Goldsmith v. Comm'r of Internal Revenue
| Decision Date | 10 October 1958 |
| Docket Number | 57620.,Docket Nos. 57619 |
| Citation | 31 T.C. 56 |
| Parties | NATHAN GOLDSMITH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.ISIDOR GOLDSMITH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Harold Davis, Esq., for the petitioners.
John F. Walsh, Esq., for the respondent.
1. Receipts from unrecorded sales were included by the Commissioner in gross income. Held, petitioners are entitled to a partially offsetting adjustment measured by the cost of such sales. Such costs determined herein under the Cohan rule. Cf. David J. Pleason, 22 T.C. 361, 371,affirmed226 F.2d 732 (C.A. 7), certiorari denied350 U.S. 1006.
2. Commissioner's disallowance of various deductions sustained where petition fails to comply with Tax Court rules calling for clear and concise assignments of error and allegations of act sustaining such assignments (rule 7(c)(4)), and where evidence presented was vague and unsatisfactory.
3. Determination of fraud upheld.
Respondent determined the following deficiencies in petitioners' income tax:
The deficiencies result, in a large measure, from the petitioners' membership in a partnership, and from respondent's recomputation of the partnership's income.
The questions presented for decision are whether the cost of merchandise sold by the partnership was greater than the cost set forth on its 1944 and 1945 income tax returns; whether respondent was correct in refusing to take into account certain costs claimed on the 1947 returns; whether the partnership incurred deductible expenses in amounts greater than those allowed by respondent; and whether any part of the deficiency (if any) for 1944 or 1945 is due to fraud.
Petitioners, Nathan Goldsmith (sometimes hereinafter referred to as Nathan) and Isidor Goldsmith (sometimes hereinafter referred to as Isidor), are brothers residing in New York. They filed individual income tax returns for the calendar years in issue with the then collector of internal revenue for the first district of New York.
During the years involved herein Nathan and Isidor were equal partners in the Manhattan Coffee and Sugar Company (sometimes hereinafter referred to as Manhattan). They were the only partners.
Manhattan had its place of business at 33 Division Place, Brooklyn, New York. The partnership engaged in buying and selling sugar, sugar syrups, groceries, and bakery and confectionery supplies at wholesale. Also, Manhattan manufactured certain syrups the principal ingredient of which was sugar. Petitioners have dealt with sugar and sugar products since 1916.
Isidor was in charge of Manhattan's shipping department and outside employees. Occasionally he did some office work. Ordinarily Nathan managed the rest of the business. For a period of approximately 9 months in 1944 Isidor managed the partnership business.
In 1944 and 1945 the Office of Price Administration attempted to regulate the sale and distribution of sugar and sugar products. During those years the supplies of sugar and sugar products were not always equal to the demand for them.
Manhattan used an accrual method of accounting and filed partnership returns of income for fiscal years ending June 30, 1944, through June 30, 1949, and for the taxable period July 1, 1949, through November 30, 1949.
On its income tax return for the fiscal year ending June 30, 1944, Manhattan reported gross receipts of $646,431.88 and cost of goods sold of $466,072.33. On its income tax return for the fiscal year ending June 30, 1945, Manhattan reported gross receipts of $488,615.11 and cost of goods sold of $327,781.96. The returns for those years show merchandise purchases of $462,491.26 and $328,254.84, respectively.
Manhattan's ‘Purchase Journal’ contained, among others, columns for ‘syrup and spices,’ ‘syrups and spices sundries,‘ and ‘sugar.’ The total amount of purchases of ‘syrups and spices' and ‘syrups and spices sundries' recorded in the ‘Purchase Journal’ for the fiscal year ending June 30, 1944, was $79,576.83. The total amount of those purchases recorded for the following fiscal year was $55,270.79. Total recorded purchases of ‘sugar’ for those 2 fiscal years were $273,595.60 and $220,415.83, respectively.
In the fiscal year ending June 30, 1944, Manhattan had sales totaling not less than $276,985.70 which were neither recorded on its books nor included in the gross receipts reported on its income tax returns. In the fiscal year ending June 30, 1945, Manhattan had sales totaling not less than $222,070.52 which were neither recorded on its books nor included in the gross receipts reported on its income tax return. (The sales mentioned in this paragraph will sometimes hereinafter be referred to as the unrecorded sales.) Substantially all of the unrecorded sales were of flavored sugar syrups.
The customers, whose purchases were not recorded by Manhattan, were involved in some transactions which were recorded on the partnership books and reflected on its income tax returns. Recorded sales to these customers totaled $64,523.55 in the fiscal year ending June 30, 1944, and $7,559.84 in the fiscal year ending June 30, 1945.
Purchasers of sugar syrup from Manhattan received bills for the amounts due, and, in the cases of unrecorded sales, made payments by check. A substantial number of checks received by Manhattan in payment for unrecorded sales were cashed by either Nathan or Isidor. No reference to the receipt or cashing of these checks appears in the books and records of Manhattan. Some of the checks received by Manhattan in payment for unrecorded sales were deposited in the partnership's bank accounts.
The costs of the merchandise sold in connection with the unrecorded sales do not appear in Manhattan's books nor are they reflected in the returns filed by Manhattan for the fiscal years ending June 30, 1944 and 1945. Such costs were $210,000 for the fiscal year ending June 30, 1944, and $165,000 for the fiscal year ending June 30, 1945.
On January 4, 1943, in the United States District Court for the Eastern District of New York, Nathan was convicted, after a jury verdict of guilty, of the offense of making and causing to be made false statements and representations in an application filed with the Office of Price Administration.
On September 18, 1947, the partnership was granted an extension which permitted it to file its income tax return for the fiscal year ending June 30, 1947, on or before December 15, 1947. On its return, filed on December 15, 1947, cost of merchandise bought for sale is listed as $543,403.18. Gross profit is listed as $222,050.49, and each partner's share of ordinary income is listed as $77,290.02. This last figure was the figure reported by each petitioner as partnership income on his individual returns which were received by respondent on March 15, 1948.
The partnership filed an amended return for the fiscal year ending June 30, 1947, which was received by respondent on March 23, 1949. This return listed the cost of merchandise bought for sale as $536,903.18, and the figures for gross profit and each partner's net income as $228,550.49 and $80,442.52, respectively. Subsequently each petitioner filed an amended return for the calendar year 1947 on which the higher amount of partnership income was reported.
In determining a deficiency for 1947 based on the original returns respondent reduced the cost of merchandise purchased in accordance with the reduction on the amended partnership return, and disallowed an additional amount of $56,525.88. The total reduction made by respondent in the cost of merchandise bought for sale set out on the original partnership return is $63,025.88; of this amount, $44,000 represents cost of goods sold in the fiscal year ending June 30, 1947, and the remainder was properly disallowed.
The following figures represent deductions claimed by Manhattan and the amounts thereof disallowed by respondent:
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