Pleason v. Comm'r of Internal Revenue, Docket No. 36954.

• Decision Date: 20 May 1954
• Docket Number: Docket No. 36954.
• Citation: 22 T.C. 361
• Parties: DAVID J. PLEASON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

22 T.C. 361

DAVID J. PLEASON, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 36954.

Tax Court of the United States.

Filed May 20, 1954.

1. Petitioner was the sole owner of a wholesale whiskey business known as Royal Distillers Products. Being unable to obtain renewal of a license to carry on the business he caused it to be transferred to his daughter's name and it was thereafter known as Anne Davis, doing business as Royal Distillers Products. Petitioner continued to manage the business as theretofore. Held, the purported transfer was a sham, and petitioner is accountable for the income from the business.

2. Petitioner bought and sold whiskey on the black market. The greater portion of overceiling payments received by him was in turn used to pay overceiling prices to his suppliers. Amount of overceiling payments received and retained by him determined.

3. Held, part of the deficiencies for each of the taxable years was due to fraud with intent to evade tax. Maurice J. Walsh, Esq., for the petitioner.

George T. Donoghue, Jr., Esq., and Thomas C. Cravens, Jr., Esq., for the respondent.

The respondent determined deficiencies in income and Victory tax for 1943 and in income tax for 1944, and additions to tax for fraud, as follows:

+-----------------------------------+
                ¦Year¦Deficiency    ¦Addition to tax¦
                +----+--------------+---------------¦
                ¦1943¦1  $222,268.68¦$111,134.34    ¦
                +----+--------------+---------------¦
                ¦1944¦28,415.34     ¦14,207.67      ¦
                +-----------------------------------+
                

The year 1942 is also involved because of the Current Tax Payment Act of 1943.

The issues are:

1. Is the entire net profit of Royal Distillers Products, computed on a calendar year basis for the years 1942, 1943, and 1944, includible in petitioner's gross income for the taxable years 1942, 1943, and 1944, under section 22(a) of the Internal Revenue Code?

2. Did Royal Distillers Products realize profits during the years 1943 and 1944, in excess of those recorded on its books and records for those years, as determined by the respondent?

3. Is some part of the deficiency for each of the years 1943 and 1944 due to fraud with intent to evade tax?

FINDINGS OF FACT.

The petitioner is now a resident of Brownsville, Texas. He filed his income tax returns for the years 1942, 1943, and 1944 with the collector of internal revenue for the eighth district of Illinois. At all times material herein he and his wife resided at Cairo, Illinois.

In 1938, petitioner began the operation as a sole proprietor of a wholesale liquor business at Cairo, Illinois. He operated the business under a basic permit issued to him under the Federal Alcohol Administration Act and under annual licenses issued to him by the State of Illinois. The business was conducted under the name ‘Royal Distillers Products' (sometimes hereinafter referred to as Royal). The customers of Royal had their places of business in Mississippi, Oklahoma, and Tennessee. Royal sold and delivered liquor to these customer at Royal's place of business in Cairo and received payment for the liquor upon delivery. Royal's customers hauled the liquor in their own vehicles to their places of business. Royal's sales to these customers were in lots of approximately 40 to 400 cases. The average transaction involved approximately 200 cases. Royal's gross profit was approximately $0.40 per case.

Petitioner purchased liquor for Royal from distillers and other wholesalers. He made arrangements under which Royal borrowed the entire cost of liquor purchased for resale. Royal paid for this liquor as soon as it was received with loans from the Security National Bank, Cairo, Illinois, covering the entire cost. It repaid these loans when the liquor was sold from proceeds of sales. To secure these loans, Lawrence Warehouse Company retained possession of Royal's liquor for the bank in a locked enclosure on the premises where the business of Royal was conducted. It surrendered possession to Royal as the liquor was sold and the loans repaid. Lawrence Warehouse Company had an employee on the premises, who was also an employee of Royal, to safeguard the liquor and release it as loans secured by it were paid. Lawrence Warehouse Company issued warehouse receipts for the liquor in its possession, and the bank retained possession of these receipts until Royal repaid the loans for which the receipts were security. Under the method by which Royal financed purchases, its capital was not invested in inventory.

During the entire period of its operation, Royal conducted its business in premises leased by petitioner at 706 Commercial Avenue, Cairo, Illinois. During this period, the business was furnished gas, electricity, and telephone service under applications to public service companies made by petitioner in his own name.

In 1939, petitioner hired Leon Bondurant, who was in charge of Royal's place of business when petitioner was absent.

In July 1941, petitioner applied for renewal of his aforementioned annual license from the State of Illinois. On or about September 1, 1941, his application was denied because petitioner had filed certain false reports with Federal officials regarding sales of liquor made through Royal. Royal did not operate for approximately the next 90 days, and made no sales or purchases of liquor during that period.

In the fall of 1941, the business of Royal could not have been sold and could not have been operated successfully without petitioner. The business had no goodwill or going concern value. Its customers had bought liquor from Royal because of the friendship between them and petitioner. It employed no salesmen. Royal's only assets were a few cases of liquor worth approximately $500 to $700. Most of these were in the possession of the Lawrence Warehouse Company as security for loans Royal had made from the Security National Bank, Cairo, Illinois, to pay the cost of the liquor.

In the fall of 1941, petitioner discussed the possibility of continuing the business with one of his daughters, Anne Davis. They agreed orally at that time that the business of Royal would be continued under the name of ‘Anne Davis, doing business as Royal Distillers Products' and that petitioner would continue to operate the business and furnish capital and make arrangements for credit. They never had a written agreement with respect to the operation of Royal.

Anne was unfamiliar with the liquor business and unable to operate such a business. She resided with her husband in Chicago, Illinois, in the fall of 1941 and subsequent years. Her husband is employed as a teacher in the Chicago public schools. They have one son born in 1934. During the years 1942 and 1943 she was employed by the Lenore Shoppe in Chicago. In her income tax returns for the fiscal years ended November 30, 1942, and November 30, 1943, she reported wages from this source in the respective amounts of $760 and $360. She is now employed as a saleslady in a dress shop in Chicago. In the fall of 1941, Anne Davis had no money other than approximately $1,000 which she and her husband had in a joint savings account in the Continental-Illinois National Bank and Trust Company, Chicago, Illinois. She did not invest any of the funds in this account in Royal.

In the fall of 1941, petitioner issued his check payable to Anne Davis in the sum of $5,000. She then opened a checking account in the Continental-Illinois National Bank and Trust Company, Chicago, Illinois, and deposited the check to this account. She drew $4,000 from this account and deposited it in the Security National Bank, Cairo, Illinois, to be used as capital in the operation of Royal. She drew other sums from this account to pay for the following items: Attorney's fees in connection with obtaining a wholesale liquor dealer's license issued in her name by the State of Illinois; the cost of Federal stamps issued in her name for the taxes imposed on wholesale and retail liquor dealers; an amount due the Lawrence Warehouse Company; and the cost of a round trip between Chicago, Illinois, and Cairo, Illinois, in connection with the resumption of the business of Royal. Anne Davis gave no note or other evidence of indebtedness to petitioner for the aforementioned $5,000 check. Royal repaid petitioner the $5,000.

In November 1941, the State of Illinois issued the aforementioned wholesale liquor dealer's license in the name of ‘Anne Davis, doing business as Royal Distillers Products.’ Petitioner, Anne Davis, and an attorney went to Springfield, Illinois, to obtain this license.

In November 1941, petitioner made arrangements with the Security National Bank, Cairo, Illinois, and the Lawrence Warehouse Company under which the latter organizations would continue to finance purchases of liquor by Royal in the same way as they had previously.

On December 10, 1941, Anne Davis filed an application with the Alcohol Tax Unit of the then Bureau of Internal Revenue for a basic permit to engage in the wholesale liquor business as ‘Anne Davis, doing business as Royal Distillers Products.’ After a hearing, the application was denied on October 1, 1942, by the district supervisor of the Alcohol Tax Unit, on the ground that she had failed to establish a real ownership in the business conducted under the name of Royal and was therefore not entitled to operate under a basic permit. On an administrative appeal by Anne Davis to the Deputy Commissioner of the Bureau of Internal Revenue in charge of such matters, the Deputy Commissioner affirmed the action of the district supervisor. Anne Davis then took an appeal to the Court of Appeals for the Seventh Circuit for review of the denial of her application. On her motion, this appeal was dismissed in February 1944. Petitioner was then under investigation by the Office of Price Administration.

Under the provisions of the Federal Alcohol Administration Act, Royal was permitted to operate while Anne Davis' application for a basic permit was...