OPPER

1. Funds improperly obtained from a corporation of which petitioners were in complete control and in connection with which there was no embezzlement prosecution and no adequate proof that petitioners' acts had not been condoned, held to be taxable income. Commissioner v. Wilcox, 327 U.S. 404, distinguished; Rutkin v. United States, 343 U.S. 130, followed.

2. Income tax returns designated joint returns but signed only by the husband, held in the absence of further evidence to impose a liability upon petitioner-wife for both deficiencies and fraud penalties. Myrna S. Howell, 10 T.C. 859,affd. (C.A. 6) 175 F.2d 240. R. J. Cleary, Esq., and F. T. Weil, Esq., for the petitioners. A. W. Dickinson, Esq., for the respondent.

Respondent determined deficiencies in petitioners' income tax and penalties thereon as follows:

+-----------------------------------------------+ ¦Petitioners¦Docket No.¦Years¦Deficiency¦Penalty¦ +-----------------------------------------------+

W. L. Kann and Stella H. Kann (Husband and 25587 1936 $15,719.79 $7,969.65 Wife)

1937 56,328.04 28,464.74 1938 23,805.61 11,934.12 1939 24,382.94 12,199.92 1940 48,106.27 24,053.14 1941 64,854.23 32,427.12

Gustave H. Kann 25588 1936 21,605.30 10,802.65

1937 47,548.22 24,191.82 1938 24,339.37 12,218.67 1939 24,421.49 12,210.75 1940 48,663.06 24,331.53 1941 79,585.02 39,792.51

That part of the deficiency asserted against petitioners W. L. Kann and Gustave H. Kann for each of these years is due to fraud with intent to evade tax is conceded.

Respondent concedes ‘that for the years 1936, 1939 and 1940 petitioner Stella H. Kann did not file joint individual income tax returns with her husband, petitioner W. L. Kann.‘ No error was assigned to respondent's determination that these two petitioners (Docket No. 25587) filed a joint individual income tax return for 1941.

The questions remaining in issue are: (1) Did respondent err by adding to petitioners' reported net income for each of the tax years 1936 to 1941, inclusive, that portion of the item described as ‘Dividends income understated,‘ which related to amounts received by petitioners from the Pittsburgh Crushed Steel Company and Globe Steel Abrasive Company; and (2) did respondent err in determining that petitioner Stella H. Kann filed a joint individual income tax return with her husband, petitioner W. L. Kann, for each of the years 1937 and 1938.

Some of the facts are stipulated.

FINDINGS OF FACT.

The stipulated facts are hereby found.

Petitioners W. L. Kann and Stella H. Kann, husband and wife, and petitioner Gustave H. Kann (also referred to as G. H. Kann) reside in Pittsburgh, Pennsylvania. All the income tax returns here involved for the years 1936 to 1941, inclusive, were filed with the collector for the twenty-third district of Pennsylvania.

During the years 1936 to 1941, inclusive, Pittsburgh Crushed Steel Company (hereafter called PCS) was a corporation organized under and existing by virtue of the laws of the Commonwealth of Pennsylvania, with its principal place of business at Pittsburgh, Pennsylvania. At all times during 1936 until December 18 that year the outstanding capital stock of PCS was 1,000 shares with a par value of $100 a share. Kann-Pangborn Co. held 997 shares; Bertha F. Kann and petitioners G. H. and W. L. Kann held one share each. On December 18, 1936, the outstanding capital stock of PCS was increased to 5,000 shares with a par value of $100 a share held as follows: Kann-Pangborn Co., 4,997 shares; Bertha F. Kann, petitioners G. H. and W. L. Kann, one share each. Shortly thereafter the stockholdings changed and the following schedule shows the stockholders of PCS and their respective holdings as of December 31 in each of the years 1936 to 1941, inclusive:

+--------------------------------------------+ ¦ ¦Number of shares at December 31¦ +------------+-------------------------------¦ ¦Stockholders¦ ¦ +--------------------------------------------+

1936 1937 1938 1939 1940 1941

G. H. Kann 944 944 969 944 944 944 W. L. Kann 198 258 283 258 258 258 I. A. Diamondstone 158 158 183 158 158 158 David Martin 200 Pangborn Corporation 249 249 249 249 249 249 Thomas W. Pangborn 1 1 1 1 1 1 E. B. Strassburger 50 50 50 50 50 50 Stanley J. Kann 450 450 500 450 440 340 Paul McConnell 10 75 75 75 75 75 Katherine S. Ream 248 248 248 248 248 248 Bertha F. Kann 2,492 2,492 1,917 397 397 397 Norman K. Kann 75 100 75 75 75 Millie F. Kann 175 Irene K. DeRoy 50 Clara K. Solomon 25 Leslie J. Solomon 25 Evelyn S. Kann 25 Stella H. Kann 25 Marguerite K. Diamondstone 25 Helen M. Kann 25 A. Leo Weil, Jr 25 Myra K. Weil 25 G. H. Kann, W. L. Kann, and A. Leo Weil, 2,095 2,095 2,095 Jr., Trustees Robert Lewin Kann 10 30 David Lelewer 20 Madeline K. Lelewer 20 Dorothy K. Mellman 20 Madeline K. Kann 20 Total 5,000 5,000 5,000 5,000 5,000 5,000

Petitioners W. L. Kann and Gustave H. Kann are brothers. The following schedule shows their family relationship to certain stockholders of PCS in the years 1936 to 1941, inclusive:

+----------------------+ ¦Name ¦Relationship ¦ +------+---------------¦ ¦ ¦ ¦ +----------------------+

Evelyn S. Kann Wife of Gustave H. Kann Stella H. Kann Wife of W. L. Kann Bertha F. Kann Mother Stanley J. Kann Brother Millie F. Kann Sister Irene K. DeRoy Sister Myra K. Weil Sister Clara K. Solomon Sister Marguerite K. Sister Diamondstone Norman K. Kann Brother A. Leo Weil, Jr Brother-in-law (Husband of Myra K. Weil) Leslie J. Solomon Brother-in-law (Husband of Clara K. Solomon) I. A. Diamondstone Brother-in-law (Husband of Marguerite K. Diamondstone) Helen M. Kann Sister-in-law (Wife of Norman K. Kann) Robert Lewin Kann Nephew (Son of Stanley J. Kann) Madeline K. Lelewer Niece (Daughter of Stanley J. Kann) Dorothy K. Mellman Niece (Daughter of Stanley J. Kann) David Lelewer Son-in-law of Stanley J. Kann Madeline K. Kann Daughter-in-law of Stanley J. Kann

On February 7, 1939, Bertha F. Kann, referred to as the Seller, entered into an agreement with petitioner Gustave H. Kann and Evelyn S. Kann, referred to as the Buyers, involving purchase by the Buyers of 140 shares of stock of PCS in exchange for their promise to pay to Bertha F. Kann during her life a certain sum annually. On the same date Bertha F. Kann entered into seven other agreements, in substance the same as that just described except that the Buyers in the respective agreements were as follows:

+-----------------------------------------------------+ ¦(1) Petitioners W. L. Kann and Stella H. Kann ¦ +-----------------------------------------------------¦ ¦(2) Stanley J. Kann ¦ +-----------------------------------------------------¦ ¦(3) Irene K. DeRoy ¦ +-----------------------------------------------------¦ ¦(4) A. Leo Weil, Jr., and Myra K. Weil ¦ +-----------------------------------------------------¦ ¦(5) Leslie J. Solomon and Clara K. Solomon ¦ +-----------------------------------------------------¦ ¦(6) I. A. Diamondstone and Marguerite K. Diamondstone¦ +-----------------------------------------------------¦ ¦(7) Norman K. Kann and Helen M. Kann ¦ +-----------------------------------------------------+

Each of these agreements entered into by Bertha F. Kann on February 7, 1939, contained a preamble reading in pertinent part as follows:

WHEREAS, the Seller together with members of her immediate family own the controlling interest in the stock of the Pittsburgh Crushed Steel Company, a Pennsylvania corporation; and

WHEREAS, the Seller desires to sell some of her stock in said Company in order to purchase life annuities for herself; and

WHEREAS, certain of the Seller's children, together with their respective spouses, desire to retain the family stock control of said Company and have offered to purchase some of the Seller's stock in the Company in exchange for life annuities to the Seller, which offers are acceptable to the Seller; * * *

On September 29, 1939, a trust agreement was entered into between certain grantors, named hereinafter, and petitioner W. L. Kann, petitioner Gustave H. Kann, and A. Leo Weil, Jr., as trustees, whereby the grantors transferred to the trustees in trust a total of 2,095 shares of stock of PCS, the trustees to manage the trust, collect the income, and after payment of expenses and obligations of the trust, pay over the net income to the grantors according to their respective interests.

The grantors of the trust created by the agreement of September 29, 1939, and their respective interests were as follows:

+---------------------+ ¦ ¦Interest ¦ +----------+----------¦ ¦Grantors ¦(shares) ¦ +----------+----------¦ ¦ ¦ ¦ +---------------------+

Petitioner Gustave H. Kann and Evelyn S. Kann 230 Petitioners W. L. Kann and Stella H. Kann 230 Stanley J. Kann 230 Millie F. Kann 255 Irene K. DeRoy 230 A. Leo Weil, Jr., and Myra K. Weil 230 Leslie J. Solomon and Clara K. Solomon 230 I. A. Diamondstone and Marguerite K. Diamondstone 230 Norman K. Kann and Helen M. Kann 230

The shares of stock of PCS making up the corpus of the trust of September 29, 1939, were obtained by the respective grantors partly as gifts from Bertha F. Kann, received in 1938 and 1939 and partly pursuant to the several February 7, 1939, agreements entered into between Bertha F. Kann and the respective grantors.

The trust agreement of September 29, 1939, contained a preamble reading in pertinent part as follows:

WHEREAS, the Grantors herein named own a total of 2,095 shares of the outstanding common capital stock of the Pittsburgh Crushed Steel Company, a Pennsylvania corporation, which said company has total common stock issued and outstanding aggregating 5,000 shares, the stock owned by the Grantors herein thus representing the working control of said company; and

WHEREAS, the Grantors herein desire to continue to retain among themselves and their children, intact, the working control of said company represented by said stock, and realize that were the stock possibly sold by some of them at some time in the future, or distributed in accordance with their respective last wills and testaments, it would not be possible to retain the working control of said company among themselves and their children; * * *

The minutes of the 1936 annual stockholders meeting of PCS record the presence of G. H., W. L., and B. F. Kann and G. H. Kann, president of Kann-Pangborn Co., representing the latter company.

The minutes of the 1937 annual stockholders meeting of PCS record the presence of the following stockholders representing the shares of stock shown opposite their names:

+-----------------------+ ¦Stockholder ¦Shares ¦ +--------------+--------¦ ¦ ¦ ¦ +-----------------------+

G. H. Kann 944 Bertha F. Kann (by proxy) 2,492 W. L. Kann 198 Thomas W. Pangborn 1 Pangborn Corporation (by Thomas W. Pangborn) 249

The minutes of the 1938 annual stockholders meeting of PCS record the presence of the following stockholders representing the shares of stock shown opposite their names:

+-----------------------+ ¦Stockholder ¦Shares ¦ +--------------+--------¦ ¦ ¦ ¦ +-----------------------+

G. H. Kann 944 Bertha F. Kann (by proxy) 2,492 W. L. Kann 258 Stanley J. Kann 450 Norman K. Kann 75 Paul McConnell 75

The minutes of the 1939 annual stockholders meeting of PCS record the presence of the following stockholders representing the shares of stock shown opposite their names:

+-----------------------+ ¦Stockholder ¦Shares ¦ +--------------+--------¦ ¦ ¦ ¦ +-----------------------+

G. H. Kann 989 W. L. Kann 303 Stanley J. Kann 540 Paul McConnell 75 Bertha F. Kann (by proxy) 1,517 Norman K. Kann 120 A. Leo Weil, Jr 45 Total 3,589

The minutes of the 1940 annual stockholders meeting of PCS record the presence of the following stockholders representing the shares of stock shown opposite their names:

+-----------------------+ ¦Stockholder ¦Shares ¦ +--------------+--------¦ ¦ ¦ ¦ +-----------------------+

G. H. Kann 944 W. L. Kann 258 Stanley J. Kann 450 Pangborn Corporation by T. W. Pangborn, Pres 249 Thomas W. Pangborn 1 Bertha F. Kann (by proxy) 397 G. H. Kann, W. L. Kann & A. Leo Weil, Jr. Trustees 2,095 Total 4,394

The minutes of the 1941 annual stockholders meeting of PCS record the presence of the following stockholders representing the shares of stock shown opposite their names:

+-----------------------+ ¦Stockholder ¦Shares ¦ +--------------+--------¦ ¦ ¦ ¦ +-----------------------+

G. H. Kann 944 W. L. Kann 258 Stanley J. Kann 450 Pangborn Corporation by T. W. Pangborn, Pres 249 Thomas W. Pangborn 1 Bertha F. Kann (by proxy) 397 E. B. Strassburger (by proxy) 50 G. H. Kann, W.L. Kann & A. Leo Weil, Jr. Trustees 2,095 Total 4,444

During the years 1936 to 1941, inclusive, the officers of PCS were petitioner Gustave H. Kann, president; Bertha F. Kann, vice president; and petitioner W. L. Kann, secretary and treasurer. These officers constituted the entire board of directors until February 1940, when A. Leo Weil, Jr., and Thomas W. Pangborn were elected to the board.

Bertha F. Kann died at age 83 in the year 1943. She received no salary from the company in the years 1936 to 1943. Petitioner Gustave H. Kann voted the stock of Bertha F. Kann in the years 1936 to 1940, inclusive; petitioners W. L. Kann and Gustave H. Kann voted her stock in 1941.

During the years 1936 to 1941 management of the operations of PCS was confined solely to petitioners W. L. Kann and Gustave H. Kann.

In the years 1936 to 1941, inclusive, petitioners W. L. Kann and Gustave H. Kann received out of funds of PCS the following amounts of money, which amounts were not included in gross income by them in their respective income tax returns for those years:

+------------------------------------+ ¦Items ¦1936¦1937¦1938¦1939¦1940¦1941¦ +------------------------------------+

(1) $43,707.50 $64,850.00 $56,600.00 $54,000.00 $99,000.00 $205,000.00 (2) 11,000.00 (3) 4,000.00 38,000.00 8,000.00 (4) 6,161.76 5,125.00 2,550.00 3,050.00 6,000.00 8,837.50 (5) 60,000.00 Totals $64,869.26 $167,975.00 $67,150.00 $57,050.00 $105,000.00 $213,837.50 G.M. Kann, 50 per $32,434.63 $83,987.50 $33,575.00 $28,525.00 $52,500.00 $106,918.75 cent W.L. Kann, 50 per $32,434.63 $83,987.50 $33,575.00 $28,525.00 $52,500.00 $106,918.75 cent

The items making up the above totals are as follows:

Item . . . . . Description

(1) Checks of PCS drawn to the order of petitioners W. L. Kann and/or Gustave H. Kann, charged on the books of PCS to merchandise accounts of wholly owned subsidiaries, and identified with overstated and fictitious purchases from such subsidiaries on the books and records of PCS.

(2) Overstated credits in personal accounts of petitioners W. L. Kann and/or Gustave H. Kann on the books of PCS identified with overstated purchases on the books and records of PCS.

(3) Overstated credits in an account on the books of PCS designated ‘Leslie J. Solomon Special, G. H. Kann Account‘, and identified with understated sales on the books and records of PCS.

(4) Checks of PCS drawn to the order of petitioners W. L. Kann and/or Gustave H. Kann, which were not recorded on the books and records of PCS, and which were deposited in personal and joint bank accounts of petitioners W. L. Kann and/or Gustave H. Kann.

(5) On or about January 27, 1937, PCS issued a check in the amount of $60,000.00 to the order of Globe Steel Abrasive Company, a wholly owned subsidiary, and on the same date said subsidiary issued its check in the amount of $60,000.00 to the order of petitioner G. H. Kann, who deposited said check in the joint bank account of petitioners G. H. and W. L. Kann at the Peoples-Pittsburgh Trust Company, Pittsburgh, Pennsylvania. The charge to Globe Steel Abrasive Company on PCS books of $60,000.00 was washed out by a journal entry charging said amount to an account designated ‘The Triumph Fuse and Fireworks Company‘, another account used by petitioners W. L. Kann and G. H. Kann for the purpose in part of clearing certain amounts obtained by them from PCS funds.

Earnings of PCS accumulated after February 28, 1913, were at all times material hereto in excess of the total funds petitioners W. L. Kann and Gustave H. Kann received from PCS in the years 1936 to 1941, inclusive, and did not include in their respective income tax returns for those years.

During the years 1936 to 1941, inclusive, petitioner W. L. Kann personally made the entries in and kept the books and records of PCS. With respect to the payments out of funds of PCS to petitioners W. L. and Gustave H. Kann as described hereinbefore, petitioner W. L. Kann personally made such payments, and deliberately and intentionally made false and fictitious entries designed to conceal the payments or deliberately failed to record them in the books and records of PCS, all with the knowledge, consent, and participation of petitioner Gustave H. Kann.

During the years 1936 to 1941, inclusive, Globe Steel Abrasive Company (hereafter called GSA) was a corporation organized and existing under and by virtue of the laws of the State of Ohio with its principal place of business at Mansfield, Ohio. At all times material hereto GSA was a wholly owned subsidiary of PCS.

During the years 1936 to 1941, inclusive, the officers of GSA were petitioner Gustave H. Kann, president; petitioner W. L. Kann, vice president; and Paul McConnell, Secretary and general manager. During that period Dick S. Porch kept the books and records of GSA.

In the years 1936 to 1941, inclusive, petitioners W. L. Kann and Gustave H. Kann received out of funds of GSA the following amounts of money, no part of which was included in gross income in their respective income tax returns for those years:

+--------------------------------+ ¦Year¦W.L. Kann¦Gustave H. ¦Total¦ +----+---------+-----------+-----¦ ¦ ¦ ¦Kann ¦ ¦ +--------------------------------+

1936 $3,000 $3,000 $6,000 1937 6,000 6,000 12,000 1938 6,000 6,000 12,000 1939 6,000 6,000 12,000 1940 6,000 6,000 12,000 1941 6,000 6,000 12,000

These amounts were received in the form of GSA checks, none of which were recorded on the books and records of that company, but they are identified with understated sales on the books and records of GSA. Earnings of GSA accumulated after February 28, 1913, were at all times material hereto in excess of the total sums received by petitioners W. L. and Gustave H. Kann in each of the years 1936 to 1941, inclusive.

In the years 1936 to 1941, inclusive, petitioners W. L. Kann and Gustave H. Kann received from the Steelblast Abrasives Company, a domestic corporation, the following dividends which they did not include in gross income in their respective income tax returns for those years:

+--------------------------------+ ¦ ¦ ¦Gustave H. ¦ +------+-----------+-------------¦ ¦Year ¦W.L. Kann ¦Kann ¦ +--------------------------------+

1936 $6,824.00 $6,824.00 1937 12,973.75 12,973.75 1938 8,990.00 8,990.00 1939 13,000.00 13,000.00 1940 15,520.00 15,520.00 1941 18,200.00 18,200.00

The failure of petitioners W. L. Kann and Gustave H. Kann to report these dividends in their respective income tax returns for the years 1936 to 1941, inclusive, was due to fraud with intent to evade and defeat tax.

With respect to the payments of the funds of GSA to petitioners W. L. Kann and Gustave H. Kann, Dick S. Porch, pursuant to instructions from petitioner W. L. Kann, prepared the checks, deliberately and intentionally failed to record them in the books and records of GSA, and deliberately offset them by understating sales in such books and records, all with the knowledge, consent, and cooperation of petitioner Gustave H. Kann and of Paul McConnell.

Sometime in late 1942 or early 1943 an audit was made by a certified public accountant, A. L. Schneider, of the books and records of PCS for the years 1936 to 1941, inclusive. It showed that a total of $660,018.68 had been received by petitioners W. L. Kann and Gustave H. Kann out of funds of PCS during the years 1936 to 1941, inclusive, this total of $660,018.68 being included in the total of $675,881.76 received by petitioners out of the funds of PCS during those years.

Page 10 of the General Journal of PCS shows the following entry:

+--------------------------------------------------------+ ¦Accounts Receivable, Special—W.L. & G.H. Kann¦660,018.68¦ +---------------------------------------------+----------¦ ¦Officers Life Insurance ¦1,069.36 ¦ +---------------------------------------------+----------¦ ¦Surplus ¦661,088.04¦ +--------------------------------------------------------+

Additional Income per audit of A.L. Schneider

The ‘G. H. and W. L. Kann‘ account appearing on the records of PCS shows credit entries represented by cash receipts after December 31, 1942, as follows:

+-------------------------+ ¦Date ¦Folio ¦Credits ¦ +-------------------------+

1943:

Dec. 14 C.R. 517 $8,000.00 Dec. 31 C.R. 520 1,030.49

1944:

Oct. 4 C.R. 571 181,700.02 Oct. 4 C.R. 571 8,582.00 Oct. 4 C.R. 571 10,104.96 Oct. 4 C.R. 571 12,125.00 Oct. 4 C.R. 571 845.00 Nov. 25 C.R. 581 2,641.60

1945:

Mar. 20 C.R. 602 1,250.00 June 1 C.R. 616 3,500.00

1946:

Dec. 11 C.R. 699 22,000.00 Total $251,779.07

The cash receipts book of PCS and canceled checks drawn by petitioners W. L. Kann and Gustave H. Kann to the order of PCS match the several amounts represented by the credits shown in the ‘G. H. and W. L. Kann‘ account.

The minutes of a meeting of the board of directors of PCS held September 15, 1947, read in part as follows:

Mr. G. H. Kann stated that he thought the Directors should know some of the details in connection with the individual and Company tax cases which were recently reported in the daily papers, and that he should explain the situation and then answer any questions. In connection with his statement and the questions answered by him, he explained the amounts and circumstances involving the unauthorized withdrawal by G. H. and W. L. Kann for their own use of certain funds belonging to the Company during the years 1936 to 1941, inclusive. He admitted that the records of the Company did not show these withdrawals until the accountant, of the Company, Mr. Schneider, entered them on the Company's books of records in the year 1943 as of the close of business December 31, 1942. Both G. H. and W. L. Kann admitted the withdrawal of the funds without any authority or knowledge of the rest of the Officers, Directors and Stockholders, and that the Company's books after December 31, 1942, as well as the annual audits thereafter, correctly showed the amounts due from them to the Company, as well as the very large amounts which G. H. and W. L. Kann had already repaid back to the Company. A discussion was had to the effect that in addition to the books showing the amounts due from G. H. and W. L. Kann and their admitting their owing the amounts so shown and that they intended to repay them to the Company, the Company should be further protected: Whereupon, on motion duly made, seconded and carried, it was

RESOLVED, that G. H. and W. L. Kann give their joint note for the balance now shown to be due from them to the Company for funds withdrawn unlawfully and without authority during the years 1936 to 1941, inclusive, as shown by Accountant Schneider, said note to be a demand note without interest, and that G. H. and W. L. Kann also assign and deliver to the Company, as security for said note and indebtedness, their certificates for the capital stock of the Company owned by them.

An instrument signed by petitioners Gustave H. Kann and W. L. Kann and delivered to PCS on or about September 15, 1947, reads as follows:

$660,018.68 . . . . . Pittsburgh, Pa . . . . . Sept. 15, 1947

On Demand after date we promise to pay to the order of Pittsburgh Crushed Steel Co. Six Hundred Sixty Thousand Eighteen and 68/100 Dollars Payable at 4839 Harrison St., Pittsburgh, Pa. Value received.

(Sgd.) G. H. Kann W. L. Kann

No . . . Due . . .

It was delivered into the custody of the secretary of PCS, I. A. Diamondstone.

Attached to the instrument were stock certificates of PCS, endorsed in blank by ‘G. H. Kann,‘ certifying his ownership of the following shares of stock:

+------------------------+ ¦Number ¦Date ¦Shares ¦ +------------------------+

1 Dec. 30, 1936 552 2 Dec. 30, 1936 50 3 Dec. 30, 1936 175 10 Dec. 30, 1936 48 13 Dec. 30, 1936 119 104 Nov. 7, 1947 31 105 Nov. 7, 1947 42

There are also attached to the instrument certificates of stock of PCS certifying that petitioner W. L. Kann was the owner of the following shares of stock of that company:

+------------------------+ ¦Number ¦Date ¦Shares ¦ +------------------------+

11 Dec. 30, 1936 48 14 Dec. 30, 1936 100 107 Nov. 7, 1947 43 106 Nov. 7, 1947 31

[All of these certificates were endorsed in blank “W.L. Kann.”]

6 Dec. 30, 1936 35 17 Dec. 30, 1936 15 20 Aug. 11, 1937 60

[There was attached to these certificates Irrevocable Stock Power signed “W.L. Kann.”]

Subsequent to 1941 petitioners W. L. Kann and Gustave H. Kann continued to hold positions both as officers and directors, in PCS and GSA. Continuing until at least through 1951 petitioner Gustave H. Kann held the office of president of PCS. Petitioner W. L. Kann held the combined office of secretary and treasurer until 1944, when those two positions were separated and he became vice president and treasurer which positions he held through 1951. Until August 4, 1944, petitioners W. L. Kann and Gustave H. Kann continued to receive from PCS the annual salaries commensurate with their positions of $24,000 and $13,500, respectively. At a special meeting of the board of directors of PCS held November 9, 1944, their respective annual salaries were increased to $27,600 and $15,500 commencing August 4, 1944.

The minutes of a meeting of the board of directors of PCS held April 2, 1946, note petitioner W. L. Kann's salary as vice president and treasurer for the year 1944 of $18,000. Petitioners W. L. Kann and Gustave H. Kann held their last-mentioned positions in PCS and were voted the same salaries of $18,000 and $27,600, respectively, for the years to and including 1951.

The minutes of a meeting of the board of directors of PCS held December 30, 1947, recite the following:

The Chairman also called attention to the fact that the individual directors had approved on November 25, 1947 a loan of $12,500.00 to G. H. and W. L. Kann to be repaid on or before December 31, 1947, and upon motion duly made and seconded, this action was unanimously approved.

On June 15, 1948, the District Court of the United States for the Western District of Pennsylvania ordered and adjudged that petitioner Gustave H. Kann, having been convicted on his plea of guilty to the charge of violating section 145(b) of the Internal Revenue Code, be imprisoned for one year and one day in a penitentiary. The minutes of a special meeting of stockholders of PCS held August 17, 1948, record the following:

The temporary absence of G. H. Kann from the company was discussed, whereupon on motion it was unanimously

RESOLVED that G. H. Kann, the President of the company be granted a leave of absence from July 1 to December 31, 1948, at his present salary.

The returns signed by petitioner W. L. Kann for the years 1937 and 1938 contain the space provided for the name and address of the taxpayer the names ‘W. L. Kann and Stella H. Kann.‘ The explanatory language printed on the return under their names reads as follows: ‘(Name) (Both husband and wife, if a joint return).‘ The answer ‘Yes‘ was given to the question on the returns signed by petitioner W. L. Kann for 1937 and 1938 which read: ‘Are items of income or deductions of both husband and wife included in this return?‘

Petitioners W. L. Kann and Stella H. Kann filed joint returns for the years 1937 and 1938.

During 1936 to 1941, inclusive, petitioners W. L. Kann and his brother, Gustave H. Kann, through stock ownership, family relationships, and their positions as directors and officers, of secretary treasurer and president, respectively, acting jointly and in association with each other, exercised control of PCS.

During 1936 to 1941, inclusive, by similar means petitioners W. L. Kann and Gustave H. Kann exercised control of GSA, the wholly owned subsidiary of PCS.

Petitioners W. L. Kann and Gustave H. Kann caused the amounts received by them from PCS and GSA, and herein contested, to be paid by virtue of their control over PCS and GSA.

OPINION.

OPPER, Judge:

The difficulty of drawing any satisfactory distinction between the ‘embezzlement‘ in Commissioner v. Wilcox, 327 U.S. 404, and the ‘fraud‘ and ‘unlawful gains‘ in Rutkin v. United States, 343 U.S. 130, is exemplified here. Cf. Tax Barometer, vol. 9, No. 19, par. 257. But confining the Wilcox ‘case to its facts,‘

we conclude that there are adequate distinctions to require the present application of the Rutkin principle.

Petitioners were never indicted nor convicted of embezzlement, and there is hence no external evidence as there was in Wilcox that they were guilty of that offense. They were in complete control of the corporations from which they obtained the funds and there is in fact no adequate proof that the method if not the act has not been forgiven or condoned. The details of the supposed liability to repay are such as to leave serious doubt whether the whole project was not a false front erected to deceive not the corporation nor its stockholders but the Commissioner of Internal Revenue. And certainly no testimony from these petitioners, self-confessed deceivers and defrauders, one of whom is an ex-convict, can be availed of to carry any of the burden that their version of the facts is reliable.

Finally, there need be little fear here as there was in the Wilcox case that ‘sanctioning a tax * * * would serve only to give the United States an unjustified preference as to part of the money which rightfully and completely belongs to the taxpayer's employer.‘ Petitioners are obviously in a financial position to make good such defalcations, if any, as their associates decide to recover. There was hence no error in the determination of deficiencies against petitioners W. L. and Gustave H. Kann. The imposition of the fraud penalty against them follows automatically from the stipulation.

As to the liability of petitioner Stella H. Kann for the deficiencies and ‘penalties,‘ we have found as a fact that the returns in question were the joint returns of herself and her husband. That finding is dispositive of the question, since the wife's liability on a joint return is joint and several. This applies to the fraud penalties as well as to the deficiencies, whether or not the wife was a party to the fraud. Myrna S. Howell, 10 T.C. 859, 869, affd. (C.A. 6) 175 F.2d 240.

There is no distinction in this respect between the years 1937 and 1938. Although the existence of joint and several liability was expressly written into the 1938 Act for the first time, that provision was merely declaratory of the rule previously existing. Both respondent and the Board of Tax Appeals had ruled under the previous legislation that such liability existed on a joint return. See Myrna S. Howell, supra, 868; Eva M. Manton, 11 T.C. 831, 835. The fact then that the returns were joint imposes a liability on the wife for the earlier year to the same extent as for the later.

This is not such a case as Eva M. Manton, supra, where the evidence demonstrated conclusively that there was no joint return. Here, the wife failed to take the stand, and there is no evidence to overcome the presumptive correctness of respondent's determination. The mere fact that she did not sign the returns is not sufficient. In Myrna S. Howell, supra, 866, we said: ‘ * * * The 1941 return is not signed by petitioner. Her failure to sign that return is not alone determinative. It was held in Joseph Carroro, 29 B.T.A. 646, 650, that where a husband filed a joint return without objection of the wife, who failed to file a separate return, it will be presumed the joint return was filed with the tacit consent of the wife.‘

Petitioner Stella H. Kann having failed to take the stand, or produce any evidence on her own behalf, has not sustained her burden of proof that these were not joint returns. Under such circumstances her liability for deficiencies and penalties is joint and several with that of her husband. Myrna S. Howell, supra, 869.

Reviewed by the Court.

Decision will be entered under Rule 50.