487 F.2d 36 (7th Cir. 1973), 72-1692, Durovic v. C. I. R.
|Citation:||487 F.2d 36|
|Party Name:||Marko DUROVIC, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.|
|Case Date:||October 18, 1973|
|Court:||United States Courts of Appeals, Court of Appeals for the Seventh Circuit|
Argued April 16, 1973.
Rehearing Denied Nov. 26, 1973.
Anna R. Lavin, Edward J. Calihan, Jr., Chicago, Ill., for petitioner-appellant.
Scott P. Crampton, Asst. Atty. Gen., Jane M. Edmisten, Atty., Tax Div., Dept. of Justice, Washington, D. C., for respondent-appellee.
Before SWYGERT, Chief Judge, and CASTLE and BARNES, [*] Circuit Judges.
BARNES, Circuit Judge.
This complex case comes to us as a timely petition to review a decision of the Tax Court of the United States. The Tax Court entered its decision on April 20, 1972, in accordance with its lengthy opinion, filed June 24, 1970, appearing in 54 U.S. Tax Court Rp. 1364 to 1402 (hereinafter "opinion").
The findings of fact of the Tax Court appear in said opinion at pages 1366 to 1383. Appellant's counsel states: "Those findings are correct and objectively set forth the evidence at trial. We would adopt them as a faithful statement of the evidence." (Opening Brief at 9).
This appeal, therefore, rests on the merits of appellant's claim that the Tax Court made erroneous conclusions upon the evidence before it.
Because of their length, we will not repeat the complete findings herein, but will assume a sufficiently interested reader of this opinion will have reviewed them himself. Some necessary facts, however, will be recited under the different issues presented.
I. FACTS, GENERALLY.
For several years in Argentina prior to coming to the United States, appellant Marko Durovic (a lawyer), aided, financially and otherwise, his brother, Stevan Durovic (a physician), who had been experimenting, and conducting research into the cause of cancer. It was the latter's theory "that if a proper stimulant for the reticuloendothelial system could be found, the defensive and reparative cells comprising this system
could be made to produce a substance which would control malignant growth." (Opinion at 1367). In his experiments in Argentina, Stevan had unexpectedly, separated a substance (named Kositerin) which showed activity against hypertension. Some of this substance was tested in 1949 at the School of Medicine at Northwestern University in Illinois. The results were uncertain. No Kositerin was sold in Argentina, but some 72,200 ampules of the substance was made and placed in storage there. The Minister of Public Health of Argentina later ordered these 72,200 ampules destroyed, as a result of spoilage, on February 17, 1956.
Meanwhile in 1947 Stevan, in Argentina, continuing his research in the area of cancer, came upon a new substance, called drug "X", later to be called Krebiozen. It was produced by a similar method to that used to extract Kositerin. It used the same horse and cattle blood, stimulated with a new substance, "actinomyces bovis" instead of "actinobacilus lignieris."
In 1949, both Marko's wife Olga (who spoke English) and Stevan traveled to the United States to interest and obtain financial backing for the commercial production of these drugs. The previous financial backers in the Argentine during 1947, 1948 and 1949 (Tanoira, et al), were holding 2 grams, 35 centigrams of Krebiozen as security for the moneys they had advanced. Marko borrowed M$N2 million pesos and paid some 3,005,000 pesos to Tanoira on January 26, 1950, so that Marko and Stevan could have all papers and products shipped to the United States and could continue their previous experiments (from 1951 on) in the United States, at the Duga Biological Institute. (On April 5, 1954, the name was changed to Duga Laboratories.) (Both are referred to as "Duga, Illinois" in the Tax Court opinion.) Duga, Illinois operated as an equal partnership between Marko and Stevan for the production, testing and distribution of the drug Krebiozen.
It was the partnership returns of "Duga, Illinois" which were filed with the collector in 1954 and which the appellant now urges gave notice to the government that Marko had no individual income, and allegedly commenced the running of the statute of limitations against the collection of deficiencies on any individual income taxes owed by the parties.
Although there is considerable dispute as to "cost of product", and a different total product cost used in the partnership 1954 return ($1,326,000) compared to the 1955-59 returns ($1,404,511.33); when divided by the number of capsules of drug "X" on hand (200,000 in 1951 and 136,097 in April, 1954), the 1954 computation asserted a cost of about $9.50 per ampule; the later computation about $10.32 per ampule. 1 We will consider other facts connected with product cost hereafter. We now turn to each issue.
II. STATUTE OF LIMITATIONS. WHETHER THE TIMELY AND COMPLETE FILING OF PARTNERSHIP RETURNS . . . COVERING THE TAX YEARS HERE IN QUESTION, AND DISCLOSING THERE WAS NO INDIVIDUAL INCOME COMMENCED THE RUNNING OF THE STATUTE OF LIMITATIONS FOR ASSESSMENTS AND COLLECTIONS OF ALLEGED DEFICIENCIES IN INDIVIDUAL INCOME TAXES AND ADDITIONS THERETO. 2
We must decide what information is required on an individual taxpayer's
return, as distinguished from that required and returned on this partnership return.
The partnership return showed:
Received for Krebiozen Cost of Goods Sold
1954 149,694.10 172,957.74
1955 205,936.73 319,682.64
1956 171,926.98 244,738.80
1957 263,336.53 344,244.24
1958 217,213.36 251,611.92
Title 26 U.S.C. § 6012(a)(I)(A) requires that an income tax return be filed by "every individual having for the taxable year a gross income of $600 or more." Taxpayer had, in each year mentioned above, a gross income of $600 or more. 26 U.S.C. § 61(a)(13), and 26 U.S.C. § 702(c). In addition, the taxpayer and his wife had interest on a joint savings account of $680.00 in 1957 and $891.28 in 1958, and no other income during the years 1954 through 1958. Taxpayers must file a return "according to the forms and regulations" prescribed by the Secretary, and must include therein the information required by such forms or regulations. (§ 6011(a)).
Title 26 U.S.C. § 6031 requires that every partnership shall make an information return, stating its gross income and the deductions allowable, and such other information as the Secretary of the Treasury requires. But the partnership is not liable for any tax: the individual taxpayers, in their individual capacity, are; and all partners are required to report their distributive shares on their individual returns.
Appellant asserts that "by reason of the family tax exemptions and deductions, and the losses of the Duga partnership, no individual tax return was required to be filed by petitioner for any years 1954 to 1958". (Brief, at 10.) The fallacy of his argument is that appellant refers to net income, not the gross income of $600 or more specified in the statute, and required to be filed by every individual, whether or not a partner.
There is simply no way to equate the two terms and appellant cites no cases to support the theory that the partnership return, standing alone, is a sufficient return to toll the statute of limitations.
The sine qua non expressed in Commissioner of Internal Revenue v. Lane-Wells Co., 321 U.S. 219, 64 S.Ct. 511, 88 L.Ed. 684 (1944) is that: "The returns did not show the facts on which liability would be predicated." (P. 223, 64 S.Ct. p. 513).
And see: Automobile Club v. Commissioner of Internal Revenue, 353 U.S. 180, 77 S.Ct. 707, 1 L.Ed.2d 746 (1957); F. E. McGillick Co. v. Commissioner, 30 T.C. 1130 (1958); Danz v. Commissioner, 18 T.C. 454 (1952).
Appellant next asserts that since the Tax Court determined there was no fraud with respect to the deficiency determined for any year (54 T.C. at 1399, cited as 54 T.C. at 3075, Opening Brief at 11), and that there were no substantial omissions from gross income, Section 6501(e) of the Internal Revenue Code started the statute of limitations to run each year. This argument overlooks the fact that there is an exception to the "substantial omission rule" in § 6501(e)'s opening paragraph:
"Except as otherwise provided in subsection (c) . . .."
Subsection (c)(3) provides:
"NO RETURN.-In the case of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time." (Emphasis added.)
It is true that the partnership return filed by Duga Laboratories reported all of appellant's actual income for 1954-56 and all income with the exception of dividend earnings of $681.00 and $891.28 for 1957 and 1958 respectively. Appellant asserts that under the rationale of Germantown Trust Co. v. Commissioner of Internal Revenue, 309 U.S. 304, 60 S.Ct. 566, 84 L.Ed. 770 (1940), this information was sufficient notice to the
Commissioner of his tax liability to begin the running of the statute of limitations. We cannot accept this argument which makes the running of the limitations period depend upon such happenstance. An individual income tax return, if filed, would have accomplished its statutory purpose of making the Commissioner's auditing task simpler by assuring him that petitioner claimed no other income, credits, or deductions other than the ones on the partnership return. The filing of an informational partnership return, upon which no assessment can be made within the meaning of 26 U.S.C. § 6501, could not begin the running of the statute of limitations. We adhere to the reasoning of the Supreme Court in Commissioner of Internal Revenue v. Lane-Wells, 321 U.S. 219...
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