Dalton v. Comm'r of Internal Revenue (In re Estate of Kahr), Docket No. 1281-65.

• Decision Date: 29 September 1967
• Docket Number: Docket No. 1281-65.
• Citation: 48 T.C. 929
• Parties: ESTATE OF WILLIAM KAHR (A.K.A. WILLIAM CARR), DECEASED, JAMES F. DALTON, EXECUTOR, AND MARY ZANGERLE (FORMERLY KNOWN AS MARY K. KAHR AND MARY CARR), SURVIVING WIFE, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

48 T.C. 929

ESTATE OF WILLIAM KAHR (A.K.A. WILLIAM CARR), DECEASED, JAMES F. DALTON, EXECUTOR, AND MARY ZANGERLE (FORMERLY KNOWN AS MARY K. KAHR AND MARY CARR), SURVIVING WIFE, PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 1281-65.

Tax Court of the United States.

Filed September 29, 1967.

James F. Dalton, pro se.

William F. Chapman and Larry Kars, for the respondent.

Taxpayer pursued a studied course of concealing a part of his distributive share of partnership income in 1958 and 1959; however he died in January 1960 and his 1959 income tax return was signed and filed by the executor of his estate several months later. Held, no fraudulent intent can be imputed to the decedent under these circumstances and the determination of fraud for 1959 is not sustained.

FORRESTER, Judge:

Respondent has determined deficiencies in petitioners' income taxes and additions to taxes as follows:

+------------------------------------------+
                ¦      ¦            ¦Additions to          ¦
                +------+------------+----------------------¦
                ¦Year  ¦Deficiency  ¦tax sec. 6653(b) 1  ¦
                +------+------------+----------------------¦
                ¦      ¦            ¦                      ¦
                +------+------------+----------------------¦
                ¦1958  ¦$16,681.95  ¦$8,340.98             ¦
                +------+------------+----------------------¦
                ¦1959  ¦8,893.24    ¦5,462.64              ¦
                +------+------------+----------------------¦
                ¦      ¦            ¦                      ¦
                +------------------------------------------+
                

The burden of proof is on the respondent to show by clear and convincing evidence that William Kahr knowingly understated a part of his income with an intent to evade the tax. Gromacki v. Commissioner, 361 F.2d 727 (C.A. 7, 1966), affirming a Memorandum Opinion of this Court; Carter v. Campbell, 264 F.2d 930, 936 (C.A. 5, 1959); Henry S. Kerbaugh, supra; M. Rea Gano, 19 B.T.A. 518 (1930). We find that the burden has been carried for the year 1958.

As was previously pointed out, we have found the evidence to be clear and convincing that Kahr received large amounts of partnership income which were not reported on the books and records of Hamilton News, the partnership return for Hamilton News, or on Kahr's 1958 return.

The evidence is also clear and convincing that Kahr knew that he should report this income, but instead took deliberate steps to hid the fact of its receipt from public scrutiny. On his orders, checks were pulled from the morning mail before they could be recorded on the books and records of the company. The checks were not deposited in the company's account, but instead they were cashed by the trusted manager, Fruscione, who could be counted upon to ‘mind * * * (his) own business.’ The proceeds of the checks were turned over to Kahr in cash, and were never recorded on the company's books and records, even though the amounts from the same payors which were not turned over to Kahr were recorded as partnership income.

In addition Kahr had a separate set of records kept for Union News Co. transactions in his own office which were not incorporated with records of the company's other customers. This gave him a private record of about 90 percent of his defalcations, and it was these records that he had destroyed.

All of the above makes it quite obvious that Kahr knew that partnership income would be understated by at least the amount of the unrecorded checks when statements were made up from the company's books and records. We conclude and hold that when he signed the partnership return and his individual return for 1958, he knew that partnership income, and his share of that income, were both grossly understated. being an astute and experienced businessman, he knew that the unrecorded checks represented amounts which were taxable as ordinary income and that if properly reported they would have increased his taxes.

Determination of fraud is a question of fact (Mensik v. Commissioner, 328 F.2d 147 (C.A. 7, 1964), affirming 37 T.C. 703) and the above facts clearly support a finding of fraud; consequently, we sustain respondent's determination as to 1958. Jackson v. Commissioner, 380 F.2d 661 (C.A. 6, 1967), affirming a Memorandum Opinion of this Court; Nathan Goldsmith, 31 T.C. 56 (1958); Gromacki v. Commissioner, supra; Arctic Ice Cream Co., 43 T.C. 68 (1964); Fred Draper, 32 T.C. 545 (1959); Jack M. Chesbro, 21 T.C. 123 (1953), affd. 225 F.2d 674 (C.A. 2, 1955); Herbert Eck, 16 T.C. 511 (1951), affd. 202 F.2d 750 (C.A. 2, 1953).

With one exception, the facts as to 1959 are substantially the same as those regarding 1958. The exception is that the joint return for 1959 was signed and filed by the executor of the William Kahr estate and not by William Kahr. This exception is fatal to the respondent's determination of fraud as to 1959.

One of the stipulated facts reads as follows:

1. Attached hereto, made a part hereof and marked as Joint Exhibits 3-C and 4-D are individual joint income tax returns for the years 1958 and 1959 respectively, filed by William and Mary Carr.

William Kahr, however, did not sign or file the 1959 return. It shows on its fact that it was signed by James F. Dalton, executor of the Estate of William Kahr and Mary K. Kahr, and it was signed and filed several months after Kahr died in January 1960. We therefore interpret the stipulation as though it read ‘filed for,‘ instead of ‘filed by’ Kahr as to the year 1959, and find that such return was filed by James F. Dalton, executor of the Estate of William Kahr, and by Mary K. Kahr. William Ernest Seatree, 25 B.T.A. 396 (1932), affd. 72 F.2d 67 (1934); Mead's Bakery, Inc. v. Commissioner, 364 F.2d 101 (C.A. 5, 1966), affirming on this point a Memorandum Opinion of this Court.

Since Kahr neither signed nor filed the 1959 return, the issue is whether the return filed can be considered fraudulent because of the action Kahr took to hide the existence of income before his death.

We have found no cases which directly discuss this exact point,³ but the cases decided in the area support our conclusion that the fraud penalty will not attach unless at the time of filing the person or persons responsible for filing the return have a fraudulent intent to evade the tax.

In Harry Gleis, 24 T.C. 941 (1955), affd. 245 F.2d 237 (C.A. 6, 1957), we stated the applicable condition necessary to find that a return filed was fraudulent:

Fraud implies bad faith, a deliberate and calculated intention on the part of the taxpayer at the time the returns in question were filed fraudulently to evade the tax due. E. S. Iley, 19 T.C. 631. Such an intention is never presumed. Rather, its presence must be demonstrated by clear and convincing evidence, as to which the burden is with the respondent. * * *

Also cf. In re Parr, 205 F.Supp. 492 (S.D. Tex. 1962).

This definition excludes the possibility that a fraudulent state of mind prior to the filing of the return can be imputed to the return. The fraudulent intent must be present when the return is filed and the intent must be to file a fraudulent return. John B. Arnold et al., 14 B.T.A. 954, 973-974 (1928). ⁴

Nor can the penalty be determined on the basis that the decedent's intent is imputed to his executor when the return is made out. As was stated in Carter v. Campbell, 264 F.2d 930, 935 (C.A. 5, 1959):

Fraud implies bad faith, intentional wrongdoing and a sinister motive. It is never imputed or presumed and the courts should not sustain findings of fraud upon circumstances which at most create only suspicion.

In order for Kahr to have filed a fraudulent return, he would have had to have been living and responsible for the proper filing of the return, and to have filed it with knowledge of its falsity.

The only persons who could possibly be guilty of fraud as to the 1959 return are James Dalton, the executor, and Mary Kahr. Respondent has neither charged nor sought to prove as against either of them any knowledge of the understatement of income or any fraudulent intent whatsoever. Consequently, we find no fraud as to 1959.

Reviewed by the Court.

Decision will be entered under Rule 50.

SCOTT, J., concurring: On the basis of the facts found in this case, I agree with the conclusion reached in the majority opinion that respondent's determination of an addition to tax for fraud for the taxable year 1959 should not be sustained.

However, I do not agree with the statement in the majority opinion that the issue for the year 1959 is ‘whether the return filed can be considered fraudulent’ or with the conclusion that because there was no fraud on the part of the executor and Mary Kahr in filing a return omitting a portion of Kahr's 1959 income, it follows that there should be no addition to tax for fraud in that year.

Section 6653(b), I.R.C. 1954, provides that if any portion of an underpayment of tax is due to fraud there shall be added to the tax an amount equal to 50 percent of the underpayment. This section does not require as does section 6501(c)(1), I.R.C. 1954, providing for an exception to the period of limitation for assessment of tax in case of fraud, that the return be fraudulent but requires only that a portion of the underpayment be due to fraud.

In my opinion the issue here is not whether the return filed on behalf of Kahr by his executor was false and fraudulent but is whether any part of the underpayment resulting from a part of Kahr's 1959 income not being included in the income reported on the return was due to fraud. I would decide the case strictly on the basis that on the facts here shown respondent has failed to establish by clear and convincing evidence that any portion of the underpayment for the year 1959 was due to fraud. The fact that Kahr was retaining partnership receipts without entry of the amount of such receipts on the partnership's books with the result that on the partnership books his partnership income was understated, and to the extent of his partners' interest in the partnership he was embezzling...