Burr v. Commissioner
| Decision Date | 27 May 1966 |
| Docket Number | 3066-64.,Docket No. 3063-64 |
| Citation | 25 TCM (CCH) 592,1966 TC Memo 112 |
| Parties | Jack M. Burr and Myn Burr v. Commissioner. Emerald Plastics Corp. (a New York corporation) v. Commissioner. |
| Court | U.S. Tax Court |
Eugene O. Cobert, 41 East 42nd St., New York, N. Y., for the petitioners. James Q. Smith and Charles G. Barnett, for the respondent.
The respondent determined deficiencies in income tax and additions to tax for fraud, as follows:
Year Additions to Tax
Ended Income Sec. 6653(b)
Tax I. R. C. 1954
Jack M. Burr and Myn Burr
12-31-55.......... $11,973.85 $5,986.93
12-31-56.......... 19,521.99 9,761.00
12-31-57.......... 7,068.46 3,534.23
12-31-58.......... 15,889.42 7,944.71
Emerald Plastics Corp
5-31-55............. 5,200.73 2,600.37
5-31-56............. 19,215.28 9,607.64
5-31-57............. 7,623.27 3,811.63
5-31-58............. 8,918.99 4,459.50
The questions presented are:
(1) Were sales of plastics to Equality Plastics Corporation during the taxable years made by Emerald Plastics Corporation or by its sole stockholder, Jack M. Burr?
(2) Did the Commissioner err in determining the amount of profit from such sales which was includable in the taxable income of the seller during the taxable years?
(3) If Emerald Plastics Corporation was the seller, did Jack M. Burr receive taxable income from it which was not reported in his returns for the years 1955 through 1958?
(4) Did the Commissioner err in disallowing deductions of $1,000 claimed for capital losses and capital loss carryovers in the joint returns of Jack and Myn Burr for the years 1955 through 1958?
(5) Did the Commissioner err in disallowing the sick pay exclusion of $2,160 claimed by Jack and Myn Burr in their joint return for the year 1958?
(6) Did the Commissioner err in disallowing all or part of the amounts claimed as deductions by Jack and Myn Burr in their returns for the years 1955 through 1958 for contributions, interest, taxes, medical expenses, travel expenses, and dues and subscriptions?
(7) Did the Commissioner err in failing to allow Jack and Myn Burr a deduction of $2,500 for legal fees paid on November 19, 1958?
(8) Did the Commissioner err in determining that Emerald Plastics Corporation was liable for a 50 percent addition to tax for fraud under Section 6653(b) of the Internal Revenue Code of 1954 for each of the fiscal years ended May 31, 1955 through May 31, 1958?
(9) Did the Commissioner err in determining that Jack and Myn Burr were liable for a 50 percent addition to tax for fraud under Section 6653(b) of the Internal Revenue Code of 1954 for each of the calendar years 1955 through 1958?
The Commissioner concedes that Jack and Myn Burr sustained a loss of $2,525 on the sale of real property in 1958, as reported in their return for that year, and that he erred in determining that they realized a short-term capital gain of $4,000 on that sale.
Some of the facts have been stipulated, and, as stipulated, are incorporated herein by reference.
Jack M. Burr and Myn Burr, husband and wife, are residents of White Meadow Lake, New Jersey. They filed joint income tax returns on the cash basis for the calendar year 1955 with the district director for the Brooklyn District of New York, for the calendar years 1956 and 1957 with the district director for the Manhattan District of New York, and for the calendar year 1958 with the district director for (what is now) the Newark District of New Jersey. Jack M. Burr will sometimes hereinafter be referred to as Burr.
During the years 1954 through 1957 Burr had a checking account at the Manufacturers Trust Company and a savings account at the Bowery Savings Bank, and Myn Burr had a checking account at the Sterling National Bank & Trust Company.
Harjax Corporation (hereinafter referred to as Harjax) was organized under the laws of the State of New York on or about February 4, 1948 to engage in the manufacture of closet accessories. Burr and Harry Adler each invested $7,500 in the corporation, and they became the owners of its stock. Burr was its president and sales manager, and Adler its secretary and treasurer. Prior to November 15, 1954, Burr received a regular salary from Harjax, and devoted practically his full time to the business of the corporation.
Emerald Plastics Corporation (hereinafter sometimes referred to as Emerald) was organized under the laws of the State of New York on June 11, 1949 to handle mail orders of products produced by Harjax. After it was organized a checking account was opened in its name at the Manufacturers Trust Company in New York. On or about April 22, 1955, another checking account was opened in its name at the Commercial State Bank and Trust Co. of New York (hereinafter referred to as the Commercial State Bank). Prior to November 15, 1954, Burr and Harry Adler each owned 50 percent of Emerald's stock. Emerald and several other enterprises in which Burr had an interest occupied the same office space. It did not maintain any books of account other than a checkbook, and did not file Federal income tax returns for the calendar years 1955 through 1958 or for any fiscal year ending within any of those years. The parties have agreed that for Federal income tax purposes its taxable year is a fiscal year ending May 31.
On October 28, 1953, Burr borrowed $3,500 and $2,473.12 from the Sterling National Bank & Trust Company on two separate time payment loans. Of the proceeds of these loans, Burr deposited to the account of Harjax $2,709.30 and $2,300, respectively, or an aggregate of $5,009.30. On November 15, 1954, the amount owing by Burr on these loans was $3,000.
In April 1954, Burr had a heart attack and was taken to the Forest Hills General Hospital where he stayed for a period of approximately seven weeks. He did not return to work at Harjax, on the advice of doctors, until October, 1954. At that time the condition of the business of Harjax was "poor" and he decided to dispose of his interest in that corporation.
On November 15, 1954, Burr sold all of his Harjax stock to Adler, and Adler transferred all of his Emerald stock to Burr. Emerald then had $292.72 in its bank account at the Manufacturers Trust Company.
The sale by Burr to Adler of his stock of Harjax was made pursuant to the terms of an agreement entered into on November 15, 1954 between the Burrs, Adler and Harjax. Therein Harjax agreed to pay Burr the balance of $3,000 which Burr then owed to the Sterling National Bank and Burr agreed to pay that amount to the bank; Burr agreed to assign to Adler all claims which he had against Harjax including any monies owing by Harjax to Burr; and Burr, Adler and Harjax agreed to give each other releases. The $3,000 balance was paid by Harjax to Burr and was deposited by him in his personal account at the Manufacturers Trust Company on November 16, 1954. The agreement also provided that in the event Harjax was actively engaged in business on the first anniversary date of the agreement, Adler would pay Burr $1,000, and in the event it was actively engaged in business on the second anniversary date of the agreement, Adler would pay Burr an additional $1,000. Burr subsequently received two $1,000 payments from Adler.
In a joint income tax return filed by Burr and his wife for the year 1954, they reported salary received by Burr from Harjax in the amount of $5,050, and a tax withholding on that salary of $540.60.
As of December 31, 1954, the balance in Burr's account at the Manufacturers Trust Company amounted to $2,310.11, the balance in Burr's account at the Bowery Savings Bank $435.12, the balance in Myn Burr's account at the Sterling National Bank $3,101.86, and the balance in Emerald's account at the Manufacturers Trust Company $288.72.
In the latter part of 1954, after his illness, Burr did not engage in any busines activity. Arnold Mandell, a friend of long standing, permitted him to use one of the offices of Remington Associates, Inc., a corporation apparently controlled by Mandell. In December of 1954 Burr met a person named David Wiener on the street; Wiener told Burr that he knew someone who had plastics which Burr could sell at a profit, but that Burr would have to pay cash in advance for this merchandise. The merchandise consisted of vinyl plastics in roll or sheet form which were classified as irregulars because of changes in color or lack of uniformity in thickness. Burr ascertained that Equality Plastics Corporation (hereinafter referred to as Equality Plastics), the president of which was Harold Richards, was interested in buying such merchandise whenever it was available.
During the years 1955 through 1958 plastics purchased from or through Wiener were sold to Equality Plastics. Whenever plastic "irregulars" became available Burr would receive a phone call from Wiener, who would tell Burr the price he wanted for the merchandise per pound or per yard. Burr would then communicate with Richards to find out if Equality Plastics could use the material at the price which Burr quoted to him. When Richards indicated that it could, Burr would call Wiener, pay him cash in advance for the merchandise, and arrange for its delivery to Equality Plastics. After delivery was made Burr would send Equality Plastics an Emerald Plastics Corp. invoice which contained a statement of the merchandise delivered and the amount due therefor. When the invoice was received, Richards, who understood that Burr was representing Emerald, would send a check of Equality Plastics payable to Emerald for the amount due. This check would be received within a period of "not more than several days, two or three days" from the time payment of the merchandise was made to Wiener. All checks received...
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