Heininger v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 10 June 1942 |
| Docket Number | Docket No. 106518. |
| Citation | 47 BTA 95 |
| Parties | S. B. HEININGER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Samuel W. Witwer, Jr., Esq., for the petitioner.
D. A. Taylor, Esq., for the respondent.
The present proceeding involves income taxes for the calendar years 1937 and 1938. The Commissioner determined deficiencies in the respective amounts of $10,816.62 and $4,359.39. The petitioner urges error as to the major portion of the amounts. The questions presented are whether certain amounts received by the petitioner were properly added to gross income, and whether certain attorney fees were deductible as ordinary and necessary expenses of business. The income tax returns involved were filed with the collector for the first district of Illinois at Chicago, Illinois. The greater portion of the facts have been stipulated, as follows:
1. The petitioner, S. B. HEININGER, was a resident of Chicago, Illinois, at the time of the filing of the petition herein. Petitioner now resides at Athens, Wisconsin. The returns for the periods here involved were filed with the Collector of Internal Revenue for the First District of Illinois, at Chicago, Illinois.
2. On December 3, 1940, the respondent mailed to petitioner a notice of deficiency in federal income taxes for the years 1937 and 1938, a true and correct copy of which is attached as Exhibit A to the petition herein.
3. The taxes in controversy are income taxes for the calendar years 1937 and 1938, and the deficiencies asserted are in the amounts of $10,816.62 and $4,359.39, respectively.
4. During the years from about 1926 to 1939, the petitioner was a licensed dentist in the State of Illinois. His principal work since about 1932 was the making of artificial dentures, commonly known as false teeth, for customers living outside of the City of Chicago who did not personally visit petitioner's office. Before said dentures were made for a customer, petitioner required from and there was forwarded to him from such customer a payment of $2.00 generally designated by the petitioner and hereinafter for convenience referred to as "deposit". Said dentures, when completed for said nonresident customers, were mailed or shipped to them, C. O. D., for the amount of petitioner's respective charges less the $2.00 "deposit". For various reasons some of the "deposits" were returned to said clients and the dentures ordered by them were not furnished by the petitioner. For years prior to the year 1937, the petitioner consistently followed the practice of entering said "deposits" in his books of account as gross receipts when received, against which he entered as offsets thereto when returned the amounts of the "deposits" returned, and reflected the difference as gross income in his income tax returns for those years.
5. Petitioner's books of account for the years 1937 and 1938 recorded aforesaid "deposits" and said "deposits" returned and gross income as set forth in paragraph 4, supra. On December 31, 1937, the petitioner credited to a "deposit account" an item of $20,593.60 representing "deposits" on orders which had not been filled or completed. Of said amount, $3,656.60 represented "deposits" received during the period prior to January 1, 1937, and $16,937.00 represented "deposits" received during the year 1937. Said item of $20,593.60 was deducted from petitioner's gross income arrived at as set forth, supra, in his income tax return filed for the year 1937. On December 31, 1938 the petitioner credited to said "deposit account" an item of $6,900.63 representing "deposits" received during the year 1938. During the year 1938 the petitioner completed, mailed and/or shipped dentures on which deposits in the amount of $13,823.94 had been made in prior years and which were included in the said item of $20,593.60. On December 31, 1938 said "deposit account" was charged with said item of $13,823.94 and gross receipts for 1938 were increased in a like amount, leaving in said "deposit account" as of January 1, 1939 the amount of $13,670.29 ($20,593.60 minus $13,823.94 plus $6,900.63) representing deposits on orders for dentures unfilled as of that date. In petitioner's income tax return for said year 1938 the aforesaid item of $13,823.94 was included in gross income and the said item of $6,900.63 was deducted from gross income.
In the respondent's final determination of the petitioner's tax liability for said year 1937, as evidenced by his notice of deficiency, a copy of which is attached to the petition herein as Exhibit A, the respondent disallowed as a deduction the said item of $3,656.60 and included in gross income the said item of $16,937.00. The petitioner concedes that the respondent's action in disallowing the said deduction of $3,656.60 was proper and in the final determination herein of petitioner's tax liability for the said year, said deduction should be disallowed.
In the respondent's final determination of the deficiency herein for the said year 1938, as evidenced by his notice of deficiency, a copy of which is attached to the petition herein as Exhibit A, the respondent eliminated from gross income the said item of $13,823.94 and included in petitioner's gross income the said item of $6,900.63.
6. Petitioner's income tax returns were at all times filed on the cash receipts and disbursements basis. The petitioner never applied for nor received permission from the Commissioner of Internal Revenue to change his method of accounting or filing his income tax returns employed for years prior to 1937.
7. On September 22, 1937 a citation was issued by the Solicitor of the Post Office Department, charging that petitioner was engaged in conducting a scheme for obtaining funds through the mails by means of false and fraudulent practices, in violation of 39 U. S. C. A., Sections 259 and 732. Shortly thereafter petitioner appeared before the United States Post Office Department, answered said charges and employed attorneys to render legal services to petitioner in resisting the issuance of the so-called "Fraud Order" under said Statute. During 1937 petitioner paid attorneys' fees and other legal expenses in connection with said proceedings, amounting to $7,069.99; said payments were reasonable in amount.
8. On February 19, 1938, and after a hearing under the aforesaid citation, the Postmaster General of the United States issued a so-called "Fraud Order," forbidding the Postmaster at Chicago, Illinois, to pay any money orders drawn to the order of petitioner, and instructing said Postmaster to return all mail addressed to the petitioner to the senders, marked "Fraudulent". Thereafter, on February 25, 1938, petitioner filed suit in the District Court of the United States for the District of Columbia against James A. Farley, Postmaster General, and on that date said Court entered an order directing the Postmaster General to hold all mail addressed to petitioner until the further order of the Court.
9. On June 6, 1938, the District Court of the United States for the District of Columbia granted to petitioner a permanent injunction, restraining the Postmaster General of the United States from enforcing the aforesaid "Fraud Order" or otherwise proceeding in accordance with the terms of said "Fraud Order". Thereafter the Postmaster General appealed said case to the Court of Appeals for the District of Columbia, and on April 17, 1939 that Court reversed the Order of the District Court for the District of Columbia and remanded the cause with instructions to dissolve the injunction and to dismiss the Bill of Complaint. The opinion of the said Court of Appeals is reported at 105 Fed. 2d 79, of which this Board may take judicial notice. Thereafter, in the October Term, A. D. 1939, petitioner applied to the Supreme Court of the United States for a Writ of Certiorari to review the judgment of the United States Court of Appeals, which Petition for Certiorari was denied.
10. A copy of the Bill of Complaint filed by the petitioner in said District Court including a copy of the aforesaid "Fraud Order" attached thereto as "Exhibit A"; a copy of the Answer thereto; a copy of the Restraint Order entered by the said District Court; a copy of the Court's opinion; and a copy of the Court's order of permanent injunction are set forth in "Exhibit A", as labeled therein, which is attached hereto and made a part hereof.
11. Pursuant to mandate of the aforesaid Court of Appeals, the said District Court entered an order dissolving the aforesaid injunction and dismissing the aforesaid Bill of Complaint. Said order is now final and in full force and effect.
12. During the year 1938 petitioner paid to attorneys for legal services in prosecuting his injunction suit in the District Court of the United States for the District of Columbia, and defending the aforesaid appeal of the Postmaster General to the Circuit Court of Appeals for the District of Columbia, and in applying to the Supreme Court of the United States for Writ of Certiorari, fees and legal expenses aggregating $29,530.56; said payments were reasonable in amount.
We find the facts to be as stipulated. In addition, from evidence adduced, we further find:
The petitioner on receiving an inquiry by mail customarily mailed a portion of wax called "first impression" material with an order blank and catalogue of prices and instructions as to how to use the wax. The customer would return it with an impression of the teeth, and was then furnished with material for a second impression. If this was satisfactory, the upper plate was made. If not satisfactory, further material was sent to get a better impression. If upon a fourth effort a satisfactory impression was not secured the procedure was discontinued and the deposit mailed back to the customer. If finally satisfactory, the upper plate was finished and sent c. o. d. for the price of the upper plate only, with wax...
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