Burnett v. Commissioner
| Decision Date | 04 December 1964 |
| Docket Number | Docket No. 91655,91656. |
| Citation | 23 TCM (CCH) 1917,1964 TC Memo 314 |
| Parties | James F. Burnett, Jr. and Margaret Burnett v. Commissioner. J. F. Burnett, Jr., Inc. v. Commissioner. |
| Court | U.S. Tax Court |
Matthew V. Byrne, Jr., 412 Syracuse-Kemper Bldg., Syracuse, N. Y., for the petitioners. Edward H. Hance, for the respondent.
Memorandum Findings of Fact and Opinion
This consolidated proceeding involves deficiencies in income tax and additions to tax determined against petitioners as follows:
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Petitioner Docket Addition to Tax1
Number Year Deficiency Sec. 6653(b)
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James F. Burnett, Jr., and Margaret Burnett....... 91655 1955 $ 3,252.59 $ 1,626.30
1956 24,466.91 12,543.68
1957 63,035.34 31,517.67
F/Y/E
J. F. Burnett, Jr., Inc. ......................... 91656 4-30-56 $16,236.41 $ 8,118.21
4-30-57 38,966.16 19,483.08
4-30-58 23,914.77 11,957.39
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Petitioners in Docket No. 91655 do not contest the adjustments to taxable income set forth in the notice of deficiency for the years 1955, 1956 and 1957, as modified by the deletion from taxable income of amounts which have been stipulated by the parties as follows:
Year Amount
1955 ..................... $ 73.57
1956 ..................... 1,280.70
1957 ..................... 1,518.78
Petitioner in Docket No. 91656 does not contest the adjustments to taxable income set forth in the notice of deficiency for the fiscal years ended April 30, 1956, 1957 and 1958, as modified by the allowance of deductions which have been stipulated by the parties as follows:
Fiscal Year Ended Amount
April 30, 1956 ............... $ 121.32
April 30, 1957 ............... 1,164.49
April 30, 1958 ............... 1,718.48
The principal issues presented for our consideration are: (1) Whether any part of any underpayment determined for each of the taxable calendar years 1955, 1956 and 1957 with respect to the individual petitioners in Docket No. 91655 was due to fraud with intent to evade tax; (2) whether any part of any underpayment determined for each of the fiscal years ended April 30, 1956, 1957 and 1958 with respect to the corporate petitioner in Docket No. 91656, was due to fraud with intent to evade tax; (3) whether assessment and collection of any of the deficiencies against the individual petitioners for the years 1955 and 1956 are barred by the statute of limitations; and (4) whether assessment and collection of the deficiencies against the corporate petitioner for the fiscal years ended April 30, 1956, and April 30, 1957, are barred by the statute of limitations.
The facts are partly stipulated and to the extent so stipulated are incorporated herein by reference.
James F. Burnett, Jr. and Margaret Burnett, the individual petitioners in Docket No. 91655, reside at 29 Kurrwood Circle, Rochester, New York.
James F. Burnett, Jr., and Margaret Burnett filed joint income tax returns for the calendar years 1955, 1956 and 1957 with the district director of internal revenue, Buffalo, New York. James F. Burnett, Jr., will sometimes hereinafter be referred to as the petitioner.
J. F. Burnett, Jr., Inc., the petitioner in Docket No. 91656 filed corporation income tax returns for the fiscal years ended April 30, 1956, 1957, and 1958, with the district director of internal revenue, Buffalo, New York. J. F. Burnett, Jr., Inc., will hereinafter sometimes be referred to as the corporate petitioner.
James F. Burnett, Jr., entered the filter business in 1949 with two employees operating from his own home and a barn in the neighborhood. In the beginning the corporate petitioner dealt with so-called "throwaway type" filters and its only activity was the sale of these filters. During the taxable period involved herein, the corporate petitioner was a fabricator and distributor of air filters and fiberglas insulation materials. The corporate petitioner did business in western and central New York with its headquarters located in a renovated theater building in Rochester, New York. After a number of years the corporation obtained substantial business with Carrier Corporation in Syracuse, New York, and from then on the corporate petitioner's business grew rapidly.
Petitioner was president, treasurer and sole stockholder of the corporate petitioner during the taxable years involved herein. Petitioner was also a salesman for the corporate petitioner during the years in question and has been so engaged throughout his working life. The financial success of the corporate petitioner was largely attributable to the sales efforts of petitioner. During the taxable years involved petitioner was occupied with sales on behalf of the corporate petitioner, making calls on customers and suppliers which restricted to a great extent his presence in the office of the corporate petitioner.
Petitioner entrusted the bookkeeping of his business to David Kass, his accountant, and to Carmella Decker, his office manager and bookkeeper. Kass had been associated with Burnett since the early 1930's when both were employed by Rochester Gas and Electric Company.
Kass was chief accountant for Rochester Gas and Electric Company. He had been employed by said company for about 37 years at the time of the instant trial. Since 1927, Kass has also engaged in public accounting. Kass took care of all of petitioner's accounting and for many years prepared all of his income tax returns, including those involved herein. Kass also acted as financial advisor to petitioner and suggested an investment program because of the accumulation of money by the corporate petitioner.
Kass set up petitioner's systems of accounting and the chart of accounts for the corporate petitioner, posted journal entries to the general ledger, reconciled the bank accounts, analyzed inventory, and computed the depreciation account.
Kass and Carmella were concerned with minute details regarding the bookkeeping of the corporation. On occasion, Kass had to change credits to accounts receivable on the corporation's books and records. At the close of the fiscal year ending April 30, 1958, Kass increased corporate sales by $9,500.
Carmella, the corporation's bookkeeper, was with the corporation from its inception in 1949. She was the manager and supervisor of all office personnel. During the taxable period involved herein there were three girls working in the office under her immediate supervision. She had charge of the banking and prepared all the checks of the business.
Carmella had gone to high school, but had no formal or academic business training. Carmella was instructed by Kass as to her bookkeeping duties. He showed her where various items belonged in the corporate books and records.
During the taxable years in question she had charge of the disbursement journal and the receipts journal.
Petitioner purchased real property on Lake Canandaigua, New York, in 1954 which he began using as his permanent year-around residence in 1956. In July 1955 petitioner contracted with Earl J. Stephan for the construction of a dock at his home on Lake Canandaigua at a cost of $1,409. On January 10, 1956, Stephan was paid $1,000 by a check drawn on the bank account of the corporate petitioner which was signed by Burnett. The amount of this check was recorded on the corporation's books as an "advertising expense" in the fiscal year 1956 and taken as a deduction on its corporate income tax return for that year. Carmella did not know the purpose of the aforesaid check at the time it was drawn and did not know how to enter the item on the corporation's books. She had to get an explanation of this item from petitioner.
On February 3, 1956, a 21-foot Chris-Craft boat was purchased from the Waldorf Boat Co., Inc. A check of corporate petitioner in the amount of $4,201.83, made payable to Waldorf, Inc., was used to pay for said boat. The amount of this check was recorded on the corporation's books as "merchandise purchase" in the fiscal year 1956 and deducted as an expense on the corporation's income tax return for that year. Carmella did not know the purpose of said check at the time it was made out and did not know how to enter it on the corporation's books. She had to obtain an explanation of this item from petitioner. The check to Waldorf, Inc., was signed by the petitioner.
In 1956 petitioner contracted with John Tiberio for the construction of a retaining wall as protection against the waters of Lake Canandaigua. Tiberio was paid for said work by two corporation checks, one dated January 25, 1957, in the amount of $600 and the other dated February 5, 1957, in the amount of $1,871.50. These checks were identified as "filter mfg." in the corporation's checkbook. Said amounts were shown on the corporation's books as a "subcontract expense" in the fiscal year 1957 and deducted on the corporation's income tax return for that year. Carmella did not know Tiberio or the purpose of the check. She had to ask petitioner for information as to these items. Said checks were...
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