20 T.C. 308 (1953), 38167, Fuller v. C.I.R.

Docket Nº:38167.
Citation:20 T.C. 308
Opinion Judge:JOHNSON, Judge:
Attorney:John E. Marshall, Esq., for the petitioners. W. B. Riley, Esq., and John P. Higgins, Esq., for the respondent.
Case Date:May 13, 1953
Court:United States Tax Court

Page 308

20 T.C. 308 (1953)




No. 38167.

United States Tax Court.

May 13, 1953

Petitioner during the years 1948, 1949, and 1950 were engaged in the sale at wholesale and retail of whiskey in violation of the laws of Oklahoma. Some of his stocks were confiscated in 1948 and 1950. He did not for any of the taxable years file a declaration of estimated tax. Respondent imposed a fraud penalty for 1949 and penalties under section 294 for failure to file declarations of tax and under-estimations of estimated tax based on zero amounts. Held, that petitioners realized gross profit of $85,088.41 in 1949 from sales of whiskey; that the fraud penalty was improperly imposed; that respondent did not err in imposing penalties under section 294; that the cost of confiscated whiskey is not deductible.

John E. Marshall, Esq., for the petitioners.

W. B. Riley, Esq., and John P. Higgins, Esq., for the respondent.

The respondent determined deficiencies in petitioners' income tax for the years 1948, 1949, and 1950, and assessed penalties as follows:

Penalties Penalties Penalties

Year Deficiency sec. 293 (a) sec. 293 (b) sec. 294 (d)

1948 $2,634.26 $131.71 $688.03

1949 16,508.00 $8,254.00 2,969.12

1950 2,973.68 148.68 930.08

The issues for decision are whether respondent erred (1) in increasing petitioners' income for 1949 based upon alleged understatement by them of gross profits they received from the sale of whiskey; (2) imposing a fraud penalty for 1949; (3) imposing penalties for 1948, 1949, and 1950, due to taxpayers' failure to file declaration of estimated tax and substantial underestimate of same: (4) disallowance in 1948 and 1950 of a deduction for cost of purchased whiskey seized and confiscated by law enforcing agencies. The proceeding was heard before Clyde Wendelken who was designated as a Commissioner for that purpose pursuant to Rule 48 of the Rules of Practice of the Tax Court and section 1114(b), Internal Revenue Code. FINDINGS OF FACT. The stipulated facts are so found. The following facts contained in Commissioner Wendelken's Report filed herein and served upon the parties are hereby found and adopted. The petitioners are husband and wife residing in Oklahoma City, Oklahoma. They filed joint income tax returns for the taxable Page 309 years with the collector of internal revenue for the district of Oklahoma. The husband, G. E. Fuller, hereinafter referred to for convenience as the petitioner, was engaged during all of the taxable years in the business of buying tax-paid intoxicating beverages and selling them at wholesale and retail to customers in and around Oklahoma City, Oklahoma. He purchased stamps from a collector of internal revenue for the wholesale and retail sale of intoxicating beverages and had such stamps for the year 1949. The petitioner knew during the taxable years that it was contrary to the laws of Oklahoma to engage in the business of buying and selling intoxicating beverages. After May 5, 1948, the petitioners were partners in a business of buying and selling salvage under the trade name of A & A Iron and Metal Company. The headquarters of the business of petitioner and the partnership were in Oklahoma City. Separate books of account were maintained for each business. The income and deductions of each business were reported on separate schedules in the returns filed by the petitioners for the taxable years. The returns reported partnership losses of $4,991.50 and $4,302.58 in 1948 and 1949, respectively, and profits of $8,117.11 in 1950. The amounts reported for the partnership were not adjusted by the respondent in his determination of the deficiencies involved herein. The petitioner kept a single entry set of books. One of the books, known as a journal, contained sheets having the following headings: ‘ Merchandise Bought,‘ ‘ Rent,‘ ‘ Phone Bill,‘ ‘ General Operating Expenses,‘ and ‘ Help and Sales.‘ He did not prepare invoices for all sales. He did not retain any of the invoices unless the selling price was not paid for at the time of sale. Petitioner did not have a cash register. Entries for cash sales were made on a tablet and the total amount so recorded for each day was entered in the journal under ‘ Sales‘ without showing the quantity of whiskey sold. The tablet was destroyed after the entry was made in the journal to avoid exposing customers whose names appeared in the record. Regulations of the Commissioner of Internal Revenue required wholesale liquor dealers to keep daily records on Form 52-A for purchases and on Form 52-B for sales and to render monthly transcripts of the forms and a summary thereof on Form 338. Provision was made in Forms 52-A and 52-B for listing the name of the seller or buyer, and quantity and brand bought or sold. Records on the forms were kept by the petitioner during the taxable years, except for the period from October 12, 1949, until August 1950, when the ‘ Bone-Dry-Law‘ of Oklahoma was in effect. During the period from October 12, 1949, to August 1950 wholesale liquor dealers outside of Page 310 Oklahoma who complied with the Commissioner's regulations for recording sales on Form 52-B would not make sales of intoxicating liquors to petitioner for transportation into Oklahoma. He did, nevertheless, acquire whiskey from some source during that period. During 1949 petitioner made entries in his name on Form 52-B for whiskey transferred from the wholesale to the retail branch of his business for the purpose of making sales of less than 5 gallons. At times the whiskey so transferred was retransferred to the wholesale branch when there was not enough whiskey in that department to fill an order. In such cases the whiskey was reentered on Form 52-A. Regulations of the Commissioner treat sales of five or more gallons of whiskey as wholesale sales and less quantities as sales at retail. Petitioner made sales of less than 5 gallons in the retail branch of his business at wholesale prices out of whiskey transferred from his wholesale department. Regulations did not require petitioner to record such retail sales on any prescribed form. Petitioner regarded a sale of one-fifth of a gallon or less as a retail sale but he made no sales of such quantities during 1949. Quantities in excess of one-fifth of a gallon were regarded by him as a wholesale sale. He made sales of less than 5 gallons of whiskey but made no separate record of the transactions for the Alcohol Tax Unit. His place of business was closed from October 13, 1949, to October 29, 1949, during which period he did not make any sales. He made some sales of from one-half of a case to 2 cases directly to the consumer. Forty-eight half-pint, 24 pint, 12 quart or 12 four-fifths of a quart bottles constitute a case of liquor. Petitioner was required to make all of his purchases on a cash basis and had no accounts payable for purchases. He did not maintain accounts receivable in books but retained invoices of credit sales until the purchase price was paid. The sale of intoxicating beverages in Oklahoma is highly competitive. Petitioner did not place selling price markings on any of his stock of whiskey and his mark-up over cost was not the same for all customers. His policy was to sell for the highest possible price, but at times he reduced his selling price to meet competition. The records petitioner kept on Forms 52-A and 52-B were examined by agents of the Alcohol Tax Unit at times during the taxable years to determine whether he was keeping them correctly. Petitioner cooperated with the agents when they made the examinations. The agents made no complaint about the entries appearing in the records. Separate checking accounts were maintained for the business of petitioner and the partnership. Petitioner and his wife also had three savings accounts and petitioner had a safe deposit box during the year 1949. He did not deposit all of the receipts of his liquor Page 311 business in the bank account kept for that business. Some of the cash received was used to purchase whiskey and to pay labor and other operating expenses of his business, fines and bail for employees who had been arrested, and living expenses. Petitioner generally kept about $3,000 or $4,000 of actual cash on hand to purchase whiskey, to furnish bail for employees, or to meet emergencies. A single purchase of whiskey by petitioner cost from $600 to $9,000, which he paid for in actual cash or by checks drawn against his checking account, or cashier's checks. Petitioner did not deposit receipts of his liquor business in a safe deposit box. The income tax returns filed by the petitioners for the taxable years were prepared by a public accountant solely from figures given to him by petitioner. After the receipt of the notice of deficiency mailed herein, the same accountant was employed by petitioner to make, and did make, an audit of his books and records. Commencing in May 1952, another accountant employed by petitioner made an audit of his books and records. The only sales invoices he found among petitioner's records were for three sales in August and September 1949 to B. F. Roland for a total of 6 1/4 cases of whiskey. The accountant did not inspect public records for real estate transactions and mortgages and notes. The books and returns of petitioner for the taxable years show purchases and sales of intoxicating beverages as follows:

Year Books Returns

1948: Purchases $219,867.95 $219,867.75

Sales 259,993.20 259,958

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