Smith v. Comm'r of Internal Revenue, Docket Nos. 30980

• Decision Date: 25 June 1953
• Docket Number: 30981,Docket Nos. 30980,30982.
• Citation: 20 T.C. 663
• Parties: H. R. SMITH AND MARY ILO SMITH, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.JUANITA ALLEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.HUGO ALLEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

20 T.C. 663

H. R. SMITH AND MARY ILO SMITH, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.JUANITA ALLEN, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.HUGO ALLEN, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 30980

30981

30982.

Tax Court of the United States.

Promulgated June 25, 1953.

1. Section 294(d)(2) of the Internal Revenue Code construed and held to contain no express or implied provision for avoiding the penalty provided for therein, upon a showing by the taxpayer of reasonable cause for making a substantial underestimation of estimated tax.

2. Assuming that the statute could be so construed, held, further, under the facts, that no showing of reasonable cause was made by petitioners to avoid imposition of additions to the tax. Robert Ash, Esq., for the petitioners.

Frank C. Allen, Esq., for the respondent.

These proceedings were consolidated for hearing and involve a deficiency in income tax and penalties for 1946, imposed for under-estimations of estimated tax, as follows:

+---------------------------------------------------------------+
                ¦Docket No.¦Petitioner                    ¦Deficiency¦Penalty   ¦
                +----------+------------------------------+----------+----------¦
                ¦30980     ¦H. R. Smith and Mary Ilo Smith¦$815.02   ¦$21,905.70¦
                +----------+------------------------------+----------+----------¦
                ¦30981     ¦Juanita Allen                 ¦          ¦313.92    ¦
                +----------+------------------------------+----------+----------¦
                ¦30982     ¦Hugo Allen                    ¦          ¦313.92    ¦
                +---------------------------------------------------------------+
                

The sole issue common to all of the proceedings is whether the penalties were properly imposed under the provisions of section 294(d)(2) of the Code.

FINDINGS OF FACT.

The stipulated facts are so found.

The petitioners in Docket No. 30980 and in Docket Nos. 30981 and 30982 are, respectively, husband and wife, residing in Alice, Texas. Their declarations of estimated tax and returns for 1946 were filed with the collector of internal revenue for the first district of Texas.

Petitioner H. R. Smith filed an income tax return for 1945 in which he reported net income of $140,184.78 and a tax liability of $79,865.73, of which he reported had been paid, $3,121.60 by withholdings and $57,677.95 on declarations of estimated tax. Included in the $141,140.28 of adjusted gross income reported in the return was $26,800 from dividends, $27,849.48 from operation of leases, and $9,302.90 from royalties.

On March 15, 1946, Smith and his wife filed a declaration of estimated tax in which they showed as estimated tax for 1946 the amount of $3,121.60, a figure equal to the tax withheld from wages of the husband for 1945. The declaration of H. R. Smith was prepared by a public accountant.

During 1946, H. R. Smith, J. E. Mowinckle, E. T. Mowinckle, Hugo Allen, the petitioner in Docket No. 30982, J. M. Ponder, and E. W. Sparger were members of a partnership doing business as H. R. Smith Special Partnership, hereinafter sometimes referred to as the partnership. In May 1946, the partnership had long-term capital gain on sales of property of which $232,066.30 was allocable to Smith and $105,939.23 to Allen.

On June 11, 1946, H. R. Smith filed an amended declaration for 1946 showing an estimated tax of $60,046.60, against which he took credit for $3,121.60 for estimated withholding, and of the remainder of $56,925, paid $18,975 at the time of filing.

In July 1946, H. R. Smith and Hugo Allen realized long-term capital gain of $134,939.30 and $61,336.32, respectively, from the partnership, and Smith, $1,352,262.18 from sales of leases and stock. In August 1946, sales by the partnership resulted in long-term capital gains of $990 and short-term gains of $673.63 allocable to Smith.

No amended declaration of estimated tax was filed by H. R. Smith on September 15, 1946, but on that date he made a payment of $18,975 on his estimated tax for 1946.

On January 15, 1947, H. R. Smith filed an amended declaration of estimated tax for 1946 in which he reported estimated tax of $80,000, credits of $3,121.60 for withholding, and $37,950 for payments, leaving a balance of $38,928.40, which he paid at the time of filing the amendment.

On March 15, 1947, petitioner H. R. Smith and his wife filed a joint return showing tax liability of $442,627.03 and payments thereon of $78,348.65 consisting of $1,470.25 by withholding and $76,878.40 by payments on declarations, leaving a balance of tax due in the amount of $364,278.38. The return reported adjusted gross income of $892,536.81 and net income of $891,121.74. Included in the adjusted gross income was $860,041.20 for taxable net long-term capital gain, which included the gains realized before September 1946, $18,080 for dividends, $15,528.57 from operation of leases, and $11,497.49 of royalty income.

Petitioners Hugo Allen and Juanita Allen filed separate income tax returns for 1945 in which they reported community income of $32,799.49 and a total tax liability of $10,289.74, of which $800 was shown as having been paid on declarations of estimated tax. Of the income reported, $29,575.74 was shown as taxable gain from sale of capital assets, $274.44 from rents and royalties, and $2,949.31 partnership profits.

The separate declarations filed by the Allens on March 15, 1946, showed their estimated tax for 1946 to be zero. Each filed an amended declaration on June 4, 1946, showing an estimated tax of $7,500, of which each paid $2,500. They did not file amended declarations on September 15, 1946, or January 15, 1947, but on each of the dates each made tax payments in the amount of $2,500.

On or about March 15, 1947, the Allens filed separate income tax returns for 1946, showing in each adjusted income of $31,793.68, tax liability of $12,731.98, and a balance of tax due of $5,231.98. Included in the income was the husband's share, totaling $167,275.55, of the long-term capital gains realized by the partnership on sales made in May and July 1946.

Petitioner H. R. Smith was engaged in the business of drilling contractor, producing oil and gas, and farming. In and after 1942 he was a member of several partnerships in addition to other business activities. In 1942 George T. Shumate entered the employ of the group as a bookkeeper and in May 1946 became office manager for Smith, in which capacity he had the responsibility of advising Smith in regard to matters connected with his Federal income tax liability.

During the first half of 1946 Smith was comparatively inactive in the oil business, but during the last half he was unusually active because of the drilling of two discovery wells in separate fields in July and August and the development of the properties by the drilling of about 60 more wells. The fields were operated by partnerships in which Smith had an interest. The development work required a substantial amount of bookkeeping. Shumate could not at any time prior to the close of 1946 accurately estimate the amount of ordinary income Smith would have in that year.

The amended declaration of estimated tax filed by H. R. Smith in June 1946 was prepared by Shumate. He was aware at that time that the partnership had realized capital gain in the previous month from sales of producing properties. He did not prepare an amended declaration of estimated tax for H. R. Smith in September 1946 because due to the drilling operations then being conducted it would have been very difficult to estimate the tax, and he thought that the filing of an amended declaration in January 1946 would comply with the applicable statute. When he prepared the declaration filed by H. R. Smith on January 15, 1947, he was of the opinion that the showing of an amount in excess of the tax for 1945 would meet the requirements of the statute. His opinion was based upon his interpretation of the statements appearing on pages 3976 and 76,137 of the Prentice-Hall Federal Tax Service for 1946. On January 15, 1946, H. R. Smith had about $1,375,000 on deposit in a bank on which no interest was payable. He acted on the advice of Shumate in regard to compliance with the taxing statute.

Shumate prepared the declarations of estimated tax and amendments thereto which were filed by the Allens for 1946. He showed no tax liability on the declarations filed in March 1946 because it was impossible for him to estimate the amount of income the husband would have in that year. He estimated the amount of $7,500 shown in the amendments filed in June 1946 on the amount of tax that would be payable on the husband's share of capital gain realized in May 1946 on sales made by the partnership. Shumate did not file amended declarations of estimated tax on September 15, 1946, and January 15, 1947, because the amendment filed in June 1946 showed tax liability in excess of the husband's tax for 1945 and it would have been difficult to estimate in September 1946 what his income would be for the year. On January 15, 1947, Hugo Allen had sufficient cash on deposit in a bank to pay his income tax for 1946.

Shumate attended Texas A. & M. for 2 years. He has done considerable studying of accounting by correspondence and has worked with certified public accountants and assisted them in preparing tax returns. He has had about 13 years of experience in that type of work. During his employment by H. R. Smith, Shumate had occasion to study tax laws, rulings, and procedure.

Shumate prepared declarations of estimated tax for 1946 and amendments thereto for other members of the partnership, except E. T. Mowinckle. J. E. Mowinckle received as much as H. R. Smith of the capital gain realized from sales made by the partnership in July 1946. The amended declaration prepared by Shumate for and filed by J. E. Mowinckle and his wife on September 15, 1946, showed tax liability within 80 per cent of the final tax for 1946. J. E. Mowinckle had an overpayment of tax for 19...