Thomas v. C.I.R., 081259 FEDTAX, 47178

Docket Nº:47178, 47179.
Opinion Judge:TIETJENS, Judge:
Attorney:Charles H. Morin, Esq., for the petitioners. Paul J. Henry, Esq., and Chester M. Howe, Esq., for the respondent.
Case Date:August 12, 1959
Court:United States Tax Court

18 T.C.M. (CCH) 676 (1959)

T.C. Memo. 1959-157







Nos. 47178, 47179.

United States Tax Court.

August 12, 1959

Charles H. Morin, Esq., for the petitioners.

Paul J. Henry, Esq., and Chester M. Howe, Esq., for the respondent.



These proceedings are now before us for the third time. The respondent determined the following deficiencies and additions to tax for fraud for the years 1943 to 1948:

Deficiency Addition


Thomas 1943 $ 2,425.72 $ 1,212.86

1944 746.53 373.27




Thomas 1945 6,853.75 3,426.88

1946 1,287.95 643.98

1947 7,329.34 3,664.67

1948 5,441.12 2,720.56

Constantine Thomas filed individual income tax returns for the calendar years 1943 and 1944. Constantine and Marie Thomas filed joint returns for the calendar years 1945 to 1948, inclusive. The returns were filed with the collector of internal revenue at Boston, Massachusetts. A stipulation of facts, with exhibits, was filed at the first hearing, and testimony and other exhibits were introduced. The deficiencies were determined by the net worth and expenditures method. The computation of net worth is agreed upon except for the amount of cash on hand at the beginning and end of each year. The issues are the amount of such cash on hand, whether the petitioners received nontaxable gifts, and whether any part of the deficiencies is due to fraud with intent to evade tax. In a Memorandum Findings of Fact and Opinion filed February 24, 1955, (T.C. Memo 1955-46) we sustained with minor adjustments the deficiencies and additions to tax determined by the respondent. The Court of Appeals for the First Circuit, ( 232 F.2d 520), reversed on April 12, 1956, and remanded the cases for the admission of further evidence, for findings as to the petitioners' cash on hand at the commencement and termination of each of the taxable years, for findings of a likely source of taxable income, and for other proceedings not inconsistent with its opinion. Pursuant to the foregoing instructions a further hearing was held and additional evidence was received. Thereupon we held that since the respondent had not proved a likely source of taxable income independent of the fact that the taxpayers' net worth had increased, the deficiencies and additions to tax could not be sustained. ( T.C. Memo. 1957-244, filed December 31, 1957) Subsequently the Supreme Court in United States v. Massei, 355 U.S. 595 (1958) commented that proof of a likely source was not necessary in every net worth case, since, if all possible sources of nontaxable income were negatived, there would be no need for proof of a likely source. The Court of Appeals for the First Circuit, ( 261 F.2d 643, Nov. 19, 1958), thereafter reversed our decisions for the taxpayers and remanded for a determination as to whether the respondent has borne the burden of negativing by a preponderance of evidence that certain alleged gifts of cash were the source of the increases in net worth. In a further memorandum on an application for rehearing, the Court of Appeals, ( 261 F.2d 645, Dec. 18, 1958), made the comment that since the only source of nontaxable income alleged by the taxpayers was the cash gifts referred to, this is the only source the respondent must negate, and if this is done we will reach the question of cash on hand at the beginning and end of each of the taxable years as mentioned in the first remand. We have reexamined the evidence in the light of the opinions of the Court of Appeals, and have made additional and revised findings of fact from such evidence. FINDINGS OF FACT. The stipulated facts are incorporated by this reference. The petitioners are husband and wife. They reside in Chelmsford, Massachusetts. During the taxable years 1943 to 1948, inclusive, Constantine Thomas, sometimes known as Charles Thomas, owned 97 per cent, and Marie Thomas owned 2 per cent of the stock of Thomas, The Master Cleaner, Inc., hereinafter referred to as the corporation, a Massachusetts corporation doing business in Lowell, Massachusetts. Thomas was president and treasurer of the corporation and in complete control of the business carried on, which was dry cleaning and the repair, storage and sale of furs. The corporation filed Federal income tax returns with the collector of internal revenue at Boston upon an accrual basis and covering calendar years. Constantine Thomas was born about 1894 and came to the United States from Greece at the age of 10 years. He has since resided in the United States. From about 1918 until about 1932 he engaged in various business ventures including the taxicab business, dealing in used cars, operating a restaurant, and investing in a hotel. About 1929 he started a dry cleaning business under the name of Highland Cleaners and Dyeing. He sold this after operating it for a year or two. He also worked in a brokerage firm and in a foreign exchange bank. Thomas also invested in stocks on margin or on borrowed funds and had an account with a brokerage firm in Boston. In 1929 he withdrew from the stock market with a substantial amount of cash and a number of shares of different stocks. Thomas borrowed on several occasions from the Union Bank of Lowell, or its predecesser, herein referred to as the bank. On February 5, 1930, Thomas borrowed.$1,546.13 from the bank, pledging as security several stocks. He borrowed additional amounts in subsequent months increasing the loans to a total of $11,970.55 by July 1931. The stocks declined in value and the bank asked for more collateral which Thomas refused to furnish at the then current market. The bank took over the collateral and in 1932 charged off $8,926.85 as a loss. In May 1932 Thomas borrowed $272.68 from the bank at 6 per cent interest. This loan was continued until June 1933. In 1932 Thomas started his dry cleaning business which was incorporated in 1935 as Thomas, The Master Cleaner, Inc. Constantine and Marie were married in 1938. Marie's father, Christos Vangos, was manager of a confectionery establishment in Easthampton, and Marie's mother worked in that business. At the time of the marriage of the petitioners, Vangos gave them money to assist in buying a home. Marie helped Constantine in his business for about a year after their marriage. In February 1936 Thomas opened a savings account with the Central Savings Bank of Lowell, depositing $1,650. After another deposit and with interest the balance in May 1938 was $1,896.82. Thomas withdrew over $1,700 in May 1938, made other deposits later and withdrew $350 in May 1940, leaving a balance of $48.22. The balance on January 1, 1943 was $50.54. In December 1943, $2,900 was deposited. In December 1949 the account was transferred to Thomas in trust for one of his daughters. Another savings account was opened by Thomas in trust for another daughter in May 1943 with a deposit of $500. Another deposit of $2,900 was made to this account in December 1943. There were no deposits or withdrawals to or from these accounts after 1943 and before 1949, but interest was added. In April 1940 the corporation sought a loan of $4,500 from the Reconstruction Finance Corporation (hereinafter referred to as the R.F.C.) to provide improvements and expand fur storage facilities. Thomas considered that an R.F.C. loan could be had at a low interest rate. The Union National Bank of Lowell agreed to participate up to 20 per cent in the loan, provided the bank receive the amount of $400 as a compromise offer in full payment of the loan to Thomas charged off in 1932 in the amount of $8,926.85. Thomas paid the amount of $400 in installments at the rate of $7 per month beginning in June 1940 and making a final lump sum payment of $148 in December 1943. The corporation was granted a loan of $4,500 at 5 per cent. This was reduced by installment payments to $3,586.83 on July 13, 1941. Thomas pledged certain policies of insurance on his life as collateral for the R.F.C. loan to the corporation. Thomas, individually, borrowed $800 from the bank in May 1940 at 5 per cent and paid the loan in January 1942. He deposited as collateral 14 shares of Wright Aeronautical Corporation common stock. In March 1941 the corporation borrowed $600 from the bank at 6 per cent. This loan was increased to $1,000 in May and was paid in June 1941. In April 1941, the corporation applied to the R.F.C. for another loan of $1,800 for the purchase and installation of 3 pieces of equipment. The application contained a balance sheet of the corporation as of December 31, 1940, and was accompanied by a statement of Thomas' personal assets. The corporation's financial statement showed cash on hand $1,272.81, inventory $4,537, total assets $22,353.02, current liabilities of $3,837.37, and a chattel mortgage to the R.F.C. for $3,960. Thomas' salary was stated to be $2,500 a year. The ownership interest was shown as common stock $5,000; surplus, donated, $8,438.36; and undivided profits, $1,117.29. This statement gave the following information of the business:

1941 to

1936 1937 1938 1939 1940 3/31

Net sales $25,872 $27,563 $25,441 $27,367 $27,912 $6,488


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