Kilpatrick v. Comm'r of Internal Revenue, Docket No. 37233.
| Decision Date | 28 May 1954 |
| Docket Number | Docket No. 37233. |
| Parties | LILLIAN KILPATRICK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. Conviction for income tax evasion on plea of nolo contendere held admissible to impeach a witness.
2. Payments made by petitioner on behalf of her two employees and her subsequent entry into a partnership agreement with them held, on facts, not to be compensation for services.
3. Petitioner's gross understatement of income accompanied by other circumstances held, on facts, to constitute fraud with intent to evade tax.
4. Respondent's computation of petitioner's 1943 tax liability by including part of 1942 income under Current Tax Payment Act of 1943 held erroneous in view of petitioner's liability for full 1942 tax by reason of fraud. James P. Hill, Esq., and William R. Frazier, Esq., for the petitioner.
Hugh F. Culverhouse, Esq., for the respondent.
Respondent determined deficiencies in income tax and penalties against petitioner for the calendar years 1942 and 1943 as follows:
+------------------------------------------+
¦Year ¦Income tax¦50 per cent fraud penalty¦
+-----+----------+-------------------------¦
¦1942 ¦$34,491.76¦$17,245.88 ¦
+-----+----------+-------------------------¦
¦1943 ¦39,685.96 ¦10,565.49 ¦
+-----+----------+-------------------------¦
¦Total¦$74,177.72¦$27,811.37 ¦
+------------------------------------------+
At the hearing petitioner moved to strike Exhibit H, which was a copy of a judgment convicting petitioner upon her plea of nolo contendere of filing false and fraudulent income and Victory Tax returns for the years 1943, 1944, and 1945, and also moved to strike every question and answer appearing in the transcript bearing upon the criminal proceedings. Both motions were taken under advisement. The issues not stipulated by the parties are:
1. Whether petitioner's motion to strike Exhibit H and every question and answer appearing in the transcript dealing with the criminal proceedings should be granted.
2. Whether certain payments made by petitioner on behalf of Velma and Clyda Sutherland in 1942, and whether the value of a 50 per cent partnership interest acquired by Clyda and Velma Sutherland on January 1, 1943, constituted reasonable compensation for past services rendered by the Sutherlands.
3. Whether deficiencies for 1942 or 1943 are barred by the statute of limitations.
4. Whether petitioner is liable for 50 per cent fraud penalties for each of the years 1942 and 1943.
5. Whether the Current Tax Payment Act of 1943 is applicable and if it is not, whether respondent is entitled to compute petitioner's tax liability for 1943 as though that act were applicable.
Some of the facts were stipulated and they are hereby found.
Petitioner resides in Panama City, Florida, where she has operated a ladies' ready-to-wear and dress shop since 1931. Petitioner's personal income tax returns for the years 1942 and 1943 were filed with the collector of internal revenue for the district of Florida.
Between 1914, when petitioner finished the eleventh grade of high school and 1931 when petitioner moved to Panama City, she operated a ladies' ready-to-wear and dress shop in Marianna, Florida, a small rural community with a population of about 2,500.
In 1931, petitioner accepted a position in the Order of the Eastern Star of Florida, an affiliate of the Masonic Fraternity, which she had belonged to for several years. Her duties took her away from her business. To keep the store open, she employed a manager, whose operation proved unsuccessful. The business failed and bankruptcy proceeding were initiated. She then moved to Panama City, which is situated on St. Andrews Bay, adjacent to the Gulf of Mexico.
At the time petitioner moved, fishing was the chief enterprise of Panama City, but the Southern Kraft Division of International Paper Company had commenced the erection of a large mill nearby which eventually stimulated business conditions. Petitioner opened a shop in a suburb adjacent to Panama City called Millville, which was near the site of the new paper mill. She stayed at Millville 9 or 10 months and then moved her shop into a location which she rented in the business district of Panama City.
Her business enjoyed moderate financial success during the early 1930's, and in 1935 petitioner purchased a store in Panama City and moved the business into this property.
In 1935, Clyda and Velma Sutherland were employed by petitioner to work in the business, and they remained as petitioner's employees until January 1, 1943. Petitioner is not related by blood or marriage to either Clyda or Velma Sutherland.
Sometime around 1936, petitioner and Clyda and Velma Sutherland moved into quarters over the store and shared expenses.
During the first part of World War II, Panama City grew rapidly. Tindall Field, a Navy Counter Measure Station, and a sizable shipyard were opened nearby. As a result, sales in petitioner's business increased substantially.
Petitioner made the following expenditures during 1942:
+--------------------------------------------------+
¦Living expenses paid by check ¦$642.23 ¦
+---------------------------------------+----------¦
¦Living expenses paid by cash ¦1,200.00 ¦
+---------------------------------------+----------¦
¦Cash difference paid on auto purchase ¦500.00 ¦
+---------------------------------------+----------¦
¦Life insurance payments ¦155.88 ¦
+---------------------------------------+----------¦
¦Payments for Clyda and Velma Sutherland¦6,404.15 ¦
+---------------------------------------+----------¦
¦Gift to brother, E. G. Kilpatrick ¦1,000.00 ¦
+---------------------------------------+----------¦
¦Income tax payments ¦626.78 ¦
+---------------------------------------+----------¦
¦Total ¦$10,529.04¦
+--------------------------------------------------+
None of these amounts were claimed by petitioner as deductible expenses in her 1942 or 1943 individual income tax returns.
The following is an analysis of the $6,404.15 expended by petitioner for Clyda and Velma Sutherland during 1942:
+-----------------------------------------------------------------------------+
¦Check ¦Date 1942 ¦Payee ¦Amount ¦
¦Number¦ ¦ ¦ ¦
+------+------------+-----------------------------------------------+---------¦
¦5205 ¦1–1 ¦Covington Company, Jacksonville, Florida ¦$18.18 ¦
+------+------------+-----------------------------------------------+---------¦
¦5323 ¦2–1 ¦Covington Company, Jacksonville, Florida ¦18.05 ¦
+------+------------+-----------------------------------------------+---------¦
¦5335 ¦2–10 ¦Covington Company, Jacksonville, Florids ¦41.56 ¦
+------+------------+-----------------------------------------------+---------¦
¦5402 ¦3–1 ¦Covington Company, Jacksonville, Florida ¦21.93 ¦
+------+------------+-----------------------------------------------+---------¦
¦5495 ¦4–1 ¦Covington Company, Jacksonville, Florida ¦21.93 ¦
+------+------------+-----------------------------------------------+---------¦
¦5608 ¦5–1 ¦Covington Company, Jacksonville, Florida ¦21.93 ¦
+------+------------+-----------------------------------------------+---------¦
¦5729 ¦6–1 ¦Covington Company, Jacksonville, Florida ¦21.93 ¦
+------+------------+-----------------------------------------------+---------¦
¦5844 ¦7–1 ¦Covington Company, Jacksonville, Florida ¦21.93 ¦
+------+------------+-----------------------------------------------+---------¦
¦5962 ¦8–1 ¦Covington Company, Jacksonville, Florida ¦21.93 ¦
+------+------------+-----------------------------------------------+---------¦
¦6060 ¦9–1 ¦Covington Company, Jacksonville, Florida ¦21.93 ¦
+------+------------+-----------------------------------------------+---------¦
¦6164 ¦10–1 ¦Covington Company, Jacksonville, Florida ¦21.93 ¦
+------+------------+-----------------------------------------------+---------¦
¦9273 ¦11–1 ¦Covington Company, Jacksonville, Florida ¦21.93 ¦
+------+------------+-----------------------------------------------+---------¦
¦6281 ¦11–7 ¦Covington Company, Jacksonville, Florida ¦2,501.53 ¦
+------+------------------------------------------------------------+---------¦
¦ ¦The above checks inscribed ‘For Clyda and Velma Sutherland’ ¦ ¦
¦ ¦are payments on the mortgage in connection with the purchase¦ ¦
¦ ¦of property described as Lot 42 and S 1/2 of Lot 43, Block ¦ ¦
¦ ¦38, Bunkers Cove. ¦ ¦
+------+------------------------------------------------------------+---------¦
¦6272 ¦11–1 ¦United Benefit Life Insurance Company ¦$66.03 ¦
+------+------------+-----------------------------------------------+---------¦
¦5611 ¦5–1 ¦United Benefit Life Insurance Company ¦66.03 ¦
+------+------------------------------------------------------------+---------¦
¦ ¦On policies Nos. C299796 and C299797 of Velma and Clyda ¦ ¦
¦ ¦Sutherland. ¦ ¦
+------+------------------------------------------------------------+---------¦
¦5414 ¦3–1 ¦Jefferson Standard Life—Loan ¦$92.40 ¦
+------+------------+-----------------------------------------------+---------¦
¦5742 ¦6–10 ¦Jefferson Standard Life—Loan ¦91.50 ¦
+------+------------+-----------------------------------------------+---------¦
¦6439 ¦12–10 ¦Jefferson Standard...To continue reading
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