Lydon v. CIR
| Decision Date | 06 October 1965 |
| Docket Number | No. 14825.,14825. |
| Citation | 351 F.2d 539 |
| Parties | William D. LYDON and Myrtle I. Lydon, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Seventh Circuit |
COPYRIGHT MATERIAL OMITTED
Edward J. Calihan, Jr., Allan J. Smietanka, Joseph G. Smietanka, Chicago, Ill., for petitioners.
Louis F. Oberdorfer, Asst. Atty. Gen., Tax Div., Carolyn R. Just, Lee A. Jackson, I. Henry Kutz, Attys., Dept. of Justice, Washington, D. C., for respondent.
Before DUFFY and KNOCH, Circuit Judges, and MAJOR, Senior Circuit Judge.
The Commissioner of Internal Revenue determined deficiencies in income tax and additions to tax against the petitioners1 for the years 1953, 1954 and 1955. The amount assessed was $85,703.83 plus a 50% penalty.
In a decision dated April 15, 1964, the Tax Court held there were deficiencies in income tax for the calendar year 1953 in the amount of $23,574.20, for 1954 in the amount of $6,172.92 and for 1955 in the amount of $4,797.16; for additions to the tax for 1953 under § 293(b), IRC, in the amount of $11,787.10; for the years 1953-1954 in the amount of $2,114.59 and $595.68, respectively, under § 294(d) (1) (A), IRC, 1939, and for the years 1954-1955 under § 6653(b), IRC, 1954, in the amount of $3,086.46 and $2,398.58, respectively.
Taxpayer claims the Tax Court's decision is not supported by substantial evidence and is erroneous. We therefore set forth in some detail statements of fact which are based upon findings of fact made by the Tax Court and which are amply supported by credible evidence in this record.
Petitioner became a patrolman on the Chicago Police Force in 1938. He had night duty. During the day, he worked for Mitchell-David, an interior decorating service. Largely through the efforts of petitioner, the business of Mitchell-David greatly increased. By 1953 petitioner had become president of Mitchell-David, and was a member of the Board of Directors.
During 1953, and until petitioner left the company in 1954, the stockholders and officers of Mitchell-David and the shares held by each were as follows:
Name Position Number of shares
William Lydon President and Director 2058 23/26
Theodore E. Dahlfors Vice President, Director 2058 23/26
David D. Dahlfors Director 926 11/13
Anne H. Karpus Secretary-Treasurer, Director 196 7/13
Total shares outstanding 5241 2/13
Petitioner met Orville Hodge in 1951 when the latter was a member of the state legislature. Hodge knew of Mitchell-David's good reputation in the decorating business and retained it to work on his Granite City, Illinois home. In 1953, Hodge contracted with Lydon to renovate the offices of his real estate and insurance firm.
Hodge was elected to the office of Auditor of Public Accounts of Illinois in November 1952. Following the election, Hodge hired Lydon to remodel his suite at the Abe Lincoln Hotel in Springfield. After Hodge took office, Lydon also commenced work on a suite of rooms rented by Hodge in the Drake Hotel in Chicago.
The Auditor's office performed many supervisory tasks including the examination and audit of many state agencies. The auditor had a large branch office in Chicago at 188 West Randolph Street. Hodge informed Lydon of his intention to have these offices remodeled and refurnished and asked Lydon to make a survey and prepare plans. No bids were taken for this work nor was there a written contract. The oral agreement between Hodge and Lydon was that Mitchell-David was to be paid cost plus 10%.
One of the chief functions of the State Auditor's office was to prepare and issue warrants for merchandise purchased for and services rendered to the State of Illinois. About 35,000 such warrants were issued each month. Hodge discovered the warrants were prepared by hand, and the entire bookkeeping and accounting system was antiquated. Hodge decided to install modern machinery.
The normal procedure involved in the issuance of the state warrants consumed several days after an invoice had been received. However, there was a practice whereby an advance payment could be made in the form of what was known as a "rush warrant." Such a warrant could be issued within an hour's time. Most of the payments for the work done on the 188 West Randolph Street job were received in advance by means of "rush warrants" which were issued by the state at petitioner's request and without the submission of an invoice.
On May 25, 1953, the State of Illinois issued three warrants to Mitchell-David in the amounts of $4,000, $2,000 and $4,000. These warrants were endorsed and cashed on May 26 by petitioner at Southmoor Bank and Trust Company (Southmoor) and were not taken into income by Mitchell-David.
Ed. A. Hintz was a vice president of Southmore. The first time Hintz transacted any business with Lydon was when Lydon went to Southmoor on May 26, 1953, with the three warrants hereinbefore described, and requested Hintz to cash them. Hintz asked petitioner to furnish written authority from the corporation. On May 27, petitioner furnished Hintz with a printed form authorizing payments out of its funds upon checks issued by the corporation and signed by the president, Lydon.
Hodge opened a checking account at Southmoor in December 1953. Hintz personally maintained this account at Southmore, but not according to customary banking procedures. This account was kept on regular bank ledger sheets, but instead of entries being made by machine, Hintz personally entered them by hand. Some checks on this account would come to Southmoor through the clearing house; at other times, Hodge would telephone Hintz and advise him that a messenger would deposit or would pick up some money. Hodge's memorandum checking account became known as the "Brown Envelope Account" because Hintz kept the ledger sheets in a brown envelope.
On July 10, 1953, the state issued two additional warrants to Mitchell-David in the amounts of $10,000 and $35,585. The latter was deposited in the Mitchell-David account but the $10,000 warrant was endorsed and cashed by petitioner and was not taken into income by Mitchell-David.
A similar transaction occurred on August 13, 1953 when the state issued two warrants in the amounts of $15,000 and $5,000. The $15,000 warrant was deposited to Mitchell-David's account, but the $5,000 warrant was endorsed and cashed on August 14 by petitioner at Southmore and was not taken into income.
Another similar transaction involved three warrants of $10,000, $5,000 and $15 232.48, respectively, issued to Mitchell-David on October 28, 1953. The disposition of the $5,000 warrant is here in issue.
The last two state warrants payable to Mitchell-David were issued on December 22, 1953, in the amounts of $2,606.01 and $2,411.28. Petitioner cashed these warrants at Southmoor and they were not reported into income by Mitchell-David.
Thus, in 1953, Lydon cashed eight warrants payable to Mitchell-David for the aggregate sum of $35,017.29 none of which were reported as income by Mitchell-David.
On March 24, 1954, the state issued a $504.34 warrant to Mitchell-David which petitioner endorsed and cashed. The proceeds of this warrant are in issue.
In 1953, the S. L. Crost Construction Company (Crost Company), a subcontractor for Mitchell-David, did remodeling work on the 188 West Randolph Street job at Lydon's request Harold H. Crost was an architect and contractor associated with Crost Company. Lydon went to Crost's office to instruct Crost how he wanted the invoices made out. Petitioner wrote on a sheet of note paper the sum he wanted Crost to charge Mitchell-David. One set of figures indicated $32,869.31. Another set of figures totaled $37,662.23. Both sets of figures were higher than Crost Company's original bids to Mitchell-David.
On July 13, 1953, petitioner gave Crost Company a Mitchell-David check for $1600 and asked Crost to turn the proceeds back to him which Crost did.
On July 27, 1953, Mitchell-David issued a check of $2,000 to Crost. The following day this check was cashed by Crost and the proceeds turned over to petitioner at petitioner's request.
On October 29, 1953, petitioner gave Crost two Mitchell-David checks. On November 2, 1953, Crost cashed the check for $2077.33 and turned over the proceeds to petitioner at the latter's request.
On December 1, 1953, Mitchell-David issued a check to Crost in the amount of $1,000. This was cashed by Crost and the proceeds turned over to petitioner at his request.
Crost cashed the various checks as an accommodation to petitioner. Crost did not consider the proceeds of these checks as being for work done.
Petitioner's relationship with Crost was of a different nature than with Hodge. Crost Company was a subcontractor for Lydon's company and Crost was dependent on Lydon for a good share of his company's business. Petitioner used his dominant position to ask Crost to raise invoices and kick back part of the proceeds which had been received from Mitchell-David.
The pattern of these transactions is clearly shown by Crost's raised bids of May 24, 1953. Lydon prepared the two sets of bids in his own handwriting. Crost charged Lydon the lower amount while Lydon used the higher amount in billing the state.
Lydon thus benefited from both ends of the transactions with Crost. He pocketed the "kick-back money" and at the same time he used the raised invoices as the basis of his 10% profit from the state.
On April 29, 1954, Mitchell-David issued a check to "currency" in the amount of $236.40. This check was endorsed and cashed by petitioner at Southmoor on May 5, 1954, and was not taken into his income for that year.
Petitioner was one of the organizers of "Interiors for Living" (Interiors) which represented various manufacturers and...
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