Lease v. Comm'r of Internal Revenue

• Decision Date: 24 March 1955
• Docket Number: Docket No. 49262.
• Citation: 23 T.C. 1058
• Parties: H. LESLIE LEASE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

23 T.C. 1058

H. LESLIE LEASE, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 49262.

Tax Court of the United States.

Filed March 24, 1955.

John J. Hyde, Esq., for the petitioner.

David M. Scheffer, Esq., for the respondent.

The notice of deficiency was issued to petitioner more than 3 but less than 5 years after the returns for 1947 and 1948 were filed. In determining whether petitioner omitted from gross income in each return an amount in excess of 25 per centum of that reported therein within the meaning of section 275(c), Internal Revenue Code 1939,

1. Held, that reported gross income from business is the gross profit stated in the return without adjustment for any items incorrectly reported therein as part of cost of goods sold;

2. Held, further, upon the facts, that petitioner omitted from his return in each year an amount in excess of 25 per centum of the gross income reported therein. H. A. Hurley, 22 T.C. 1256, distinguished.

Respondent asserted deficiencies in income tax in the notice of deficiency and by amendment to answer as follows:

+--------------------------+
                ¦    ¦Notice of  ¦Amendment¦
                +----+-----------+---------¦
                ¦Year¦deficiency ¦to answer¦
                +----+-----------+---------¦
                ¦1947¦$10,993.93 ¦$8,967.18¦
                +----+-----------+---------¦
                ¦1948¦1,504.50   ¦1,784.86 ¦
                +----+-----------+---------¦
                ¦1949¦330.00     ¦454.62   ¦
                +--------------------------+
                

The only issue involved is whether this proceeding with respect to 1947 and 1948 is barred by limitations. The basis for the computation of the deficiency for 1949 is stipulated and the amount may be determined under Rule 50. Our findings of fact and opinion will therefore be confined to the years 1947 and 1948.

FINDINGS OF FACT.

Most of the material facts were stipulated by the parties. As will appear from our Opinion, infra, we have sustained respondent's objection to some of the stipulated facts, which we accordingly omit from our findings. The remaining stipulated facts are found as stipulated, and are incorporated herein by reference.

Petitioner is a resident of Monona, Iowa, and during the years in question he was engaged in the business of manufacturing concrete products, ready-mixed concrete, and stokers. He was also a road surfacing contractor and the operator of a stone quarry. He filed income tax returns for the years 1947 and 1948 with the then collector of internal revenue for the district of Iowa. These returns reported in part the following items:

+--------------------------------------------------+
                ¦Pertinent Items Reported in Petitioner's Returns  ¦
                +--------------------------------------------------¦
                ¦                ¦                ¦                ¦
                +--------------------------------------------------+
                

Item 1947 return 1948 return  
                1. Items included in Schedule C
                (a) Total receipts (line 1)           $139,676.63    $138,916.06
                (b) Net cost of goods sold (line 9)
                                                      1   111,003.38 105,823.35
                (c) Gross profit (line 10)            2   28,673.25  33,092.71
                (d) Total other business deductions
                (line 20)                             18,704.69      29,292.18
                (e) Net profit (line 22)              9,968.56       3,800.53
                2. Total amount of rents (Schedule B) 336.00         336.00
                3. Interest                           49.36          31.29
                4. Gain from sale of capital assets                  1,090.00
                5. Adjusted gross income (page 1
                line 6)                               9,554.80       4,361.64
                

FN1 Includes $4,748 for railroad siding construction expense discussed infra.FN2 Line 10 of Schedule C of the 1947 return was in fact left blank by petitioner and the above figure was calculated from other reported amounts. Respondent, however, does not contend that this was an omission from reported gross income, and in the brief he treats the above amount as though it had been reported by petitioner. Accordingly, we do not concern ourselves with any issue which might arise in this respect in a proper case.

Petitioner's correct adjusted gross income for each of the years 1947 and 1948 was $29,105.77 and $14,028.83, respectively. Petitioner omitted from his reported adjusted gross income for each year $19,550.97 and $9,667.19, respectively.

The unreported adjusted gross income for 1947 reflects the cost of constructing a railroad siding in the amount of $4,748 which petitioner reported as one of the items constituting cost of goods sold in the return for that year. See item 1(b) of schedule above. Respondent disallowed the item as an expense and petitioner does not contest the adjustment with respect to the determination of his correct 1947 adjusted gross income.

The correct adjusted gross income for 1947 reflects an additional deduction for depreciation in the amount of $449.91. This amount was not claimed by petitioner in his 1947 return, but was allowed by respondent in the determination of the correct adjusted gross income for that year.

Petitioner correctly stated in his returns for 1947 and 1948 expenditures and depreciation allowances relating to the operations of his rental property. He also incurred all expenditures which comprise the amounts claimed by him as cost of goods sold and as other business deductions in Schedule C of each such return. See item 1(b) and 1(d) above. His inventories at the beginning and end of each year were correctly stated in each Schedule C.

The notice of deficiency issued to petitioner is dated March 13, 1953. It was issued more than 3 but less than 5 years after the returns for the years 1947 and 1948 were filed. Petitioner omitted from gross income in each year an amount properly includible therein which is in excess of 25 per centum of the amount of gross income stated in the return for that year.

OPINION.

FISHER, Judge:

The parties have stipulated and agreed upon the correct amount of adjusted gross income realized by petitioner during 1947 and 1948. We have found, accordingly, that petitioner omitted from his reported adjusted gross income for each of those years $19,550.97 and $9,667.19, respectively. The only issue involved herein is whether this proceeding is barred by the statute of limitations (section 275(a), Internal Revenue Code of 1939) since the notice of deficiency was not issued within 3 years after the returns were filed.

Respondent contends that proceedings in the instant case were properly commenced within 5 years after the returns were filed in view of the provisions of section 275(c). That section states that ‘if a taxpayer omits from gross income an amount properly includible therein which is in excess of 25 per centum of the amount of gross income stated in the return,‘ proceedings may be commenced within 5 years after the return was filed. Petitioner, on the other hand, contends that an amount of gross income sufficient to meet the requirements of section 275(c) was not omitted from the return for each year. We agree with respondent for the reasons set out below.

To determine whether or not section 275(c) is applicable in any year it is necessary to determine two amounts: (1) The amount of gross income ‘stated in the return’; and (2) the amount omitted from gross income which is ‘properly includible therein.’ If the latter amount exceeds 25 per centum of the former, section 275(c) is applicable. Accordingly, we turn first to a determination of the amount of gross income stated in the return for each of the years in question.

Petitioner reported gross income during the years in question from four sources: his businesses, rentals, interest, and gain from sale of capital assets (in 1948 only). There is no dispute between the parties as to the amounts of reported gross income derived from the last three sources. The amount of reported gross income from business for each year, however, requires some discussion. Regulations 111, section 29.22(a)-5, provide in part as follows in this respect:

GROSS INCOME FROM BUSINESS.— In the case of a manufacturing, merchandising, or mining business, ‘gross income’ means the total sales, less the cost of goods sold, plus any income from investments and from incidental or outside operations or sources. In determining the gross income subtractions should not be made for depreciation, depletion, selling expenses, or losses, or for items not ordinarily used in computing the cost of goods sold. * * *

In the instant case, the reported ‘gross income from business' is the reported gross profit, i.e., the total receipts less net cost of goods sold as set out in Schedule C of the return for each year. See items 1(a), (b), and (c) of the schedule set out in our Findings of Fact. Petitioner, however, contends that the reported ‘net cost of goods sold’ reflects many items which were not properly deductible from total receipts in determining the gross profit for each year. He argues that these amounts should have been deducted instead from gross profits as ‘other business expenses' in Schedule C in determining net profit for each year. The practical effect of petitioner's contention would be to increase the reported gross profit in each year (though leaving reported net profit and adjusted gross income unaffected), and thus to increase the total amount of reported gross income.

In this connection, the parties have stipulated and agreed, subject to respondent's objections with respect to relevancy and materiality, that the net cost of goods sold reported in the 1947 return contains items in a total amount of over $10,000 which petitioner now contends were improperly included as costs of goods sold. Moreover, petitioner submitted testimony of an experienced accountant to the effect that these and other items were improperly reported in the returns as costs of goods sold (instead of as other business deductions) for each year in question. (With respect to 1948 such evidence is contrary to paragraph 19 of the stipulation of facts.) Were the returns adjusted according to petitioner's contention, the...