Reis v. Commissioner of Internal Revenue

• Citation: 142 F.2d 900
• Decision Date: 02 June 1944
• Docket Number: No. 9671.,9671.
• Parties: REIS v. COMMISSIONER OF INTERNAL REVENUE.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

142 F.2d 900 (1944)

REIS v. COMMISSIONER OF INTERNAL REVENUE.

No. 9671.

Circuit Court of Appeals, Sixth Circuit.

June 2, 1944.

Thomas E. Sandidge, of Owensboro, Ky., for petitioner.

Ray Brown, of Washington, D. C. (Samuel O. Clark, Jr., Sewall Key, Helen R. Carloss, and Harry Baum, all of Washington, D. C., on the brief), for respondent.

Before HICKS, SIMONS, and McALLISTER, Circuit Judges.

HICKS, Circuit Judge.

Petitioner, Reis, seeks a review of a decision of the Tax Court finding deficiencies in his income tax for the years 1935 and 1936 in the amounts of $639.93 and $5,933.41, respectively, with interest.

E. D. Evans, E. C. Barrett and J. R. Barrett were the stockholders in Green River Collieries Company, which operated a coal mine at Mogg, Kentucky, and they had approximately $400,000 invested in the property.

On February 28, 1920, petitioner entered into a written contract with these stockholders for employment with the Collieries Company. The contract provided that in addition to receiving his salary, petitioner could purchase stock of the Company to the extent of $10,000, which might, with interest, be paid out of dividends.

In March 1920, petitioner, in furtherance of the contract, moved to Mogg and engaged in the business of the Company. During the latter part of 1920, the Collieries Company went into the hands of a state court Receiver.

In 1922, petitioner and Evans, Barrett and Barrett organized the Green River Fuel Company, a corporation having capital stock of $20,000, divided into 750 shares, for the purpose of selling coal produced from the Collieries Company's mine and other mines. In 1922 and 1923, petitioner bought for $5,000 cash 50 shares of the stock of the Fuel Company. Before December 1927, he became the owner, by gift, of 15 additional shares. T. J. Naughton owned 10 shares and the remaining shares were owned by Evans and the Barretts. Petitioner as General Manager was in active control and supervision of the Fuel Company.

On December 17, 1927, petitioner and one R. J. Fox entered into a contract with Evans and the Barretts whereby they agreed to act as General Manager and Sales Manager respectively of the Fuel Company for ten years, at salaries to be fixed from time to time by the Board of Directors of the Fuel Company. Petitioner's salary was to be not less than $4,500 per year and that of Fox not less than $2,700 per year. Evans, Barrett and Barrett agreed to sell to petitioner and Fox the 675 shares of stock which they then owned in the Fuel Company, for $338,060.09, with interest at 5% from January 1, 1927. The purchase price was to be paid from net earnings or dividends realized each year by the Fuel Company after it had set aside specified amounts for capital and improvements. The stock was reissued, 440 shares to petitioner, 220 shares to Fox, and 5 shares each to Evans and the Barretts. The stock issued to petitioner and Fox was placed in escrow for delivery to them as their indebtedness was reduced. The contract gave petitioner and Fox the right at any time during the ten year period to pay for any part of the stock in cash at the price of $500.90 per share.

In 1928 and 1929, petitioner received a total of $36,650 in dividends which he applied on the purchase price of the stock and received from the escrow agent 28.31 shares of stock. On May 16, 1931, by mutual agreement, the contract was cancelled and there was an oral agreement that another similar contract might be drawn. The contract was never renewed; but between May 22, 1930 and February 10, 1932, the Barretts and Evans advanced to the Fuel Company $133,800 in varying amounts which were used in the improvement and operation of the Fuel Company. These amounts were evidenced by the Fuel Company's notes, and on October 31, 1933, they aggregated $143,743.37, principal and interest. Petitioner bought these notes for $1,338.00 cash. At that time he owned 94½ shares of the stock of the Fuel Company and was its largest creditor.

On August 4, 1932, the Stephens-Adamson Manufacturing Company brought suit against the Fuel Company to recover an indebtedness of $9,036.92 and to foreclose a mechanics' lien on all its properties to secure the indebtedness. On January 8, 1934, the properties were sold at auction pursuant to a court order to the judgment creditor, the sole bidder, for $5,510.

The Fuel Company had one year from the date of the sale to redeem by the payment of the bid price plus interest and a statutory penalty, but did not exercise its right of redemption; and petitioner purchased the bid of the judgment creditor for $5,000 in cash and assumed the payment of the court costs, and on January 14, 1935, the Commissioner of the court conveyed to petitioner all the assets of the Fuel Company.

Petitioner filed his income tax return for the years involved with the proper collector on or before March 15, 1936 and March 15, 1937, respectively. The Commissioner determined a deficiency for 1935 of $632.17 and for 1936 of $5,892.25. The petitioner sought a redetermination by the Tax Court. The primary question before that court was, whether the assessment of the deficiencies was barred by the limitations of the Revenue Act of 1936. The applicable statute is printed in the margin.¹

The Court held that the three year period of limitation found in Sec. 275(a) had run; and this is true, because the deficiency notice was not mailed to petitioner until February 7, 1941. However, the Court held that the Commissioner, seeking to bring the deficiency assessment within the five year limitation, Sec. 275(c), had the burden of showing that petitioner had omitted from his returns properly includible gross income to the extent of 25% of the gross income stated in the returns; that the Commissioner had not carried this burden because petitioner's returns had not been introduced in evidence and there was, therefore, no proof of "the amount of gross income stated in the return. * * *" The resultant decision was that there was no deficiency. See Reis, Petitioner, v. Commissioner of Internal Revenue, Respondent, 1 T.C. 9.

The decision was entered on November 17, 1942, and on December 11th following, the Commissioner moved for a reconsideration, or, in the alternative, to reopen the record to receive the tax returns in evidence. On December 29, 1942, the Court granted the motion to the extent of allowing the Commissioner to introduce evidence to show the amount of gross income stated in the returns and leave was given to petitioner to offer proof to meet it, and on February 5, 1943, the Board vacated its prior decision, pending further hearing. On April 5, 1943, the Commissioner placed copies of the returns in evidence and argument was heard.

On June 4, 1943, the Tax Court filed its "Memorandum Findings of Fact and Opinion" and on July 29th following it entered its decision that deficiencies existed as hereinabove indicated.

We think that the determinative question here is, whether the five years' limitation found in Sec. 275(c) supra bars the collection of the adjusted deficiencies. It does not if petitioner omitted from his gross income for the years involved an amount properly includible therein in excess of 25% of the amount of the gross income stated in the returns. The Tax Court found that he had omitted such amounts and there is substantial evidence to support the finding.

Petitioner advertised and sold by piecemeal the properties of the Fuel Company conveyed to him by the court commissioner. He realized from these sales $43,366.75 in 1935 and $35,366.75 in 1936 and reported the sales in his tax returns but deducted the same amounts as his cost of the properties. He proceeded upon the...