Sonnenborn v. Comm'r of Internal Revenue
| Decision Date | 13 December 1971 |
| Docket Number | Docket No. 877-69. |
| Citation | 57 T.C. 373 |
| Parties | JEROME J. SONNENBORN AND ETHEL G. SONNENBORN, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
O. John Rogge and Ira Paul Klein, for the petitioners.
Agatha L. Vorsanger, for the respondent
H and W, owners of all the stock of M Corp., filed joint Federal income tax returns for 1965, 1966, and 1967. The Commissioner determined that certain expenditures and payments by M (including ‘payments charged to loan account’) constituted constructive dividends to H and W. H has conceded the deficiencies and W does not contest their correctness but seeks merely to be relieved of liability therefor under the ‘innocent spouse’ provisions of sec. 6013(e), I.R.C. 1954. The record establishes affirmatively that W knew or had reason to know that there was at lease some unreported income during each of the years. Also, the record is entirely silent as to the nature of the ‘loan account’ payments as well as to the purpose for which they were used. Held, taking into account the fact that the burden of proof was upon W, she has failed to meet the requirements not only of sec. 6013(e)(1)(B) but also of sec. 6013(e)(1)(C).
The Commissioner determined deficiencies in petitioners' income tax in the years and amounts as follows:
+--------------------+
¦Year ¦Deficiency ¦
+------+-------------¦
¦1965 ¦$27,446.68 ¦
+------+-------------¦
¦1966 ¦39,383.34 ¦
+------+-------------¦
¦1967 ¦13,371.25 ¦
+--------------------+
Petitioner Jerome J. Sonnenborn has conceded that he is liable for the deficiencies as determined by the Commissioner. Petitioner Ethel G. Sonnenborn similarly does not contest the correctness of the deficiencies but presents merely the issue as to whether she is relieved of liability in respect thereof by section 6013(e), I.R.C. 1954.
Jerome J. and Ethel G. Sonnenborn are husband and wife. They filed joint Federal income tax returns for the calendar years 1965, 1966, and 1967 with the district director of internal revenue at Manhattan, New York, and resided in New York at the time the petition in this case was filed.
Ethel G. Sonnenborn (petitioner) attended New York University. She later did graduate work at the College of Podiatry of New York University, and in 1944 received a doctorate degree in podiatry. She and Jerome J. Sonnenborn were married in 1939p they have remained married and have continuously lived together until the date of the trial herein. Although petitioner did some volunteer ‘clinic’ work in podiatry in the early years following her education, she does not appear to have been gainfully engaged in her profession until 1970 when she ‘purchased’ a private practice in order to supplement family income which had meanwhile declined as a result of financial reverses.
From 1961 until the present time the Sonnenborns have lived in a large apartment in a fashionable area in New York City. The rent for this apartment was originally $1,000 a month; during the tax years, 1965-67, the rent was at least $1,200 a month; and the rent now is about $1,400 a month. The Sonnenborns have three sons, Monroe, Donald, and Gene, who in 1965 were 23, 21, and 12 years old, respectively.
During 1965, 1966, and 1967, the years in issue, petitioner and her husband each owned 50 percent of the stock of Monodon Corp. (‘Monodon’ or the ‘corporation’). Its principal business was the sale and export of paper.
Mr. Sonnenborn was president and petitioner was treasurer of the corporation. In its fiscal years ended January 31, 1966, 1967, and 1968, Monodon paid salaries of $26,100, $16,180, and $42,460, respectively, to Mr. Sonnenborn and $3,120, $3,172, and $8,352, respectively, to petitioner. Monodon's income tax returns for each of those years stated that ‘All’ of the time of each of its officers was devoted to business. That representation was not truthful in petitioner's case, although she did devote some time to its affairs. In the years 1965, 1966, and 1967, Mr. Sonnenborn was not only active in the management of Monodon but was also concerned with the operation of another company, Northland Paper Mill (Northland), of Norfolk, N.Y. That company had been acquired some time during or prior to the tax years, and the record indicates that it was under Mr. Sonnenborn's control; its activities appear to have been related to those of Monodon. The record does not satisfactorily disclose whether it was a subsidiary of Monodon, whether it was wholly owned by the Sonnenborns individually, or whether petitioner had any interest therein. During the tax years, 1965-67, Mr. Sonnenborn traveled to Norfolk often in connection with Northland's affairs. On these and other occasions when he was absent from the corporate office of Monodon, petitioner, who was authorized to sign checks on the corporation's behalf, went to Monodon's offices and signed such checks presented to her by other corporate officers. She was otherwise only generally acquainted with the operation of the corporation from discussions she had with her husband and other corporate officers.
For the years 1965, 1966, and 1967, the Sonnenborns reported the following ‘total income’ on their joint returns:
+------------------------------------------------------+
¦ ¦1965 ¦1966 ¦1967 ¦
+----------------------+----------+----------+---------¦
¦ ¦ ¦ ¦ ¦
+----------------------+----------+----------+---------¦
¦Wages, salaries, * * *¦$39,520.00¦$39,520.00¦3,920.00 ¦
+----------------------+----------+----------+---------¦
¦Other income ¦5,778.88 ¦6,339.97 ¦6,151.72 ¦
+----------------------+----------+----------+---------¦
¦Total income ¦45,298.88 ¦45,859.97 ¦60,071.72¦
+----------------------+----------+----------+---------¦
¦ ¦ ¦ ¦ ¦
+------------------------------------------------------+
As to the ‘Wages, salaries * * *‘ component, the record does not reveal whether the foregoing figures include compensation from any source or sources other than Monodon; and if that component relates exclusively to compensation from Monodon, the record does not explain the possible discrepancy that may exist between those figures and the following salaries (as found above p. 374) received by petitioner and her husband from Monodon during its fiscal years ending January 31, 1966, 1967, and 1968:
+--------------------------------------+
¦ ¦Year ending Jan. 31— ¦
+--------------+-----------------------¦
¦ ¦_ ¦
+--------------+-----------------------¦
¦ ¦1966 ¦1967 ¦1968 ¦
+--------------+-------+-------+-------¦
¦ ¦ ¦ ¦ ¦
+--------------+-------+-------+-------¦
¦Mr. Sonnenborn¦$26,100¦$26,180¦$42,460¦
+--------------+-------+-------+-------¦
¦Petitioner ¦3,120 ¦3,172 ¦8,352 ¦
+--------------+-------+-------+-------¦
¦Total ¦29,220 ¦29,352 ¦50,812 ¦
+--------------+-------+-------+-------¦
¦ ¦ ¦ ¦ ¦
+--------------------------------------+
As to the ‘Other income’ component, no amount thereof for any of the years includes any income from Monodon, by the way of dividends or otherwise. Such ‘Other income’ was attributable in major part to securities (predominantly stock in American Telephone & Telegraph Co.) owned by petitioner which she had acquired either from her father or prior to the tax years involved herein. The remaining ‘Other income’ related to interest on a small bank account of petitioner's, dividends on securities owned by her husband, and sales or exchanges of property.
The joint returns of petitioner and her husband for the 3 years 1965-67 indicate that the following aggregate amounts of income tax were withheld from their salaries by their employer:
+------------------------+
¦Year ¦Total withheld ¦
+------+-----------------¦
¦1965 ¦$5,067.20 ¦
+------+-----------------¦
¦1966 ¦6,226.70 ¦
+------+-----------------¦
¦1967 ¦11,088.60 ¦
+------------------------+
Every week during the tax years petitioner's husband gave her a $900 check issued by Monodon. She deposited each such check in her personal checking account and returned $100 therof to her husband for his personal expenses. She used the remaining $800 for household and living expenses. In this manner petitioner received $46,800 in checks from Monodon in each of the years in issue, of which $41,600 was applied by her to household and living expenses. Mr. Sonnenborn did not make any deposits to petitioner's account.
Among the household expenses paid by petitioner during the tax years out of her personal checking account were the following: Apartment rent ($1,200 per month); maid's salary ($50 per week); clothing for family (approximately $3,000 per year); food (approximately $100 per week); tuition and expenses for Monroe at Yale Law School, for Donald at Haverford College and Columbia Law School, and for Gene at the Walden School plus summer camp (in the aggregate of about $9,000 or $10,000 a year). In addition to these living expenses petitioner and her husband made the following payments during the tax years:
+--------------------------------------------------------+
¦ ¦1965 ¦1966 ¦1967 ¦
+----------------------------+--------+---------+--------¦
¦Charitable contributions ¦ ¦$200.00 ¦$200.00 ¦
+----------------------------+--------+---------+--------¦
¦Sales taxes ¦$250.00 ¦270.00 ¦240.00 ¦
+----------------------------+--------+---------+--------¦
¦State and local income taxes¦3,301.52¦3,412.39 ¦3,830.41¦
+----------------------------+--------+---------+--------¦
¦Interest ¦ ¦7,083.03 ¦2,645.96¦
+----------------------------+--------+---------+--------¦
¦Total...To continue reading
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