Arctic Ice Cream Co. v. Comm'r of Internal Revenue
| Decision Date | 21 October 1964 |
| Docket Number | Docket Nos. 94984,94985. |
| Citation | 43 T.C. 68 |
| Parties | ARCTIC ICE CREAM COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTJULIUS LENCIONE, SR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Edward W. Rothe, for the petitioners.
George G. Young, for the respondent.
1. During the years 1944, 1945, and 1946 the corporate petitioner understated its sales of ice cream and related frozen dairy products. During these same years it also understated its purchases of black market raw materials used in the manufacture
of its products. Held, amount of understated sales, understated purchases, and understated income determined.
2. On the facts, held, a part of the deficiencies in income, declared value excess-profits, and excess profits taxes of the corporate petitioner for the year 1944 was due to fraud with intent to evade tax.
3. The corporate petitioner was indicted, pleaded guilty, and convicted, of willful attempted evasion of income tax for the year 1946 necessarily carries with it the ultimate factual determination that a part of the resulting deficiency for 1946 was ‘due to fraud with intent to evade tax’ within the purview of section 293(b), I.R.C. 1939.
4. On the facts, held, no part of the deficiency in tax of the individual petitioner for the years 1944, 1945, and 1946 was due to fraud with intent to evade tax.
Respondent determined the following deficiencies in income tax, declared value excess profits tax, excess profits tax, and additions to tax under section 293(b) of the Internal Revenue Code of 1939:
The issues for decision are as follows:
(1) Whether Arctic Ice Cream Co. failed to report income for the years 1944, 1945, and 1946 in the amounts determined by respondent or in any other amounts.
(2) Whether Arctic Ice Cream Co. is entitled to additional deductions for the years 1944, 1945, and 1946 for alleged unrecorded purchases of raw material.
(3) Whether any part of the deficiencies asserted against Arctic Ice Cream Co. for the years 1944 and 1945 is due to fraud with intent to evade tax.
(4) Whether Arctic Ice Cream Co. is estopped, by reason of a prior conviction for willful attempted income tax evasion for the year 1946, from denying that a part of the deficiency asserted against it for that year was due to fraud with intent to evade tax.
(5) Whether the statute of limitations bars assessment and collection of the deficiencies in tax asserted against Julius Lencione, Sr., for the years 1944, 1945, and 1946.
Some of the facts have been stipulated by the parties. Their stipulations, together with attached exhibits, are incorporated herein by this reference.
Arctic Ice Cream Co. (sometimes hereinafter referred to as Arctic) is an Illinois corporation having its principal place of business in Chicago, Ill. Its Federal corporation income, declared value excess profits, and excess profits tax returns for the calendar years 1944 and 1945 and its income tax return for the calendar year 1946, made on the accrual basis, were timely filed with the then collector of internal revenue for the first district of Illinois. Julius Lencione, Sr. (sometimes hereinafter referred to as Lencione), is an individual residing in Chicago, Ill. His Federal income tax returns for the taxable years 1944, 1945, and 1946 were timely filed with the then collector of internal revenue for the first district of Illinois.
Artic Ice Cream Co. was organized on November 3, 1933. During the period material to this proceeding and for some time prior thereto its business consisted of the manufacture and sale of bulk and package ice cream and related frozen dairy products to ice cream parlors, grocery and delicatessen stores, and restaurants. Julius Lencione, Sr., was the founder and has at all times pertinent hereto been president and principal stockholder of Arctic. Edwin T. Riordan (sometimes hereinafter referred to as Riordan) was, during the period here material, Arctic's secretary and treasurer and second to Lencione in command of the business.
The commercial manufacture of ice cream is accomplished by whipping and freezing a mixture of butterfat, milk-solids-not-fat, sugar stabilizer, and flavoring. With the onset of World War II, ice cream manufacturers, such as Arctic, were subjected to U.S. Department of Agriculture regulation as to the amounts of butterfat, milk-solids-not-fat, and sugar which they could use in their businesses. Sugar rationing began in April 1942 and lasted until July 1947. During the period 1944-46 ice cream manufacturers were allotted a quota of 70-80 percent of their 1941 base period usage of sugar. Rationing of butterfat and milk-solids-not-fat began in February 1943 under War Food Order No. 8 and except for May, June, and July of 1944, when higher quotas were authorized, ice cream manufacturers were prohibited pursuant thereto from using more than 65 percent of the butterfat and milk-solids-not-fat used during the corresponding month in the December 1, 1941-November 30, 1942, base period. On March 1, 1945, milk-solids-not-fat were removed from the effect of rationing and on August 31, 1945, butterfat was likewise removed.
The technique of milk-solids-not-fat and butterfat rationing was such that the quota restrictions and sanctions (which were of both a criminal and civil nature) applied not to a seller of rationed merchandise, but to a user. For the first few months subsequent to the promulgation of War Food Order No. 8 Arctic attempted to comply with the quota restrictions prescribed, but Lencione and Riordan soon determined that the cutback in ice cream production attendant upon continued compliance with War Food Order No. 8 would make it exceedingly difficult, if not impossible, for Arctic to stay in business. They therefore decided that Arctic should obtain the necessary ingredients to maintain its production from the so-called black market.
During the years 1944, 1945, and 1946 Arctic made substantial purchases on the black market of butterfat, milk-solids-not-fat, and sugar. None of these black-market purchases were reflected upon the books and records of Arctic, except to the extent that they were indirectly reflected in a gallonage record maintained by Arctic which purported to show the total amount of all products sold.
During the first few months of Arctic's black-market purchasing, the cash with which to make such purchases was supplied directly by Lencione from his own personal funds. However, when it became apparent that he could not continue to supply money in this manner, he discussed the situation with Riordan and they determined to withhold from recordation a part of Arctic's receipts for use in making black-market purchases. Although a purpose of withholding such receipts was to evade the Department of Agriculture regulations by avoiding entries on the books reflecting black-market purchases, the necessary effect of such conduct was the understatement of Arctic's taxable income for Federal tax purposes.
The following schedule shows for each of the years 1944, 1945, and 1946 the amounts by which Arctic understated its sales, its black-market purchases, and its taxable income:
+-----------------------------------------------------------------------+
¦ ¦1944 ¦1945 ¦1946 ¦
+-----------------------------------+-----------+-----------+-----------¦
¦Total sales ¦$428,231.36¦$530.137.79¦$687,268.09¦
+-----------------------------------+-----------+-----------+-----------¦
¦Total sales per tax returns ¦337,883.35 ¦526,402.81 ¦537,116.32 ¦
+-----------------------------------+-----------+-----------+-----------¦
¦Understated sales ¦90,348.01 ¦3,734.98 ¦150,151.77 ¦
+-----------------------------------+-----------+-----------+-----------¦
¦Black-market purchases not deducted¦51,779.54 ¦18,566.64 ¦75,099.04 ¦
+-----------------------------------+-----------+-----------+-----------¦
¦Unreported taxable income ¦38,568.47 ¦(14,831.66)¦75,052.73 ¦
+-----------------------------------------------------------------------+
While Arctic occasionally made sales directly from its plant, most of its sales were made by its truckdrivers, each of whom had a route with designated customers to be called on and serviced. Each Arctic driver was given a ring of tickets showing the names of the customers on his route, the prices each was to pay for Arctic's products, and an indication whether the customer was allowed to charge his purchases or was required to pay cash. When a driver made a sale, he filled out, in duplicate, a sales invoice showing the quantity of each kind of merchandise sold (e.g., 5 gallons of bulk ice cream, 8 gallons of pint brick ice cream, etc.), the total price applicable to each kind of merchandise sold, and the total price of all merchandise sold to the customer. If...
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