Lipsitz v. Comm'r of Internal Revenue, Docket Nos. 24799
| Citation | 21 T.C. 917 |
| Decision Date | 18 March 1954 |
| Docket Number | Docket Nos. 24799,24800. |
| Parties | MORRIS LIPSITZ AND HELEN LIPSITZ, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.MORRIS LIPSITZ, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Llewellyn A. Luce, Esq., and Walter H. Maloney, Esq., for the petitioners.
J. Nelson Anderson, Esq., for the respondent.
Held: 1. Respondent's right to compute income by use of the increase in net worth method upheld.
2. In determining income by use of the increase in net worth method, the creation of a Maryland ‘ground rent‘ is not a transaction wherein income is realized in the absence of circumstances which cause the transaction to be in substance a purchase money mortgage. The interest retained by the creator of the ground rent is included on the net worth statement in an amount equal to the investment in the land.
3. Where taxpayer files a return and pays taxes under a fictitious name as well as his true name, the amounts of income reported and taxes paid in the fictitious name must be taken into account in computing any deficiencies.
4. Deficiencies in income tax for years 1938 to 1944, inclusive, determined. Deficiencies for each of such years proved by clear and convincing evidence to be due to fraud with intent to evade tax.
The Commissioner determined deficiencies and additions to tax under section 293(b) of the Internal Revenue Code, as follows:
+-------------------------------------------+
¦ ¦ ¦ ¦Addition to tax¦
+-----+----------+----------+---------------¦
¦Year ¦Docket No.¦Deficiency¦section 293(b) ¦
+-----+----------+----------+---------------¦
¦1938 ¦24800 ¦$898.38 ¦$449.19 ¦
+-----+----------+----------+---------------¦
¦1939 ¦24800 ¦3,383.58 ¦1,691.79 ¦
+-----+----------+----------+---------------¦
¦1940 ¦24800 ¦1,935.84 ¦967.92 ¦
+-----+----------+----------+---------------¦
¦1941 ¦24800 ¦28,840.61 ¦14,420.31 ¦
+-----+----------+----------+---------------¦
¦1942 ¦24799 ¦7,712.56 ¦3,856.28 ¦
+-----+----------+----------+---------------¦
¦1943 ¦24799 ¦6,146.71 ¦3,073.36 ¦
+-----+----------+----------+---------------¦
¦1944 ¦24800 ¦7,733.94 ¦3,866.97 ¦
+-----+----------+----------+---------------¦
¦1945 ¦24799 ¦2,515,57 ¦1,257.79 ¦
+-----+----------+----------+---------------¦
¦Total¦ ¦$59,167.19¦$29,583.61 ¦
+-------------------------------------------+
The determination in Docket No. 24799 was made against Morris Lipsitz and Helen Lipsitz, since joint returns were filed for the years 1942, 1943, and 1945. Docket No. 24800 involves deficiencies against Morris Lipsitz, individually. The principal issues are whether the Commissioner was justified in resorting to the net worth method, and whether there were deficiencies that were due to fraud with intent to evade tax.
All facts stipulated by the parties are incorporated herein by this reference.
The petitioner Morris Lipsitz is an individual who during the years here involved has resided at 4201 Fernhill Avenue, in Baltimore, Maryland. The petitioner Helen Lipsitz is the wife of Morris Lipsitz and has resided with him at the above address during all the years relevant herein. Morris Lipsitz filed individual Federal income tax returns for the years 1938, 1929, 1940, 1941, and 1944 and joint Federal income tax returns together with Helen Lipsitz for the years 1942, 1943, and 1945 with the collector of internal revenue at Baltimore, Maryland. Morris Lipsitz will be sometimes hereinafter referred to as the petitioner.
Morris Lipsitz is a citizen of the United States. He immigrated to this country in 1904 with his parents and five brothers and sisters. He engaged in the wholesale grocery business with members of his family and continued in that business until 1913. For a period of several years thereafter he was engaged in the liquidation of that business. Commencing about the year 1920, Lipsitz invested in real estate in Baltimore, Maryland. Sometime about 1930, he invested in and began operating a lumber and builders' supply business, known as the Northwestern Lumber Company. In 1930, he also invested in and began to operate a funeral supply business, known as the Northwestern Funeral Supply Company. From 1932 to 1941 he also engaged in the ice business, owning and operating ice manufacturing plants and ice stations in the city of Baltimore. An ice station is a refrigerated building used as a distribution and storage center and not for manufacturing ice. Lipsitz' real estate activities have been extensive. He owns or has owned many properties, which he holds for rental as residences, and ‘ground rents‘ in the State of Maryland which provide him with income.
Lipsitz purchased many properties which were in an old and rundown condition. He then repaired, improved, and rehabilitated them, making them available for rental. He ordinarily used supplies from the Northwestern Lumber Company in making such repairs. Since 1941, his only business activities have consisted of dealings in real estate.
Early in 1930, Lipsitz purchased a going lumber business at 1400 Winchester Street in Baltimore. He paid the owner of the business between $100 and $200 for the machinery and lumber and operated in under the name ‘Northwestern Lumber Company,‘ referred to above. He purchased the property at 1400 Winchester Street and received a deed thereto, made to him and his wife, as tenants by the entirety, on July 7, 1930. The cost of the land and buildings thereon was $7,100. By entering into such business, Lipsitz intended to make use of the purchased lumber and supplies and other lumber and supplies, which he would be in a position to purchase at wholesale prices, in repairing his real estate properties. From 1939 to 1937 the lumber was stored on the premises. Thereafter, whatever supplies that were on hand were stored on other properties which he owned. Lipsitz also purchased, from time to time, additional machinery and equipment for the lumber business. As of June 1, 1937, the fair market value of machinery and equipment (exclusive of lumber and supplies) in the lumber business was $9,690. He reported income from the Northwestern Lumber Company in his income tax returns for the years 1933 to 1936, inclusive, as follows:
+---------+
¦1933¦$468¦
+----+----¦
¦1934¦362 ¦
+----+----¦
¦1935¦375 ¦
+----+----¦
¦1936¦275 ¦
+---------+
On October 18, 1932, Lipsitz made an application for a loan from the Union Trust Company of Maryland. The application stated that he traded as the Northwestern Lumber Company and was, in the lumber and building supply business and ice manufacturing business. It gave his financial status as of July 1, 1932, as follows:
+-----------------------+
¦Assets ¦$111,387.66¦
+-----------+-----------¦
¦Liabilities¦9,800.00 ¦
+-----------+-----------¦
¦Net worth ¦$101,587.66¦
+-----------------------+
Lipsitz gave up his lumber business activities in 1937. Some of the lumber and building supplies were sold at a public auction conducted on the lumber company's premises on July 29, 1937. Some of woodworking machinery owned by Lipsitz was sold prior to that time in private sales and some of the remainder was disposed of at the auction. On December 31 of each of the years listed petitioners owned woodworking machinery which had a cost or other basis as follows:
+-----------------+
¦Dec. 31 ¦ ¦
+----------+------¦
¦1937 ¦$3,000¦
+----------+------¦
¦1938 ¦2,000 ¦
+----------+------¦
¦1939 ¦1,000 ¦
+----------+------¦
¦1940 ¦0 ¦
+-----------------+
The lumber and building supplies remaining after the sale were stored by Lipsitz on other property which he owned. The property at 1400 Winchester Street was disposed of in an exchange, with his brother-in-law, Louis Shane, which will be considered hereinafter. On December 31 of each of the years listed petitioners owned building supplies including lumber and materials which had a cost or other basis, as follows:
+-------------+
¦1937¦$18,500 ¦
+----+--------¦
¦1938¦16,000 ¦
+----+--------¦
¦1939¦14,000 ¦
+----+--------¦
¦1940¦12,000 ¦
+----+--------¦
¦1941¦10,000 ¦
+----+--------¦
¦1942¦8,000 ¦
+----+--------¦
¦1943¦6,000 ¦
+----+--------¦
¦1944¦4,000 ¦
+----+--------¦
¦1945¦2,500 ¦
+-------------+
The decrease in the amounts of such materials from year to year was due to sales and use of the materials in repairing property owned by petitioners. No income arising from such sales was ever reported in petitioners' income tax returns.
In connection with his lumber business Lipsitz established a funeral supply business, under the name ‘Northwestern Funeral Supply Company,‘ referred to above. While in this business, he accumulated a stock of miscellaneous funeral supplies, which he liquidated starting in 1937 until 1941. The cost of petitioner's funeral supplies in stock on various dates was as follows:
+-----------------+
¦Dec. 31 ¦ ¦
+----------+------¦
¦1937 ¦$7,000¦
+----------+------¦
¦1938 ¦5,000 ¦
+----------+------¦
¦1939 ¦500 ¦
+----------+------¦
¦1940 ¦0 ¦
+-----------------+
Petitioners owned a number of properties, consisting of land and buildings, referred to herein as fee simple interests; they also owned a number of buildings on land owned by others, subject to ground rents, referred to herein as leaseholds. These properties were held for rental by petitioners. In order to prepare them for rental, repairs and improvements were made thereon. In making such repairs, Lipsitz used his own labor and his sons's labor. When other labor was needed, cheap nonunion labor was hired and Lipsitz acted as his own contractor. Materials from his building supply business were used and such materials were acquired at a cost lower than the normal cost to a builder or a contractor. Some of the repairs were ordinary...
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