Perlmutter v. Comm'r of Internal Revenue, Docket Nos. 91253

• Citation: 44 T.C. 382
• Decision Date: 18 June 1965
• Docket Number: 91255.,Docket Nos. 91253
• Parties: BEN AND BERNICE PERLMUTTER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTTHE PERLMUTTERS, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: United States Tax Court

44 T.C. 382

BEN AND BERNICE PERLMUTTER, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENTTHE PERLMUTTERS, INC., PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 91253

91255.

Tax Court of the United States.

Filed June 18, 1965.

Gene W. Reardon and Gene F. Reardon, for the petitioners.

Arthur B. Bleecher, for the respondent.

1. JURISDICTION.— Petitioners moved to dismiss for lack of jurisdiction, predicated upon allegations that the notices of deficiency were illegally issued by a person not legally authorized to do so and therefore null and void. During an extended leave of absence of the district director pending his retirement, the Commissioner made an interim appointment of an identical additional district director for the Denver district to perform the functions of that office. Held, that the statutory notices here involved are valid statutory notices of deficiency. Held, further, that petitioners have not sustained their burden of proving that the notices were issued without respondent's authority. The motions to dismiss are denied.

2. COMPENSATION.— REASONABLENESS.— Held, that petitioner corporation failed to prove any amount in excess of that determined by respondent as reasonable compensation for its stockholder president for the fiscal year ended January 31, 1960.

3. ALLOCATION OF CERTAIN EXPENDITURES TO COST OF ACQUISITION OF CAPITAL ASSET.— Held, respondent's determination as to petitioner corporation is sustained upon failure of proof.

4. DEDUCTION.— Held, that the individual petitioners failed to prove error in respondent's disallowance of a claimed deduction as an ordinary loss or an ordinary and necessary business expense.

HOYT, Judge:

Respondent determined income tax deficiencies for the years and in the amounts, as follows:

+-----------------------------------------------+
                ¦Ben and Bernice Perlmutter (docket No. 91253)  ¦
                +-----------------------------------------------¦
                ¦                       ¦                       ¦
                +-----------------------------------------------+
                

Taxable year: Deficiency  
                1956                    $15,710.82
                1957                    6,800.73
                1958                    4,216.85
                1959                    13,164.76
                The Perlmutters, Inc. (docket No. 91255)
                

Taxable FYE
                Jan. 31— Deficiency  
                1958           $972.86
                1959           1,114.86
                1960           15,806.18
                

These cases were consolidated for trial, briefs, and opinion. The parties have filed a stipulation with respect to various issues in both cases and effect thereto will be given in the recomputation under Rule 50. In his opening statement at the trial and on brief, counsel for petitioners stated in regard to the petitioners Ben and Bernice Perlmutter than all issues involving the years 1956, 1957, and 1958 have been settled and that only one issue would be litigated on the merits with respect to the asserted deficiency for 1959. Further, counsel stated in regard to petitioner, the Perlmutters, Inc., that all issues involving the fiscal years ended January 31, 1958 and 1959, have been settled and that only two issues would be litigated on the merits with respect to the asserted deficiency for the fiscal year ended January 31, 1960.

Shortly before the trial petitioners filed a motion to dismiss for lack of jurisdiction of the individual taxpayers' petition insofar as it relates to the taxable year 1959, and at the trial a similar motion as to the corporate taxpayer's petition insofar as it relates to the taxable fiscal year ended January 31, 1960, was filed. Both motions are based on the ground that the notice of deficiency for such taxable year in each case was illegally issued and therefore null and void. The motions were taken under advisement and trial of the consolidated cases processed.

The issues presented herein for decision are:

(1) In regard to the motions to dismiss for lack of jurisdiction, whether the notices of deficiency issued to the petitioners herein are invalid, null, and void so as to deprive us of jurisdiction, and on the merits;

(2) In regard to the corporate petitioner for the fiscal year ended January 31, 1960, and with respect to a claimed deduction of $53,901.44 as compensation to Ben Perlmutter, whether respondent erred in disallowing $19,001.44 as excessive and in determining that only $34,900 constituted a reasonable allowance as compensation for personal services actually rendered;

(3) In regard to the corporate petitioner for the fiscal year ended January 31, 1960, and with respect to a claimed deduction of $105,028.24 as overhead expenses, whether respondent erred in disallowing $21,142.18 and allocating such amount as part of the cost basis of a shopping center constructed and retained by the corporate petitioner for rental purposes, and;

(4) In regard to the individual petitioners for the year 1959, whether respondent erred in failing to allow a deduction in the amount of $16,818.45 as an ordinary loss or business expense incurred in an alleged business venture known as Sonny's Auto Sales.

FINDINGS OF FACT

Some of the facts have been stipulated by the parties with respect to both cases and the stipulation and exhibits attached thereto are included herein by this reference.

The individual petitioners Ben and Bernice Perlmutter are husband and wife, residing at 1635 Xavier, Denver, Colo. Their joint Federal income tax returns on a cash basis for the calendar years 1956, 1957, 1958, and 1959 were filed with the district director of internal revenue, Denver, Colo. A statutory notice of deficiency was sent by certified mail on November 28, 1960, to Ben and Bernice Perlmutter with respect to their taxable years 1956, 1957, and 1958, and a separate purported statutory notice of deficiency was sent to them by certified mail on January 19, 1961, with respect to their taxable year 1959.

The petitioner, the Perlmutters, Inc., is a corporation with its principal office at Littleton, Colo. The corporation's Federal income tax returns for the fiscal years ended January 31, 1958, 1959, and 1960 were filed with the district director of internal revenue, Denver, Colo. A statutory notice of deficiency was sent by certified mail on November 28, 1960, to the Perlmutters, Inc., with respect to its taxable fiscal years ended January 31, 1958 and 1959, and a separate purported statutory notice of deficiency was sent to it by certified mail on January 19, 1961, with respect to its taxable fiscal year ended January 31, 1960.

Jurisdiction

The Secretary of the Department of the Treasury or his delegate is authorized by statute to determine that there is a deficiency in a taxpayer's income tax and to send notice of such deficiency to the taxpayer by certified or registered mail. Such authority has been delegated to the Commissioner of Internal Revenue and in turn to the district directors for their respective internal revenue district. The Commissioner is not limited in his authority to delegate power to determine deficiencies or to issue statutory notices thereof.

George H. Allan held the position of district director, Denver, Colo., from November 22, 1954, until the effective date of his retirement from Government service on April 30, 1961. The last date that Allan was in the office and actually functioned as district director, was the day before Thanksgiving Day in November 1960. Thereafter, Allan was absent from his office on annual leave for about one week and then on sick leave continuously until the date of his retirement. He had an operation performed on or about December 5, 1960. Prior to beginning his annual leave and pursuant to his authority as district director, Allan designated the then assistant district director, Lawrence W. Hill, as the acting district director and Hill functioned in that capacity until on or about December 11, 1960,when V. Lee Phillips occupied the office and performed the duties of district director of internal revenue, Denver, Colo., pursuant to an appointment as hereinafter mentioned.

On November 21, 1960, the Commissioner of Internal Revenue addressed the following memorandum to the Under Secretary of the Treasury:

It is requested that you ask the Civil Service Commission to approve for a period not to extend beyond August 1, 1961, an identical additional position in GS-16 for District Director in Denver, CSC No. 61.

This position is required for the immediate reassignment of Mr. Lee Phillips, now District Director in Des Moines, to the Denver District. Mr. George H. Allan, present Denver District Director, is retiring on or before July 31, 1961, at which time Mr. Phillips will be placed on the permanent position and the temporary position will be canceled. In the interim period it is anticipated that Mr. Allan will be in and out of the hospital and on sick leave a substantial period of the time. Therefore, Mr. Phillips is needed immediately in Denver for orientation so that he can act for Mr. Allan during his absence.

On December 6, 1960, the Chairman of the U.S. Civil Service Commission addressed the following letter to the Secretary of the Treasury:

In response to your letter of December 1, 1960, the Commission has given careful consideration to your request for approval of a temporary identical-additional position of District Director of Internal Revenue, Denver, Colorado, in grade GS-16.

The Commission has approved the establishment of an identical-additional position of District Director of Internal Revenue, Denver, Colorado, in GS-301-16-134, under authority of the Classification Act of 1949, as amended (505(k)). This position will automatically be cancelled at the close of business on August 1, 1961.

By direction of the Commission:

On December 7, 1960, the Acting Commissioner of Internal Revenue issued a ‘Notification of Personnel Action’ to V. Lee Phillips directing his temporary reassignment from his position of district director, Des Moines, Iowa, to the position of district director, Denver, Colo., effective on December...