Rosenbaum v. Commissioner

• Decision Date: 24 February 1983
• Docket Number: Docket No. 5199-72,5312-72,2460-75.,5200-72,5311-72
• Parties: Jane C. Rosenbaum, et al. v. Commissioner.
• Court: U.S. Tax Court

45 TCM (CCH) 825

1983 TC Memo 113

T.C. Memo. 1983-113.

Jane C. Rosenbaum, et al.¹ v. Commissioner.

Docket Nos. 5199-72, 5200-72, 5311-72, 5312-72, 2460-75.

United States Tax Court.

Filed February 24, 1983.

COPYRIGHT MATERIAL OMITTED

Austin J. Doyle for petitioner in Dkt. No. 5199-72. Francis N. Rosenbaum, pro se in Dkt. No. 5200-72. Sidney Gelfand, Wallace Musoff, 750 3rd Ave., New York, N.Y. and Barry Gordon, for petitioners in Dkt. Nos. 5311-72, 5312-72, and 2460-75. Marlene Gross, Thomas F. Kelly, and Mary V. Harcar, for respondent.²

Memorandum Findings of Fact and Opinion

WILBUR, Judge:

These consolidated cases were tried before a Special Trial Judge pursuant to Rule 180, Tax Court Rules of Practice and Procedure. His report was filed with the Clerk of the Court on February 29, 1980, and was served on the parties. Respondent and petitioner Francis N. Rosenbaum filed exceptions to the report, and the cases were assigned to this Division pursuant to Rule 182(d), Tax Court Rules of Practice and Procedure.

In particular, respondent has objected to the findings and conclusions of the Special Trial Judge that:

(1) Petitioners Andrew L. Stone and/or Francis N. Rosenbaum did not receive constructive dividends and unreported income, respectively, arising from deductions claimed by Chromcraft Corporation and/or Alsco, Inc. with respect to payments to Scientific Electronics, Ltd., Bregman Electronics, Ltd., Republic Electronic Industries, Inc., Western Molded Fibre Products, Inc., Establissement Velo International, Establissement Orma-Commerce, CEPAB, Finax, A.G., and Dr. Jorg Haemmerli.

(2) Petitioner Andrew L. Stone had legitimate interest expense for his transactions with Finanz Gesellschaft and Peralta Shipping.

(3) Neither petitioner Andrew L. Stone nor Francis N. Rosenbaum is liable for civil fraud for the taxable years 1963 through 1967.

(4) The assessment and collection of deficiencies and additions to tax for the taxable year 1963 of petitioners Stone, and for the taxable years 1963 and 1964 of petitioner Francis N. Rosenbaum, are barred by the statute of limitations.

(5) Petitioner M. Jeanne Stone is not liable as a transferee under section 6901³ for the deficiencies in tax of Andrew L. Stone, additions to tax, and interest with respect thereto for the taxable years 1963 through 1967.

Respondent also contends that petitioner M. Jeanne Stone does not qualify for innocent spouse status under section 6013(e). Since under the determination of the Special Trial Judge the requisite omissions from gross income were absent, this issue was not presented in all its aspects.

Petitioner Francis N. Rosenbaum has objected to the finding and conclusion of the Special Trial Judge that he has failed to carry the burden of proving he is entitled to interest deductions claimed for the taxable years 1963 through 1967.

We have given due regard to the circumstance that the Special Trial Judge had the opportunity to see and evaluate the credibility of the witnesses. Nevertheless, the presumptive correctness of the Special Trial Judge's report does not impair nor dilute our duty of bearing the ultimate responsibility for determining matters before us. Rule 182(d), Tax Court Rules of Practice and Procedure and note thereto. See 60 T.C. 1150. Montgomery Coca-Cola Bottling Co., Inc. v. United States, 222 Ct. Cl. 356 80-1 USTC ¶ 9130, 615 F. 2d 1318, 1322 (1980). After careful consideration of the evidence presented and the exceptions noted above, we hold for respondent on all issues excepted to, other than those concerning Republic Electronics Industries, Inc. and a portion of Stone's interest expenses. We also decide that M. Jeanne Stone qualifies as an innocent spouse during the years in issue. In reaching these holdings, we have to a very large degree, adopted the findings of fact of the Special Trial Judge; to the extent that we disagree with the Special Trial Judge, our disagreement relates to certain inferences he drew and the conclusions which he reached based on those findings.

Respondent determined deficiencies in income tax and additions to tax for fraud under section 6653(b) and transferee liability for deficiencies and additions to tax against petitioners in amounts and for years as follows:

                ___________________________________________________________________________________________
                            Petitioner         Docket No.    Year      Deficiency     Addition
                                                                    (or Liability)       To Tax
                ___________________________________________________________________________________________
                  Jane C. Rosenbaum             5199-72      1963    $  174,021.32    $
                                                             1964     1,559,931.24     
                                                             1965     1,923,724.85     
                                                             1966     1,578,936.91     
                                                             1967       332,576.27     .........
                  Francis N. Rosenbaum          5200-72      1963       174,021.32      87,010.66
                                                             1964     1,559,931.25     779,965.63
                                                             1965     1,923,724.85     961,862.43
                                                             1966     1,578,936.91     789,468.46
                                                             1967       332,576.27     166,288.47
                  Andrew L. Stone               5311-72      1963       171,488.03      85,744.02
                                                             1964     1,347,174.97     673,587.49
                                                             1965     1,945,630.33     972,815.17
                                                             1966       992,449.38     496,224.69
                                                             1967       282,498.43     141,249.22
                  M. Jeanne Stone               5312-72      1963       171,488.03      85,744.02
                                                             1964     1,347,174.97     673,587.49
                                                             1965     1,945,630.33     972,815.17
                                                             1966       992,449.38     496,224.69
                                                             1967       282,498.43     141,249.22
                  M. Jeanne Stone,              2460-75      1963 |                    .........
                    Transferee                               1964 |                    .........
                                                             1965  >  1,460,098.00     .........
                                                             1966 |                    .........
                                                             1967 |                    .........
                ___________________________________________________________________________________________
                

By amendments to his answers, respondent claimed increased deficiencies and additions to tax for fraud for 1966 and 1967, as follows:

                ___________________________________________________________________________________________
                                                                               Increased
                                                               Increased       Addition
                            Docket No.      Year               Deficiency      to Tax
                ___________________________________________________________________________________________
                            5199-72         1966              $574,706.31      .........
                                            1967               532,709.55      .........
                            5200-72         1966               574,706.31    $287,353.16
                                            1967               532,709.55     266,354.78
                            5311-72         1966               565,440.53     282,720.27
                                            1967               532,709.54     266,354.77
                            5312-72         1966               565,440.53      .........
                                            1967               532,709.54*     .........
                ___________________________________________________________________________________________
                  * Erroneously stated as $532,809.54 in the prayer of amended answer.
                

The principal area of dispute concerns respondent's determination that certain items, which respondent determined to be unallowable deductions fo Chromcraft Corporation (Chromcraft) or its successor corporation, Alsco, Inc. (Alsco), or unreported income of Chromcraft or Alsco, constituted constructive distributions⁴ to Andrew L. Stone (Stone), and "unreported income" to Francis N. Rosenbaum (Rosenbaum) "representing funds accruing to your benefit from your manipulation of transactions to divert monies arising from contracts between Chromcraft Corp. and Alsco, Inc. and the United States Government."⁵ Identical amounts were determined to be the income of each of those individuals. There is also a group of items which respondent disallowed as deductions to Chromcraft or Alsco which were determined to be constructive dividends to Stone alone.

Numerous issues raised by the pleadings have been settled or stipulated by the parties. The issues thus remaining for our decision are:

1. Whether Stone and/or Rosenbaum are properly chargeable with constructive dividends and "unreported income," respectively, arising from respondent's disallowance of:

a. Deductions claimed by Chromcraft with respect to payments to Scientific Electronics Ltd., of $108,175 for 1963, $1,051,766 for 1964, and $1,161,178 for 1965, which were charged to purchases of materials;

b. Deductions claimed by Chromcraft with respect to payments to Bregman Electronics, Inc., of $812,386 for 1965 and $380,774 for 1966, which were charged to purchases of materials;

c. (1) Deductions claimed by Chromcraft and Alsco with respect to payments to Republic Electronics Industries, Inc., of $255,000 for 1966, representing the purchase of rights to the Zuni rocket launcher, which were charged to purchases and factory office expenses;

(2) Deductions claimed by Chromcraft and Alsco with respect to payments to Republic Electronic Industries, Inc., of $821,009 for 1966 and $761,013 for

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