Gano v. Commissioner of Internal Revenue
| Decision Date | 08 April 1930 |
| Docket Number | Docket No. 28421. |
| Citation | 19 BTA 518 |
| Parties | M. REA GANO, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Albert Hubschman, Esq., for the petitioner.
E. C. Lake, Esq., for the respondent.
In this case redetermination is asked of deficiencies in income taxes and fraud penalties as follows:
-----------------------------------------------------------------------------------
Year | Deficiency | |
| in tax | Penalty | Total
---------------------------------------------|------------|------------|-----------
1920 _______________________________________ | $53,234.32 | $26,617.16 | $79,851.48
1921 _______________________________________ | 67,698.70 | 33,849.35 | 101,548.05
1922 _______________________________________ | 2,297.56 | 0 | 2,297.56
1923 _______________________________________ | 380.72 | 0 | 380.72
| __________ | __________ | __________
| 125,611.30 | 60,466.51 | 184,077.81
-----------------------------------------------------------------------------------
At the hearing respondent moved to increase the deficiencies for 1922 and 1923 by the addition of fraud penalties.
The following assignments of error are made:
For the calendar year 1920
(1) The increase of petitioner's income by the amount of $51,000 alleged to have been received as dividends from Gano Moore Co.
(2) Disallowance of alleged loss on sale of certain stocks and interests in oil leases in the amount of $15,477.04.
(3) Disallowance of deduction of $6,419.70 for taxes paid.
(4) Disallowance of bad debt deductions aggregating $19,000.
(5) Disallowance of alleged loss of $7,540.19 expenses of prospecting and drilling oil wells.
(6) Disallowance of loss of $6,500 paid to compromise a threatened law suit.
(7) Assertion of fraud penalty of $26,617.16 for filing a false and fraudulent return.
For the calendar year 1921
(8) The increase of petitioner's income by the amount of $70,125, alleged dividends received from Gano Moore Co.
(9) Increase of petitioner's income by $19,131.46 alleged distribution of profits of Gano Moore Co.
(10) Increase of petitioner's income by $30,841.06 alleged compensation received by petitioner.
(11) Disallowance of deduction of $9,900 alleged ordinary and necessary expenses.
(12) Disallowance of deduction of $1,285 alleged taxes paid.
(13) Disallowance of bad debts aggregating $250.
(14) Assertion of fraud penalty of $33,849.35.
For the calendar year 1922
(15) Increase of petitioner's income by $2,456.45 alleged additional compensation from the Gano Moore Coal Mining Co.
(16) Increase of petitioner's income by $1,666.69 alleged additional compensation from Gano Moore Co.
(17) Disallowance of deduction of $6,400 ordinary and necessary expenses paid.
(18) Whether an amount of $19,131.46 paid to petitioner by Gano Moore Co. represented additional income.
(19) Disallowance of a deduction of $4,260 for interest paid.
(20) Disallowance of deduction of $762.90 taxes paid.
(21) Disallowance of a bad debt deduction of $22,822.50.
For the calendar year 1923
(22) Disallowance of a deduction of $1,820 ordinary and necessary expenses paid.
(23) Disallowance of a deduction of $4,260 interest paid.
(24) Disallowance of a deduction of $50.67 taxes paid.
(25) Disallowance of deduction for bad debts aggregating $135.
(26) Disallowance of an alleged loss of $675.
FINDINGS OF FACT.
Petitioner is an individual residing in Philadelphia, Pa., where he has been engaged in the coal business since 1906.
In 1913 he organized a Pennsylvania corporation known as Gano, Moore & Co., Inc. The total capital paid in was $11,200, of which $8,000 was paid in by petitioner's wife, Ethel Pape Gano, $3,000 by Moore, and $200 by Charles C. Gano, a brother of petitioner. Eighty shares of preferred stock were issued to Ethel Pape Gano for her contribution of capital. All the common stock of the company was issued to the petitioner, M. Rea Gano. All the preferred stock, including that held by Ethel Pape Gano, was retired in 1915. The contribution of $8,000 to Gano Moore & Co. for which preferred stock was issued and which stock was retired in 1915 was the only contribution ever made by Ethel Pape Gano to this or the later corporations. She never participated in the business management of the company and took no active part in any corporate operations.
About May 1, 1919, a Delaware corporation known as the Gano Moore Co. was organized to take over the business known as Gano Moore & Co., Inc., the Pennsylvania corporation. On May 2, 1919, the Gano Moore Co. issued 2,490 shares of its authorized capital stock of 2,500 shares to Gano, Moore & Co. for its assets, good will, etc. The remaining 10 shares were issued to qualify directors of the new corporation. The stock remained thus until January 22, 1920, when the 2,490 shares held by Gano, Moore & Co. were returned to the Gano Moore Co. and reissued as follows:
Shares
M. Rea Gano _______________________________________________ 317
Ethel Pape Gano (wife of M. Rea Gano) _____________________ 1,275
Irene P. Gano (wife of C. C. Gano) ________________________ 400
Charles C. Gano ___________________________________________ 393
L. J. Costello ____________________________________________ 60
C. W. Van Artsdalen _______________________________________ 1
_____
2,500
On September 15, 1921, the 1,275 shares held by Ethel Pape Gano were transferred on the records to M. Rea Gano. On the same day the 400 shares held by Irene P. Gano were transferred to her husband, Charles C. Gano. During the period January 22, 1920, to September 15, 1921, Ethel Pape Gano took no part in the active management of the corporations and her shares were always voted by proxy.
On December 9, 1921, M. Rea Gano, Charles C. Gano, and others organized the Gano Moore Coal Mining Co. with an authorized capital stock of $3,000,000 common and $6,000,000 preferred. On January 1, 1922, the good will and other assets of the Gano Moore Co. were transferred to the Gano Moore Coal Mining Co. for capital stock of that company.
On April 26, 1920, the board of directors of the Gano Moore Co. declared a cash dividend of 40 per cent payable May 1, 1920. On May 13, 1920, the dividend was paid and entered on the books of the company as follows:
May 13, 1920 M. Rea Gano Dividend _____________________ $65,880.00
May 13, 1920 C. C. Gano " _____________________ 31,720.00
May 13, 1920 L. J. Costello " _____________________ 2,400.00
The above dividend to M. Rea Gano was paid by check No. 255 of the Gano Moore Co., on the back of which check appeared the following notation:
Dividend on Gano Moore Co. stock ______________________ $65,880.00
Ethel P. Gano 1275 shares _____________ $51,000.00
M. Rea Gano 371 " _____________ 14,840.00
C. W. Van Artsdalen 1 " _____________ 40.00
__________
65,880.00
The check was deposited by petitioner to his account the same day in Land Title & Trust Co., Philadelphia, in an account that had been closed on June 28, 1919. During the period May 13 to May 28, 1920, petitioner paid out by check from that account the aggregate sum of $38,937.22 in payment of taxes on property held in the name of Ethel Pape Gano, in repayment of a loan of $15,000 from the Equitable Life Insurance Co., and for other purposes.
On March 15, 1921, the board of directors of Gano Moore Co. declared a cash dividend of 25 per cent, payable March 16, 1921, which dividend was duly paid and recorded on the cash book as follows:
Mar. 16, 1921 M. Rea Gano Dividend _____________ $9,275.00
Mar. 16, 1921 L. J. Costello " _____________ 1,500.00
Mar. 16, 1921 C. W. Van Artsdalen " _____________ 25.00
Mar. 16, 1921 Chas. C. Gano " _____________ 9,825.00
Mar. 16, 1921 Irene P. Gano " _____________ 10,000.00
Mar. 16, 1921 Ethel P. Gano " _____________ 31,875.00
The amount of $9,275 entered as paid to M. Rea Gano was deposited in his account at Land Title & Trust Co. on March 16, 1921. On the same day there was paid out of this account to the Gano Moore Co. the sum of $9,300, which sum was by that company placed to the credit of M. Rea Gano.
The amount of $31,875 recorded on the books of the Gano Moore Co. as paid to Ethel P. Gano was deposited in the Ethel P. Gano account in Land Title & Trust Co. on March 16, 1921. On the same day there was paid out of this account the sum of $31,875 to Gano Moore Co. and there placed to the credit of M. Rea Gano.
The sum of $9,825 recorded as paid to Charles C. Gano and the sum of $10,000 recorded as paid to Irene P. Gano were returned to Gano Moore Co. on the same day and placed to the credit of Charles C. Gano on the books of that company.
On April 25, 1921, the board of directors of Gano Moore Co. declared a cash dividend of 20 per cent payable on or after May 1, 1921. On May 16, 1921, this dividend was paid and recorded as follows:
May 16, 1921 M. Rea Gano Dividend ________________ $7,420.00
" Ethel P. Gano " ________________ 25,500.00
" Charles C. Gano " ________________ 7,860.00
" Irene P. Gano " ________________ 8,000.00
" L. J. Costello " ________________ 1,200.00
" C. W. Van Artsdalen " ________________ 20.00
The dividend of $25,500 recorded as paid to Ethel Pape...
To continue reading
Request your trial
-
Labay v. CIR, 71-1224.
...evidence", a standard traditionally applied by the tax court to cases involving the 50% addition to tax for fraud. See M. Rea Gano 19 BTA 518, 532-533. Five judges dissented from the majority opinion, concluding that the clear and convincing evidence standard should be read into the statute......
-
Penalties for tax fraud against a corporation.
...7 Laputka, note 2, at 81-2859, citing Charles E. Mitchell, 303 US 391 (1938)(20 AFTR 796, 38-1 USTC [PARAGRAPH]9152). Scc also M. Rea Gano, 19 BTA 518, 533 (1930). 8 Laputka, note 2, at 81-2859. 9 C.S. Day, TC Memo 1965-326. 10 Sec. 6663(b). The IRS still has the initial burden of proving f......