Hicks Co. v. Comm'r of Internal Revenue

• Decision Date: 09 August 1971
• Docket Number: Docket Nos. 3332-69— 3334-69.
• Citation: 56 T.C. 982
• Court: U.S. Tax Court
• Parties: THE HICKS CO., INC.1 (FORMERLY THE LYNN CORPORATION), (FORMERLY S. D. HICKS & SON COMPANY), PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

56 T.C. 982

THE HICKS CO., INC.1 (FORMERLY THE LYNN CORPORATION), (FORMERLY S. D. HICKS & SON COMPANY), PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 3332-69— 3334-69.

United States Tax Court

Filed August 9, 1971.

John M. Doukas and John M. Barnes, Jr., for the petitioners.

Joel Gerber, for the respondent.

Held: 1. Testimony of an unavailable nonparty witness given at a prior criminal income tax evasion trial involving Thomas Wheeler and the Lynn Corp. is admissible in evidence in subsequent Tax Court proceedings. An affidavit and question and answer transcript of the same unavailable nonparty witness are also admissible.

2. Fraud proved by clear and convincing evidence against the corporation and its principal officer because of intentional overstatements of various deductions, particularly fictitious and false travel expenses and personal expenses of the officer paid by the corporation.

3. Concession by respondent that Shirley Wheeler is not liable for addition to tax under sec. 6653(b), I.R.C. 1954, does not automatically relieve her of liability for the deficiencies under sec. 6013(e) or prevent the running of the statute of limitations as to determined deficiencies.

4. Corporate petitioner is not entitled to report gain from the sale of realty on the installment method under sec. 453, I.R.C. 1954, and the applicable regulations.

5. Respondent's adjustments to income and disallowance of various deductions sustained.

DAWSON, Judge:

In these consolidated cases respondent determined Federal income tax deficiencies and additions to tax against the petitioners as follows:

+---+
                ¦¦¦¦¦
                +---+
                

                                                        Addition to
                Petitioners                   Taxable        Deficiency tax, sec
                                              year ended                6653(b)
                                                                        I.R.C. 1954 2  
                                              (July 31, 1957 $14,174.52 $7,087.26
                The Hicks Co., Inc.           (July 31, 1958 23,495.25  11,747.63
                                              (July 31, 1959 33,056.42  16,528.21
                                              (Dec. 31, 1957 18,050.14  9,724.64
                Thomas and Shirley C. Wheeler (Dec. 31, 1958 2,264.29   1,132.14
                                              (Dec. 31, 1959 1,417.80   3,631.80
                Thomas Wheeler                Dec. 31, 1956  3,351.46   1,675.73
                

By an amendment to his answer in the Hicks Co;, docket No. 3332-69, respondent alleged an increased deficiency of $4,160 for the taxable year ended July 31, 1959, and an increase in the addition to tax under section 6653(b) of $2,080.

The trial of these cases was long, involved, and complex. Many issues were presented. The key question, however, is whether respondent has proved by clear and convincing evidence that any part of the underpayment of tax by the corporate petitioner and Thomas Wheeler was due to fraud with intent to evade tax. If fraud has not been proved by respondent, the statute of limitations operates to bar the assessment of any deficiencies and additions to tax against the petitioners for the years before us. An important, perhaps crucial, factor in respondent's tendered proof of fraud revolves around the admissibility of the testimony of Raymond L. White contained in the record of United States v. Thomas Wheeler, Criminal No. 63-163-F (D. Mass.), which was offered by respondent in these proceedings and objected to by petitioners. In addition, certain oral and written statements made by Raymond L. White to respondent's agents were objected to as hearsay.

If fraud has been proved by respondent, then the following issues must be decided:

1. Whether the corporate petitioner, through its officers, understated its taxable income by deducting salary expense which was not paid during the taxable years ended July 31, 1957, and July 31, 1958, or within 2 1/2 months thereafter, in the amounts of $7,083 and $8,000, respectively.

2. Whether the corporate petitioner, through its officers, understated its taxable income for the taxable year ended July 31, 1957, by deducting, as salary expense, $3,500 represented by a check made payable to Raymond L. White, which was paid to its president, Thomas Wheeler, for his personal use.

3. Whether the corporate petitioner, through its officers, understated its taxable income for the taxable years ended July 31, 1957, July 31, 1958, and July 31, 1959, by deducting claimed travel expenses for its president and Raymond L. White and paying its president these amounts for his personal use, in the total amounts of $7,317.88, $3,619, and $20,299.50, respectively.

4. Whether the corporate petitioner, through its officers, understated its taxable income for the taxable years ended July 31, 1957, and July 31, 1958, by deducting as its professional expense moneys paid to attorneys who represented Thomas Wheeler and his estranged wife in their personal divorce proceeding in the amounts of $5,000 and $2,500, respectively.

5. Whether the corporate petitioner, for its taxable year ended July 31, 1957, improperly deducted the costs of acquiring real estate, in the amount of $685.88, as professional service expense.

6. Whether, for its taxable year ended July 31, 1958, the corporate petitioner failed to report $33,143.87 attributable to gains realized from insurance reimbursements in excess of damage to property basis caused by two fires.

7. Whether, for its taxable year ended July 31, 1958, the corporate petitioner failed to report income from the sale of boilers in the amount of $1,500.

8. Whether, for its taxable year ended July 31, 1958, the corporate petitioner failed to report income from the sale of an Ingersoll Rand compressor in the amount of $278.13.

9. Whether, for its taxable year ended July 31, 1958, the corporate petitioner failed to include in income a refund of Massachusetts excise tax in the amount of $2,490.87.

10. Whether, for its taxable year ended July 31, 1959, the corporate petitioner failed to report gain from the sale of real estate located in East Boston, Mass., in the amount of $61,719.17.

11. Whether the corporate petitioner, for its taxable year ended July 31, 1959, understated its taxable income by taking a $6,918.62 bad debt deduction with respect to a ‘shell’ corporation which still held some of petitioner's valuable real estate at the close of that fiscal year.

12. Whether the corporate petitioner has shown that it is entitled to deductions for State and local taxes in excess of the following amounts for the taxable years ended July 31, 1957, and July 31, 1958:

+---------------------------------------------------------+
                ¦                         ¦Taxable year ended July 31—  ¦
                +-------------------------+-------------------------------¦
                ¦Type of tax              ¦1957           ¦1958           ¦
                +-------------------------+---------------+---------------¦
                ¦Massachusetts excise tax ¦$3,050.60      ¦$550.02        ¦
                +-------------------------+---------------+---------------¦
                ¦Asheville real estate tax¦517.47         ¦29.06          ¦
                +-------------------------+---------------+---------------¦
                ¦Boston real estate tax   ¦               ¦16,702.80      ¦
                +---------------------------------------------------------+
                

13. Whether Thomas Wheeler understated his taxable income for the year 1957 by claiming $4,500 for legal fees incident to his personal divorce action.

14. Whether Thomas Wheeler understated his taxable income by failing to report alleged travel reimbursements from corporate petitioner which were converted to his personal use during the years 1957 and 1958 in the amounts of $8,047.88 and $1,979.50, respectively.

15. Whether Thomas Wheeler understated his 1957 taxable income by failing to report $3,500 which he caused the corporate petitioner to make payable by check to Raymond L. White, and then caused the proceeds of the check to be converted to his own personal use and charged to the office salary account of the corporate petitioner.

16. Whether Thomas Wheeler failed to include $7,500 in his 1957 taxable income, being an aggregate amount paid on his behalf by the corporate petitioner for attorneys fees for his personal divorce action.

17. Whether Thomas Wheeler understated his taxable income by failing to report alleged travel reimbursements from the Hicks Corp. which were based on travel vouchers, and the ‘reimbursements' were converted to his personal use during the taxable years 1956, 1957, 1958, and 1959, in the amounts of $6,005.60, $17,274.75, $3,857.69, and $2,180.92, respectively.

18. Whether Thomas and Shirley Wheeler failed to report interest income, received from their 1957 Federal income tax refund, in the amount of $246.68 on their 1958 income tax return.

19. Whether Thomas and Shirley Wheeler are entitled to a medical deduction in excess of $104.90 for their taxable year 1957.

20. Whether Thomas Wheeler failed to report $9,300 in income received from Wheeler Rocket Corp. during his taxable year 1959.

21. Whether Thomas Wheeler failed to report $494.84 in income received from Border Industries, Inc., during his taxable year 1956.

FINDINGS OF FACT

Some of the facts are stipulated. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.

The Hicks Co. (formerly the Lynn Corp.) (formerly S. D. Hicks & Son Co.), hereinafter referred to as Lynn, was organized and existing under the laws of Massachusetts with its principal office being located at 1623 Hyde Park Avenue, Boston, Mass., on July 3, 1969, the date of filing its petition herein.

Lynn filed its Federal corporate income tax returns (Form 1120) for the taxable years ended July 31, 1957, July 31, 1958, and July 31, 1959, with the district director of internal revenue at Boston, Mass.

Thomas Wheeler and his wife, Shirley C. Wheeler, resided in Miami Beach, Fla, on July 3, 1969, the date of filing their petition herein.

Thomas Wheeler and his deceased wife, Ruby P. Wheeler, filed their joint...