Auerbach Shoe Co. v. Comm'r of Internal Revenue, Docket No. 37955.
| Decision Date | 06 November 1953 |
| Docket Number | Docket No. 37955. |
| Citation | 21 T.C. 191 |
| Parties | AUERBACH SHOE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Harry Bergson, Esq., for the petitioner.
Lester H. Salter, Esq., for the respondent.
1. The petitioner's president and sole stockholder sold certain goods from the petitioner's stock in 1944 and 1945 and retained the proceeds. Cost of these goods was charged to the petitioner. The president signed returns which omitted to report the income from these sales. Held, the returns were false and fraudulent with intent to evade tax.
2. Deficiencies for 1944 and 1945 were eliminated by excess profits credit and net loss carry-backs from 1947. Held, the 50 per cent additions to the tax for fraud are properly based upon deficiencies computed without application of carry-backs.
The respondent determined 50 per cent additions to the tax under section 293(b) of the Internal Revenue Code for fraud in the amounts of $3,207.27 and $19,421.84 based on deficiencies in excess profits taxes for the fiscal years ended October 31, 1944 and 1945, respectively, and of $1,504.89 based on a deficiency in declared value excess-profits tax for the fiscal year ended October 31, 1945. The sole issue is whether the additions to tax for fraud were properly determined.
All of the facts have been stipulated and are so found.
The petitioner is a Massachusetts corporation engaged in the manufacture and sale of shoes at wholesale. The petitioner maintained its books and filed its Federal tax returns on the accrual basis covering fiscal years ending October 31. It filed timely returns for the fiscal years ended in 1944 and 1945 with the collector of internal revenue at Boston, Massachusetts.
Hyman Auerbach was president and treasurer of the petitioner during its fiscal years 1944 and 1945 and was owner of 225 shares of its common stock, which were all of the shares of the petitioner issued and outstanding at that time.
During the petitioner's fiscal years ended in 1944 and 1945, Hyman Auerbach received compensation form the petitioner in the amounts of $21,824.29 and $31,725.10, respectively. On January 2, 1946, 200 shares of preferred stock, par value $100 each, were issued for cash to David Auerbach, son of Hyman Auerbach.
During the fiscal years ended in 1944 and 1945 the petitioner's gross sales as recorded on its books amounted to $652,854.36 and $1,214,672.79, respectively. These were reported on its returns.
The petitioner's income and declared value excess-profits tax returns for the years in question were signed by Hyman Auerbach as president and treasurer. He also signed the excess profits tax returns for such years. The returns understated the actual income of the petitioner.
During these years Hyman Auerbach devoted his full time to the management of the business of the petitioner, principally in charge of its sales. He sold goods belonging to the petitioner, chiefly shoes, in the amounts of $13,788.80 in the fiscal year 1944 and $54,456.43 in fiscal 1945 and retained the proceeds of the sales for his own uses. His method was to get the bills of lading before they reached the petitioner's bookkeeper, personally to make out invoices for the sales, and then to collect the amounts of the sales from the customers. The amounts thus received were not reported by Hyman Auerbach on his individual income tax returns for the appropriate years, nor were they reported on the petitioner's tax returns. The cost to the petitioner of the goods so sold and unreported was included in ‘Cost of Goods Sold‘ in its returns for these years.
Neither the clerk nor the directors nor any employee of the petitioner other than Hyman Auerbach had knowledge of his diversion of the proceeds of the above-mentioned sales or of the petitioner's failure to disclose these amounts on its Federal tax returns.
In May 1947, the petitioner voluntarily disclosed to the respondent that it had unreported income in 1943, 1944, 1945, and 1946. Thereupon an examination of the petitioner's books for the years 1944 through 1947 was undertaken by the respondent and the following deficiencies were disclosed:
+-----------------------------------------------------------+
¦ ¦Deficiency for fiscal year ¦
+-----------------------------+-----------------------------¦
¦ ¦ended Oct. 31 ¦
+-----------------------------+-----------------------------¦
¦Kind of tax ¦1944 ¦1945 ¦
+-----------------------------+--------------+--------------¦
¦Income ¦$1,510.30 ¦ ¦
+-----------------------------+--------------+--------------¦
¦Declared value excess-profits¦94.70 ¦$3,009.78 ¦
+-----------------------------+--------------+--------------¦
¦Excess profits ¦6,414.53 ¦38,843.67 ¦
+-----------------------------------------------------------+
The examination also disclosed that the petitioner had incurred a net operating loss in its fiscal year ended October 31, 1947. On May 17, 1948, the petitioner filed an application for tentative carry-back adjustment by reason of its net operating loss in 1947. By the application of the tentative carry-back adjustment and an unused excess profits credit carry-back, the petitioner's tax liability for its fiscal years 1944 and 1945 was modified as follows:
+-----------------------------------------------------------+
¦Fiscal year ended in ¦ ¦ ¦
+-----------------------------+------------+----------------¦
¦ ¦1944 ¦1945 ¦
+-----------------------------+------------+----------------¦
¦Kind of tax ¦Deficiency ¦Overassessment ¦
+-----------------------------+------------+----------------¦
¦ ¦ ¦ ¦
+-----------------------------+------------+----------------¦
¦Income ¦$3,590.64 ¦$3,993.45 ¦
+-----------------------------+------------+----------------¦
¦Declared value excess-profits¦94.70 ¦ ¦
+-----------------------------+------------+----------------¦
¦Excess profits ¦ ¦16,915.18 ¦
+-----------------------------------------------------------+
On May 14, 1948, the petitioner executed a ‘Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment ‘ (Form 874), which set forth deficiencies for the taxable year ended October 31, 1944, in income tax in the sum of $3,590.64 and 50 per cent penalty of $1,795.32, and in declared value excess-profits tax in the sum of $94.70 and 50 per cent penalty of $47.35, amounting to the total sum of $3,685.34 and penalty of $1,842.67 and accepted as correct overassessments of tax for the taxable year ended October 31, 1945, income tax in the sum of $3,993.45 and excess profits tax in the sum of $16,915.18 and for the taxable year ended October 31, 1946, income tax in the sum of $2,666.87.
The petitioner received refunds for these overassessments.
The notice determining the deficiencies here involved was mailed in September 1951. These deficiencies in addition to the tax for fraud were computed on the basis of the original deficiencies in excess profits tax and declared value excess-profits tax before application of the excess profits credit and net operating loss carry-backs.
The taxpayer filed false and fraudulent returns for the fiscal years ended in 1944 and 1945 with intent to evade tax. At least a part of the deficiencies in tax for such fiscal years was due to fraud with intent to evade tax attributable to the petitioner.
The petitioner contends that this Court is not required as a matter of law to find the petitioner chargeable with the fraudulent conduct of its president, Hyman Auerbach, and, such a finding not being required as a matter of law, the respondent has failed to sustain the burden of proving as a fact that the petitioner was guilty of fraudulent conduct at the time of filing its returns for the fiscal years 1944 and 1945.
Auerbach knowingly concealed sales made of the petitioner's goods and retained the proceeds for himself. He arranged to keep these sales from being recorded on the petitioner's books. He made false affidavits on the petitioner's returns certifying them as true and correct when he knew they were not. These facts permit of no other conclusion that that corporation's tax returns for the fiscal years 1944 and 1945 were fraudulently filed with the intention of evading tax. The...
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