Eck v. Comm'r of Internal Revenue, Docket Nos. 22612

• Decision Date: 28 February 1951
• Docket Number: Docket Nos. 22612,22614.,22613
• Citation: 16 T.C. 511
• Parties: HERBERT ECK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.MARTIN M. KARLAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.COSIMO PERRUCCI, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

16 T.C. 511

HERBERT ECK, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.MARTIN M. KARLAN, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.COSIMO PERRUCCI, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 22612

22613

22614.

Tax Court of the United States.

Promulgated February 28, 1951.

Paul Arnold, Esq., for the petitioners.

Scott A. Dahlquist, Esq., for the respondent.

1. FRAUD.— The Commissioner sustained his burden of proof and showed that a part of the deficiency against each taxpayer for each year was due to fraud with intent to evade tax.

2. FRAUD— ADDITION UNDER SECTION 293 (b).— The addition to the tax under section 293 (b) is 50 per cent of ‘any‘ deficiency and is not dependent upon the determination of a deficiency by the Commissioner.

3. JURISDICTION— NOTICE OF FRAUD PENALTY ONLY.— A statutory notice from the Commissioner, in which no deficiency is determined but advising the taxpayer that the 50 per cent addition provided by section 293 (b) is due, is a notice upon which a proceeding in the Tax Court can be based.

The Commissioner determined deficiencies in income tax and additions for fraud under section 293 (b) as follows:

+-------------------------------------------------------------------+
                ¦    ¦Herbert Eck         ¦Martin M. Karlan    ¦Cosimo Perrucci     ¦
                +----+--------------------+--------------------+--------------------¦
                ¦Year¦          ¦         ¦          ¦         ¦          ¦         ¦
                +----+----------+---------+----------+---------+----------+---------¦
                ¦    ¦Deficiency¦Fraud    ¦Deficiency¦Fraud    ¦Deficiency¦Fraud    ¦
                +----+----------+---------+----------+---------+----------+---------¦
                ¦    ¦          ¦addition ¦          ¦addition ¦          ¦addition ¦
                +----+----------+---------+----------+---------+----------+---------¦
                ¦1942¦$11,359.52¦$5,679.76¦$11,393.20¦$5,696.60¦$11,618.89¦$5,809.45¦
                +----+----------+---------+----------+---------+----------+---------¦
                ¦1943¦          ¦6,220.01 ¦          ¦5,999.27 ¦          ¦6,343.01 ¦
                +----+----------+---------+----------+---------+----------+---------¦
                ¦1944¦1,172.47  ¦7,363.29 ¦1,059.70  ¦7,144.32 ¦1,148.90  ¦7,484.26 ¦
                +-------------------------------------------------------------------+
                

The only issue for decision is whether any part of any deficiency for the taxable years was due to fraud with intent to evade tax.

The petitioners were equal partners in Rae Metal Products Company, a partnership organized on April 1, 1942, for the purpose of manufacturing metal stampings.

Original partnership returns for the calendar years 1942, 1943, and 1944 were timely filed with the collector of internal revenue for the second district of New York. Herbert Eck and his wife timely filed joint income tax returns for the calendar years 1942, 1943, and 1944 with the collector of internal revenue for the fourteenth district of New York. Martin M. Karlan timely filed individual income tax returns for the calendar years 1942, 1943, and 1944 with the collector of internal revenue for the second district of New York. Cosimo Perrucci timely filed individual income tax returns for the calendar years 1942, 1943, and 1944 with the collector of internal revenue for the second district of New York. All of those returns contain deliberate understatements of income in substantial amounts.

Rae Metal Products Company filed amended returns on August 29, 1945, for the calendar years 1942, 1943, and 1944, reporting net income in a much larger amount for each year than had been reported on the original returns. Herbert Eck and his wife filed amended returns on August 30, 1945, for the calendar years 1942, 1943, and 1944, reporting net income in a much larger amount for each year than had been reported on the original returns. Martin M. Karlan filed amended returns on August 29, 1945, for the calendar years 1942, 1943, and 1944, reporting net income in a much larger amount for each year than had been reported on the original returns. Cosimo Perrucci filed amended returns on August 29, 1945, for the calendar years 1942, 1943, and 1944, reporting net income in a much larger amount for each year than had been reported on the original returns. The additional taxes shown to be due on the amended returns were paid.

A part of a deficiency as to each of the three petitioners and as to each year was due to fraud with intent to evade tax.

OPINION.

MURDOCK, Judge:

The partnership income for each of the 3 years was understated on the original returns by amounts varying from $60,000 to $68,000. Those understatements were carried into the returns filed by the three partners. The partnership books were falsified in an effort to conceal the true amount of income earned in each year. Sales in substantial amounts in each year were not reported and purchases were overstated in substantial amounts for each year. The falsification of the accounts was with the knowledge of and, in many instances, at the direction of Karlan. The false and fraudulent accounting for the partnership business and the false and fraudulent reporting of the partnership income on the returns was all part of a scheme suggested to the partners by Milton Trager, a certified public accountant. He also prepared most of the returns. The purpose of the scheme was to evade taxes.

Trager had been employed by a predecessor of the partnership. Eck was instrumental in retaining his services so that he could look after Eck's interest in the Rae Metal Products Company. The partners, at Trager's direction, withdrew partnership earnings in large equal amounts on checks taken from the back of the partnership check book out of chronological order and without any entries on the checks or stubs to show what they were for. The partners received those amounts and used them for their own purposes. The books of the partnership did not account for the withdrawals. The books contained many false entries. Later, futile attempts, including the raising of checks, were made to ‘reconcile‘ the accounts. Finally, when it appeared that the plan might get the partners into trouble, they hired a new accountant and upon his advice filed the amended returns.

Karlan was directly responsible for a number of the false...