per cent was proper.
On August 27, 1947, Novick and Milgrom executed an affidavit setting forth the amounts and sources of certain purchases invoiced to and paid by Chesterfield during fiscal 1943, 1944, and 1945 which had been entered on Chesterfield's books, included in cost of goods sold on Chesterfield's tax returns, and allowed as purchases by respondent. The affidavit also contained a schedule of the following alleged cash purchases:
+-----------------------------------------------------------------------------+ ¦U. S. Pillow Corp., 37 West 26th St., New York City ¦$43,000 to $45,000¦ +----------------------------------------------------------+------------------¦ ¦Budd Fabrics, Scadron Bros., 268 Fourth Ave., New York ¦45,000 ¦ ¦City ¦ ¦ +----------------------------------------------------------+------------------¦ ¦New England Textile Co., Boston, Mass ¦8,500 ¦ +----------------------------------------------------------+------------------¦ ¦Mastercraft Textile, Paterson, N. J. ¦1,500 ¦ +----------------------------------------------------------+------------------¦ ¦Jack Turk, 570 Seventh Ave., New York City ¦1,000 ¦ +-----------------------------------------------------------------------------+
During the period here involved U.S. Pillow Corp. made no cash sales. U.S. Pillow received net payments from Chesterfield, after discount, totaling no more than $5,777.70.
Chesterfield recorded and respondent allowed cash purchases of approximately $30,000 for fiscal 1943 and $26,700 for fiscal 1944. Respondent disallowed no cash purchases shown by petitioners' books for fiscal 1945 except for the reversal of the journal entry debiting purchases for $80,000 and allowed as purchases the amounts of all checks drawn to cash supported by penciled notations on small sales slips.
In the statutory notice of deficiency issued to Chesterfield, respondent made the following adjustments which increased net income for fiscal 1943 and 1944.
+------------------------------------------------------+ ¦1943 ¦ +------------------------------------------------------¦ ¦ ¦ ¦ +-------------------------------------------+----------¦ ¦(a) Unreported sales ¦$42,284.66¦ +-------------------------------------------+----------¦ ¦(b) Unsubstantiated cash purchase ¦1,150.00 ¦ +-------------------------------------------+----------¦ ¦(c) Unsubstantiated cash commissions ¦1,339.75 ¦ +-------------------------------------------+----------¦ ¦(d) Unsubstantiated general expenses (cash)¦20,908.38 ¦ +-------------------------------------------+----------¦ ¦Total adjustments ¦65,682.79 ¦ +-------------------------------------------+----------¦ ¦ ¦ ¦ +------------------------------------------------------+
1944 (a) Unreported sales 59,299.49 (b) Unsubstantiated cash purchases 2,208.36 (c) Unsubstantiated cash commissions 1,411.55 (d) Unsubstantiated general expenses (cash) 20,692.31 Total adjustments 83,611.71
In the statutory notice of deficiency issued to Chesterfield, respondent adjusted net income for fiscal 1945 by adding additional sales of $58,780.52, and disallowing ‘general expenses' of $15,061.10. On its return for fiscal 1945, Chesterfield claimed a deduction for ‘professional’ expenses including $10,000 representing a legal fee to the lawyer referred to above, which amount it accrued on its books for fiscal 1945. Respondent disallowed the $10,000 legal fee as an accrued deduction for fiscal 1945. In his determination, respondent reduced sales by $100,000 and disallowed purchases of $80,000.
For each of the years ended June 30, 1943, 1944, and 1945, Chesterfield regularly and systematically omitted from its books substantial amounts of sales. Chesterfield, through its principals, Novick and Milgrom, willfully and systematically attempted to conceal these sales by such means as the use of a series of unrecorded invoices, requiring that its customers pay cash, causing erasures upon its bank statements, and requesting that customers conceal such sales.
Chesterfield filed false and fraudulent returns for each of the taxable years ended June 30, 1943, 1944, and 1945, with intent to evade tax, and a part of the deficiencies in each of those years is due to fraud with intent to evade tax.
Novick and Milgrom received, and exercised complete and equal control over, the unreported income of Chesterfield during each year. During 1948, Novick constructively received a dividend from Chesterfield of $12,361.83.
Prior to January 1945, Chesterfield purchased United States Treasury bonds in the face amount of $50,000 and United States Treasury notes in the face amount of $10,000. About February 9, 1945, Chesterfield transferred bonds in the face amount of $25,000 without reservation or qualification to Novick and a like amount to Milgrom. The balance sheet in Chesterfield's income tax return for fiscal 1945 lists as an asset as at June 30, 1945, United States Treasury bonds and notes valued at $60,000. Novick did not report as income on his 1945 income tax return any part of the value of bonds distributed to him by Chesterfield on February 9, 1945.
Chesterfield never declared a formal dividend, nor did Milgrom or Novick ever report any on their returns.
In 1945, Novick actually received one-half of the proceeds of Chesterfield's unreported cash sales for fiscal 1945 of $58,780.52, or $29,390.26.
Novick's basis for his Chesterfield stock was $2,500. Chesterfield had no earnings and profits available for dividends as at June 30, 1945. Novick realized capital gain of $51,890.26, 50 per cent of which, or $25,945.13, he should have included in gross income for 1945. Respondent determined only that $23,161.66 should be taken into account in computing Novick's 1945 net income. He has not requested an increased deficiency.
On February 27, 1950, a criminal information in three counts was filed against Novick in the United States District Court for the Eastern District of New York, charging violation of section 145(b), I.R.C. 1939, in that he did willfully and knowingly attempt to defeat and evade a large part of taxes due from him for 1943 and 1945 by filing false and fraudulent returns wherein he substantially understated his true income for such years. Novick pleaded guilty to that count relating to 1943, and on June 14, 1950, was convicted with respect to 1943, sentenced, and fined. The court dismissed counts of the criminal information relating to 1945.
On March 15, 1946, Novick filed a document purporting to be a ‘tentative’ income tax return for 1945, from which he omitted (1) names and relationships of persons with respect to whom Novick claimed dependency exemptions, (2) the computation and amount of Novick's income tax liability as distinguished from the ‘Tentative Est. Tax’ shown, (3) income from rents and royalties, (4) amounts and itemization of capital gains, (5) income from ‘other sources,’ (6) explanation of depreciation deductions, (7) itemization of medical deductions, (8) itemization of building expenses, (9) itemization of charitable contributions, and (10) itemization of deductible taxes. Respondent granted successive extensions of time allowing Novick until September 15, 1946, within which to file his individual income tax return for 1945. Novick's return, which was not filed until March 15, 1947, included information relating to the 10 categories listed above. That return bore the heading ‘U.S. Individual Income Tax Return for Calendar Year 1945.’ The ‘payments on 1945 Declaration of Estimated Tax’ claimed in that return included the amount entered as ‘Balance of Tax Due’ in the document filed March 15, 1946.
Novick without reasonable cause failed to file his 1945 return within the time required by law.
Novick filed false and fraudulent returns for each of the taxable years ended December 31, 1943 and 1945, with intent to evade tax, and a part of the deficiency for each year is due to fraud with intent to evade tax.
OPINION.
OPPER, Judge:
As to the deficiencies against the petitioner corporation, Chesterfield, and with respect to the years 1943 and 1944, the evidence seems to us clearly to establish fraud. This is virtually admitted by the attempt made in the 1945 return to include unreported sales for all 3 years. Respondent has established that a total of almost $129,000 in cash sales,
which were not recorded on petitioner's books nor reported on its tax returns, were actually made. Of these, some $39,000 apply to 1943 and over $30,000 to 1944. The receipt of such large amounts of income for several years, without an adequate explanation of the failure to include them on the returns, alone strongly evidences fraudulent intent. Arlette Coat Co., 14 T.C. 751; Max Cohen, 9 T.C. 1156, affd. (C.A. 10) 176 F.2d 343. We think there can accordingly be no question that the returns involved were false and fraudulent with intent to evade tax and that, consequently, the statute of limitations is no bar to the conclusion that deficiencies exist for those years. Hugh B. Monjar, 13 T.C. 587; G. A. Comeaux, 10 T.C. 201, affd. C.A. 10) 176 F.2d 394.
Receipts from unrecorded sales, some after discount (as enumerated in the findings):
To borrow the language of respondent's brief, ‘Fiscal 1945 admittedly presents a difficult problem.’ For that year petitioner Chesterfield reported on the return which it ultimately filed an amount of unrecorded sales in excess of the proved by respondent. But at the same time, the cost of goods sold was increased by asserted cash purchases in the amount of $80,000. This on its face was a misrepresentation since according to petitioner's own position, the cash purchases were meant to apply to the cash sales on the theory that the computed markup was 25 percent and that, consequently, $100,000 of sales would indicate $80,000 of purchases. But the sales in question were concededly intended to apply not alone to 1945 but to the preceding 2 years so that the cash purchases reported for 1945 were on their face excessive for that year alone.
Entirely apart from this, however, petitioners submitted to respondent an affidavit purporting to state in detail the sources of these cash purchases. As appears in greater detail in our findings, not less than $43,000 of the supposed purchases were stated under oath to have come from U.S. Pillow Corp. The uncontradicted evidence is that nothing was purchased by petitioner Chesterfield for cash from U.S. Pillow Corp. in 1945 and that the total purchase from this source was less than $6,000. We are forced to conclude that the affidavit filed on behalf of petitioners was completely false, and the only logical inference is that it was part of a plan for the fraudulent evasion of income taxes due for 1945. Of course, the fact that this was an overstatement of cost, rather than an understatement of income offers no comfort to petitioner. G. A. Comeaux, supra at 208. Even if there were nothing more, we should accordingly be forced to conclude that the 1945 return, as well as those for 1943 and 1944, was false and fraudulent and designed to evade the taxes legitimately due. This conclusion is less difficult to reach in view of the amply demonstrated fraud involved in the 2 prior years.
Our finding that the returns of the petitioner corporation were false and fraudulent for the 3 years involved does not rest solely upon the factors already described. Numerous other indications, almost too many to recount, are also present. They are stated in detail in our findings. Without suggesting that the statement is at all complete, there are such items as the insistence that purchasers pay cash; the numbering out of their regular order of the invoices for such sales; the request in at least one instance that the purchaser also maintain falsified records; erasures of items on bank statements; and concealment from, and false and inconsistent statements to, the investigating agents. See Lillian Kilpatrick, 22 T.C. 446, affd. (C.A. 5) 227 F.2d 240.
For similar reasons, not only the deficiency but the additions to tax for fraud must also be approved.
We have made the finding that the individual petitioner received one-half of the unreported income of the corporate petitioner because it is clear to us from respondent's proof that Novick received and retained large amounts of unreported cash and other assets resulting from these transactions, thereby indicating, in the absence of an adequate explanation, that the return was fraudulent, Arlette Coat Co., supra; Frank A. Weinstein, 33 B.T.A. 105; because he pleaded guilty to a charge of tax evasion for 1943, Bennett E. Meyers, 21 T.C. 331; and because, since the statute of limitations is no longer a bar under such circumstances, the Commissioner's determination becomes presumptively correct and the amount determined to have been received must, for purposes of the deficiency, be assumed to have been correct, absent credible contrary evidence. Leonard B. Willits, 36 B.T.A. 294; Max Cohen, supra.
On the entire record, the result is inescapable that because both petitioners filed false and fraudulent returns with intent to evade tax, the statute of limitations is inapplicable; that no adequate evidence to overcome the presumptive correctness of the determination having been produced, the deficiencies must be approved; and that part of each deficiency is due to fraud, thus supporting the additions to tax under section 293(b).
The final question is petitioner Novick's liability for a 1945 addition to tax under section 291(a) for delinquency in filing his return. The issue is whether a document concededly filed within the permissible period constitutes the ‘return’ intended by that section. The paper filed by him, purporting only to be ‘tentative,‘ failed to include his correct gross income, or any deductions, or credits.
Under the facts disclosed by this record we fail to see how this document can be considered the return required by section 51, I.R.C. 1939. Not only was the paper designated as ‘tentative’ but petitioner requested and secured extensions of time within which to file his return. Even so, he failed to file anything else until long after the last extension had expired, and when the return was finally filed it was not stated to be an amended return, but rather appeared on its face to be the return which petitioner himself considered to be required. We cannot say under these aggravated facts that petitioner's course of action or the ‘tentative return’ filed by him ‘evinces an honest and genuine endeavor to satisfy the law.’ Zellerbach Co. v. Helvering, 293 U.S. 172, 180. See also National Contracting Co., 37 B.T.A. 689, affd. (C.A. 8) 105 F.2d 488. No effort having been made to show any ‘reasonable cause’ for failure to file on time, the addition to tax was proper.
Reviewed by the Court.