Hoffman v. Commissioner
| Decision Date | 29 July 1960 |
| Docket Number | Docket No. 64405. |
| Parties | Robert C. Hoffman v. Commissioner. |
| Court | U.S. Tax Court |
Elmer M. Morris, Esq., 32 North Duke Street, York, Pa., and Arthur Markowitz, Esq., for the petitioner. Stephen P. Cadden, Esq., for the respondent.
Memorandum Findings of Fact and Opinion
The respondent determined deficiencies in income tax and additions thereto for the years and in the amounts as follows:
I. R. C. 1939
Sec. Sec. 294
Year Income Tax 293(b) (d)(2)
1948....... $109,100.56 $54,550.28 $6,486.42
1949....... 40,178.00 20,089.00 2,500.62
1950....... 26,779.72 13,389.86 1,494.75
The respondent on brief has conceded that the petitioner is not liable for additions to tax under section 293(b) of the Internal Revenue Code of 1939. The remaining issues are whether the respondent properly computed taxable income under the cash expenditures method; whether he erroneously increased rental income; whether he improperly disallowed deductions for certain claimed travelling expenses; and whether petitioner is liable for additions to tax for substantial underestimation of estimated tax. Other issues were settled by stipulations at the trial, and will be referred to hereinafter.
Some of the facts are stipulated and are found as stipulated, the stipulation being incorporated herein by this reference.
The petitioner resides in York, Pennsylvania. He filed timely income tax returns and declarations of estimated tax for the years 1948, 1949, and 1950 with the collector of internal revenue for the first district of Pennsylvania. Petitioner also filed individual income tax returns for the years 1929 through 1947 reporting total net income of $384,748.88 on which he paid income taxes and interest totaling $94,911.01 (plus some undisclosed amount for 1933), and in which depreciation deductions were taken in the total amount of $36,371.42.
During the years in question, 1948, 1949, and 1950, petitioner was engaged in several businesses. He owned as sole proprietor the York Barbell Company which manufactured and sold numerous types of weight lifting and body building equipment throughout the United States and in many foreign countries; Strength and Health Publishing Company which published and sold monthly the "Strength and Health" magazine (subscription $2.50 per year) and sold books written by the petitioner on health, body building, weight lifting and related subjects; York Barbell Foundry which manufactured castings for barbells and did custom work for others; and the York Light House Company, which sold light fixtures. Petitioner was editor of the Health and Strength magazine and also authorized many articles published therein. This magazine served also as the advertising medium for products sold under the name of the petitioner's various enterprises. There are also advertised therein under the name of the petitioner several products such as sun tan lotion, "Bob Hoffman's Rub," pamphlets or publications on weight lifting, and barbell training sets. There are also advertised numerous muscle building and other athletic products under the name of York Athletic Supply Company. Therein York Barbells and other products are advertised as being manufactured in Tulare, California, and Scarborough Bluffs, Ontario, Canada. The petitioner was also a stockholder in the York Precision Company, a corporation which manufactured, among other things, CO2 appliances.
Since 1936 Michael Dietz, who is not an accountant but who had taken a course in bookkeeping, has kept separate books and records for each of the three businesses — York Barbell Company, Strength and Health Publishing Company, and York Barbell Foundry. These books were kept on an accrual method. Dietz also kept a separate record of transactions of the petitioner, aside from the business activities conducted under the names of York Barbell and Strength and Health Publishing Company. These separate records were kept on the cash receipts and disbursements method of accounting. The petitioner seldom went over the results of transactions with Dietz, and generally did not give him any instructions or directions as to how to handle any specific transaction or transactions on the books.
Dietz took care of the purchasing as well as the bookkeeping in petitioner's businesses, but had very little to do with sales Receipts of the businesses were received by check, money order, or cash. Cash receipts of the businesses were not handled by Dietz upon original receipt. When money orders were received Dietz would record these on tape rather than in a record book. The money orders were taken to the post office and cashed and then deposited in a business bank account. Duplicate deposit slips were made, one going to the bank and one being retained.
The petitioner drew money from these businesses. These withdrawals were made by checks prepared by Dietz and signed by the petitioner. Dietz would generally cash them although at times the petitioner would have them cashed elsewhere. The petitioner maintained a personal bank account in the Western National Bank in which was deposited nonbusiness income. At times business income was deposited in this account when the balance became low.
For each of the years 1948, 1949, and 1950 the petitioner's income tax return was prepared by a firm of certified public accountants located in York. The returns for 1948 and 1950 indicate that they were prepared by the accounting firm from figures furnished them without verification. The return for 1949 indicates that it was prepared from the books without complete audit. The information furnished the accounting firm was furnished by Dietz. None of the information so supplied by Dietz was furnished by the petitioner. Although the returns purport to show operations of Strength and Health Publishing Company only, the figures contained therein are composite figures compiled by the bookkeeper from all the records which are kept.
In his return for the year 1948, filed March 15, 1949, the petitioner reported gross profit from business of $121,558.92 and net profit of $16,003.60; rental income of $4,380; net income of $22,894.06; and tax liability of $7,006.51.
In his return for 1949, filed March 15, 1950, the petitioner reported gross profit from business of $122,331.76 and net profit of $20,237.17; rental income of $5,580; net income of $25,817.17; and tax liability of $8,505.55.
In his return for 1950, filed March 15, 1951, the petitioner reported gross profit from business of $115,060.22 and net profit of $17,172.01; rental income of $5,100; net income of $22,272.01; and tax liability of $6,933.06.
The respondent, in the notice of deficiency, stated that his determination was based on an examination of available books and records. Therein he disallowed certain claimed deductions, determined that the petitioner had unreported rental income, and also determined that he had additional unreported income for each of the years. He determined that the correct net income was as follows: $172,095.25 for 1948; $88,399.99 for 1949; and $64,118.71 for 1950. In determining the unreported income the respondent employed the "cash expenditures" method and added bank deposits for the years 1948 and 1949 which he determined had not been reported as income. The amounts of unreported income thus determined were as follows: $134,021.85 for 1948, $36,667.20 for 1949, and $23,095.50 for 1950.
In applying the cash expenditures method the respondent determined the amount of cash expeditures, set forth the ascertained sources of available funds, and determined that the difference constituted unreported income. His computation includes sources of available funds as follows:
1948
Drawings—Strength & Health Co.... $26,062.69
less—Payments to third parties
Income taxes paid
1-15-48 ............. $ 3,937.97
3-15-48 ............. 2,431.06
9-15-48 ............. 1,833.33
Peoples Laundry...... 311.40
Miscellaneous ....... 98.93
Rosetta Morris....... 100.00
Checks cancelled..... 4,650.00 13,362.69
__________ __________
Net drawings available............... $12,700.00
Rental Income—Gross ................. 4,380.00
Interest received per return......... 2,510.46
__________
Total ......................... $19,590.46
==========
1949
Drawings—Strength & Health Co.... $14,676.23
less—Payments to third parties
Income taxes paid
1-17-49 ............. $ 1,833.33
3-15-49 ............. 1,503.25
6-7-49 .............. 1,503.27
9-14-49 ............. 1,503.25
Peoples Laundry...... 288.85
John Dauber.......... 195.65
George Deardorff..... 400.00
Miscellaneous ....... 98.63 7,326.23
__________ __________
$ 7,350.00
Add—checks of prior year previously
cancelled—added to check
dated 2-24-49................ 4,650.00
__________
$12,000.00
Rental Income—Gross................ 5,580.00
Proceeds from sale of property
located at 316 E
Market St., Marietta
Penna., Consideration....... $18,000.00
less—mortgage assumed....... 15,500.00 2,500.00
__________ __________
$20,080.00
==========
1950
Drawings—Strength & Health Co.... $18,324.22
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