Docket Nos. 19386 19380.
William Rosenberger, Jr., Esq., for the petitioners. George J. LeBlanc, Esq., for the respondent.
1. RETURNS— JOINT OR SEPARATE— ELECTION.— Where a husband files a return reporting all of the income of a partnership in which his wife had an equal interest and she filed none, he has, in effect, elected to use a joint return and thereafter has no right to have his tax liability for that year computed upon the basis of a separate return to include only one-half of the income.
2. FRAUD— PROOF.— Evidence held insufficient to prove fraud where the gross errors in the returns prepared by accountants were due to inadvertence and the adoption of the errors by the taxpayers was not shown by clear and convincing evidence to have seen the equivalent of an intent to defraud.
3. FAILURE TO FILE RETURN— REASONABLE CAUSE— SECTION 291(a).— No addition to the tax under section 291(a) is proper where a return and check were made out and mailed to the collector, even though the latter has no record of actual receipt and the check was never cashed. William Rosenberger, Jr., Esq., for the petitioners. George J. LeBlanc, Esq., for the respondent.
The Commissioner determined deficiencies in income tax and penalties as follows:
+-----+ ¦¦¦¦¦¦¦ +-----+
Walter Anne Year Fraud Fraud Delinquency Deficiency penalty Deficiency penalty penalty 1943 $2,147.38 $1,073.69 1944 3,811.55 1,905.78 1945 1,458.18 729.09 $2,456.75 $1,228.38 $614.19
The parties have now agreed upon the amount of taxable net income for each year. The petitioners contest the penalties and Walter claims that the income for 1943 and 1944 should be divided equally between him and his wife on the basis of separate returns.
FINDINGS OF FACT.
The petitioners are husband and wife. Walter filed a return for each year with the collector of internal revenue for the district of Virginia.
Walter was formerly employed as a salesman on a bakery route, but in December, 1941, he and his wife, as equal partners, opened a restaurant in Lynchburg, Virginia. They gave all of their time to the operation of the restaurant during the taxable years. Their only other sources of income during the period were two sales of residences.
Walter gave such records as they had kept during 1943 to a reputable firm of certified accountants in Lynchburg early in 1944, with instructions to prepare a proper income tax return. The accountants asked for and received no explanation to the entries in the records. They prepared a single return, purporting to show all of the income of the business for 1943, which Walter signed and filed. The same procedure was followed for the next year. A part time bookkeeper was employed by the petitioners in 1946 and he prepared separate returns for Walter and Anne for 1945, each purporting to report one-half of the income from the restaurant. He prepared the returns from records similar to those furnished the accountants in the previous years.
No partnership returns, Form 1065, were filed for the taxable years.
The Commissioner determined the deficiencies by taking the increase in net worth and adding estimated living expenses.
The following table shows the total net income reported on the returns filed by Walter and the correct amounts as now agreed to by the parties:
+--+ ¦¦¦¦ +--+
Year Reported Correct 1943 $2,129.60 $9,869.05 1944 3,833.06 14,245.61 1945 11,392.19 FN1 Walter reported one-half of this amount as his distributable share of the income.FN2 One-half to be reported by each.
The differences between the net incomes reported and the correct amounts are due chiefly to the fact that the certified public accountants and the bookkeeper who prepared the returns failed to understand the records furnished them and, as a result, inadvertently duplicated a number of items making up the total costs of goods sold and also deducted as wages the cost of meals furnished employees, which amounts were also a part of the cost of goods sold but had not been included in sales.
No part of any of the deficiencies was due to fraud with intent to evade tax.
Anne signed the 1945 return prepared for her by the bookkeeper and made out a check to the collector for the tax shown thereon on or before March 15, 1946. The bookkeeper then placed the return and the check in an envelope with other returns prepared by him. The envelope bore his return address, was addressed to the collector of internal revenue, Lynchburg, Virginia, and had stamps attached. The bookkeeper placed the envelope in the post office at Lynchburg on March 15, 1945. The office of the collector at Lynchburg has no record of the receipt of the return and the check has not been cashed. Any failure on the part of Anne to file the return was due to reasonable cause and was not due to willful neglect.
Walter argues that the tax liabilities for 1943 and 1944 should not be computed upon the basis of single annual returns, but upon the basis of separate annual returns. Unfortunately for him, he filed a single return for each year purporting to report all of the income from the partnership business rather than merely his one-half share. Anne filed no returns for those years, although one-half of the income was hers. The Commissioner has properly accepted and treated the returns filed by Walter as joint returns and has determined no penalties for Anne's failure to file returns for those years. Joseph Carroro, 29 B.T.A. 646. The election thus made by the taxpayers is binding and they are not entitled to have the tax for 1943 and 1944 computed upon the basis of two separate returns for each year. John D. Biggers, 39 B.T.A. 480.
The petitioners did not keep regular books of account during the taxable years, but they did have informal records from which acceptable returns could have been prepared. One of the purposes of those records was to keep account of their funds going through their cash register. The accountants, and later the new bookkeeper, did not realize that there was in that portion of the record a duplication of expenditures for some goods, the cost of which was also shown separately at another place in the records. The gross income reported was not out of line, but the deductions reflected the duplications, so that the net was grossly incorrect. That was concededly not a deliberate error on the part of the persons preparing the returns, since the record shows that they were men of good repute. The same may be said of their error in twice deducting the cost of employee's meals. If those two errors had not been made the returns for all years would have been substantially correct.
However, fraud could be found if the taxpayers, or either of them, had brought about those errors with the intention of defrauding the tax collector or, knowing of their existence, had failed to correct them. The evidence is clear that the petitioners, in keeping their accounts, had no intention to defraud anyone in any way. The real question is whether their adoption of and their failure to correct the erroneous returns innocently, if somewhat carelessly, prepared for them, was due to a fraudulent intent to avoid taxes lawfully due.
Their sudden prosperity, alleged ignorance, and reliance upon others not fully informed, are inadequate excuses for their incorrect returns. They should have kept better records and they should have known that the net income reported was substantially less than their actual income from the restaurant. An investigation on their part could easily have disclosed the errors. A strong suspicion that Walter knew his income was more than he was reporting might arise from the record. But suspicion of incredible ignorance or of actual knowledge on his part is not enough. Negligence, careless indifference, or disregard of rules and regulations would not suffice. The petitioners dismissed their responsibility to file proper returns much too lightly. But the Commissioner, to support the fraud penalties, must prove by clear and convincing evidence that the taxpayers, or one of them, intended to defraud him. The evidence is not quite adequate to support that burden. It shows no act intended to defraud and, under all of the evidence, the negligent omissions to eliminate the duplications of deductions are not the equivalent of an intent to defraud.
The final issue has to do with the penalty determined for the alleged failure of Anne to file a return for 1945. The Commissioner makes and could make no sound argument in the light of the evidence. It is unnecessary to decide whether there was a ‘filing.‘ This would not be the first time that a collector had lost a return. Even if no return was filed, the failure was due to reasonable cause (failure of the mails) and not to willful neglect upon Anne's part, so in no event would the penalty be proper.
Decision will be entered under Rule 50.