Federbush v. Comm'r of Internal Revenue, Docket Nos. 41930
| Decision Date | 29 July 1960 |
| Docket Number | Docket Nos. 41930,69574.,66600,41931 |
| Citation | 34 T.C. 740 |
| Parties | IRVING S. FEDERBUSH AND SYLVIA C. FEDERBUSH, ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Burnett Schwartz, Esq., Morris A. Shenker, Esq., and Bernard J. Mellman, Esq.;2 Harry Malter, Esq., and George Delson, C.P.A.; 3 and Morris A. Shenker, Esq., and Bernard J. Mellman,Esq.,4 for the petitioners.
John J. O'Toole, Esq., and John J. Madden, Esq., for the respondent.
1. Corporate petitioner's income tax returns held to have been false and fraudulent with intent to evade tax.
2. Beginning in September of 1942 and continuing through 1946, five brothers, who were the officers of petitioner corporation and who owned five-sixths of its outstanding stock, took possession of certain checks received by the corporation in payment for merchandise shipped to its customers and in payment of rent owed to it. After cashing the checks, they divided the proceeds. They also paid corporate funds to themselves in the guise of business expenses. Held, that petitioner corporation did not sustain embezzlement losses during the fiscal years involved within the meaning of section 23(f) of the Internal Revenue Code of 1939 in the amount of the corporate funds received by the five brothers.
3. The deficiencies determined against the corporation are due to fraud with intent to evade tax.
4. Held, that respondent did not err in his determination that funds thus siphoned from the corporation into the hands of petitioner Irving Federbush, one of the five brothers referred to above, constituted taxable income to him. Commissioner v. Wilcox, 327 U.S. 404, distinguished. Kann v. Commissioner, 210 F.2d 247, followed. Held, further, that Irving has not shown that the income so received by him was less in amount than respondent determined, and that the deficiencies in tax are due to fraud with intent to evade tax.
5. Income tax returns for 1942, 1943, 1944, 1945, 1946, and 1948 designated joint returns of Irving and Sylvia Federbush, held to have been intended as such, and pursuant to section 51(b) of the Internal Revenue Code of 1939 their liability is joint and several.
6. Deficiencies in income tax of Jack Federbush held to have been due to fraud with intent to evade tax.
The respondent determined deficiencies in tax and additions to tax against the petitioners as follows:
For convenience the corporate petitioner, the Federbush Company (Docket No. 66600), will sometimes hereafter be referred to as the corporation, and the members of the Federbush family will sometimes be referred to by their first names.
Certain issues have been settled, and the adjustments will be reflected in the computations under Rule 50.
The respondent's motion to dismiss the proceeding for failure properly to prosecute with respect to the income tax deficiencies against Jack D. Federbush (Docket No. 41931) was granted because of the petitioner's failure to appear, but trial was held as to the additions to tax for fraud under section 293(b) of the Internal Revenue Code of 1939.
The issues for decision are:
(1) Whether the tax returns filed by the Federbush Company were ‘fraudulent * * * with intent to evade tax,‘ to the end that the period within which the tax may be assessed and collected as provided by section 276(a) of the 1939 Code has or has not expired.
(2) Whether the corporation sustained embezzlement losses in the amount of corporate funds which its officer-stockholders distributed among themselves, but which were not reflected as such in the corporate books of account.
(3) Whether the deficiencies determined against the corporation were due to fraud with intent to evade tax.
(4) Whether that part of the corporate funds distributed as above shown and received by petitioner Irving Federbush was taxable income to him; if so, whether the respondent correctly determined the amount of such income; and whether the deficiencies in tax were due to fraud with intent to evade tax.
(5) Whether Sylvia filed joint returns with Irving for the taxable years 1942 through 1946 and for 1948.
(6) Whether the deficiencies in income tax, or parts thereof, against Jack were due to fraud with intent to evade tax.
Some of the facts have been stipulated and are found as stipulated.
The Federbush Company was incorporated under the laws of New York on September 19, 1932. It filed its income tax returns on an accrual basis, using a fiscal year ending August 31. The returns for the years involved were filed with the collector of internal revenue for the second district of New York.
From its inception the corporation has been engaged in the business of manufacturing and selling looseleaf devices, ring binders, catalog covers, and zipper cases.
The corporate stock was owned in equal amounts by six Federbush brothers, Max, Irving, Samuel, Jack, Nathan, and Charles, until September 30, 1942, when Charles died intestate. His one-sixth interest passed to his wife, Regina, and to his daughter, Natalie, who was then 17 years of age.
After the death of Charles, the corporate stockholders were Max, Irving, Samuel, Jack, Nathan, Regina, and Natalie. Complete control of the business and affairs of the corporation was vested in the surviving brothers, who were the sole members of the board of directors. Except for the summer vacation period in 1943 when Natalie was employed as a part-time clerk, and up to August 1947, neither Regina nor Natalie was an officer or director, had anything to do with the management or operation of the corporation, or was employed by it.
During the taxable years involved, the surviving brothers diverted corporate funds to their own use in the amount of $500,060.44 by (1) taking the proceeds of unrecorded sales, (2) taking rental income owed to the corporation, and (3) paying money to themselves in the guise of business expenses.5 To conceal the unrecorded sales, the brothers billed certain customers with unnumbered invoices which were never turned over to the bookkeeper for entry on the corporate books. The first brother to arrive at the office in the morning would open the mail and remove any checks in payment of unnumbered invoices. These checks were withheld from the bookkeeper. Other corporate sales were billed to customers on numbered invoices and were duly recorded by the bookkeeper on the books of the corporation.
Informal meetings were held with all of the Federbush brothers present to determine the sales in respect of which unnumbered invoices would be used.
All of the unrecorded sales were made by the corporation in transactions in the regular course of its business. The Federbush brothers never represented themselves to customers as other than corporate officers acting on behalf of the corporation, and the customers in making their purchases never dealt with them except as officers or representatives of the Federbush Company. They made their checks for the merchandise purchased payable to the corporation and regarded them as covering payments to the corporation.
Checks received in payment of the unnumbered invoices were cashed, and the division of the proceeds among the brothers was accomplished by three methods:
(1) Some checks were deposited in the corporate bank account without any record of their receipt on the corporation's books. Contemporaneously a withdrawal was made of a similar amount by using a check taken from the back of the corporate checkbook without any record being made of the withdrawal.
(2) Some checks were deposited in the personal bank account of Max or that of Irving without any record of receipt being made on the corporate records.
(3) Other checks were cashed by one or another of the brothers without any record being made of the transaction on the corporate records.
The amounts thus siphoned from the corporation or bypassing its books of account were as follows:
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