Simon v. Commissioner of Internal Revenue

• Decision Date: 29 October 1957
• Docket Number: No. 15752-15755.,15752-15755.
• Citation: 248 F.2d 869
• Parties: Sam SIMON, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Albert SIMON, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Clara SIMON, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Melvin SIMON, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Eighth Circuit

248 F.2d 869 (1957)

Sam SIMON, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Albert SIMON, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Clara SIMON, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Melvin SIMON, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 15752-15755.

United States Court of Appeals Eighth Circuit.

October 29, 1957.

Llewellyn A. Luce, Washington, D. C. (Walter H. Maloney, Washington, D. C., and Kenneth K. Simon, Kansas City, Mo., on the brief), for petitioners.

Louise Foster, Attorney, Department of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., and John N. Stull, Robert N. Anderson, and S. Dee Hanson, Attorneys, Department of Justice, Washington, D. C., on the brief), for respondent.

Before SANBORN, WOODROUGH, and VAN OOSTERHOUT, Circuit Judges.

VAN OOSTERHOUT, Circuit Judge.

Sam Simon, his wife, Clara, and his sons, Albert and Melvin Simon, hereinafter usually called taxpayers, have petitioned the court to review the decisions of the Tax Court determining substantial deficiencies in their individual income tax for the years 1942 to 1945, inclusive, and statutory additions thereto by reason of fraud and delinquency penalties. These petitions which involve common questions were consolidated in the Tax Court and are consolidated here.

The principal error urged is that the Tax Court erred in treating all of the sums received by the individual taxpayers from U. S. Packing Company, Inc., hereinafter called the corporation, as ordinary income, the taxpayers' contention being that the income diverted from the corporation by the stockholders should be treated as corporate distributions. Complaint is also made by Clara Simon as to the computation of fraud and delinquency penalties against her.

The cases of the petitioners were consolidated in the Tax Court with the appeal of the corporation. The memorandum findings of fact and opinion of the Tax Court, not officially reported,¹ were filed on July 15, 1955. The material facts which we here set out are either undisputed or are taken from the findings of the Tax Court.

The individual taxpayers, during the tax years here involved, were residents of Missouri, and filed their tax returns in that State. The corporation was formed in 1942 by Sam Simon and his sons, Albert and Melvin. Sam served as president, Albert as secretary and general manager, and Melvin as treasurer. The Board of Directors consisted of Sam, Clara, Albert, and Melvin. The authorized capital of the corporation was 1,500 shares with a par value of $100 a share. Seven hundred shares involving a paid-in capital of $70,000 were issued. One hundred shares were issued in the name of Sam Simon, 250 shares were issued in the name of Sam Simon as trustee for various members of his family, and 350 shares were issued to Superb Packing Company. Later, the corporation acquired the shares issued to Superb Packing Company and held them for a time as treasury stock. Such stock after 1944 was sold. Two hundred fifty shares were issued to Sam Simon, 50 shares to Sam Simon as trustee for Melvin, and 50 shares to Sam Simon as trustee for Albert. The money for the purchase of the original stock was withdrawn by Sam Simon from various savings and loan association accounts belonging to Sam Simon and members of his family.

The corporation operated a slaughtering and processing plant at Kansas City, Kansas. It sold dressed carcasses of beef in carload lots and various by-products. The corporation, during the years here involved, was subject to the Emergency Price Control Act of 1942, 50 U.S.C.A. Appendix, § 901 et seq., which, among other things, placed a ceiling upon the prices the corporation could charge for its products. The corporation made many sales at above ceiling prices. Side payments in cash were collected for the overage above the ceiling prices, and most of such black market payments are not reflected in the corporation's records or in its income reported for tax purposes. The corporation and Sam and Albert Simon were indicted for conspiracy to sell beef at over ceiling prices, pleaded guilty to said charge, and were convicted and sentenced. Taxpayers do not dispute the fact that the corporation was engaged in black market operations. Taxpayers and the corporation both contended that the black market profits were ultimately reflected in the corporate records and accounted for in the corporation's tax returns.

It is undisputed that between April 16, 1943 and May 17, 1945, taxpayers purchased United States bonds aggregating a face value of $211,500, costing with accrued interest $213,098.47, which bonds were issued as follows: Sam Simon, $130,500; Albert Simon, $14,500; Clara Simon, $38,000; and Melvin Simon, $28,500. Additional currency totaling $21,780 was used for the benefit of the various taxpayers. This currency added to that used to purchase bonds totals $234,878.47. The Commissioner determined that such sum was the amount of unreported corporate sales, and that tax upon such unreported sales was due from both the corporation and the individual taxpayers. The Tax Court found some of the black market sales had been reported, and that the unreported sales for the involved tax years aggregated $191,542.55.² The Tax Court's finding as to corporate income is as follows:

"The unreported sales for these three years aggregate $191,542.55, but respondent\'s aggregate adjustment for these years is $234,878.47. The difference of $43,335.92 has been called unidentified sales. After examining the record as to the unidentified sales, we conclude that respondent has erred, and these sales should not be included in the adjustments to the Corporation\'s net income."

The corporation does not petition for a review of the determination of its tax liability. The liability of the corporation to pay the tax on $191,542.55 of unreported income has been conclusively established. The Tax Court's findings as to the corporation are incorporated in this opinion as they have an important bearing upon the issues before us.

The Tax Court then found that the same income from black market sales, which the corporation had failed to report and upon which the corporation was taxed, was diverted by the individual taxpayers, and was used by them in the bond purchases for their individual benefit, heretofore described. The Tax Court on the individual income issues states:

"* * * In the first issue corporate income the record compelled us to find that the Corporation had gains from unreported over-ceiling sales. Since there were gains, some one must have benefitted from these gains.

"Respondent determined that the individuals diverted the corporate gains to their personal use. Petitioners have shown that respondent erred in the `unidentified\' sales, but they did not show error as to $191,542.55. Therefore, since respondent has determined that the individuals received the money, it is proper that the sum be prorated to the individual petitioners. * * *"

The $191,542.55, which is the amount of corporate income the Tax Court found the individual stockholders had diverted, was prorated to the taxpayers in the ratio of the bond purchases heretofore set out. No one has objected to this method of apportionment. The taxpayers in their petitions do not contest the Tax Court's determination that they received funds belonging to the corporation in the amount found by the Tax Court. Taxpayers' complaint is that the identical income taxed to the corporation can not be taxed to the individual taxpayers as ordinary income, but must be treated as corporate distributions. It is very clear from the record that the Commissioner is seeking to tax the same unreported income upon which the corporation was taxed to the individual taxpayers as ordinary income. The Tax Court has determined that the unreported black market income here involved was income to the corporation and taxable to it.

Before considering the main contention of the taxpayers that the receipts diverted by the stockholders should be taxable as dividends, it is necessary to examine the Commissioner's contention that such issue was not properly raised in the Tax Court and hence can not be asserted here.

The pleadings in the Tax Court do not appear in the printed record. The statement of issues in the Tax Court indicates that the issue before the Tax Court was whether the gross sales of the corporation had been understated, and whether the individual taxpayers had received unreported income. Doubtless, the question of the tax treatment to be given the funds belonging to the corporation which were diverted by the taxpayers was not raised in the original pleadings. In the Tax Court the corporation and the taxpayers took the position that there was no unreported income. The distribution and dividend issue was, however, squarely raised in the proceedings in the Tax Court for computation under Rule 50, 26 U.S.C. § 7453. The Commissioner contends that this is a new issue and can not be raised in a Rule 50 computation proceeding. As stated by the Supreme Court in Bankers Pocahontas Coal Co. v. Burnet, 287 U.S. 308, 313, 53 S.Ct. 150, 151, 77 L.Ed. 325, Rule 50 contemplates the tax computation upon the basis of the decision made by the Tax Court upon the issues before it, and such computation is "confined strictly to the consideration of the correct computation of the deficiency or overpayment resulting from the determination already made, and no argument will be heard or consideration given to * * * any new issues." If corporate distributions are to be treated as constructive dividends, a subject hereinafter discussed, we seriously doubt whether the Tax Court in its original opinion made any determination as to the manner in which the diversions by the taxpayers should be treated for tax purposes. We feel that there is a reasonable basis for finding that this question was left open for consideration...