Arheit v. Comm'r of Internal Revenue
| Decision Date | 10 October 1958 |
| Docket Number | Docket No. 63289. |
| Citation | 31 T.C. 46 |
| Parties | FRED J. ARHEIT AND GERTRUDE D. ARHEIT, PETITIONERS, v. Commissioner OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Arnold F. Bunge, Esq., and A. J. Beran, C.P.A., for the petitioners.
Maurice B. Townsend, Jr., Esq., for the respondent.
SEC. 23(b)— DEDUCTIBILITY OF INTEREST: YEAR OF PAYMENT: SUSPENSE ACCOUNT DEPOSIT.— In 1952, prior to any formal determinations or assessments of deficiencies in income tax for the years 1945-1950, inclusive, petitioner made a remittance to a collector of estimated tax deficiencies and interest thereon up to the date of the remittance for the purpose of stopping the running of interest upon proposed deficiencies. Petitioner's estimate of deficiencies was based upon information received informally from agents of the Commissioner about their reports recommending determinations of deficiencies plus 50 per cent additions for fraud under section 293(b). The petitioner disputed some of the proposed deficiencies and the 50 per cent additions thereto. The collector credited the entire remittance to a suspense account. In 1955, after the issuance of a 30-day letter by the Commissioner, the petitioner executed waivers and consents, deficiencies and 50 per cent additions thereto were assessed, and the collector credited the deposit in the suspense account to the assessment account. Petitioner reported income on a cash basis. Held, there was no payment of interest on indebtedness in 1952, and a deduction for interest ‘paid’ under section 23(b), 1939 Code, is not allowable.
The Commissioner determined a deficiency in income tax for the year 1952 in the amount of $8,439.80. The question is whether there was a payment in 1952 of interest in the amount of $12,953.90 on deficiencies in income tax for prior years within the provisions of section 23(b), 1939 Code, for which petitioners are entitled to a deduction in 1952.
The Commissioner determined that for the year 1951 an addition to tax is due under section 294(d)(2) in the amount of $1,338.27. He has conceded that this determination was incorrect and that no addition to the tax for 1951 is due.
The petitioners are residents of Toledo, Ohio. They filed joint returns for the years 1951 and 1952 with the collector of internal revenue for the tenth district of Ohio.
The issue relates to Fred J. Arheit only. Therefore, he is referred to hereinafter as the petitioner.
The petitioner reported his income for 1952, and for all other material years, on a cash basis.
In the joint return for 1952, a deduction was taken for interest which was claimed to have been paid in 1952 to the collector of internal revenue in Toledo in the amount of $12,953.90. The Commissioner disallowed the deduction on the ground that it was not allowable under section 23(b) of the 1939 Code.
The amount, $12,953.90, was part of a larger amount,.$66,639.70, which was the amount of a check which petitioner mailed to the collector of internal revenue in Toledo on April 7, 1952, under circumstances which are described hereinafter. The amount, $12,953.90, represents the total of various amounts of interest computed on proposed deficiencies in income tax for each of the years 1945 through 1950, as is explained hereinafter, the proposed deficiencies totaling $53,685.80. The proposed deficiencies and the interest thereon computed to April 7, 1952, aggregated.$66,639.70.
As of April 7, 1952, the Commissioner had not mailed either a 30-day letter or a final notice of deficiency (90-day letter) setting forth determinations of deficiencies for the years 1945-1950, and deficiencies for those years had not been assessed.
The collector of internal revenue in Toledo, upon receipt of petitioner's check for.$66,639.70, credited that amount to a suspense account.
On or about July 1, 1955, petitioner agreed to the assessment of deficiencies in income tax for the years 1945-1950, inclusive, in the total amount of $54,497.70, and to 50 per cent additions to the deficiencies under section 293(b) (so-called fraud penalties) in the total amount of $28,462.38. The agreed deficiencies and 50 per cent additions totaled $82,960.08. Petitioner agreed to the deficiencies and additions by executing Forms 870. Thereafter, in 1955, the Commissioner made assessment of the deficiencies and interest, and of the additions to the deficiencies.
The circumstances leading up to the assessment in 1955 of the income tax deficiencies and additions are as follows:
Prior to February 26, 1952, the respondent caused an audit to be made of the returns of the petitioner for the years 1945-1950, inclusive. On February 26, 1952, agents of the respondent, who had completed their audits and made their reports, advised petitioner orally, at a conference, that their audits showed that there were deficiencies in income tax for each of the years 1945-1950, inclusive, in the amounts set forth below; that they had determined that the deficiencies were due to fraud with intent to evade tax; and that 50 per cent additions to the deficiencies under section 293(b) were proposed. Petitioner did not agree to the 50 per cent additions to the deficiencies, and after his counsel and accountant had checked the amounts of the proposed deficiencies, he did not agree with the amounts computed by the agents for 1949 and 1950, although he did not dispute the amounts of the deficiencies computed for the years 1945-1948, inclusive. The amounts of the deficiencies in income tax computed by the respondent's agents for the years 1945-1950 were as follows:
+--------------------+
¦Year ¦Deficiency ¦
+------+-------------¦
¦1945 ¦$12,595.69 ¦
+------+-------------¦
¦1946 ¦14,324.96 ¦
+------+-------------¦
¦1947 ¦7,447.49 ¦
+------+-------------¦
¦1948 ¦7,442.62 ¦
+------+-------------¦
¦1949 ¦1,653.56 ¦
+------+-------------¦
¦1950 ¦11,515.68 ¦
+------+-------------¦
¦Total ¦54,980.00 ¦
+--------------------+
Petitioner's counsel and accountant, in their computations of deficiencies for 1949 and 1950, arrived at the amounts of $1,323.96 and $10,551.08, respectively. The deficiencies in income tax for 1945-1948, inclusive, which petitioner did not dispute, totaled $41,810.76. Added to that figure the amounts of deficiencies for 1949 and 1950 computed by petitioner's accountant, the total deficiencies in income tax which petitioner estimated in February 1952 amounted to $53,685.80.
Although petitioner's representatives were satisfied that there were some deficiencies in income tax for each of the years in dispute, they protested the imposition of the 50 per cent additions for fraud in 1952, and they continued to object to the imposition of such civil fraud penalties up to the time in 1955 when petitioner finally agreed to them at the time he executed the Forms 870. On April 14, 1952, petitioner's counsel sent a letter to the special agent in charge, in the Intelligence Division of the Internal Revenue Service in Toledo, in which he discussed, inter alia, the petitioner's denial of liability for 50 per cent civil fraud additions to the deficiencies under section 293(b), in which he said: ‘In our opinion no fraud penalty should be assessed and we are hopeful that this matter may be finally closed without the assessment of a fraud penalty or any further proceedings upon the part of your department.’
In the early part of 1952, there were pending against petitioner charges of fraudulent tax evasion under the criminal statutes. Because of the charges, the Commissioner withheld issuing formal notice under either a 30-day letter or a 90-day letter of determinations of deficiencies in income tax for the years 1945-1950, inclusive, and of 50 per cent additions to the deficiencies, as recommended by his agents in their reports and audits which had been completed as of February 26, 1952. The Commissioner withheld issuing a formal notice of his determinations of deficiencies pending the outcome of proceedings involving the charges of criminal tax evasion.
Prior to April 7, 1952, petitioner requested the collector's office in Toledo to compute interest on estimated deficiencies (with petitioner's adjustments for 1949 and 1950) to April 7, 1952. The collector's office orally advised petitioner of the amounts of such interest. On April 7, 1952, petitioner sent his check for.$66,639.70 to the collector with the following letter of his attorney:
The Revenue Department has made an audit of the tax returns of Fred J. Arheit for the years 1945, 1946 and 1947, and of Fred J. Arheit and Gertrude E. Arheit for the years 1948, 1949 and 1950. The Revenue Agent has proposed the assessment of certain deficiencies for the years in question. While the taxpayers are not entirely in agreement with the figures submitted by the Revenue Agent, nevertheless there does appear to be a deficiency in the tax for those years and the taxpayer, in order to save interest upon the proposed deficiencies, tenders herewith his check in the amount of.$66,639.70 which is to be applied as follows:
+--------------------------------------+
¦Year¦Proposed ¦Interest to¦Total ¦
+----+----------+-----------+----------¦
¦ ¦deficiency¦4/7/52 ¦ ¦
+----+----------+-----------+----------¦
¦1945¦$12,595.69¦$4,582.07 ¦$17,177.76¦
+----+----------+-----------+----------¦
¦1946¦14,324.96 ¦4,351.65 ¦18,676.61 ¦
+----+----------+-----------+----------¦
¦1947¦7,447.49 ¦1,815.55 ¦9,263.04 ¦
+----+----------+-----------+----------¦
¦1948¦7,442.62 ¦1,367.80 ¦8,810.42 ¦
+----+----------+-----------+----------¦
¦1949¦1,323.96 ¦163.88 ¦1,487.84 ¦
+----+----------+-----------+----------¦
¦1950¦10,551.08 ¦672.95 ¦11,224.03 ¦
+----+----------+-----------+----------¦
¦ ¦$53,685.80¦$12,953.90 ¦$66,639.70¦
+--------------------------------------+
Will you please endorse your receipt upon a copy of this letter and return it to us.
The collector deposited...
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