232 F.2d 520 (1st Cir. 1956), 5052, Thomas v. C.I.R.

Docket Nº:5052.
Citation:232 F.2d 520
Party Name:Constantine THOMAS et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
Case Date:April 12, 1956
Court:United States Courts of Appeals, Court of Appeals for the First Circuit
 
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Page 520

232 F.2d 520 (1st Cir. 1956)

Constantine THOMAS et al., Petitioners,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 5052.

United States Court of Appeals, First Circuit.

April 12, 1956

Page 521

Charles H. Morin, Boston, Mass., for petitioners.

David O. Walter, Atty., Dept. of Justice, Washington, D.C., with whom Charles K. Rice, Acting Asst. Atty. Gen., and Lee A. Jackson, Harry Baum and Walter Akerman, Jr., Attys., Department of Justice, Washington, D.C., were on the brief, for respondent.

Before MAGRUDER, Chief Judge, and WOODBURY and HARTIGAN, Circuit judges.

HARTIGAN, Circuit Judge.

This is a petition brought by the taxpayers for a review of decisions of the Tax Court of the United States filed May 26, 1955, which determined deficiencies in the joint returns of petitioners Constantine Thomas and his wife, Marie, of Chelmsford, Massachusetts, for the years 1945 through 1948, and in the individual returns of Constantine Thomas for the years 1943 and 1944.

The facts may be summarized substantially as they appear in the findings of the Tax Court.

During the taxable years 1943 to 1948, inclusive, Constantine Thomas, sometimes known as Charles Thomas, owned 97 per cent, and Marie Thomas owned 2 per cent of the stock of Thomas, The Master Cleaner, Inc., a Massachusetts corporation doing business in Lowell. Thomas was president and treasurer of the corporation and in complete control of the business which dealt in dry cleaning and the sale of furs. The corporation filed federal income tax returns with the Collector of Internal Revenue at Boston upon the accrual basis and covering calendar years.

Thomas was born in Greece about 1894 and came to the United States at the age of 10 years. He has since resided in the United States. From about 1918 until about 1932 he engaged in various ventures including the taxicab business, dealing in used cars, operating a restaurant and investing in a hotel. About 1929 he started a dry cleaning business under the name of Highland Cleaners and Dyeing which he sold after operating

Page 522

for a year or two. He also invested in stocks on margin or on borrowed funds and had an account with a brokerage firm in Boston. He borrowed from the Union National Bank of Lowell, or its predecessor. In 1932 the bank took over collateral on his loans and charged off $8, 926.85 as a loss.

About 1932 Thomas started his present dry cleaning business which was incorporated in February 1935.

Constantine and Marie were married in 1938. Marie's father, Christo Vangos, was manager of a confectionery establishment in Easthampton. At the time of the marriage of the petitioners, Vangos gave them money to assist in buying a home. Marie helped Constantine in his business for about a year after their marriage.

In 1940 the corporation sought a loan for $4, 500 from the Reconstruction Finance Corporation. The Union National Bank of Lowell agreed to participate up to 20 per cent in the loan, provided the bank receive a compromise offer of $400 in full payment of the loan to Thomas charged off in 1932 in the amount of $8, 926.85. Thomas paid the $400 in installments at the rate of $7 per month beginning in June 1940 and made a final payment of $148 in December 1943. The corporation's loan was reduced by installment payments to $3, 586.83. It was paid on July 13, 1941, and a new loan of $5, 400 was made. This was reduced by November 1942 to $2, 070.30 which was paid December 7, 1942. Thomas, individually, borrowed $800 from the same bank in May 1940 and paid the loan in January 1942.

In April 1941 the corporation applied to the R.F.C. for a loan of $1, 800 for the purchase and installation of two pieces of equipment. The application contained a balance sheet of the corporation as of December 31, 1940, and was accompanied by a statement of Thomas' personal assets. The corporation's financial statement showed cash on hand $1, 272.81, total assets $22, 353.02, current liabilities of $3, 837.37 and a chattel mortgage to the R.F.C. for $3, 960. Net sales for the five preceding years were stated as ranging between $25, 000 and $27, 000 annually. Thomas' salary was stated to be $2, 500 a year. The ownership interest was shown as common stock $5, 000; surplus, donated, $8, 438.36; and undivided profits, $1, 117.29. The statement purporting to show as of April 26, 1941, all assets and liabilities of Thomas, other than his interest in the corporation, shows cash on hand $200; securities $1, 660; real estate valued at $11, 000 (having an assessed value of $7, 000); furniture $3, 000; cash surrender value of life insurance, $647; and shows liabilities of $5, 150.

Thomas filed an income tax return for 1940 showing no tax due. He filed no return for 1941. His return for 1942 showed a tax of $33, of which two quarterly installments were paid in March and June 1943. His return for 1943 reported a total income of $2, 658 of which $2, 550 was salary and $108 was dividends. Tax withheld was greater than the tax due and a refund was made. His return for 1944 reported income of $2, 652.50, consisting of salary $2, 550 and $102.50. The petitioners' joint return for 1945 reported salary of $5, 000 and dividends or interest of $500.62. Their joint return for 1946 reported salary $5, 200, dividends $579.40 and interest $213.44. Their joint return for 1947 reported salary $5, 100, dividends $957.50 and interest $613.47. Their joint return for 1948 reported salary $4, 940, dividends $1, 186.61, interest of $669.80, and long-term capital gain of $80.

In December 1943 Vangos made two gifts of $3, 000 each for the benefit of the petitioners' two children. Of these amounts $2, 900 was deposited in a savings account for the benefit of each child.

At the beginning of 1943, Constantine Thomas had the following assets exclusive of cash on hand:

Assets

Bank Accounts

Central Savings Bank--

#107875 $ 50.54

Bonds $5, 000.00

Securities

5 shares Radio Corp.

of America $ 56.25

14 shares Wright

Aeronautical Corp. $ 992.25

90 shares Maraceabo

Oil Ex. Co. $1, 242.29

Loans Receivable $3, 002.45

Real Estate $5, 500.00

Equity in corporation--

Thomas, The Master

Cleaner, Inc. $5, 000.00

Page 523

During the year 1943 Thomas' personal and living expenditures amounted to $2, 779.40. At the end of 1943 he had assets to the value of $28, 940.71, exclusive of cash on hand, and no liabilities.

During the year 1944, Thomas' personal and living expenditures amounted to $2, 629.08. At the end of 1944 he had assets of $34, 059.44, exclusive of cash on hand, and liabilities of $1, 494.50.

At the beginning of 1945 assets of Constantine and Marie Thomas amounted to $34, 059.44, exclusive of cash on hand, and their liabilities amounted to $1, 494.50. During the years 1945 to 1948, inclusive, their living expenses were as shown below and their assets and liabilities as of the end of each year were as follows:

Living Expenses End of Year

during year Assests Liabilities

1945 $5, 500.62 $ 51, 222.55 $ 0

1946 $5, 992.84 $ 58, 101.72 $ 282.34

1947 $6, 671.07 $ 82, 274.71 $5, 000.00

1948 $6, 836.41 $104, 497.20 $5, 000.00

Thomas' interest in the corporation is valued at $5, 000 in the foregoing computation of assets. At the end of 1943 his assets included loans receivable of $1, 794.86. At the end of 1944 his liabilities included loans payable to the corporation amounting to $1, 494.50. At the end of 1945 the petitioners had loans receivable of $1, 128.79. At the end of 1946 loans payable to the corporation by the petitioners amounted to $282.34. The petitioners had loans receivable amounting to $19, 868.75 at the end of 1947, and.$41, 325 at the end of 1948.

On March 26, 1946, and on August 29, 1949, the petitioners submitted net worth statements to the Department of State, Visa Division, for the purpose of satisfying the immigration authorities as to the ability of Thomas to provide financially for a relative whom he brought to the United States from Greece. The statement submitted in 1946 showed assets of a market value of $86, 978.56, including $29, 211.72 as book value of 99 per cent of stock of the corporation on December 31, 1945, and $1, 128.79 as accounts receivable from the corporation, and no...

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