Estate of Stein v. Comm'r of Internal Revenue

• Decision Date: 31 January 1956
• Docket Number: 47475.,47467,Docket Nos. 47465,47466
• Citation: 25 T.C. 940
• Parties: ESTATE OF ESTHER M. STEIN, DECEASED, SAMUEL STEIN, EXECUTOR AND SAMUEL STEIN, ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

25 T.C. 940

ESTATE OF ESTHER M. STEIN, DECEASED, SAMUEL STEIN, EXECUTOR AND SAMUEL STEIN, ET AL.,1 PETITIONERS,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 47465

47466

47467

47475.

Tax Court of the United States.

Filed January 31, 1956.

National Thread Company, Inc., (NTC), was organized by the father of Esther M. Stein in 1913. Esther was NTC's sole stockholder from 1916 until January 27, 1944, on which date she transferred all her stock to Samuel Stein, her husband. Esther died on March 27, 1944. Prior to the years in issue (1942-1945) Esther directed NTC'S affairs and, although she remained active until her death, Samuel took an increasingly greater part, and was dominant (as between himself and Esther), in running NTC from about 1942 on. Carolina Thread Mills (Carolina) was a business name registered by Samuel.

1. It was stipulated that certain sales made in the names of NTC, Carolina, and Samuel, the proceeds of which were for the most part deposited in Samuel's and Esther's bank accounts, were not reported by any of the petitioners. Petitioners contend that they were sales by Samuel in his individual capacity. Held, the sales were those of NTC taxable first to it and then, as corporate distributions, to NTC's stockholder. Held, further, certain minor amounts of deposits to Esther's bank accounts in 1942 and 1943 represented unreported income to her. An estimated 50 per cent of certain other deposits to Samuel's and Esther's bank accounts during the years in issue were unreported proceeds of sales by NTC and represented income taxable first to it and then, as corporate distributions, to NTC's stockholder. Held, further petitioner NTC is entitled to deduct as cost of goods sold, in addition to to the amounts already deducted, 25 per cent of the above unreported sales during each year in issue as representing cash purchases of merchandise not recorded on its books.

2. Held, prior to January 27, 1944, NTC was owned entirely by Esther, its sole stockholder of record. Thereafter it was owned entirely by Samuel. NTC's corporate distributions during the years in issue must be taxed accordingly.

3. NTC was on the accrual basis. Samuel and Esther were on the cash basis. The proceeds of some of the stipulated unreported sales were not received by Samuel or Esther until the year following the applicable sale. Held, such proceeds cannot be taxed as corporate distributions to Samuel or Esther until the year of receipt.

4. Held, for each year in issue NTC is entitled to deduct ‘traveling’ and selling expenses' $1,000 in excess of those allowed by respondent.

5. Held, deductions claimed for ‘traveling,’ ‘entertainment,‘ and ‘necessary’ expenses incurred by Samuel and Esther on NTC'S behalf disallowed for lack of substantiation.

6. Held, the returns filed by NTC for 1942, by Samuel and Esther jointly for 1942, and by Samuel for 1943, were not false or fraudulent with intent to evade tax and assessment of deficiencies applicable to those returns is barred by the statute of limitations. Held, further, the returns filed for 1943 by NTC and by the Estate of Esther were false and fraudulent with intent to evade tax and assessment of deficiencies applicable to those returns is not barred by the statute of limitations.

7. Held, portions of the deficiencies determined against NTC for 1943, 1944, and 1945, against the Estate of Esther for 1943, and against Samuel for 1944 and 1945, were due to fraud with intent to evade tax and the Commissioner's imposition of fraud additions for those years is sustained.

8. Held, although assessments of deficiencies against Samuel and Esther jointly for 1942, and against Samuel for 1943, are barred by the statute of limitations, the full 25 per cent of the difference between the tax he and Esther reported for 1942, and their correct tax for that year is, under section 6(d)(2) of the Current Tax Payment Act of 1943, includible in the deficiency determined against Esther for 1943.

9. Held, fraud additions applicable to NTC'S 1943 excess profits tax deficiency must be calculated as 50 per cent of the total deficiency for such year. It is not calculated by first deducting from the deficiency the 10 per cent postwar refund credit allowed under section 780(a) of the 1939 Code, and then taking 50 per cent of the remainder.

10. Held, in calculating NTC'S earnings and profits available for dividends, each fraud addition here determined against NTC must be deducted in the year in which the return, to which the fraud addition applies, was filed.

11. Held, Samuel and Esther received their distributions from NTC under a claim of right and without restriction as to use. Consequently, those distributions impairing capital are (after allowance for tax-free recovery of the cost of NTC's stock) taxable to them as capital gains, as the Commissioner has determined.

[25 T.C. 941]

Joseph Getz, C.P.A., and Murray L. Brinn, Esq., for the petitioners.

William G. O'Neill, Esq., and Maurice E. Stark, Esq., for the respondent.

The Commissioner determined the following deficiencies, and additions for fraud, in the taxes of the petitioners herein:

Docket No. 47467— National Thread Company, Incorporated

+-----------------------------------------------------------------------+
                ¦Deficiencies¦ ¦ ¦ ¦ ¦
                +------------+--------------+--------------+--------------+-------------¦
                ¦Year ¦ ¦Declared value¦ ¦Additions for¦
                +------------+--------------+--------------+--------------+-------------¦
                ¦ ¦Income tax ¦excess-profits¦Excess-profits¦fraud ¦
                +------------+--------------+--------------+--------------+-------------¦
                ¦ ¦ ¦tax ¦tax ¦ ¦
                +------------+--------------+--------------+--------------+-------------¦
                ¦1942 ¦ ¦$322.81 ¦$16,878.52 ¦$9,180.32 ¦
                +------------+--------------+--------------+--------------+-------------¦
                ¦1943 ¦$8.73 ¦8,271.58 ¦65,915.68 ¦37,563.66 ¦
                +------------+--------------+--------------+--------------+-------------¦
                ¦1944 ¦1 (1,261.50)¦3,136.19 ¦39,332.25 ¦21,234.23 ¦
                +------------+--------------+--------------+--------------+-------------¦
                ¦1945 ¦2,812.22 ¦8,070.09 ¦62,677.21 ¦36,779.77 ¦
                +-----------------------------------------------------------------------+
                

+-----------------------------------------------------------------------------+
                ¦Docket ¦Petitioner ¦Year ¦Income tax ¦Additions for ¦
                ¦No. ¦ ¦ ¦deficiency ¦fraud ¦
                +-------+--------------------------------+-----+---------------+--------------¦
                ¦47465 ¦Estate of Esther M. Stein, ¦1942 ¦$8,418.61 ¦$4,209.31 ¦
                ¦ ¦Deceased, Samuel ¦ ¦ ¦ ¦
                +-------+--------------------------------+-----+---------------+--------------¦
                ¦ ¦Stein, Executor, and Samuel ¦ ¦ ¦ ¦
                ¦ ¦Stein. ¦ ¦ ¦ ¦
                +-------+--------------------------------+-----+---------------+--------------¦
                ¦47466 ¦Estate of Esther M. Stein, ¦1943 ¦22,389.07 ¦11,194.54 ¦
                ¦ ¦Deceased, Samuel ¦ ¦ ¦ ¦
                +-------+--------------------------------+-----+---------------+--------------¦
                ¦ ¦Stein, Executor. ¦ ¦ ¦ ¦
                +-------+--------------------------------+-----+---------------+--------------¦
                ¦ ¦ ¦(1943¦20,998.12 ¦10,499.06 ¦
                +-------+--------------------------------+-----+---------------+--------------¦
                ¦47475 ¦Samuel Stein ¦(1944¦15,885.73 ¦7,942.87 ¦
                +-------+--------------------------------+-----+---------------+--------------¦
                ¦ ¦ ¦(1945¦33,581.04 ¦16,790.52 ¦
                +-----------------------------------------------------------------------------+
                

[25 T.C. 942]

For convenience the corporate petitioner, National Thread Company, Incorporated (Docket No. 47467), will sometimes hereinafter be referred to as NTC; the fiduciary petitioner, Estate of Esther M. Stein, Deceased, et al. (Docket Nos. 47465, 47466), and its decedent, will sometimes hereinafter be referred to, respectively, as the estate and Esther; and the individual petitioner, Samuel Stein (Docket Nos. 47465, 47475), will sometimes hereinafter be referred to as Samuel.

Many adjustments were made by the Commissioner in his determination of the deficiencies and additions for fraud. Some of these were either not contested by petitioners, were disposed of by stipulation of the parties, or were conceded or abandoned on brief. They will be reflected in the computations under Rule 50.

The issues remaining for consideration may be stated as follows:

Issues Applicable to All Petitioners.

1. It was stipulated that the following proceeds of sales made in the names of Samuel, Carolina Thread Mills, and NTC were received by Samuel and/or Esther and were not reported by any of the petitioners herein:

+-----------------+
                ¦Year ¦Amount ¦
                +------+----------¦
                ¦1942 ¦$1,092.36 ¦
                +------+----------¦
                ¦1943 ¦59,882.06 ¦
                +------+----------¦
                ¦1944 ¦35,784.36 ¦
                +------+----------¦
                ¦1945 ¦59,504.85 ¦
                +-----------------+
                

Were those sales actually sales of NTC, resulting in the proceeds thereof being reportable both as income by NTC and as corporate

[25 T.C. 943]

distributions by NTC's stockholders? Or were they the sales of Samuel and reportable as taxable income only by him?

2. The following bank deposits (among others) were made during the years in issue to the accounts of Samuel and Esther:

+-----------------+
                ¦Year ¦Amount ¦
                +------+----------¦
                ¦1942 ¦$8,478.06 ¦
                +------+----------¦
                ¦1943 ¦11,413.67 ¦
                +------+----------¦
                ¦1944 ¦2,985.23 ¦
                +------+----------¦
                ¦1945 ¦35,986.61 ¦
                +-----------------+
                

Were portions of those deposits, not in excess of (from 1942 to 1945, respectively) $6,595.63, $4,459.78, $1,794.66, and $34,817.86, receipts from unreported sales of NTC and therefore taxable both to NTC and (as corporate distributions) to NTC's stockholders? If not, were they taxable income, in whole or in part, of Samuel and/or Esther?

3. In determining the unreported net income from the sales referred to in issue 1 and (if any bank deposits are found to represent unreported sales) in issue 2, should deductions be allowed for cost of merchandise applicable to those sales? If so, in what amounts?

Issues Applicable to NTC.

4. Did the Commissioner err is disallowing, for lack of...