Scudder v. Comm'r of Internal Revenue, Docket No. 2736-62.
| Decision Date | 17 April 1967 |
| Docket Number | Docket No. 2736-62. |
| Citation | 48 T.C. 36 |
| Parties | LOUISE M. SCUDDER, PETITIONER V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
John S. Hager, for the petitioner.
Gerald W. Fuller, for the respondent.
Held, petitioner is liable for income tax deficiencies and penalties based upon her husband's embezzlements and other unreported business income during taxable years in which legally effective joint returns were filed.
Respondent determined deficiencies in income taxes and additions to the tax for fraud under section 6653(b)1 against petitioner as follows:
+------------------------------------------+
¦Year ¦Deficiency ¦Sec.6653(b) addition ¦
+------+------------+----------------------¦
¦1954 ¦$42,718.41 ¦$21,359.21 ¦
+------+------------+----------------------¦
¦1955 ¦52,842.54 ¦26,421.27 ¦
+------+------------+----------------------¦
¦1956 ¦23,868.98 ¦16,631.23 ¦
+------+------------+----------------------¦
¦1957 ¦20,390.83 ¦10,195.42 ¦
+------+------------+----------------------¦
¦1958 ¦15,679.41 ¦7,839.71 ¦
+------------------------------------------+
At trial we granted petitioner's motion to file an amendment to her reply to respondent's answer. The amendment admitted that Forms 1040 signed and filed by petitioner and her husband for the years 1954 through 1958 were false and fraudulent and that the unreported income of petitioner's husband for the years 1955 through 1958 was correctly determined by respondent. In view of the agreement of the parties and the concessions of petitioner, the only questions remaining for our determination are whether the joint returns filed by petitioner and her husband during the years in issue were legally effective and thus subjected her to joint and several liability, and, if so, whether petitioner's husband received unreported embezzlement income for the year 1954 in the amount of $71,025.28.
The stipulated facts are found accordingly and adopted as our findings.
During the years in issue, Frank E. Scudder (hereinafter referred to as Frank), and Louise M. Scudder (hereinafter referred to as petitioner), were husband and wife residing in Owensboro, Ky. Forms 1040 were filed jointly during these years in the names of Frank and Louise Scudder with the district director of internal revenue, Louisville, Ky.
Petitioner was a partner with her five sisters in a wholesale liquor business (hereinafter referred to as the partnership), throughout the taxable years in question. Her income from this partnership was $7,799.65 in 1954, $10,222.51 in 1955, $8,218.01 in 1956, $10,466.68 in 1957, and $7,419.15 in 1958. During those years Frank was employed by the partnership as manager. He received wages and a bonus totaling $8,980.74 in 1954, $10,501.25 in 1955, $8,790.53 in 1956, $10,512.59 in 1957, and $8,214.92 in 1958.
Frank exercised complete control over the affairs of the partnership until the latter part of 1958. He determined his own rate of compensation, supervised recordkeeping, determined the amount of cash distributions to the partners, handled employee problems, and signed the partnership information tax returns pursuant to a power of attorney from the partners.
Substantial amounts of partnership funds were taken and used by Frank for his individual purposes in each of the years 1954 through 1958. The money was taken without the knowledge or consent of the partners, and the parties agree that the misappropriations constituted embezzlements. Frank concealed his embezzlement activities from petitioner and the accountants who prepared joint income tax returns for the years 1954 through 1958. Repayments of part of the amounts taken occurred periodically prior to the discovery of Frank's defalcations. The parties are in agreement that the net amounts taken in each year, except 1954, were as follows:
+----------------+
¦1954¦$71,025.28 ¦
+----+-----------¦
¦1955¦83,768.70 ¦
+----+-----------¦
¦1956¦56,293.97 ¦
+----+-----------¦
¦1957¦33,514.65 ¦
+----+-----------¦
¦1958¦37,063.24 ¦
+----------------+
Petitioner contends that the net amount taken in 1954 should be only $63,685.79 in lieu of $71,025.28 as determined by respondent.
The embezzlements were concealed by distinguishing them as loans on partnership information which was furnished to the accountants for preparation of annual financial statements and information returns. Copies of the financial statements were available to the partners, but Frank avoided distributing them by telling one of the partners that the preparation of each copy would cost the partnership $12.50. The embezzlements were discovered in the fall of 1958 when it was learned that the partners had not received copies of the financial statements and an investigation was then made.
Following his admission of the embezzlements, Frank transferred to the partnership in partial restitution assets valued at $135,470.45. This transfer of assets was made by a document dated November 17, 1958.
Petitioner was not informed of her husband's conduct until May or June of 1959. It was feared that an immediate disclosure would jeopardize petitioner's health since she had been suffering from illnesses and emotional disturbances. Petitioner's nervous condition had required hospitalization and extensive medical treatment in 1955.
It was considered to be in the best interest of the partnership to retain Frank as a figurehead manager for a period following the discovery of the embezzlements. Frank's position with the partnership was terminated in May or June of 1959 about the time that petitioner was advised by her relatives of Frank's defalcations; it was decided then that it would be beneficial to her children to move the family to Hopkinsville, Ky. The move to Hopkinsville was accomplished and petitioner obtained employment. Petitioner and her husband were separated in 1962 and a divorce was granted in 1963.
It is not contended by respondent that petitioner personally benefited, directly or indirectly, from the funds taken by Frank from the partnership. The partnership sustained a loss due to the embezzlements in the amount of $140,817.95. Petitioner's distributive share of the loss was $21,082.75, of which $6,596.16 was taken as a deduction on her 1959 return. The remaining balance of $14,486.59 was allowed as a net operating loss carryback for the taxable year 1956.
The joint income tax returns filed by Frank and petitioner for the years 1954 through 1958 were prepared from information furnished entirely by Frank. Petitioner never questioned her husband concerning the information on the returns and did not discuss financial matters with him. Petitioner had complete trust and confidence in her husband during this period, and he was well respected in the community. Their marriage was normally happy throughout these years. The question of whether joint income tax returns should be filed was discussed once in 1949. At that time Frank told petitioner that it would be to their advantage to file joint returns. Petitioner continued to sign joint returns without question until she was informed of her husband's embezzlement activities. Subsequent to this time, petitioner filed separate income tax returns even though she was eligible to file joint returns until 1962.
Although most of the tax deficiencies are based on the unreported embezzlement income, Frank also received income from several other sources during the years in question which he failed to report. He received a share of the profits from a number of local business enterprises in which he was secretly interested. He also failed to report a travel and expense allowance from the partnership which he received each year but did not use for business travel and expenses.
A consent, Form 872, was signed by Frank and petitioner for the taxable year 1957. This action extended the normal limitation period for assessment of 1957 taxes to June 30, 1962. The notice of deficiency was mailed to petitioner on April 13, 1962.
OPINIONPetitioner's liability for the assessed income taxes and fraud penalties is based upon section 6013(d)(3)2 which provides for joint and several liability for the tax on the aggregate income where a husband and wife elect to file a joint return. The joint and several liability also applies to...
To continue reading
Request your trial
-
Wilson v. Comm'r of Internal Revenue
...are appalled at the harshness of this result in the instant case, the inflexible statute leaves no room for amelioration.” Scudder v. Comm'r, 48 T.C. 36, 41 (1967). The court concluded that “only remedial legislation can soften the impact of the rule of strict individual liability for incom......
-
Rosenbaum v. Commissioner
...attributable only to the husband, unknown to the wife, and where she had not enjoyed any benefit therefrom. See Scudder v. Commissioner Dec. 28,421, 48 T.C. 36 (1967). It was in an effort to eliminate the unfairness of the joint and several liability provisions in such circumstances that se......
-
Clarke v. Comm'r of Internal Revenue (In re Estate of Clarke) , Docket No. 4888-66.
...Hazel Stanley, 45 T.C. 555, 560-561 (1966) (dictum), or fraud, Scudder v. Commissioner, 405 F.2d 222, 226 (C.A. 6, 1968), remanding 48 T.C. 36 (1967), rehearing denied 410 F.2d 686 (C.A. 6, 1969), certiorari denied 396 U.S. 886 (1969), or forgery, trickery, or deliberate deception by the fr......
-
Huelsman v. CIR
...other narrowly defined situations, a victimized spouse will be absolved of paying the tax. It was said in Scudder v. Commissioner of Internal Revenue, 48 T.C. 36, 40 (1967), that "although we agree that fraud may void a person's signature for purposes of liability on a purported joint retur......