Lowy v. CIR, 9

• Decision Date: 02 February 1959
• Docket Number: No. 9,Docket 24888.,9
• Citation: 262 F.2d 809
• Parties: Leo L. LOWY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Second Circuit

262 F.2d 809 (1959)

Leo L. LOWY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 9, Docket 24888.

United States Court of Appeals Second Circuit.

Argued October 23, 1958.

Decided February 2, 1959.

Maurice V. Seligson, New York City, for petitioner.

Carolyn R. Just, Atty., Dept. of Justice, Washington, D. C. (Andrew F. Oehmann, Acting Asst. Atty. Gen., Lee A. Jackson and Robert N. Anderson, Attys., Dept. of Justice, Washington, D. C., on the brief), for respondent.

Before SWAN and MOORE, Circuit Judges, and KAUFMAN, District Judge.

MOORE, Circuit Judge.

The taxpayer, Leo L. Lowy, petitions to review the decision of the Tax Court finding deficiencies in income taxes for the years 1941, 1942 and 1943 in the respective amounts of $1,909.16, $44,598.70 and $62,256.60. Fraud penalties of 50% were added for 1942 and 1943, i. e. $22,299.35 and $31,131.72 respectively.

Since 1927 taxpayer had been engaged in the business of manufacturing ball and roller bearings. From 1927 to 1931 he accumulated machinery in New York and New Jersey and opened a small experimental shop where he manufactured tapered roller bearings. In April 1930 taxpayer formed a corporation, Tapered Roller Bearing Company, Inc., to which he transferred some of his machinery and tools. Tapered's tax return for 1930, signed under oath by taxpayer, stated an opening inventory of $300,000 and machinery and equipment of $700,000. He subsequently admitted this statement was false.

Because of financial difficulties Tapered's machinery, fixtures and equipment were mortgaged to secure a loan and shortly thereafter taken in foreclosure by the lender. The taxpayer himself was then petitioned into personal bankruptcy. Never discharged in bankruptcy he recommenced business in 1934 with the equipment lost in foreclosure, having obtained permission from the lender to use both the equipment and a portion of the lender's plant. He carried on in this manner manufacturing and selling bearings in his own name until the end of 1937.

During 1933 taxpayer, with the financial and legal assistance of an attorney named Garfield, recovered a substantial quantity of previously manufactured bearings (referred to as "stock bearings") for an outlay of $5,600. These bearings taxpayer claimed at times had great value; at other times when the opposite better suited his purposes that they were worthless because they had not been properly case hardened.

On December 24, 1937 taxpayer caused to be incorporated the American Rolbal Corporation (Rolbal). He was the sole stockholder. Rolbal continued the operations in which taxpayer had been engaged from 1934 to 1938 using the same equipment. From 1938 to 1943 he sold bearings manufactured during those years as well as bearings previously manufactured, the sales volume for the former being $247,872.84; for the latter $233,327.29.

During the years 1941, 1942 and 1943 taxpayer received substantial sums from Rolbal which he failed to report as income. In addition he made many purchases for his own account which he entered as Rolbal expenses. The Commissioner attributed these items to income. The tax thereon gives rise to the deficiencies now in issue. The taxpayer in turn argues that these sums were not income but consisted of repayment of loans by him to Rolbal, sums due from the sale of his own bearings to Rolbal (the stock bearings) and that sizeable amounts of cash received from Rolbal were used by him for corporate purposes.

The taxpayer's case cannot be properly appraised without some reference to a previous tax case before the Tax Court involving Rolbal and very similar facts. This court affirmed per curiam on the findings of fact and the opinion below of the Tax Court (American Rolbal Corp. v. Commissioner of Internal Revenue, 2 Cir., 1955, 220 F.2d 749). In that case the deficiencies imposed resulted principally from the disallowance of certain deductions relating to machinery and equipment used to manufacture Rolbal's products. At first Rolbal claimed that the machinery was owned by Lowy and leased to Rolbal. Lowy put an estimated value of $3,600,000 on the machinery. On its 1942 and 1943 tax returns Rolbal deducted $360,000 as annual rent for the machinery. The rent in fact was not paid to Lowy. Despite advice from Rolbal's accountant that rent not paid was not an allowable deduction Rolbal not only did not file an amended return for 1942 but even continued the same practice for 1943. Nor did Lowy report as income these rental payments. In its first petition before the Tax Court Rolbal contended that Lowy constructively received the income which he allowed his wholly owned corporation to keep as working capital. Shortly before the trial Rolbal by amendment changed its entire fact theory by claiming that it and not Lowy owned the machinery and that as the owner it was entitled to annual depreciation of $360,000. In their endeavor to preserve the deductions and defeat the deficiencies both Rolbal and Lowy showed a marked ability...