Baughn v. C.I.R., 122269 FEDTAX, 1548-68
|Docket Nº:||1548-68, 2049-68.|
|Opinion Judge:||DAWSON, Judge:|
|Party Name:||HUBERT F. BAUGHN and LEILA F. BAUGHN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent JOE T. BARTON and RUTH D. BARTON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent|
|Attorney:||Joe T. Booth, III, and Richard J. Grassgreen, for the petitioners in docket No. 1548-68. Joe T. Barton, pro se. Robert D. Hoffman, for the respondent.|
|Case Date:||December 22, 1969|
|Court:||United States Tax Court|
MEMORANDUM FINDINGS OF FACT AND OPINION
In these consolidated cases respondent determined income tax deficiencies and additions to tax against the petitioners as follows:
Additions to Tax
Petitioners Docket No. Year Deficiency § 6653(b) § 6654(a)
Hubert F. and Leila F. Baughn 1548-68 1960 $34,450.26 $17,225.13 ......
1961 34,823.53 17,411.77 ......
1962 9,194.17 4,597.09 ......
Joe T. and Ruth D. Barton 2049-68 1960 30,741.03 15,370.52 ......
1961 27,719.04 13,859.52 $119.87
1962 5,460.97 ........ ......
By amendments to his answers respondent has asserted the following additional deficiencies on alternative grounds:
Additions to Tax
Petitioners Docket No. Year Deficiency Sec. 6653(b)
Hubert F. and Leila F. Baughn 1548-68 1960 $24,254.82 $12,127.41
1961 19,228.69 9,614.34
1962 5,254.66 2,650.26
Joe T. and Ruth D. Barton 2049-68 1960 71,202.40 35,601.20
1961 66,275.94 33,137.97
1962 15,587.24 10,524.10
The two principal issues for decision are (1) whether Hubert F. Baughn and Joe T. Barton failed to report all of their respective shares of income derived from a road striping contract with the State of Alabama during 1960, 1961, and 1962, resulting in understatements of taxable income for such years; and (2) whether any part of the underpayment of tax in each of the years was due to fraud with intent to evade tax. In docket No. 1548-68 we must also decide the following questions:
1. Did the relationship between Hubert F. Baughn and Howard Sadler constitute a partnership within the meaning of section 7701(a)(2)? 2. If no partnership existed, were the amounts which Baughn permitted Sadler to retain from the Alabama Marking & Sign Company deductible as ordinary and necessary business expenses by Baughn under section 162 in each of the years involved? 3. If such amounts are not deductible as ordinary and necessary business expenses, did Baughn lack the requisite dominion and control over the amounts admittedly received by Sadler from Alabama Marking & Sign Company in each of the years in issue so that such amounts are not income to Baughn in those years? 4. Does the statute of limitations bar assessment of the deficiency in the income tax of Hubert F. Baughn and his wife for the year 1961?
FINDINGS OF FACT These consolidated cases were submitted almost entirely on the basis of the stipulated statements of Hubert F. Baughn and Joe T. Barton. These statements were given to respondent's agent on July 1, 1963, in the office of Richmond Flowers, then Attorney General for the State of Alabama. Present at that time were William S. Duke and Joe T. Booth, III (attorneys for Baughn and Barton), and Joe Gantt (Assistant Attorney General of Alabama). At the time he received the statements, respondent's agent was investigating the activities of Baughn and Barton for possible criminal tax prosecution. The stipulations of facts, containing these statements and exhibits, are incorporated herein by this reference. Hubert F. Baughn and Leila F. Baughn are husband and wife who had their legal residence in Birmingham, Alabama, at the time their petition was filed herein. They filed joint Federal income tax returns for the years 1960, 1961, and 1962 with the district director of internal revenue at Birmingham, Alabama. Joe T. Barton and Ruth D. Barton are husband and wife. Their legal residence was Montgomery, Alabama, at the time they filed their petition in this proceeding. Their joint Federal income tax returns for the years 1960, 1961, and 1962 were filed with the district director of internal revenue at Birmingham, Alabama. In early 1959, Joe T. Barton (herein called Barton) became interested in obtaining a contract from the State of Alabama to paint the traffic lines or markings (herein referred to as striping) on the State's roads and highways. To get the contract, Barton solicited the assistance of Harold Purdy, a man Barton knew to be a ‘ favorite of the Administration.’ As it turned out, Purdy had already received all the patronage the Administration was going to give him. He was unable to help Barton, except for the suggestion that Barton see Hubert F. Baughn (herein called Baughn), who had worked in the previous election, but who, according to Purdy, had not at that time received any ‘ favors' from the Administration. Sometime during the summer of 1959, Barton contacted Baughn in Montgomery, Alabama, to get his help in obtaining a contract from the State to stripe the highways on a negotiated basis. Baughn owned and published the South News Magazine in Birmingham. Prior to this meeting Barton had known Baughn casually for several years. On this particular occasion, Baughn indicated he was busy, but he would discuss the matter further with Barton at a later time. Subsequently, the two met on various occasions to discuss further the matter of the road striping contract. In late 1959, after a number of discussions with Barton, Baughn disclosed to Sam Engelhardt, the State Highway Director, Barton's interest in painting the traffic lines on the highways and asked him about the State's plans with respect to road striping. Engelhardt responded that he did not know what what the Department's plans were but that he thought any contract for such work would be let on a competitive bid basis. In the past Alabama had used convict labor to stripe the highways and there was some doubt whether the State would contract the work out to a private contractor. Baughn was frequently in Montgomery and while there he came into contact with Engelhardt and Walter Craig (herein called Craig), the assistant director of highways. Once while Baughn was at the Highway Department, Craig approached him and indicated he had given considerable thought to the proposition of having a private contractor stripe the roads and he ‘ could see great possibilities for some of us.’ At one point during their discussions, Craig asked Baughn how much he thought it would cost Barton to do the work and ‘ how much money could be made out of it.’ Baughn replied he did not know and suggested that they meet with Barton to discuss the matter. Late in 1959, Craig, Baughn, and Barton met in Craig's office to discuss the road striping contract. Prior to such meeting, Barton had never met Craig. At the time of the meeting it was not known if the State would negotiate the contract or if it would be let on a competitive bid basis. During the course of their discussions Craig made it clear to Barton that ‘ he (Barton) did not mean a thing to the Administration,‘ and that it would be necessary for him ‘ to play ball’ with Baughn if he expected to get any business. Craig also made it clear to both Baughn and Barton that he was going to get a share of the profits or there would be no work ordered under the proposed contract. Baughn assured Craig that he thought he could handle Barton and, if they could get the contract, he would make sure that Craig got part of the profits. In either December 1959 or January 1960, Craig discovered that the State was not going to negotiate the contract but instead was going to let it on a low bid basis. Even under these circumstances-the letting of the contract on a competitive bid basis-Craig was confident he could handle the matter. Acting in accordance with Craig's directions, Barton procured letters from four of his friends who were contractors in which each indicated an interest in striping the roads and quoted a price for which they would do such work. In each instance Barton suggested the quoted bid price submitted by the four contractors. None of the contractors, in fact, wanted the contract. The ‘ bids' were merely submitted as a favor to Barton. The ‘ phoney’ bids submitted by Barton's contractor-friends were as follows:
Contractor Bid price per mile of striping
Montgomery Construction Co., Inc. $46.00
Mobile Car Spacing Co. 39.75
W. S. Newell Construction Co. 45.00
DuBose Construction Co. 42.00
As a result of the collusive bidding arrangement, Barton knowingly prepared and submitted the low bid of $39.50 per mile in the name of Alabama Marking & Sign Company (herein sometimes referred to as the company). Craig knew of, and participated in, the collusion. When Barton handed Craig the bids, Craig asked if his bid was low. Barton replied that he was low as to these particular bids. ‘ Well, Bud,‘ Craig responded, ‘ we are in business.’ The next day Barton received word through Baughn that Craig wanted to see him right away. When Barton reached Craig's office, Craig said: ‘ Joe, you damn fool, all these * * * bids are dated the same date! It looks...
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