Wodehouse v. Comm'r of Internal Revenue
| Decision Date | 28 March 1947 |
| Docket Number | Docket Nos. 3401,6487. |
| Citation | 8 T.C. 637 |
| Parties | PELHAM G. WODEHOUSE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. Petitioner, a British subject, or his agent, filed income tax returns for the years 1923 and 1927. Assessment and collection of taxes for such years barred by statute of limitations.
2. Imposition of fraud penalty for year 1937 not sustained.
3. Omissions from gross income for year 1937 less than 25 per cent thereof. Statute of limitations has tolled as to that year.
4. Alleged assignments to his wife of undivided one-half interest of petitioner in novels, etc., written by him, held to be, for purpose of securing tax advantages, equivalent to community property status in California which petitioner, a nonresident alien, could not assume, and were based on no real donative intent. Proceeds from the sale of such literary works taxable to petitioner.
5. Lump sum payments for serial rights to literary productions taxable to petitioner. Sax Rohmer, 5 T.C. 183;affd., 153 Fed.(2d) 61;certiorari denied, 328 U.S. 862, followed.
6. Allocation of income between sources within and without United States denied.
7. Attorney's fees allowed under section 23(a)(2), Internal Revenue Code. Watson Washburn, Esq., for the petitioner.
Walt Mandry, Esq., for the respondent.
The respondent determined deficiencies in the petitioner's income tax liabilities and imposed penalties as follows:
+------------------------------------+
¦Docket No.¦Year¦Deficiency¦Penalty ¦
+----------+----+----------+---------¦
¦6487 ¦1923¦$2,699.83 ¦$881.03 ¦
+----------+----+----------+---------¦
¦ ¦1924¦5,567.25 ¦1,555.07 ¦
+----------+----+----------+---------¦
¦ ¦1938¦12,220.86 ¦ ¦
+----------+----+----------+---------¦
¦ ¦1940¦8,080.83 ¦ ¦
+----------+----+----------+---------¦
¦ ¦1941¦2,802.08 ¦ ¦
+----------+----+----------+---------¦
¦3401 ¦1937¦21,328.82 ¦10,664.41¦
+------------------------------------+
The petitioner claimed overpayments of $1,121.89, $3,156.32, and $14,290.12 for the years 1938, 1940, and 1941, respectively.
The cases before us present a number of issues, some common to two or more of the taxable years and some peculiar to a single year. They are best stated by relating them to the several taxable years. The facts pertinent to such issues and the opinions thereon will be set forth in the same manner.
The petitioner is a British subject, formerly residing at Le Touquet, France. From June 1940 until the date of the petition, November 13, 1944, he was in the custody of the German Government in territory controlled by the German Army. During the years prior to June 1940, he was a resident of either England or France. During the taxable years he was a nonresident alien, with the exception of the period hereinafter mentioned. The petitioner was unable to attend the trial of the proceeding because of the Government's restrictions on travel from France.
The petitioner was a prolific writer of serials, plays, short stories, and other literary works. He is a well known writer of stories and has a wide reputation as such in the United States. His writings were in demand by the public and were accepted and published by the Saturday Evening Post, Red Book, Liberty, Collier's, Cosmopolitan, and other such magazines. During the taxable years and for several years prior thereto the sale of the petitioner's writings in the United States was accomplished by one or more literary agents.
Issues:
1. The major issue both in time and importance is the applicability of the stature of limitations, based on the alleged failure of the petitioner to file income tax returns for those years.
2. The subordinate issues are:
a. The taxability of payments for the petitioner's literary works;
b. The deductibility of his literary agents' commissions;
c. The right of the petitioner to personal exemption;
d. The imposition of the 25 per cent penalty for failure to file income tax returns.
FINDINGS OF FACT.
R. J. Denby took care to the petitioner's business in the United States from 1918 to 1926. Paul R. Reynolds is a literary agent. He or his firm has acted for the petitioner in that capacity since 1918. The American Play Co. (owned by John W. Rumsey) is a literary and dramatic agent and has acted as such for the petitioner since 1914. Over a period of five or six years, beginning about 1920, Rumsey filed various tax returns for the American Play Co. showing withholding taxes for the petitioner's account.
During the period from 1918 to 1926, Denby took care of filing the petitioner's income tax returns and saw that the taxes were paid. While Denby was handling the petitioner's affairs a controversy with the Treasury Department arose, involving the petitioner's status as a nonresident alien. About 1923 the further question was raised as to whether or not outright sales and royalties produced exempt income. In 1923 the Department sent a letter to the petitioner's representative (addressed to the petitioner) stating that it contained a settlement to date. The letter, and also copies relating to income tax return files, were left with Rumsey, who cooperated with Denby in handling the petitioner's income tax returns in the early twenties.
In May 1938 Rumsey's business collapsed and he moved his office files to a room containing less than one-tenth of the space which he formerly occupied. He took from the old office only papers relating to the period from 1931 to 1938. All other papers were thrown away except two ledger sheets, which he was able to find and which show the following payments made to the collector of internal revenue for the petitioner.
+------------------------+
¦June 16, 1919 ¦$1,000.00¦
+--------------+---------¦
¦Mar. 24, 1923 ¦430.00 ¦
+--------------+---------¦
¦Mar. 31, 1923 ¦1,781.22 ¦
+--------------+---------¦
¦Apr. 12, 1923 ¦4,739.72 ¦
+--------------+---------¦
¦Aug. 23, 1923 ¦1,267.24 ¦
+------------------------+
Rumsey continued to have numerous financial transactions with the petitioner during 1923, 1924, and 1925. Shortly after August 24, 1923, Rumsey established a ‘mechanical system‘ of bookkeeping, which failed to work satisfactory.
In the spring of 1933 the petitioner retained Watson Washburn, the attorney representing him in the cases before this Court, to endeavor to settle a controversy with the Government relating to the petitioner's income tax liability for several years prior to 1932.
Washburn cooperated with the agents of the respondent to determine the facts on which such liability would be based. It appeared that the petitioner had not filed returns for certain years prior to 1932, but that withholding returns had been filed for him.
Washburn's discussions with the respondent's agents covered the period from 1925 to 1933, inclusive, and also involved years prior to 1925. The agents concluded that the petitioner owed between $200,000 and $300,000 in income taxes for the period from 1925 to 1933, inclusive. Washburn vigorously contested the finding and, after much discussion and negotiation, the petitioner's income tax liability and that of Jeeves Dramatics, Inc., his wholly owned corporation, for such period were compromised in June 1936 by the payment of approximately $85,000.
The petitioner, through his counsel, in his preparation for trial in these cases, applied for subpoenas directed to the collectors of internal revenue for the second and third districts of New York and requiring them to produce the tax returns of the petitioner, of the American Play Co. and of John W. Rumsey for the years 1918 to 1924, inclusive, and also any and all books, records, lists, files and memoranda relating to the filing of such returns, the contents thereof, and the payment of taxes by any of such persons in the years 1918 to 1925, inclusive. The subpoenas were properly served two days before the hearing.
The petitioner proposed to prove by such witnesses that the records of the collectors' offices would establish that the petitioner, or some one for him, filed timely returns for the years 1923 and 1924 in compliance with the law and that such records would disclose the petitioner's course of conduct and would demonstrate errors in the collector's records for that period.
Deputy collectors from the two districts refused to testify ‘without the express permission of the Commissioner of Internal Revenue * * * on penalty of dismissal.‘ The deputy collector from the second district made no attempt to obtain such permission and the representative from the third district stated that he had not had a chance to do so. The Court directed the deputy collector from the second district to answer a question asking him to produce the records and data set forth in the subpoena. The witness declined to answer ‘in view of his instructions.‘ The representative for the third district adopted the same position.
The respondent's counsel offered in evidence so-called ‘certificates,‘ not under seal, of various collectors of internal revenue purporting to show that their offices contained no record of the filing of returns for the years 1923 and 1924 by the petitioner. Ruling was reserved. Objection to the proffered certificates is sustained.
During the years 1923 and 1924 the petitioner received the following payments, as compensation from American publishing companies for serial rights in his literary works and for short stories:
+--------------------------------------+
¦ ¦1923 ¦1924 ¦
+----------------+----------+----------¦
¦Royalty income ¦$33,907.82¦$48,609.97¦
+----------------+----------+----------¦
¦Less commissions¦3,390.78 ¦4,861.00 ¦
+----------------+----------+----------¦
¦Net ¦30,517.04 ¦43,748.97 ¦
+--------------------------------------+
About 90 per cent of such payments were made in lump sums...
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