Comm'r of Internal Revenue

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Tax Court of the United States.Jun 30, 1948
10 T.C. 1253 (U.S.T.C. 1948)

Docket No. 8839.



James P. Hill, Esq., for the petitioners. Edward L. Potter, Esq., for the respondent.

1. Wallace H. Petit, manager of a wholesale grocery establishment, was convicted by a Federal district court of counterfeiting war ration sugar stamps and falsifying certain OPA forms in connection with securing large quantities of sugar for sale on the black market. Petitioner received in 1944 sums of money in excess of the ceiling price for the sugar so acquired. Held, the moneys paid to him in connection with these transactions are includible in his gross income under section 22(a), I.R.C.

2. Held that, in their joint income tax return for the taxable year 1944, the taxpayers fraudulently understated their income with intent to evade tax, and they are subject to the 50 per cent penalty under section 293(b) of the code. James P. Hill, Esq., for the petitioners. Edward L. Potter, Esq., for the respondent.

This proceeding involves a deficiency in Federal income tax for the taxable year ended December 31, 1944, in the amount of $13,859.40, and a fraud penalty of $6,929.70.

The first question for decision is whether certain proceeds received by petitioner in connection with sales in 1944 which violated certain regulations of the Office of Price Administration are taxable income under section 22(a) of the Internal Revenue Code. The remaining issue is whether petitioner and his wife filed a joint income tax return with intent to evade tax so as to be subject to the 50 per cent fraud penalty under section 293(b) of the code.


Wallace H. Petit, hereinafter referred to as petitioner, and Eula J. Petit are husband and wife and reside at Jacksonville, Florida. Their joint income tax return for the period here involved was filed with the collector of internal revenue at Jacksonville, Florida.

During the taxable year petitioner and his wife were both employed by the Economy Wholesale Grocery Co., hereinafter referred to as the company, which was engaged in the wholesale grocery business at Miami and Jacksonville, Florida. Petitioner had been associated with the company approximately seven years prior to 1944 and was manager of the branch store in Jacksonville in that year. His wife was then employed as a sales lady.

The company handled a general line of grocery items, including flour, rice, and sugar. Sales were made to retail merchants on a cash and carry basis. No accounting books or other business records were maintained by the Jacksonville branch. Periodical inventories were conducted and daily reports were rendered to the main office in Miami by petitioner, as manager.

Petitioner had complete charge of the branch store funds during 1944 and made all necessary bank deposits. Because no safe was available, he kept the money in the cash register or on his person until deposited. For his services as manager, petitioner received a weekly salary in addition to a share of the gross profits. His compensation was paid promptly and was reported, together with the salary received by his wife, on a joint 1944 return.

During 1944 the company was registered by the Office of Price Administration as a wholesale dealer in sugar. Under the regulations then in effect, sugar could be obtained by the general public only through the use of special ration stamps. The stamps which were turned in by the retail customers at the time of purchase were in turn delivered by the retail grocers to the company in order to replenish their supplies of sugar. The retailers were required to place the surrendered stamps in sealed envelopes, together with certificates which listed the name of the merchant, the number of enclosed stamps, and the pounds of sugar covered thereby. The stamps were then deposited by the company in the Atlanta National Bank of Jacksonville in order to gain credit for future deliveries of the commodity.

It was determined that the company's branch store had deposited counterfeit sugar stamps with the bank in varying quantities from December 4, 1944, to January 2, 1945, which represented 521,230 pounds of sugar. All of the sugar stamps originated from transactions occurring in 1944, no additional stamps being deposited after January 2, 1945. As a result of this discovery and because of a suspicion that the illegally obtained sugar was being used for the manufacture of whiskey, an agent of the Intelligence Unit and an agent of the Alcohol Tax Unit were detailed on January 1, 1945, by the Bureau of Internal Revenue to assist the Investigating Division of this unlawful practice.

In an indictment filed March 16, 1945, petitioner was charged with unlawfully, knowingly, fraudulently, and feloniously causing to be published certain forged and counterfeit war ration sugar stamps, with false and fraudulent certification of fictitious purchasers of sugar in the sealed envelopes above described, and with thereby gaining credit for the acquisition by the company, as a wholesale distributor, or additional sugar supplies. He was tried in the District Court of the United States, Southern District o f Florida, Jacksonville Division, and was determined by a jury to be guilty of violating certain OPA regulations as charged. The judgment by the court was rendered on January 30, 1946, under which petitioner was committed to prison for three years.

During 1944 petitioner maintained a personal checking account at the Barnett National Bank, Jacksonville, Florida. His deposits during the years 1941 to April 16, 1945, varied in amounts from $40 to $750. The year end balances of his account were as follows:

+--------------------------+ ¦1942 ¦$989.32 ¦ +-----------------+--------¦ ¦1943 ¦1,406.95¦ +-----------------+--------¦ ¦1944 ¦1,319.12¦ +-----------------+--------¦ ¦Apr. 16, 19451 ¦1,521.70¦ +-----------------+--------¦ ¦ ¦ ¦ +--------------------------+ FN1. The date of the transcription by the investigators.

In 1941 petitioner's wife opened a savings account, the entire amount of which, approximately $900, was attached when the Government levied a jeopardy assessment some time prior to the dispatch of the deficiency notice on June 6, 1945.

During 1944 and the first three months of 1945, petitioner and his wife purchased various parcels of real estate and completed all payments in cash, aggregating $26,309.83. None of the purchase money was drawn by petitioner or his wife from their respective bank accounts. On February 17, 1944, petitioner rented a safe deposit box in the Barnett National Bank of Jacksonville, Florida, in which was kept certain sums of cash; the date of first renting the box being at a time prior to the purchase of any of the real estate.

In connection with securing and disposing of large quantities of sugar during 1944, petitioner received sums of money in excess of the ceiling price of sugar as fixed by the Office of Price Administration. The sugar was purchased in the name of the company for which petitioner was employed and was secured by using counterfeit ration stamps and false certificates on the part of petitioner. When petitioner would record the sales he would ring up the ceiling price of the sugar that was bought and would put the rest of the money received in his pocket for himself. The latter funds were not reported by petitioner in his 1944 tax return. Petitioner received during the taxable year from the foregoing black market operations income in a sum not less than $26,309.83, as determined by the respondent.

At the time the jeopardy assessment was levied, respondent attached the bank accounts and all other property then owned by petitioner and his wife. The company, prior to the trial of this proceeding, had made no demand for the funds which petitioner received as a result of his illegal operations.

The omission of the taxpayers to include, in their joint return for the year 1944, income received by them in the sum of $26,309.83 was with intent to evade the tax, and the return so filed was false and fraudulent.



In determining the instant deficiency, respondent increased the reported net income of the taxpayers by $26,309.83 of ‘miscellaneous income‘ not reported in their original 1944 return. In so doing, respondent did not state the source of such income or the manner in which it was received. Petitioner does not deny that an identical amount of money was invested in real estate in 1944, but contends that approximately $11,000 of this amount was paid out of accumulated savings and that the remainder consisted of embezzled funds.

The sole evidence offered with respect to the savings was testimony by petitioner's wife that they had gradually accumulated $11,000, a portion of which was on deposit in their two bank accounts and the remainder of which was kept ‘at the house.‘ The money in her savings account, estimated at $900, was attached by the Government and therefore was not involved as disputed income. Inasmuch as the taxpayers' counsel conceded that all payments for real estate were made in cash, it would appear that the funds on deposit in petitioner's bank account, approximating $1,400, likewise were not a part of the $26,309.83 used to purchase real estate. Finally, we are unable to accept the casual statement of petitioner's wife that the remaining portion of the alleged savings, apparently in the amount of $8,700, was actually on hand or was in fact used for the purchase of the property. No lock box had been rented prior to the taxable year and it hardly seems reasonable that a married couple maintaining a checking and savings account would keep such a large sum lying around the house.

The taxpayers contend that the balance of the consideration paid for the real estate, or approximately $15,300, was received by petitioner in connection with his black market sugar sales, and further urge that the sums so received and appropriated were in fact money of the company, and the petitioner's taking constituted an embezzlement. Embezzlement, however, is a technical statutory offense which requires strict and convincing proof. No facts have been introduced which would warrant the finding that a specific sum was embezzled by petitioner, and what might at first blush appear to be an admission against interest on petitioner's part may not be so when it is advanced solely to relieve petitioner from paying a tax.

Petitioner was tried and convicted of making false representations on OPA envelopes and aiding and abetting in counterfeiting war ration sugar stamps. It would appear quite probable that the sums in excess of the ceiling price paid to him by the purchasers of sugar were in fact paid for doing the very things for which he was indicted and convicted, which things were done to make available the sugar. Petitioner did something more than merely sell sugar of his employer above the ceiling price. He made use of forged stamps and forged certificates to make the sugar available.

Petitioner relies on Commissioner v. Wilcox, 327 U.S. 404, and McKnight v. Commissioner, 127 Fed. (2d) 572, in support of his position. Both of these cases are clear instances of embezzlement, with that fact established, and the court's holdings were that embezzled funds as such were not income. We are not convinced, however, that we have here an embezzlement of the company's funds. Money paid for the securing of sugar by issuing forged ration stamps and making of false certificates does not constitute embezzlement, even though the money is paid in connection with the securing and selling of sugar in the company's name. We sustain the Commissioner's determination of the deficiency.

There remains for consideration the matter of the fraud penalty. While the burden rests on taxpayers to prove that the deficiency in tax as determined was not due, the statute places on the respondent the burden of proving fraud. Because direct and clear-cut proof of fraud is seldom available, it must be established by a full consideration of the records and testimony offered, the appearance and manner of the witnesses, the conduct of the taxpayer, and all conditions and circumstances surrounding the transactions which produced the disputed income.

Respondent offered the testimony of two Government agents who personally traced counterfeit ration stamps representing 521,230 pounds of sugar to the wholesale establishment managed by petitioner. He was subsequently convicted by a Federal District Court, not only of using counterfeit stamps on a wide scale, but also of falsifying the names and addresses of retail buyers in order to acquire additional sugar supplies.

Moreover, the petitioner freely admitted that he surreptitiously received a considerable amount of money in connection with the sales of sugar which he handled, of which no business records were kept. Petitioner's wife did not deny that she was fully aware of these transactions when they occurred.

On this record, we cannot escape the definite conclusion that the failure of petitioner to include the disputed income in his 1944 return was deliberate, with a clear intent to evade the tax due. The general atmosphere of his black market operations, his conviction, his personal efforts to escape tax by relying on the commission of another felony, and the other considerations discussed above convince us that fraud was committed. Therefore, the fraud penalty was properly claimed by respondent.

Decision will be entered for the respondent.

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