Close v. Commissioner, Docket No. 63304.
| Decision Date | 14 April 1959 |
| Docket Number | Docket No. 63304. |
| Citation | 1959 TC Memo 71,18 TCM (CCH) 348 |
| Parties | William Edgar Close v. Commissioner. |
| Court | U.S. Tax Court |
Kenneth Cleaver, Esq., 2120 Colorado Boulevard, Los Angeles, Calif., for the petitioner. Eugene F. Reardon, Esq., for the respondent.
The respondent determined the following deficiencies in income taxes and additions to tax:
Additions to Tax
I. R. C. 1939
---------------------------------
Sec. Sec. 294 Sec. 294
Year Deficiency 293(b) (d)(1)(A) (d)(2)
1947..... $ 486.07 $ 243.03 $ 52.78 $ 35.18
1948..... 650.19 325.09 76.90 51.25
1949..... 4,825.57 2,412.78 563.83 375.87
1950..... 3,903.62 1,951.81 419.62 279.75
_________ _________ _________ _______
$9,865.45 $4,932.71 $1,113.13 $742.05
The issues are:
1. Whether part of the deficiency for each of the years 1947, 1948, 1949 and 1950 was due to fraud with intent to evade tax.
2. Whether petitioner is liable for the additions to tax provided for in Section 294(d)(2) for making substantial underestimate of estimated tax.
3. Whether petitioner sustained deductible losses from gambling in the amount of $287.70 in the year 1947 and in the amount of $199 in the year 1950.
4. Whether petitioner is entitled to a deduction for child support in the amount of $900 for the year 1950.
The petitioner concedes that he is liable for the additions to tax provided for in Section 294(d)(1) (A) for failure to file declarations of estimated tax for each of the years 1947 through 1950. Petitioner does not contest the basic deficiencies determined by the Commissioner except as they are affected by issues 3 and 4.
A stipulation of facts filed by the parties is incorporated herein by reference.
Petitioner, a resident of Glendale, California, filed his income tax returns for the taxable years with the then collector of internal revenue for the sixth district of California.
Petitioner has been in the coffee business since 1915. During the taxable years he was employed as the manager of the coffee and manufacturing division of the Smart & Final Company of Glendale, California (hereinafter sometimes referred to as Smart & Final), a corporation engaged in the wholesale grocery business. Its activities, among others, included the purchase of green coffee for roasting and the sale of the roasted coffee to its customers. At times during the taxable years Smart & Final had green coffee in excess of its requirements and would sell this excess coffee. Petitioner handled such sales for the company.
During the years 1947 through 1950 William J. Morton was a green coffee broker engaged in the business of buying various types of green coffee and selling it to coffee roasters in the Los Angeles area. Prior to November 1949 Morton engaged in this business as an individual. In November 1949 the business was incorporated and became W. J. Morton, Inc. (As used hereinafter the name "Morton" will be used to refer to William J. Morton individually, or to his corporation, or to William J. Morton acting for his corporation.) Petitioner, acting as agent for Smart & Final, had sold green coffee to Morton prior to 1947. During the years 1947 through 1950 coffee was in short supply and there was an upward swing in the market.
Early in 1947, at the suggestion of petitioner, he and Morton entered into an oral agreement the substance of which was that petitioner, acting as agent for Smart & Final, would sell green coffee to Morton and thereupon petitioner and Morton would share equally any profits or losses resulting from the resale of that coffee by Morton. Morton shared the profit on resale with petitioner because petitioner was selling the coffee to him at a price which was from one-quarter to one-half cent per pound lower than Morton could purchase it elsewhere. Neither petitioner nor Morton told Smart & Final about their profit-sharing agreement.
During the years 1947 through 1950 petitioner, acting as agent for Smart & Final, made a number of sales of green coffee to Morton. Morton paid Smart & Final for this coffee. When Morton sold the coffee he realized a profit on every sale. In accordance with the oral agreement he divided the profit realized with petitioner. The amount received by petitioner as his share of the profit on the coffee transactions with Morton during the taxable years was as follows:
Year Amount
1947.................. $ 1,417.79
1948.................. 1,478.52
1949.................. 9,950.00
1950.................. 10,171.70
Petitioner received from Morton checks during each of the years as his share of the profits.
During the years 1947 and 1948 petitioner and Morton discussed the profit realized on coffee transactions, and Morton, who kept records showing the profit on each transaction, told petitioner the specific amounts he was reporting as profit on these transactions in his income tax returns for 1947 and 1948. These amounts represented 50 per cent of the profit. Petitioner did not report the amounts he received from Morton as his share of the profits for 1947 and 1948 in his income tax returns for those years.
Subsequent to 1948 petitioner and Morton had a conversation with respect to the manner in which any profits realized during the years 1949 and 1950 would be reported, and Morton told petitioner that he would include the full amount of any profits realized during those years in his (Morton's) income tax returns. From and after November 1949, when W. T. Morton, Inc. was incorporated, all of the profits on the coffee transactions, including petitioner's share, were reported in the income tax returns of W. T. Morton, Inc. Petitioner did not report his share of the profits in his income tax returns for 1949 and 1950. He did not know whether Morton realized a profit or sustained a loss from his business during the years 1949 and 1950. Morton did not list the payments to petitioner on his books during these years. He knew that petitioner was an employee of Smart & Final and did not want his returns to show the large payments made to petitioner in 1949 and 1950. He was trying to do petitioner a favor by handling the payments in this manner. He never told petitioner that he would pay any of his personal income taxes for 1949 and 1950.
In the spring of 1951, after the time for filing 1950 returns had expired, petitioner was in Morton's office and had a conversation with an accountant employed by Morton with reference to the profits from the coffee transactions reported by W. T. Morton, Inc. for the years 1949 and 1950. The accountant told petitioner that notwithstanding the fact that the profits had been reported by the corporation, petitioner as the recipient of one-half of the profits should have reported them. Petitioner never filed any amended returns reporting the share of profits from the coffee transactions which he received from Morton during the taxable years.
Petitioner engaged in profit-sharing transactions with at least one other person, W. H. Kunz, during 1949 and 1950. He reported the share of profits received from Kunz on coffee transactions in his income tax returns. He reported income in the amount of $4,631.87 received from Kunz during the year 1950. During that year he received from Kunz income in the amount of $6,204.87. The amount of $1,573, which he did not report in his 1950 return, represented profit which he realized in that year from a joint venture with Kunz involving the purchase and sale of some coffee roasting equipment.
When petitioner filed his income tax return for each of the years 1947 through 1950, he knew that he was required to report his income from commissions or profits on transactions with Morton and Kunz and that he had understated his income in his returns for those years.
Part of the deficiency for each of the years 1947 through 1950 is due to fraud with intent to evade tax.
Petitioner did not file any declarations of estimated tax for the years 1947 to 1950, inclusive.
Petitioner had unreported income from gambling gains in the amount of $287.70 for 1947 and $199 for 1950. However, his losses from gambling in each of those years exceeded his gains in each such year, respectively.
Petitioner and his wife were divorced in 1949. He was ordered by a decree of the Superior Court of the County of Los Angeles, State of California, to pay $75 per month during the years 1949 and 1950 for the support of his daughter, Kathryn LaVerne Close. Petitioner made these payments. In his returns for the years 1949 and 1950, he claimed deductions for child support in the amount of $1,400 for 1949 and $900 for 1950. These deductions were disallowed by the respondent.
1. The principal issue is whether part of the deficiency determined by the respondent for each of the taxable years 1947 through 1950 was due to fraud with intent to evade tax.
The burden of proving fraud by clear and convincing evidence is on the respondent. In each of the years 1947 through 1950 petitioner received from Morton a share of the profits on sales of green coffee and in 1950 he received from Kunz a share of the profits realized from the sale of some coffee roasting equipment. This income was not reported by petitioner in his income tax returns.
Petitioner testified that he knew he was required to report the income he received on the profit-sharing transactions. He stated that he did not report the profits received from Morton during 1947 and 1948 because he inadvertently overlooked and just forgot this income when he filed his returns for these years. He stated that he did not report the profits received from Morton...
To continue reading
Request your trial