Estate of Wheeler v. C.I.R., 011678 FEDTAX, 986-69

Docket Nº:986-69, 987-69, 988-69, 989-69, 990-69.
Opinion Judge:DAWSON, Judge:
Party Name:ESTATE OF HELEN MAY WHEELER, DECEASED, HENRY H. WHEELER, JR. AND FLORENCE WHEELER NEAL,[1] EXECUTORS, ET AL.,[2] Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Carl A. Stutsman, Jr. and Jack R. White, for the petitioners. Marion Malone, for the respondent.
Case Date:January 16, 1978
Court:United States Tax Court
 
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37 T.C.M. (CCH) 51

ESTATE OF HELEN MAY WHEELER, DECEASED, HENRY H. WHEELER, JR. AND FLORENCE WHEELER NEAL,[1] EXECUTORS, ET AL.,[2] Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Nos. 986-69, 987-69, 988-69, 989-69, 990-69.

United States Tax Court

January 16, 1978

Carl A. Stutsman, Jr. and Jack R. White, for the petitioners.

Marion Malone, for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

DAWSON, Judge:

These consolidated cases were heard by former Special Trial Judge John H. Sacks pursuant to the provisions of section 7456(c), Internal Revenue Code of 1954. Subsequent to the trial and upon oral agreement of the parties, the cases were transferred to Judge Howard A. Dawson, Jr., by an order of the Chief Judge, for the preparation of the Findings of Fact and Opinion.

Respondent determined deficiencies in petitioners' Federal income and estate taxes and additions to tax as follows:

Dkt. No. 986-69 (Estate Tax)
Year Deficiency Addition to Tax3
........... $532,957.45 $266,478.73
Dkt. No. 987-69 (Income Tax)
Year Deficiency Addition to Tax
1956 $135,999.86 $ 67,999.93
1957 214,498.03 107,249.02
1958 32,205.29 16,102.65
1959 2,237.00 ..........
1960 5,427.91 ..........
1961 8,001.00 ..........
19624 34,735.49 ..........
19634 32,754.76 ..........
19644 18,687.15 ..........
Dkt. No. 988-69 (Income Tax)
1965 3,068.75 ..........
Dkt. No. 989-69 (Income Tax)
1949 289,731.56 144,865.785
1950 544,245.82 274,367.115
1951 280,426.56 143,536.645
1952 198,413.14 99,206.575
1953 402,117.66 201,058.835
1954 131,301.02 65,650.51
1955 109,671.12 54,835.56
Dkt. No. 990-69 (Corporate Income Tax)
1953 230,939.41 115,469.715
1954 19,161.86 ..........
1955 14,391.32 ..........
1956 2,289.99 1,145.00
Fraud is the principal issue for resolution. If we conclude that respondent has not proved fraud by clear and convincing evidence, then the assessment and collection of income and estate taxes in various dockets and years are barred by the statute of limitations. On the other hand, if we conclude that fraud has been proved for a particular year or docket, then such taxes are open for assessment and collection. Specifically, the assessment of the entire amounts of the deficiencies in Docket Nos. 986-69, 989-69 and 990-69 is barred absent fraud. Additionally, in Docket No. 987-69, assessment of the tax for the year 1957 is barred absent a finding of fraud, and the year 1956 is barred unless there is a finding of either fraud or a 25 percent omission from gross income[6] for that year. In the cases involving the individual petitioners there are income adjustments relating to certain alleged unreported income cleared through the Advance Account of L.A. Decomposed Granite Company; unreported income cleared through the Stock Subscription Account of Park Water Co.; unrecorded in aid of construction; unreported income cleared through the Notes Payable Account of Park Water Co.; additional receipts from LADG; unreported property sales, disallowed business bad debts and losses; and various other adjustments. In the corporate tax case there are income adjustments relating to alleged unreported profits from completed jobs; improperly charged off costs on an uncompleted job; and a loss on jobs in progress. In the estate tax case there are a substantial number of allegedly omitted assets, including cash in banks, a mortgage note, natural gold and advances to the Wheeler children and others. In addition, there are issues involving the value of the Park Water Co. stock on the date of Helen Wheeler's death and the ownership of some of that stock. FINDINGS OF FACT Some of the facts were stipulated by the parties. The stipulation of facts and attached exhibits are incorporated herein by this reference. Henry H. Wheeler, Jr. and Florence Richardson Neal, the executors of the Estate of Helen May Wheeler and the Estate of Henry H. Wheeler, Sr., were legal residents of Balboa Island, California, and Santa Monica, California, respectively, when the petitions were filed in these proceedings. Violet E. Wheeler was a legal resident of Los Angeles, California, at that time. The principal office of L.A. Decomposed Granite Company was located in Los Angeles, California, when its petition was filed herein. I. GENERAL A. Identification of Taxpayers and Tax Returns Involved. Petitioners in Docket No. 989-69 are the Estate of Henry H. Wheeler, Sr., Deceased, Henry H. Wheeler, Jr. and Florence Richardson Neal, Executors and the Estate of Helen May Wheeler, Deceased, Henry H. Wheeler, Jr. and Florence Richardson Neal, Executors. Henry and Helen Wheeler were married in 1916. They filed joint income tax returns on Form 1040, for the years 1949 through 1954. Helen May Wheeler died January 9, 1955, and Henry Wheeler (hereinafter sometimes referred to as ‘ Wheeler’ ), the surviving spouse, filed a joint income tax return, on Form 1040, with her estate for the year 1955. All of said returns were filed with the District Director of Internal Revenue at Los Angeles, California. Henry H. Wheeler, Sr., died on January 22, 1977. Subsequent to the filing of said joint return for the year 1955, a fiduciary income tax return on Form 1041 was filed for the estate of Helen M. Wheeler, for the year ending December 31, 1955. An amended return on Form 1040 was filed by Wheeler for the calendar year 1955, excluding items of income and expense shown as allocable to the estate of his deceased wife. Petitioners in Docket Nos. 987-69 and 988-69 are the Estate of Henry H. Wheeler, Sr., Deceased, Henry H. Wheeler, Jr. and Florence Richardson Neal, Executors and Violet E. Wheeler (sometimes hereinafter called ‘ Violet (Motz) Wheeler’ ). Wheeler and Violet E. Motz were married in 1956 and filed joint income tax returns on Form 1040 for the years 1956 through 1965, with the District Director at Los Angeles. The petitioner in Docket No. 986-69 is the Estate of Helen May Wheeler, Deceased, Henry H. Wheeler, Jr. and Florence Richardson Neal, Executors. A Federal estate tax return on Form 706 was filed on June 29, 1956, with the District Director at Los Angeles. Petitioner in Docket No. 990-69 is Los Angeles Decomposed Granite Company (hereinafter called ‘ LADG’ ), a California corporation, organized prior to 1927. LADG filed corporate income tax returns on Form 1120 for the years 1953 through 1956 with the District Director at Los Angeles. B. Background Facts Relating to Taxpayers, Park Water Co. and the Individuals Who Prepared Their Tax Returns. Wheeler was born in Kansas on December 24, 1892, and moved to California in 1911. He attended the University of Southern California, receiving a degree of A.M. in 1915. Shortly thereafter he moved to Needles, California, and worked as a teacher. He remained there until 1921, when he became a teacher of mathematics and physics at South Pasadena High School near Los Angeles. He resigned his teaching position in 1926 and has been self-employed or employed as an officer in various companies which he has controlled from that date to the date of his death. In about 1927, Wheeler acquired a 1/3 interest in the stock of LADG through a default on a loan of $1,500 which he made. LADG was engaged in mining and selling decomposed granite, a form of soil useful in road building, surfacing automobile parking lots, and school playgrounds. By 1929, Wheeler had acquired all of the stock of LADG consisting of 400 shares. In 1935, Wheeler transferred 25 shares of LADG stock each to Violet (Motz) Wheeler and O. D. Collins, both of whom were employees of the corporation, in lieu of year-end bonuses. On February 23, 1953, O. D. Collins' 25 shares of stock of LADG were transferred to Henry H. Wheeler, Jr., Florence A. Richardson and Henry Cassel, Wheeler's son, daughter, and nephew, respectively. The stock ledger of LADG shows that on October 28, 1954, Certificate No. 44 for 175 shares was issued to Thomas N. Neale and Certificate No. 45 for 175 shares was issued to Herald E. Williams and that the shares had been transferred from Wheeler's Certificates 35 and 40, respectively. In January 1957, all of the stock of LADG was sold to a group of disinterested third parties as follows:
Purchaser No. of Shares Transferred from
John Skochdopole 100 Herald Williams
James M. Brown 100 Herald Williams (75 Shares)
Violet E. Motz (25 shares)
Bernice Britton 40 Thomas N. Neale
Marian Harris 40 Thomas N. Neale
Paul DeShaw 40 Thomas N. Neale
John G. Sperling 40 Thomas N. Neale
Carl B. Sturzenaker 40 Thomas N. Neale (15 shares)
H. H. Wheeler, Jr. (12 shares)
F. A. Richardson (12 shares)
Henry Cassel (1 share)
Total 400
After Wheeler assumed control of LADG, he expanded its operations to include contracting to supply various improvements to real property in connection with the development and sale of such property by subdividers. Beginning with simple paving, the services supplied by LADG grew to include sewers, curbs, gutters, sidewalks and water mains. LADG had a contractor's license from the State of California, and Wheeler, who had previously been in the contracting business himself, became experienced in the field of contracting for subdivision development. In 1937, Wheeler organized Park Water Company (sometimes hereinafter called ‘ Park Water’ ) as a California corporation and, on February 14, 1938, obtained a certificate of public convenience and necessity from the Public Utilities Commission of the State...

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