Maddas v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 28 September 1939 |
| Docket Number | Docket No. 82403. |
| Parties | FRANK A. MADDAS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Earle F. Reed, Esq., and Lee W. Eckels, Esq., for the petitioner.
Henry C. Clark, Esq., for the respondent.
Deficiencies in income tax and 50 percent penalty additions thereto for fraud were determined against petitioner by the respondent for the calendar years 1920 to 1922, inclusive, in amounts respectively as follows:
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Year | Deficiency in | 50% fraud
| tax | penalty
----------------------------------------------|---------------|-------------
1920 _________________________________________| $606,660.25 | $303,330.12
1921 _________________________________________| 373,571.12 | 186,785.56
1922 _________________________________________| 261,635.32 | 130,817.66
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The date of the deficiency notice is September 17, 1935.
The entire amount of the deficiencies and the fraud penalties are in issue. The petitioner pleads the statute of limitations as a bar to the assessment and collection of any of the deficiencies and also contests the deficiencies and penalties on the merits. The respondent concedes that the deficiencies would all be barred by the statute of limitations and that there would be no penalties if the returns filed by petitioner for each of the taxable years were not false or fraudulent with intent to evade tax. Respondent contends the returns were false and fraudulent.
The alleged deficiencies in tax and penalties were based upon the respondent's determination that petitioner willfully failed and omitted to report as taxable net income items of income totaling $921,264.23, $597,529.33, and $501,440.20 for the years 1920, 1921, and 1922, respectively. At the conclusion of the hearing, counsel for the respondent abandoned the Commissioner's determination that the above figures represent the correct amounts of taxable income which petitioner failed to report on his income tax returns for the respective taxable years and submitted revised figures, as follows: $500,000 for the year 1920, $100,000 for the year 1921, and $400,000 for the year 1922. Respondent thereupon moved that the Board find that these latter amounts were falsely and fraudulently omitted from petitioner's income tax returns for the respective taxable years with intent to evade the tax and that the Board enter its decision in accordance with such findings. No ruling was made on respondent's motion at the hearing, the presiding member stating that the case would be disposed of in the usual way, by the submission of a report containing findings of fact and an opinion.
FINDINGS OF FACT.
Petitioner is an individual, residing at 206 North First Street, Jeannette, Pennsylvania. He was born in Berardino, Italy, about the year 1866. He entered the United States on Christmas Eve, 1881. He never went to school and could not speak English when he first arrived in this country. He can now speak English, but reads and writes it poorly, and has but little education.
Petitioner's first employment was working on a railroad. In 1899 he started a commissary along the Monongahela River. Shortly afterwards, he rented a small store at Masontown at $10 a month and started in the grocery business, which was later enlarged to include baked goods and meat. His business outgrew the little store, whereupon petitioner built a three-story brick building across the street and opened up a general store, consisting of clothing, meat, grocery, and furniture departments. At that time he had about 22 men working for him and he owned about 14 head of horses. About 1904 he organized the Masontown Brewing Co. About 1907 petitioner went to Jeannette and organized the Victor Brewing Co., a corporation with a capitalization of $400,000, sometimes hereinafter referred to as the brewery. At that time he was worth approximately $100,000. About two years later he built a small brewery up at Republic. A little later, he organized the Connellsville Macaroni Co. — petitioner put $10,000 in this concern. About 1914 or 1915 petitioner organized the Greensburg Brewing Co. at Greensburg, Pennsylvania. A few years later he also became interested in a mine at Millsborough, and by the beginning of the taxable years in question petitioner's net worth was somewhere between $400,000 and $450,000.
Petitioner has filed income tax returns since the adoption of the Sixteenth Amendment to the Constitution. His returns for the years prior to the years in question show the following general information:
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Year | Gross income | Deductions | Net income | Tax liability
------------------------|--------------|------------|------------|--------------
1913 ___________________| $33,573.35 | $2,088.64 | $31,484.71 | $129.19
1914 ___________________| 21,884.03 | 1,854.47 | 20,029.56 | .30
1915 ___________________| 24,922.07 | 2,237.14 | 22,684.93 | 36.57
1916 ___________________| 37,472.40 | 1,841.64 | 35,630.76 | 231.13
1917 ___________________| 38,286.99 | 7,155.03 | 31,131.96 | 1,819.75
1918 ___________________| 40,796.84 | 7,061.41 | 33,735.43 | 2,818.96
1919 ___________________| 35,492.06 | 5,581.54 | 29,910.52 | 2,780.64
|______________|____________|____________|______________
| 232,427.74 | 27,819.87 | 204,607.87 | 7,816.54
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Petitioner's return for the calendar year 1920 was prepared by the firm of Hosack & Hartman, Inc., of Pittsburgh, from data submitted to that firm, and was filed on or before March 15, 1921. His returns for the calendar years 1921 and 1922 were prepared by his secretary, Joe Dietrich, and were respectively filed on or before March 15, 1922, and March 15, 1923. The returns for the years in question disclose amounts of net income and tax due as follows:
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Year | Amount of net | Tax
| income |
----------------------------------------------|----------------|----------
1920 _________________________________________| $38,555.26 | $4,258.64
1921 _________________________________________| 34,544.59 | 3,234.80
1922 _________________________________________| 21,526.69 | 1,449.34
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Petitioner paid the tax shown to be due on these returns. None of the income involved in this proceeding was included in petitioner's income tax returns for the respective taxable years shown above.
During the taxable years involved, petitioner owned close to 50 percent of the stock of Victor Brewing Co. and about 75 percent of the stock of Greensburg Brewing Co. These corporations, under the active management of petitioner (except for about three months in 1922 while petitioner was in Italy), manufactured and sold beer illegally under the guise of cereal beverages, or near beer, from the latter part of May 1920 on through 1922.
On August 27, 1919, one John Peduzzi, in compliance with an act of the General Assembly of the Commonwealth of Pennsylvania making it unlawful for any individual or individuals to carry on or conduct any business under an assumed or fictitious name, presented a certificate to the Prothonotary of Westmoreland County, Pennsylvania, stating that he was the only person owning or interested in the business to be carried on under the name of "Victor Distributing Company", the character of which was the distribution of cereal beverages and other commodities. Peduzzi was an employee of the Victor Brewing Co. at the time he presented the certificate. He died about 1930 or 1931.
The purpose of the Victor Distributing Co. was to save some of the tax then being levied on cereal beverages, which purpose was accomplished by the Victor Brewing Co. selling its output to the Victor Distributing Co. at a price less than the Victor Distributing Co. in turn sold it to its customers.
Section 602 (a) of the Revenue Act of 1921, which was approved on November 23, 1921, changed the method of collecting the tax on cereal beverages from one of percentage of sale price to so much for each gallon manufactured and sold. Thereafter, the Victor Distributing Co. was liquidated. All of its assets, except its bank account of $17,197.40, were taken over and all of its liabilities were assumed by the Victor Brewing Co. Two checks were drawn for the total amount of $17,197.40 to the order of Peduzzi, who in turn endorsed them over to petitioner. The Victor Distributing Co. functioned only from May 1920 to November 1921.
The capacity of the Victor plant was about 70,000 barrels a year. The capacity of the Greensburg plant was between 15,000 and 20,000 barrels a year. A barrel would make about 12.5 cases when bottled.
The price of real beer during 1920 was $33 a barrel and $3.50 a case. During the first four months of 1921 it was $30 a barrel and $3 a case. During the remainder of 1921 it was $25 a barrel and $2.75 a case. The prices in 1922 were $22.50 a barrel and $2.75 a case. The prevailing price of near beer to the retail dealer was $12 a barrel and $1.50 a case.
During 1920 and until November 1921, the Victor Brewing Co. disposed of its real beer in substantially the following manner (for convenience we will use the 1920 prices): The beer was sold direct to the dealer at the real beer price of $33 a...
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