348 F.2d 122 (2nd Cir. 1965), 392, DiZenzo v. C.I.R.

Docket Nº:392, 29360.
Citation:348 F.2d 122
Party Name:Patsy F. DiZENZO, Transferee, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Patsy F. DiZENZO and Anna DiZenzo, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. PATSY FRANK, INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
Case Date:June 28, 1965
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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Page 122

348 F.2d 122 (2nd Cir. 1965)

Patsy F. DiZENZO, Transferee, Petitioner,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

Patsy F. DiZENZO and Anna DiZenzo, Petitioners,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

PATSY FRANK, INC., Petitioner,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 392, 29360.

United States Court of Appeals, Second Circuit.

June 28, 1965

Argued May 25, 1965.

Page 123

Harold Lavien, Boston, Mass., on the brief for petitioners.

Meyer Rothwacks, Washington, D.C. (Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Gilbert E. Andrews, and Mark S. Rothman, Department of Justice, Washington, D.C., on the brief), for respondent.

Before LUMBARD, Chief Judge, and SMITH and KAUFMAN, Circuit Judges.

LUMBARD, Chief Judge.

Patsy DiZenzo and his wife appeal from that portion of a Tax Court decision which held them liable for additional taxes on their joint returns for 1946 through 1948. 1 The issues on this appeal stem from the Tax Court's finding that Patsy DiZenzo diverted to his own use, but did not report on the appellants' tax returns, a part of the income of Patsy Frank, Inc. ('Patsy Frank'), a corporation controlled by him and engaged in general masonry and carpentry work in Bridgeport, Connecticut. Patsy DiZenzo owned 98 per cent of its stock; the balance was owned by his wife and son.

The appellants do not dispute that substantial amounts were diverted from Patsy Frank. However, they dispute that the net amounts diverted were as large as found by the Tax Court, and they contend that the court erred in holding that the entire amount should be treated as ordinary income to them without regard to whether Patsy Frank then had earnings and profits equal to the diversions.

We affirm the Tax Court's findings as to the net amounts diverted from Patsy Frank. With respect to whether these should be treated as ordinary income, however, we remand for a finding as to whether the appellants have established that these amounts were greater than the earnings and profits of Patsy Frank at that time.

As the appellants concede, adequate business records were not kept for Patsy Frank. An accountant, employed parttime at $75 per year, made entries in a cash disbursement book from check stubs, but no regular record was kept of payments made in cash or of the corporation's receipts. The corporation's tax returns were prepared by the accountant from the cash disbursements book and from information obtained from Patsy DiZenzo.

Income tax deficiencies were assessed against Patsy Frank from 1946 through 1950 and against the appellants for 1946 through 1951. The parties stipulated the gross receipts or Patsy Frank, which were over half again as much as had been reported. These unreported receipts were in part set off by the Commissioner's allowance of operating expenses greater than claimed in the corporation's

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returns, and additional unreported operating expenses were allowed by the Tax Court-- $14,000 for 1946, $42,000 for 1947, and $38,000 for 1948.

The deficiencies assessed against the appellants as individual taxpayers resulted principally from the Commissioner's determination that substantial sums had been diverted by Patsy DiZenzo from Patsy Frank and Putnam Realty Company-- another corporation controlled by him. (No diversion of corporate income had been reported on the appellants' returns.) The Tax Court accepted the Commissioner's determination as to the gross amounts diverted. However, it found that appellants had made payments on behalf of Patsy Frank in addition to those assumed by the Commissioner, and it reduced accordingly the net amounts diverted from Patsy Frank.

Of relevance to this appeal are the reductions related to the court's allowance of additional operating expenses to Patsy Frank. The court concluded that a portion of these additional expenses had been paid for Patsy Frank by the appellants. Faced with an almost total lack of direct evidence as to what that portion was, it estimated that the appellants had paid $1,000, $4,000, and $3,000 respectively for 1946 through 1948.

After making the several adjustments, the Tax Court found that the net amounts diverted from Patsy Frank...

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