Sanders v. Commissioners of Internal Revenue

Decision Date29 March 1954
Docket Number46747.,46746,Docket Nos. 46745
Citation21 T.C. 1012
PartiesLEO SANDERS and JESSIE H. SANDERS, PETITIONERS, v. COMMISSIONERS OF INTERNAL REVENUE, RESPONDENT.LEO SANDERS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.JESSIE H. SANDERS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

Herman J. Galloway, Esq., and John E. Marshall, Esq., for the petitioners.

E. G. Sievers, Esq., for the respondent.

1. TAXABILITY OF INCOME— SETTLEMENT DID NOT INCLUDE SETTLEMENT OF TAXES.—The settlement of the petitioner's claims for additional compensation arising from a contract to perform work for the United States Government did not include the settlement of the petitioner's income tax liability.

2. CAPITAL GAIN OR ORDINARY INCOME— CONTRACT SETTLEMENT.— The amounts paid in a settlement of the petitioner's claims for additional compensation arising from a contract to perform work were ordinary income to the petitioner and not capital gain.

3. DEDUCTIONS— DEPRECIATION— SEPARATELY OWNED PROPERTY.— Deductions for depreciation on separately owned property, the income from which falls into the marital community, are to be equally divided between the spouses and may not be taken in their entirety by the owner of the property.

4. FAILURE TO FILE TIMELY RETURN— REASONABLE CAUSE— WIFE'S RELIANCE UPON HUSBAND— SEC. 291(a), I.R.C.— The failure to file timely returns is not shown to be due to reasonable cause and not due to willful neglect. A wife who filed a separate return for one year on a community property basis and joined with her husband in a joint return for another year is not relieved of delinquency liability under section 291(a) because she relied upon her husband who had no special qualifications in tax matters.

The Commissioner has determined the following deficiencies in income tax and additions for delinquency against Leo and Jessie H. Sanders:

+-------------------------------------------------------+
                ¦Docket¦              ¦        ¦            ¦Sec.291 (a)¦
                +------+--------------+--------+------------+-----------¦
                ¦No.   ¦Petitioner    ¦Year    ¦Deficiencies¦delinquency¦
                +------+--------------+--------+------------+-----------¦
                ¦      ¦              ¦        ¦            ¦           ¦
                +------+--------------+--------+------------+-----------¦
                ¦46745 ¦Leo and Jessie¦1   1943¦$18,733.69  ¦$14,083.58 ¦
                +------+--------------+--------+------------+-----------¦
                ¦46745 ¦Leo and Jessie¦1   1944¦1,415.73    ¦353.93     ¦
                +------+--------------+--------+------------+-----------¦
                ¦46745 ¦Leo and Jessie¦1949    ¦688,273.66  ¦189,273.61 ¦
                +------+--------------+--------+------------+-----------¦
                ¦46746 ¦Leo           ¦1946    ¦20,785.22   ¦11,345.77  ¦
                +------+--------------+--------+------------+-----------¦
                ¦46747 ¦Jessie        ¦1946    ¦238.06      ¦11,201.58  ¦
                +-------------------------------------------------------+
                

FN1 The record does not show why the 1943 and 1944 deficiencies were determined against Leo and Jessie jointly.

The issues for decision are:

(1) Whether ‘The Commissioner erred in taxing $940,000.00 accrued or paid to Leo Sanders by the United States in the year 1949 upon claims arising out of * * * the construction of the Oklahoma Aircraft Assembly Plant‘ and if there was no error, whether it was taxable as a long-term capital gain or as ordinary income;

(2) Whether the Commissioner erred in failing to allow to Leo for the years 1946, 1947, and 1948 the full depreciation on his separately owned property which was used in the construction business (the years 1947 and 1948 are involved because the deduction for depreciation affects a loss carry-back to 1946); and

(3) Whether the Commissioner erred in determining that a 25 percent delinquency penalty under section 291(a) of the Internal Revenue Code was due for each taxable year.

FINDINGS OF FACT.

Leo Sanders and Jessie H. Sanders, husband and wife, filed their tax returns for the calendar years in question with the collector of internal revenue for the district of Oklahoma. Their returns were filed on the community property basis for the years 1946 and 1947.

Leo has been engaged for many years in the general contracting and construction business. He used an accrual method of accounting. Leo entered into a contract with the United States on June 6, 1942, for excavating and concrete work at the site of the Oklahoma Aircraft Assembly Plant. Leo started work in accordance with this contract immediately and completed the job by early 1943. The United States made various changes in the plans and specifications during the course of the work as permitted by the contract. The petitioner was entitled to make claims for additional compensation as a result of those changes and many such claims were made. The claims were originally made to the contracting officer in charge of the project and appeals from his adverse decisions could be taken to the Board of Contract Appeals. Some of the rulings rendered were favorable to the petitioner and some were unfavorable. Several years elapsed while Leo pressed these claims and, to avoid the effect of the statute of limitations, he filed a petition on May 17, 1949, in the United States Court of Claims, Leo Sanders v. The United States, No. 49159, in which he sought $2,254,420.37 from the United States. The Department of Justice took charge of the case for the United States after the petition was filed in the Court of Claims and further negotiations for the purpose of settlement were carried on with that department.

Congress appropriated approximately $1,600,000 to pay the claims of the petitioner to be availed only through June 30, 1949. Leo and his attorneys, accountants, and engineer held many conferences during June 1949 with the attorneys and accountants from the Department of Justice and representatives of the Corps of Engineers in order to work out a mutually satisfactory settlement of Leo's claims.

It was finally agreed on June 29, 1949, that the United States would pay and Leo would accept the sum of $940,000, plus a bond premium of $14,100, and a retained percentage of $1,001.71, for a total of $955,101.71 in full settlement of his claims. Leo made a written offer to the Attorney General of the United States to accept that sum ‘in full settlement of all claims which are included in the above-entitled suit and of all claims growing out of contract W-957-eng-968 and of the construction of the Oklahoma Aircraft Assembly Plant.‘ This offer was accepted by the United States on June 29, 1949, in a letter which stated that ‘the acceptance of your offer of compromise * * * covers all claims arising out of the contract whether or not they are set forth in the petition. ‘ A motion to dismiss the suit in the Court of Claims was placed in escrow to be filed upon the receipt by the petitioner of payment by the United States. Leo signed a supplemental agreement on June 30, 1949, which modified the original contract in accordance with the compromise settlement agreed upon by the parties. That supplemental agreement stated that ‘upon payment of the above amount agreed to as a compromise settlement, and retained percentage in the amount of $1,001.71, all matters between the Contractor and the Government arising by reason of or in connection with Contract No. W-957-eng-968 will have been settled, and, the Contractor hereby releases the Government from any and all claims now filed or to be filed in the future, arising from or in connection with Contract No. W-957-eng-968 as amended.‘

The United States paid Leo the $955,101.71 on June 30, 1949.

The settlement between Leo and the United States did not include settlement of or relieve Leo from income taxes on the amounts received by him.

The petitioners in their return for 1949, filed on September 12, 1952, reported $940,000 of the amount received as a capital gain and the $15,101.71 remainder as ordinary income. The Commissioner ‘determined that the $940,000.00 settlement received from the Government of the United States during 1949 in connection with work performed on the Oklahoma Aircraft Assembly Plant constituted ordinary income.‘ The Commissioner eliminated the capital gain reported by the petitioners for 1949 in connection with this payment and increased income by $940,000.

The $940,000 was ordinary income.

Leo, prior to July 26, 1945, the date of the Oklahoma Community Property Statute, purchased various pieces of construction machinery and equipment which were his separate property and which were used in the construction business until they were sold. Pieces of this equipment were sold during each of the years 1946, 1947, and 1948. Leo and Jessie each reported one-half of the long-term capital gain from the sale of this property and each claimed a deduction for one-half of the depreciation sustained on that property for the year 1946.

The Commissioner determined that the full amount of the long-term capital gains derived from the sale of Leo's separately owned property in the years 1946 and 1947 was taxable to Leo, but allowed one-half of the depreciation on that property to Leo, and One-half to Jessie, as claimed. The Commissioner allowed a net operating loss carry-back from the years 1947 and 1948 to 1946.

Leo signed and filed Forms 1040 for the years 1943, 1944, and 1946 which were blank except for his name and address and amounts shown as the tax due. Leo and Jessie filed a similar form for 1949 on September 15, 1950. Separate returns showing income and deductions for Leo for the years 1943, 1944, and 1946, and for Jessie for 1946 were filed on July 16, 1952. A joint return showing income and deductions for Leo and Jessie for 1949 was filed on September 12, 1952, and the tax shown thereon of $235,768.93 was paid at that time. The $940,000 received in the settlement described above was reported in that return as a long-term capital gain.

The Commissioner determined additions of 25 percent for delinquency...

To continue reading

Request your trial
55 cases
  • Koithan v. Comm'r of Internal Revenue (In re Estate of La Meres), Docket No. 6909-88.
    • United States
    • United States Tax Court
    • March 23, 1992
    ...1983-450, affd. 762 F.2d 891 (11th Cir. 1985); Estate of Meredith v. Commissioner, T.C. Memo. 1981-72. 20 See e.g., Sanders v. Commissioner, 21 T.C. 1012, 1019 (1954), affd. 225 F.2d 629 (10th Cir. 1955); Baclit v. Commissioner, supra; Estate of Meredith v. Commissioner, supra. 21 See, e.g.......
  • In re Wyly
    • United States
    • United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Northern District of Texas
    • May 10, 2016
    ...See id. §§ 6013, 6038, 6048, 6677.1442 Tr. Trans. 160:10–161:14(Dee).1443 Belk v. C.I.R., 93 T.C. 434 (1989) ; see also Sanders v. C.I.R., 21 T.C. 1012, 1040 (1954) (“A wife required to file a return because of income of her husband in a community property state or who joins in a joint retu......
  • In re Wyly, CASE NO. 14-35043-BJH
    • United States
    • United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Northern District of Texas
    • May 10, 2016
    ...id. §§ 6013, 6038, 6048, 6677. 1442. Tr. Trans. 160:10-161:14 (Dee). 1443. Belk v. C.I.R., 93 T.C. 434 (1989); see also Sanders v. C.I.R., 21 T.C. 1012, 1040 (1954) ("A wife required to file a return because of income of her husband in a community property state or who joins in a joint retu......
  • Sanders v. Commissioner of Internal Revenue, 4968-4970
    • United States
    • United States Courts of Appeals. United States Court of Appeals (10th Circuit)
    • September 30, 1955
    ...included a settlement of the taxpayers' liability for income taxes on the amount paid to them. The Tax Court held that it did not, 21 T.C. 1012, and the District Court, after overruling an objection to its jurisdiction, held that the settlement did include any liability for income taxes on ......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT