Virden v. Commissioner of Internal Revenue, Docket No. 5200.
| Decision Date | 29 April 1927 |
| Docket Number | Docket No. 5200. |
| Citation | 6 BTA 1123 |
| Parties | M. L. VIRDEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Chas. D. Hamel, Esq., Benj. H. Saunders, Esq., and O. R. Ewing, C. P. A., for the petitioner.
J. E. Marshall, Esq., for the respondent.
This proceeding involves the redetermination of deficiencies in income tax for the years 1918, 1919, and 1920, in a total amount of $33,852.64. These deficiencies arise (1) from the refusal of the Commissioner to recognize that R. L. Virden, wife of petitioner, was a partner in the M. L. Virden Lumber Co. during the years 1918, 1919, and 1920; (2) from the refusal of the Commissioner to recognize a partnership between R. L. Virden, wife of petitioner, and J. R. Hervey in the operation of a plantation near Moorhead, Miss., during the years 1919 and 1920; (3) the determination by the Commissioner that the March 1, 1913, value of a brick business building in Moorhead, Miss., sold by petitioner in 1920, was $2,500; and (4) the determination of the Commissioner that the petitioner repossessed himself in 1920 of the property known as the Swan Lake Plantation, which he sold in 1919 to one Mike Seghesio.
In an amended answer, respondent alleges that in addition to income set forth in the 60-day deficiency letter, which is the basis of the petition, the petitioner received income in 1920 in the sum of $10,693.90, which the respondent alleges the petitioner willfully, falsely, and fraudulently failed to report on his income-tax return for that year.
FINDINGS OF FACT.
The petitioner is a resident of the City of Greenville, Miss., with his principal office in that city.
Prior to January 1, 1918, the petitioner was a stockholder in the Virden Lumber Co., which was a Mississippi corporation. This corporation, which was engaged in the lumber business, was organized with a capital stock of $7,000, of which $2,000 was issued to C. E. Couty, and $5,000 was issued in the name of petitioner. The capital stock of the corporation was increased to $10,000. The petitioner purchased the stock of Couty and thereupon all the stock of the corporation stood in his name. R. L. Virden is the wife of petitioner. At the time she married petitioner, she owned real and personal property to the extent of about $15,000, part of which was used to purchase the stock of the corporation which stood in petitioner's name. The Virden Lumber Co. was dissolved in 1917, whereupon the petitioner proposed to his wife that they form a partnership to carry on the business. To this she agreed. The agreement was oral, providing that they should equally share the profits and losses and the partnership was organized under the firm name of M. L. Virden Lumber Co. A new set of books was not opened, but the old corporation books were continued. These books reflected as of January 1, 1918, the joint interest of petitioner and his wife in the business, each owning one-half; the books showing that the petitioner had a $25,000 investment and his wife an equal amount. At the end of the year the books showed that the petitioner was credited with $27,500 and his wife with an equal amount, thus showing an investment of each of $27,500.
Each party made withdrawals and the petitioner drew a salary of $500 per month. The wife took no active part in the business. Upon the dissolution of the corporation and the formation of the partnership, the petitioner notified the banks and the persons and corporations with whom he was dealing, and also the mercantile agencies, of the dissolution of the corporation and the formation of the partnership and the interest of the partners therein. The partnership first transacted business with the Greenville Bank & Trust Co. The officers of this bank were informed of the dissolution of the corporation, the formation of the partnership, and the names of the members thereof. Additional credit was extended the partnership by reason of the fact that R. L. Virden was a partner. She was no longer asked to endorse the paper of the concern as she had been required to do during the existence of the corporation, for the reason that being a member of the partnership, she was bound by the obligations thereof. In November, 1920, the M. L. Virden Lumber Co. transferred its account to the First National Bank of Greenville. The officers of this bank were also informed of the facts relating to the partnership. There is in the file a signature card filed with that bank on November 15, 1920, which states that the names of the partners were M. L. Virden and R. L. Virden. R. G. Dun & Co., and the Bradstreet Company, in the publications made for the use of their subscribers, rated the M. L. Virden Lumber Co. as a partnership composed of M. L. Virden and R. L. Virden. The reports by these agencies were based not only on the representations of the persons reported, but also upon a verification of their statements made after thorough investigation. Suits were filed in the name of the petitioner and his wife, as partners, and deeds of trust, which were public records, were taken in their names as partners.
It was stipulated, and we so find, that the net income of the M. L. Virden Lumber Co. was as follows:
Net income
1918 __________________________________________ $17,954.87
1919 __________________________________________ 48,143.08
1920 __________________________________________ 24,769.31
In 1911 or 1912, M. L. Virden acquired a farm near Moorhead, Miss. The petitioner and J. R. Hervey operated this plantation as partners. In 1918, M. L. Virden, in consideration of love and affection, conveyed this farm to his wife, and Hervey and M. L. Virden rented the property from her during the year 1918, at a rental of $5,000 per annum, and operated the farm as partners. After the expiration of the lease and beginning with 1919, Mrs. Virden conducted the farm with Hervey, as partners. She contributed the farm and 50 per cent of the expenses as her share of the obligations, and Hervey contributed his services and 50 per cent of the expenses as his share of the expenses of the partnership. Whenever money was needed to operate the farm, Hervey would advance one-half of the money and draw upon Mrs. Virden for the remaining half. The receipts were divided equally. Although the respondent denies that R. L. Virden was a member of the partnership of Hervey & Virden, it was stipulated, and we so find, that the net income of Hervey & Virden, for the year 1919, was $46,699.79, and that said partnership sustained a net loss for the year 1920 of $10,076.28.
It was stipulated, and we so find, that in 1910 or 1911, the petitioner purchased at a bankrupt sale a brick business building at Moorhead, Miss., for the sum of $2,250; that he sold it in 1920 for $4,250; and that the depreciation sustained to date of sale was $205. The fair market value of the property on March 1, 1913, was $3,500.
In 1917, the petitioner acquired what is known as the Swan Lake Plantation, at the following original cost:
Price paid _________________________________ $65,784.07
Commissions paid in cash ___________________ 12,625.00
Expenses paid in connection with sale ______ 904.00
Commissions to be paid in 1920 _____________ 19,625.00
__________
Total cost ______________________________ 98,938.07
This plantation was sold November 19, 1919, to Mike Seghesio for $199,000, paid and to be paid as follows: Cash paid during the year 1919, $35,000, liabilities assumed, $25,000, and notes as follows: January 5, 1920, $25,000, and ten notes for $11,400 each, the first being payable January 5, 1921, and the remaining nine notes on January 5 of each succeeding year. It was stipulated, and we so find, that the percentage of profit contained in each installment is 50.282 per cent. The purchaser paid the $25,000 note which matured January 5, 1920, and made no further payments on the purchase price. In November, 1920, the purchaser, who had produced a crop, notified the petitioner that he could make no further payments and was going to leave the place. This he did in November, 1920, taking with him all his personal property. The petitioner's income-tax return for the calendar year 1920 was verified by him on March 12, 1921. In this return he states
During the year 1920 M. L. Virden Lumber Co. of Greenville, Miss., transmitted to the Planters Lumber Co. of Jackson, Miss., its two checks of $5,922.52 and $4,787.48, respectively; the Planters Lumber Co. took these checks to the Jackson-State National Bank of Jackson, Miss., where exchange was purchased payable to M. L. Virden in the amount of $5,313.62, and $600 for the first check, and $3,880.28 and $900 with the second check; and the same were endorsed by M. L. Virden. The drafts for $5,313.62 and $600 were each dated August 7, 1920, and the drafts for $3,880.28 and $900 were each dated October 19, 1920. In 1924 the Planters Lumber Co. suffered a fire which destroyed many of its records. The bills payable account of the Planters Lumber Co. showed on December 31, 1919, a total of $34,600, and this total included five notes of the Planters Lumber Co., for $2,000 each, payable January 1, 1920, to M. L. Virden, and bearing interest at the rate of 6 per cent. It was the custom of petitioner, acting for the M. L. Virden Lumber Co. and B. L. Fulton, who was secretary-treasurer and active manager of the Planters Lumber Co., of which petitioner was president, to buy lumber in large lots for...
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