Hurley v. Comm'r of Internal Revenue, Docket Nos. 41210

• Decision Date: 24 September 1954
• Docket Number: 41211.,Docket Nos. 41210
• Citation: 22 T.C. 1256
• Parties: H. A. HURLEY, Petitioner,v.COMMISSIONER OF INTERNAL REVENUE, Respondent.H. A. AND OPAL HURLEY, Petitionerv.COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

22 T.C. 1256

H. A. HURLEY, Petitioner,v.COMMISSIONER OF INTERNAL REVENUE, Respondent.H. A. AND OPAL HURLEY, Petitionerv.COMMISSIONER OF INTERNAL REVENUE, Respondent.

Docket Nos. 41210

41211.

Tax Court of the United States.

Filed September 24, 1954.

1. Held, under the facts, respondent was justified in computing net income by the net worth method.

2. The net worth statement for 1947 showed an increase in net income of about 50 per cent of the amount of gross income stated in the return. Held, that the statement, showing only assets and liabilities at the beginning and close of the year, is not, under the facts of the case, sufficient to prove an omission from gross income of an amount in excess of 25 per cent of the amount stated in the return.

3. Negligence penalty not shown to have been improperly imposed. Percy C. Young, Esq., for the petitioners.

Frederick T. Carney, Esq., for the respondent.

These proceedings involve the following deficiencies in income tax and penalties:

+---------------------------------------------------------+
                ¦Docket No.¦Petitioner           ¦Year ¦Deficiency¦Penalty¦
                +----------+---------------------+-----+----------+-------¦
                ¦41210     ¦H. A. Hurley         ¦(1946¦$9,399.10 ¦$469.96¦
                +----------+---------------------+-----+----------+-------¦
                ¦          ¦                     ¦(1947¦12,696.59 ¦634.83 ¦
                +----------+---------------------+-----+----------+-------¦
                ¦41211     ¦H. A. and Opal Hurley¦(1948¦2,024.22  ¦101.21 ¦
                +----------+---------------------+-----+----------+-------¦
                ¦          ¦                     ¦(1949¦6,215.66  ¦310.78 ¦
                +---------------------------------------------------------+
                

In his answers to amended petitions respondent made claim for increased deficiencies and penalties as follows:

+-------------------------------+
                ¦          ¦1947      ¦1948     ¦
                +----------+----------+---------¦
                ¦Income tax¦$11,611.80¦$9,174.02¦
                +----------+----------+---------¦
                ¦Penalty   ¦580.59    ¦458.70   ¦
                +-------------------------------+
                

The issues are (1) whether the taxable income was understated in returns and, if so, the amount thereof each year; (2) whether any part of the deficiencies was due to negligence or intentional disregard of rules and regulations; and (3) whether assessment of the deficiency and penalty for 1947 is barred by the statute of limitations.

Petitioner H. A. Hurley claims that he overpaid his income tax for 1946 in the amount of $3,797.20.

FINDINGS OF FACT.

The facts set forth in a stipulation are so found.

Petitioners are husband and wife and reside in Memphis, Tennessee. Petitioner H. A. Hurley filed separate returns for 1946 and 1947, and petitioners filed joint returns for 1948 and 1949 with the collector of internal revenue for the district of Tennessee. All of the income involved herein is attributable to petitioner H. A. Hurley, who, for convenience, will hereinafter be referred to as the petitioner.

Petitioner has, since 1939, bought, sold, and repaired new and old tractors and farm implements in Memphis under the name of Hurley Tractor Company, hereinafter referred to as the Company. Prior to that time he was engaged in the occupation of mechanic and did some farming. He had from 20 to 25 employees during the taxable years, including 3 salesmen.

The Company maintained a bank account in its name with the Peoples State Bank, Millington, Tennessee, located about 20 miles from its place of business, and, during part of 1947, with the Union Planters National Bank, Memphis. Petitioner had a checking account in his name with the Union Planters National Bank, hereinafter referred to as the personal account, in which funds of the Company were deposited at times and some of it was used by the Company to purchase machinery. The personal account was not recorded in the books of the Company, and during the course of his examination of the books of the Company for the taxable years the revenue agent was not informed by petitioner, or the head bookkeeper, or his daughter, an assistant bookkeeper, that the account was considered to be a part of the records of his business activities. At times during the taxable years petitioner redeposited money withdrawn from the bank account kept in the name of the Company and the personal account to purchase equipment.

During 1946 and 1947 petitioner deposited $34,456.36 and $84,643.20, respectively, in the personal account. Except for two checks, totaling $1,1000.81, all of the deposits made in 1946 were of currency, of which $18,005.50 was withdrawn from the Company. Of the deposits made in 1947, $27,874.26 was of currency, and the remainder of $56,768.94 was of checks, including one for $6,500 representing the proceeds of sale of a farm, and two constituting volume rebates from two companies, one of which was in the amount of $7,101.54. The deposits made in 1947 included $32,524.50 withdrawn from the Company. The rebates were not recorded in the books of the Company or returned as income.

Petitioner's daughter, Ruth Hurley Wilson, has been in the employment of the Company continuously since 1940. Her duties consisted of general office work, in connection with which she made out sales invoices and posted journals. She depended upon others for data to make out invoices.

Petitioner depended upon others to keep the books maintained for the business of the Company. He had five different head bookkeepers during the taxable years, some of whom were employed on a part-time basis. The bookkeeping work performed by petitioner's daughter was performed under the general supervision of the head bookkeepers.

The Reconstruction Finance Corporation made a loan to the Company in 1948, in connection with which a representative of the former spent 2 days examining the books of the latter, and made periodic checks of the books while the loan was outstanding.

In August 1949 the Minneapolis-Moline Power Implement Company canceled the franchise issued to the Company for the sale of its products. It required local dealers to keep sufficient books to adequately reflect their income and made periodic checks for the purpose of determining whether the books were so kept.

The Company had a liberal credit policy. During the taxable years the Company received a substantial number of complaints from customers that they did not owe the amounts reflected by its books.

In 1946, 1947, and 1948 the Company bought and sold to friends and employees of petitioner about 40 automobiles and trucks, only a few of which transactions were recorded on its books. At the time of the revenue agent's examination of the returns petitioner could not supply him with data to determine gain or loss on the transactions. Gain of $538.28 realized from sales made in 1946 was not recorded on the books of the Company or reported in the return filed for that year. Of the gain of $2,721.27 realized in 1947 from the sales, only $102 was reported in the return for that year. The Company realized capital gain of $1,052.08 in 1947 from sales of trucks and trailers used in the business, none of which was reported in the return. Gain of $2,067.91 was realized from the sales made in 1948, of which only $501.41 was reported in the return. The Company realized capital gain of $18.75 from the sale of a truck, a fixed asset, but continued to carry the property as an asset of the business. The sale of the truck was not recorded in the books of the Company.

During the taxable years petitioner owned and operated a farm on James Road near Memphis consisting of 156 acres, of which about 75 acres were planted to corn, soybeans, and cotton. In 1948 or 1949 he purchased a farm near Horn Lake, Mississippi, consisting of 160 acres, of which about 100 acres were in cultivation. Petitioner received $800 of income from the Horn Lake farm during the first 3 years of his ownership of the property. During the summer of 1949 petitioner purchased a farm near Parkin, Arkansas. About 60 acres of 185 acres in the farm were planted to soybeans during the first 2 years. Taxes on the property and the cost of work done on roads and improvements on the farm exceeded the gross income realized by the petitioner from the farm in 1949 and 1950.

The only accounts kept by petitioner for income and expenses of his farms were for his James Road farm and the entries in them lacked supporting data. The records kept by petitioner for the operation of his farms were insufficient to reflect any income derived from that source.

In his return for 1948 petitioner reported the receipt of $1,597.71 from rents or royalties from farm lands and $1,551.88 for repairs and $2,677.55 for other expenses. Petitioner reported in his return for 1949 rental or royalty income of $1,750 from the James Road farm and repairs and other expenses totaling $3,691.44.

The books for 1947 contain a journal entry ‘Charging Purchases—$45,000’ and a balancing credit to ‘Notes Payable.’ Petitioner was unable to provide data to support the entries.

The revenue agent who examined the returns of petitioner for the taxable years requested his inventories but petitioner was unable to locate any of the lists. In the absence of inventories the revenue agent accepted the book figures for inventory purposes in determining the deficiencies. It would have been extremely difficult, if not impossible, to determine the accuracy of petitioner's inventories during the taxable years.

After the revenue agent made his examination of the returns filed for the taxable years, petitioner employed accountants to audit his books for the same years. One or more of five accountants, including a certified public accountant, spent part or all of from 1 month to 6 weeks in making the audit, during the course of which they made about 107 adjustments. Later, another certified public accountant spent full time for 2 months in an effort to make an audit of the books for 1946, during the course of which he test checked the books for 1947 and 1948. He made about 150...