Hauser v. Commissioner
| Decision Date | 22 July 1970 |
| Docket Number | Docket No. 639-67. |
| Citation | 29 TCM (CCH) 908,1970 TC Memo 207 |
| Parties | Frank M. Hauser, Jr., and Mary M. Hauser v. Commissioner. |
| Court | U.S. Tax Court |
W. Frank Taylor, John H. Kerr, III, and Lindsay C. Warren, Jr., P. O. Box 1616, Goldsboro, N. C., for the petitioners. J. Randall Groves, for the respondent.
Memorandum Findings of Fact and Opinion
The respondent determined deficiencies in the petitioners' income tax and additions to the tax under section 6653 (b) of the 1954 Code for the calendar years and in the amounts listed below:
Additions
to Tax
Sec. 6653(b)
Year Deficiency 1954 Code
1961 ......... $1,354.34 $ 677.17
1962 ......... 1,016.32 508.16
1963 ......... 984.27 492.14
1964 ......... 862.47 431.24
_________ ________
TOTALS ..... $4,217.40 $2,108.71
The issues presented for our decision are (1) whether amounts embezzled by the petitioner-husband are includable in the petitioners' gross income during the years in issue under section 61(a) of the 1954 Code; (2) whether any part of the deficiencies in question was occasioned by fraud with intent to evade tax for purposes of section 6653(b) of the 1954 Code; and (3) whether the petitioners are jointly and severally liable for the deficiencies and additions to the tax by virtue of their having filed joint returns under section 6013 of the 1954 Code.
The petitioners concede that, if the respondent is upheld in his contentions respecting the aforementioned issues, the deficiencies and penalties appearing in the table above were correctly determined.
Some of the facts have been stipulated and are found accordingly. The stipulation of facts and exhibits thereto are incorporated herein by this reference.
During the taxable years in question and at the time the petition herein was filed, petitioners Frank M. Hauser, Jr., and Mary M. Hauser, husband and wife resided at 1707 East Pine Street, Goldsboro, North Carolina. Frank and Mary executed joint income tax returns for each of the taxable years 1961 to 1964, inclusive, and caused the returns to be timely filed with the district director of internal revenue at Greensboro, North Carolina. The execution of these returns was the voluntary act of each petitioner and was not occasioned by duress, mistake, trickery or deception. Each petitioner intended to file a joint return.
Frank was employed as the Tax Collector of the City of Goldsboro during the years under consideration and for many years prior thereto. In this capacity, Frank prepared yearly bills for taxes owing to the City of Goldsboro, mailed these bills to city taxpayers, and collected remittances.
During the 1950's, Frank developed a method for embezzling portions of the tax payments he collected. He would alter his office's public records to reduce the amount of tax due from a given taxpayer, but he would mail the taxpayer a bill for the correct amount. When the taxpayer mailed in his payment for the correct tax liability, Frank would record payment of the reduced amount. He would then appropriate the difference for himself out of accumulated cash collections from other taxpayers.
By this method Frank wrongfully converted to his own use and benefit the following amounts properly belonging to the City of Goldsboro:
Amount
Year Appropriated
1961 ............... $6,301.32
1962 ............... 4,694.31
1963 ............... 4,520.20
1964 ............... 4,440.19
These amounts were not reported by the petitioners on their joint income tax returns for the years at issue. During the years 1961 through 1964 Frank had full control over the amounts he embezzled and enjoyed the benefits thereof. At no time during this period did he intend to return the money.
In 1965, a shortage of the public funds administered by Frank was discovered, and an investigation by the North Carolina State Bureau of Investigation was conducted. As a result of these investigations, the Grand Jury of Wayne County, North Carolina, indicted Frank for the embezzlement of funds belonging to the City of Goldsboro during the years 1954 through 1965.
In December of 1965, Internal Revenue Agent Bearl Vick, who had become aware of Frank's embezzlement activities through the local news media, interviewed Frank about his income tax returns for the years in question. At this interview, Frank volunteered no information about the embezzled funds, and none of the financial records he showed to the agent reflected these amounts. When questioned by the agent how he was able to maintain his standard of living on the salary shown on the return, Frank stated that he had no other income except that received from the City of Goldsboro. Vick then mentioned the publicity concerning the embezzlement and inquired why Frank had failed to report on his returns the money he had taken from the City. Frank replied that he had thought about filing amended returns after his embezzlement activities were exposed but that he had never done so. During the interview with the agent, Frank did not express surprise over the fact that the amounts he had wrongfully converted were taxable to him. Frank was not asked about nor did he comment on his knowledge or motivations at the times the returns in question were filed.
On January 25, 1966, Frank entered a plea of nolo contendere to the charges of embezzlement in the Wayne County Superior Court. On January 27, he was sentenced to confinement in the state prison. Execution of the sentence was suspended, provided that Frank comply with certain conditions. One of these conditions was that Frank reimburse the City for the amounts he misappropriated, with interest. In compliance with this requirement in the order of sentence, the petitioners in 1966 paid an undisclosed amount of cash to the City and executed a note, dated January 28, 1966, which was secured by a deed of trust on the petitioners' residence. On September 22, 1967, the petitioners paid to the City of Goldsboro the sum of $26,102.01, which amount was accepted by the City in full discharge of principal and accumulated interest on the note. In this manner the petitioners made full restitution of the amounts Frank had embezzled. Prior to 1966, petitioners had made no effort to restore these amounts.
A statutory notice of deficiency was mailed to the petitioners, Frank M. Hauser, Jr., and Mary M. Hauser, on November 9, 1966, for the taxable years 1961 through 1964, inclusive. The respondent increased the petitioners' gross income in these years by the amounts Frank had appropriated from the City of Goldsboro, and the 50 percent addition to tax for fraud was asserted.
(1) The petitioners had embezzlement income in the amounts determined by the respondent for the years 1961 through 1964.
(2) No part of the underpayment of tax in the years 1961 through 1964 was due to the fraud of the petitioners.
(3) The returns filed by the petitioners during the years 1961 through 1964 were validly executed joint returns.
OpinionThe first issue presented for our decision is whether the respondent correctly included the amounts Frank embezzled in the petitioners' gross income for the years 1961 through 1964. On brief, the petitioners contend that, since Frank was at all times under an unqualified duty to make restitution to his employer and since he recognized this obligation and actually restored the funds prior to the respondent's determination, the money he embezzled should not be included in the petitioners' gross income. It is not totally clear what theory the petitioners employ to reach this conclusion, but their briefs seem to suggest that this result should follow from the fact that Frank did not hold the misappropriated amounts under a claim of right. Petitioners also allude to certain unstated "broad principles of equity * * * embodied in section 1341,"1 although they admit that that section would not benefit them in this case.2
We hold that the respondent correctly included the embezzled funds in the petitioners' income under section 61(a).3 In James v. United States 61-1 USTC ¶ 9449, 366 U. S. 213 (1961), the Supreme Court held that embezzled amounts are included in the gross income of an embezzler in the year of the embezzlement. In so holding the Court overruled its prior decision in Commissioner v. Wilcox 46-1 USTC ¶ 9188, 327 U. S. 404 (1946). Wilcox had held that an embezzler does not have a taxable gain because he does not hold the misappropriated funds under a claim of right. In the absence of a bona fide legal or equitable claim to the money, the Court had originally concluded that a taxpayer cannot be said to have received any gain or profit that would be subject to the income tax. In reversing Wilcox, the James case does not reach the conclusion that an embezzler has a claim of right to misappropriated funds. See 366 U. S. at pages 215 and also 216, footnote 7. James held that, regardless of the claim of right test, an embezzler has taxable income because "in such case the taxpayer has `actual command over the property taxed — the actual benefit for which the tax is paid,' Corliss v. Bowers 281 U. S. 376 * * *" 366 U. S. at page 219. While Frank may not have had a claim of right to the funds involved in the instant case, he used them year after year as he saw fit; he clearly had "actual command" over the money and the "actual benefit" from it.
The result we reach in this case is similar to the one reached in Norman Mais Dec. 29,288, 51 T. C. 494 (1968). There, the taxpayer contended that no portion of the value of the property he embezzled was properly includable in his gross income in the year of embezzlement. He argued that a taxpayer does not...
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