Opinion
Docket Nos. 47581 47582 54591.
1955-04-29
ESTATE OF MERLIN H. AYLESWORTH, DECEASED, CAROLINE ANDREWS MCENTEER AYLESWORTH, EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.ESTATE OF MERLIN H AYLESWORTH, DECEASED, CAROLINE ANDREWS MCENTEER AYLESWORTH, EXECUTRIX, AND CAROLINE A. AYLESWORTH, SURVIVING WIFE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Ernest R. Mortenson, Esq., for the petitioners. Maurice E. Stark, Esq., for the respondent.
Ernest R. Mortenson, Esq., for the petitioners. Maurice E. Stark, Esq., for the respondent.
1. Petitioners' claim that the respondent erred in disallowing as deductions amounts charged to an expense account of $2,000 per month disapproved for lack of evidence showing that a substantial portion of the amounts qualified as business expenses and that the portion that did so qualify was not included in amounts claimed as deductions in returns and allowed by respondent.
2. Decedent entered into an agreement with an incorporated advertising agency in 1947 relating to compensation to be paid to him for bringing to it and helping to maintain a large account and for any new business he might help it to secure. The agreement, after providing for a monthly expense allowance for decedent and for the right to purchase a certain amount of the corporation's common stock for a nominal amount, gave him the right to purchase 500 shares of class A and 500 shares of class B preferred stock of the corporation at 5 cents per share and to have the former redeemed in 1949 and the latter in 1950 at $100 per share. No other shares of class A or class B preferred stock were issued to anyone other than to decedent. The class A shares were in fact redeemed in 1949 and the class B shares in 1950, each at $100 a share. Held:
a. The income realized by decedent as a result of the preferred stock provisions constituted compensation for services and ordinary income.
b. The income was taxable in 1949 and 1950, when the preferred stock was redeemed, and not in 1947 when the agreement was executed.
3. Signatures of wife of decedent on joint returns filed for years 1948 to 1951, inclusive, held not to have been procured by fraud or duress.
4. Disallowance by respondent of a portion of deductions claimed in returns for traveling and entertainment, contributions, loss by theft, and sales tax, approved.
The respondent determined a deficiency in income tax against the Estate of Merlin H. Aylesworth, deceased, for the taxable year 1947 in the amount of $5,307.02, and deficiencies in income tax against the estate and Caroline A. Aylesworth, surviving wife of decedent, as follows:
+---------------+ ¦1948¦$9,779.40 ¦ +----+----------¦ ¦1949¦22,797.68 ¦ +----+----------¦ ¦1950¦24,015.76 ¦ +----+----------¦ ¦1951¦6,859.48 ¦ +---------------+
The issues are:
1. Are the petitioners entitled to offsetting business deductions against the amounts of $8,000 for the year 1947 and $24,000 for each of the years 1948 to 1951, inclusive, which were received by Merlin H. Aylesworth during those years from Ellington & Company, Inc., and which are conceded by the petitioners to be properly includible in income?
2. Are the amounts of $49,975 received by Merlin H. Aylesworth in each of the years 1949 and 1950 upon the redemption of certain preferred stock ordinary income or capital gains? If ordinary income, are they taxable in 1947, when the agreement respecting the stock was entered into, or in 1949 and 1950 when they were received upon redemption of the stock?
3. Were the signatures of Caroline A. Aylesworth on the joint returns for the years 1948 to 1951, inclusive, procured by fraud and duress?
4. Did respondent err in disallowing a portion of certain deductions claimed in joint returns for traveling and entertainment expenses, contributions, loss from theft, and sales tax for one or more of the years 1947 to 1951, inclusive?
FINDINGS OF FACT.
Merlin H. Aylesworth, hereinafter referred to as the decedent, died September 30, 1952. Caroline Aylesworth, his widow, is the executrix of his estate.
For the year 1947, the decedent filed an individual income tax return and for the years 1948 to 1951, inclusive, joint returns were filed signed by the decedent and his wife. All returns were filed with the collector of internal revenue for the third district of New York. Decedent's occupation was stated on the returns to be that of ‘Advisory Counsel,‘ and he had an office at 30 Rockefeller Plaza, New York City. His books were kept on the case receipts and disbursements basis.
During his lifetime the decedent had been at various times president of both the National Broadcasting Company and of R.K.O. Pictures. He had also been in the newspaper business, and during the taxable years was active in the advertising business. He was an excellent executive and salesman and he knew many prominent and influential persons.
The only business income reported by the decedent in returns for the taxable years 1947 to 1951, inclusive, was that realized from his activities as ‘Advisory Counsel.’ The amounts of reported business income and claimed business deductions, including certain deductions for traveling and entertainment expense, were as follows:
+--------------------------------------+ ¦ ¦ ¦Claimed ¦Traveling ¦ +----+--------+----------+-------------¦ ¦Year¦Business¦business ¦and ¦ +----+--------+----------+-------------¦ ¦ ¦income ¦deductions¦entertainment¦ +----+--------+----------+-------------¦ ¦1947¦$79,000 ¦$28,816.26¦$9,197.19 ¦ +----+--------+----------+-------------¦ ¦1948¦49,000 ¦20,031.80 ¦6,264.77 ¦ +----+--------+----------+-------------¦ ¦1949¦25,000 ¦17,964.28 ¦4,271.46 ¦ +----+--------+----------+-------------¦ ¦1950¦26,800 ¦18,923.91 ¦5,474.75 ¦ +----+--------+----------+-------------¦ ¦1951¦30,700 ¦15,754.60 ¦2,339.98 ¦ +--------------------------------------+ The respondent disallowed $1,500 of the amount claimed as traveling and entertainment expense for the year 1947. He allowed the remainder of the business deductions claimed for that year, and all of the business deductions claimed for the years 1948 to 1951, inclusive. The business deductions claimed and allowed for the taxable years covered expenditures for salaries, interest, taxes, club dues, depreciation on furniture and automobile, rent, light, water, petty cash, telephone and telegraph, office supplies, office expense, insurance, miscellaneous expense, safe-deposit box, and auto expense, as well as traveling and entertainment. The decedent owned only one automobile.
Additional deductions claimed by petitioners in the returns for the years 1948 to 1951, inclusive, were partially disallowed by the respondent as follows:
+-----------------------------------------+ ¦Year¦Item ¦Claimed ¦Disallowed¦ +----+---------------+---------+----------¦ ¦1947¦Contributions ¦$4,954.00¦$2,000.00 ¦ +----+---------------+---------+----------¦ ¦1948¦Contributions ¦4,570.00 ¦2,500.00 ¦ +----+---------------+---------+----------¦ ¦1949¦Contributions ¦2,745.00 ¦1,500.00 ¦ +----+---------------+---------+----------¦ ¦1949¦Loss from theft¦600.00 ¦250.00 ¦ +----+---------------+---------+----------¦ ¦1950¦Contributions ¦2,875.00 ¦1,500.00 ¦ +----+---------------+---------+----------¦ ¦1951¦Contributions ¦2,105.00 ¦1,000.00 ¦ +----+---------------+---------+----------¦ ¦1951¦Sales tax ¦268.40 ¦143.40 ¦ +-----------------------------------------+
Ellington & Company, Inc. (hereinafter referred to as Ellington), was an advertising agency. In 1947, decedent was instrumental in bringing to Ellington an important new client, referred to as Cities Service. Prior thereto decedent was neither an officer, employee, nor stockholder of Ellington.
On September 10, 1947, decedent entered into a written agreement with Ellington, which was set forth in a letter by Ellington to the decedent reading as follows:
This will confirm our conversation of yesterday. If this meets with your understanding, we can initial it, as you suggest, and later on have any documents drawn up that may be indicated.
Based on your estimate of minimum annual revenue from the Cities Service account of $212,000, the following will be carried out: (The understanding also is that if revenue from Cities Service or other new business you may help secure develops beyond this point, we would mutually work out additional means of compensating you, such as salary, bonus or expense allowance— the controlling principal being that this is a starting basis by which the account pays its way, and likewise, in case revenue from the account is lost in part or in whole during the next thirty-six months, and is not made up be (sic) revenue from other business you help secure, then this factor would be taken into consideration in paying off your Preferred Stock. This could be mutually worked out— for example, by extending the callable dates or reducing the amount of the Preferred Stock).
1. Expense Allowance of $2,000 per month.
2. 20% of the total outstanding Common Stock of the Corporation— cost to you 1¢ per share— subject to the same options and agreements as the other stockholders (principals) give and receive. (We are to change the present agreement to provide a formula for setting a value on the Common Stock and add a provision against any call of any principal's stock, except by mutual agreement, as long as the principal is an active member of the firm.)
3. $50,000 of Prior Preferred Stock, which the company agrees to call for $50,000 eighteen months after receiving the Cities Service account— and $50,000 of Prior Preferred Stock which the company agrees to call for $50,000 thirty-six months after getting the Cities Service account— cost to you 5¢ per share.
This stock will be held in escrow for you, but with this provision for the protection of your widow or estate in case of your death: She would receive the full amount of the callable price if the agency continued to hold the Cities Service account to the end of the thirty-six months' period, or a pro rata part in case the account were lost.
4. You will become a director and Chairman of the Executive Committee.
On October 7, 1947, the decedent wrote an officer of Ellington expressing his complete satisfaction with the terms of the September 10, 1947, agreement.
Beginning in September 1947, Ellington paid $2,000 per month to decedent, which payments continued throughout the taxable years here involved.
During the year 1947, the $8,000 received by the decedent from Ellington was deposited in his regular bank account and an account called Reserve for Expenses was set up on his office books against which certain charges were made.
For the years 1948 to 1951, inclusive, decedent maintained a separate account in the City National Bank & Trust Company, Danbury, Connecticut, hereinafter referred to as the Ellington Expense Account, in which he deposited the $2,000 check received each month from Ellington. The account was transferred to the Bethel National Bank in May 1951 and deposits were made in that account during the remainder of the year. In each of these years some additional deposits were made to the account, the largest of which amounting to $5,307.64 on December 17, 1948, and $3,000 on March 21, 1949, were made to reimburse the account for prior withdrawals used to pay for apartment or house furnishings.
The charges against the Ellington Expense Account, and the amounts of those charges which represented cash items and rentals on an apartment in New York occupied by petitioner and his wife were approximately as follows:
+-----------------------------------+ ¦ ¦ ¦ ¦Apartment ¦ +----+-------+----------+-----------¦ ¦Year¦Charges¦Cash items¦rentals ¦ +----+-------+----------+-----------¦ ¦1948¦$28,900¦$15,100 ¦1 $483.34¦ +----+-------+----------+-----------¦ ¦1949¦34,100 ¦10,700 ¦5,800.00 ¦ +----+-------+----------+-----------¦ ¦1950¦24,500 ¦9,800 ¦5,800.00 ¦ +----+-------+----------+-----------¦ ¦1951¦26,300 ¦8,200 ¦5,800.00 ¦ +-----------------------------------+ The remaining withdrawals from this account, insofar as they could be identified, were for such items as gas service, groceries, and weather vane for petitioners' house in Connecticut, hay and straw for burros at the Connecticut property, tractor and power equipment, electricity and telephone, insurance, monthly rental for organ in New York apartment, television receiver, garbage collection, vacation trips to Bermuda, auto expense, gifts, radio for office, taxi and other transportation, golf and other club dues, office supplies, extra stenographic service, accountant's fees, magazines and business publications, Christmas cards, theatre tickets, hotel and restaurant bills, contribution to church, and to reimburse Caroline Aylesworth for some expenditures made by her for flowers, liquor, and the purchase of such items as a large silver platter.
After September 10, 1947, and during the taxable years the decedent worked on the Cities Service account which he had obtained for Ellington and also was successful in obtaining some other business of an undisclosed amount or character for that company. The income of Ellington increased substantially as a result of its acquisition of the Cities Service account.
The decedent did not include the $8,000 received from Ellington in 1947, or the $24,000 received from it in each of the years 1948 to 1951, inclusive, in gross income reported in income tax returns filed for those years. The respondent added these amounts to the income reported for each of the years, and determined that the petitioners were not entitled to any deductions for business expenses allegedly paid from this income.
Pursuant to the provisions of the agreement of September 10, 1947, there were issued in the decedent's name on December 14, 1948, 500 shares of class A preferred stock and 500 shares of class B preferred stock of Ellington at a cost to decedent of 5 cents per share. The stock was referred to in the agreement as ‘Prior Preferred Stock’; when it was issued Ellington decided to call it ‘Class A’ and ‘Class B.’ This stock was held in custody or escrow by Ellington.
In accordance with the agreement Ellington redeemed the 500 shares of class A preferred stock on June 24, 1949, paying the decedent $50,000 therefor, and redeemed the 500 shares of class B preferred stock on October 9, 1950, paying the decedent $50,000 therefor. The amounts expended to redeem this stock were charged to surplus on the books of Ellington. The stock provided for no dividends and none were paid thereon. No shares of class A or class B preferred stock were issued to anyone other than the decedent, and the foregoing were the only such shares issued to the decedent.
The first charge for apartment rental appears in the account of December 17, 1948.
In the returns filed by decedent and his wife for the years 1949 and 1950, capital gain in the amount of $49,975 was reported for each year in connection with the redemption of the class A and class B preferred stock of Ellington, respectively. The respondent determined that the amounts reported were taxable as ordinary income.
The decedent also purchased from Ellington, in accordance with the terms of the September 10, 1947, agreement, 8,250 shares of the common stock of Ellington for 10 cents a share. Ellington repurchased this stock from the decedent's estate, following his death, for $825, the same amount he had paid for it.
Decedent and Caroline Aylesworth were married on July 1, 1945. At that time decedent was 59 years old and she was 30. She is a graduate of West Virginia University and, prior to her marriage to decedent, she had been employed in his office, and in other places. After they were married they lived in a furnished apartment at 930 Fifth Avenue, New York City, for about 3 years. They then moved to another apartment at 710 Park Avenue. In 1946 Caroline Aylesworth acquired some land in Connecticut as a gift from decedent and about 3 years thereafter a house was constructed on this property. During the period between the purchase of the land and the construction of the house they spent weekends in a trailer located on the property. On August 15, 1951, Caroline Aylesworth sold some MacMillan Petroleum stock which the decedent had given her and received therefor the amount of $17,500, all of which she used to pay for their Connecticut house. A long-term capital gain of $17,500 resulting from the sale of this stock was reported in the joint return for 1951. After the house was completed they rented an apartment at 116 East 62d Street in New York City and lived there when they were not at their Connecticut home.
During the years 1946 to 1951, inclusive, the decedent frequently drank alcoholic beverages to excess and became intoxicated. When intoxicated he was belligerent and at time, beginning in 1946 and continuing through part of 1952, abused and mistreated his wife and destroyed some of their apartment furnishings. On one occasion he kicked their dog across the floor although he was very fond of the dog.
During the years 1948 to 1951, inclusive, Caroline Aylesworth received weekly ‘salary’ checks from the decedent. These checks were sent to the bank where she had her personal account by the executive secretary of the decedent and she drew checks against the amounts deposited. She signed a document or documents giving her husband permission to withhold taxes on the salary paid to her.
The salary payments, plus bonus, received by Caroline Aylesworth during the years 1948 through 1951 were reported on the returns filed for those years and the amounts withheld were claimed as credits on the same returns as follows:
+---------------------------+ ¦ ¦ ¦ ¦Taxes ¦ +----+------+-----+---------¦ ¦Year¦Salary¦Bonus¦withheld ¦ +----+------+-----+---------¦ ¦ ¦ ¦ ¦ ¦ +----+------+-----+---------¦ ¦1948¦$3,922¦$250 ¦$530.70 ¦ +----+------+-----+---------¦ ¦1949¦3,848 ¦ ¦483.60 ¦ +----+------+-----+---------¦ ¦1950¦3,848 ¦ ¦508.30 ¦ +----+------+-----+---------¦ ¦1951¦3,857 ¦ ¦593.20 ¦ +----+------+-----+---------¦ ¦ ¦ ¦ ¦ ¦ +---------------------------+
Caroline Aylesworth performed no services for the salary which she received from decedent. She did not mind receiving the weekly checks. She stated that she knew she was getting a salary and that if the return were made she had to sign, but she resented having to sign a return which listed her as an employee of her husband. She signed each of the joint returns for the years 1948 to 1951, inclusive, over the printed words ‘(Signature of taxpayer's wife * * * if this is a joint return).’ She also signed and filed individual New York State income tax returns for these years and paid taxes of $47.45 for 1948, $47.56 for 1949, $23.08 for 1950, and $38.20 for 1951. Deductions were taken for these tax payments in the joint Federal income tax returns. On October 11, 1951, she and the decedent signed a consent extending to June 30, 1953, the period for assessment of any income taxes due for the year 1948, and on January 18, 1953, she, both for herself individually and as executrix of the estate of the decedent, signed a consent extending to June 30, 1955, the period for assessment of any income taxes due for the year 1950.
On April 8, 1952, the decedent returned to their apartment about 6 p.m. in a very intoxicated condition and had much to say about his wife's failure to go to his office and sign the return for the year 1951 which had been awaiting her signature. When she told him she could no longer sign anything for a man who was completely irrational, drunk, and abusive, and would not do so, he tore her clothes, pulled her hair so severely that some came out, and forced her head under the bed. She counter-attacked him with a hatpin. She then called the police and four came almost immediately. Two of them took the decedent out, and two stayed with her. After changing her clothes she went to the Harvard Club and reported the incident to her father. Later that night he permitted her to return to the apartment when she assured him she could lock herself in. He saw that the chain lock was securely fastened and left her there. The next morning she went to decedent's office and signed the 1951 return in the presence of his secretary. She did not see the decedent. She immediately went to their Connecticut house and did not see the decedent again until August 1952 at the Sayville Hospital, a short time prior to his death. On June 2, 1952, she filed a complaint for divorce in Connecticut alleging cruelty as grounds for the divorce.
In petitions filed in these proceedings on April 3, 1953, with respect to the years 1948 and 1949, and on September 9, 1954, with respect to the years 1950 and 1951, Caroline Aylesworth alleges that her signature to the joint returns filed for all of these years were procured by force and duress.
The signatures of Caroline Aylesworth to the joint returns filed by her and the decedent for the years 1948 to 1951, inclusive, were not procured by fraud or duress.
During the years 1947 to 1951, inclusive, the decedent and Caroline Aylesworth entertained in their apartments in New York City and in their home in Connecticut. The entertainment consisted of formal dinner parties and was elaborate and frequent. Sometimes caterers were hired to handle these parties and sometimes servants were hired to serve the food. Some of the people entertained were officials of Ellington and officials in the entertainment world.
In 1945 or 1946 Caroline Aylesworth purchased a fitch cape. The cost of the cape was $500. It was stolen from her apartment in December 1949. The cape was in good condition. In the joint return filed by decedent and his wife for 1949, a loss from theft of the cape in the amount of $600 was claimed as a deduction. The respondent disallowed $250 of the amount thus claimed as a deduction.
OPINION.
RAUM, Judge:
1. Petitioners contend that they are entitled to business deductions in each of the taxable years equivalent to the $2,000 monthly payments decedent received from Ellington. They argue that the decedent was personally acquainted with many prominent persons and executives of many of America's largest corporations; that a man in his position was expected to entertain on a lavish scale; that the decedent had expenses other than those charged to the Ellington account which were entered in his regular books; that the funds in the Ellington account were not included in the regular books kept by decedent but were handled in a separate checking account; that although checks were drawn on the Ellington account for items which might be considered personal, reimbursements or other deposits were made to take care of them; and that the disallowance by the respondent of all the amounts charged to the Ellington account was purely arbitrary.
The petitioners had the burden of proving that they were entitled to business deductions for the taxable years in addition to those allowed by the respondent. Decedent filed an individual income tax return for 1947. Petitioners submitted no evidence from which we can find that he was entitled to any business deductions, in addition to those already allowed by the respondent, because of any expenditures made from the $8,000 received from Ellington during that year.
For the years 1948 to 1951, inclusive, decedent and his wife claimed business deductions in their returns for those years ranging from $15,754.60 to $20,013. Additional deductions were claimed for contributions and miscellaneous items. Respondent allowed all of the business deductions claimed in these returns. Petitioners made no attempt to prove that any expenditures made from the Ellington account for business purposes were not included in the business deductions allowed for the taxable years. They introduced in evidence bank ledger sheets, checks drawn against the Ellington account, and a detailed schedule showing the number, payee, and amount of the checks charged against it. Decedent's secretary testified by deposition and was asked to explain the nature of the various expenditures made from the account. She was able to explain the purpose of some of the expenditures form the names of the payees appearing on the checks. Her explanation of many of these expenditures indicated that they were of a personal nature. As to others that may have been of a business nature, such as auto expenses, office expenses, etc., there was no convincing evidence that such items had not been included in the amounts claimed in the returns and allowed by the respondent as business deductions in each of the taxable years. In a few instances the account was reimbursed for charges of a personal nature, such as for furnishings for apartment, but in most instances where the personal nature of withdrawals was established, there does not appear to have been any reimbursement. The witness had no knowledge of the nature of many of the expenditures or of the purpose for which the decedent expended the substantial amount of cash withdrawals he made from the account each year. The rental of the New York apartment, which was used as living quarters by decedent and his wife, was not a business expense even though it may have been used at times for entertainment of business guests. Where entertainment expenses are proximately related to a taxpayer's business, they may be deductible, but the general statements made by petitioners' witnesses with respect to entertainment for business purposes do not convince us that to the extent that such expenses were properly deductible they were not already included in the deductions claimed and allowed by the respondent in each of the taxable years. After a careful consideration of the evidence, we hold that the petitioners have not proved that the respondent erred in failing to allow additional business deductions for the taxable years because of expenditures made from the Ellington account.
2. The second issue relates to the gains derived by the decedent in 1949 and 1950 upon the redemption of the class A and class B preferred stock of Ellington. Each of these blocks of stock was purchased by decedent at the nominal amount of $25, and each was redeemed at $50,000 as originally contemplated. Petitioners contend that the difference, $49,975, represents capital gain during each of the years 1949 and 1950, whereas the Commissioner takes the position that the profit in fact consists of earnings derived by the decedent from Ellington which are taxable as ordinary income rather than as capital gain. We think that the facts in this case abundantly support the conclusion that these were not bona fide capital transactions, and that they were merely a device for compensating the decedent in part for his services in connection with bringing in and maintaining the Cities Service account for Ellington.
It is important in this connection to read the entire letter of September 10, 1947, set forth above in our findings. That letter constituted the basic agreement between the decedent and Ellington. It plainly shows that the financial advantages spelled out therein for decedent's benefit were intended as compensation to him for his efforts in connection with the Cities Service account; and that such rewards were predicated upon a minimum annual revenue of $212,000 from the Cities Service account. Indeed it was clearly indicated that if such revenue were not received and not replaced by other accounts there would be an appropriate downward revision of the amounts obtainable by decedent on account of the preferred stock. The preferred stock itself was sold to the decedent at a nominal cost of 5 cents a share, although redemption was to be at the rate of $100 a share. The two blocks of preferred stock involved— class A and class B— were unique. No other shares of class A or class B preferred stock were issued to anyone else. Dividends were not payable upon such stock, and the shares were kept in escrow. It is all too plain that such stock was tailored for a special purpose, namely, to provide the vehicle for paying additional compensation to the decedent in 1949 and 1950, and that the issuance and redemption of the preferred stock were merely a sham. The various cases cited by petitioners dealing with stock options are not pertinent to the facts involved herein. The amounts in controversy here were in truth and in fact compensatory in nature and were not mere capital gains.
Nor do we accept petitioners' alternative contention that the amounts were income in 1947 rather than in 1949 and 1950. The decedent's rights in relation to the stock and payments ripened only with the passage of time and the receipt of the anticipated revenue from the Cities Service account. The payments to the decedent were in fact made in 1949 and 1950, as originally planned. He was on the cash basis, and, in any event, his rights thereto did not accrue until the time of payment. We hold that the amounts in question were ordinary income and were chargeable to the decedent in 1949 and 1950.
3. Petitioner Caroline Aylesworth contends that she is not individually liable for any of the deficiencies found to be due for the taxable years 1948 to 1951, inclusive, because her signature on the returns filed for those years was procured by fraud and duress.
In petitions filed in these proceedings on April 3, 1953, with respect to the years 1948 and 1949, and on September 9, 1954, with respect to the years 1950 and 1951, Caroline Aylesworth alleges that she married the decedent on July 1, 1945, that beginning with January 1, 1946, he inflicted intolerable cruelty upon her; that this cruelty continued up to and including 1952; that she was in constant fear of the decedent and by reason of such cruelty and fear, she was compelled by him to sign the returns filed for the years 1948 to 1951, inclusive; that the signing was not her free act; and that her signatures on the returns were procured by force and duress.
Caroline Aylesworth testified at the trial. From her testimony it appears that at times during the years she was married to the decedent he drank alcoholic beverages to excess and then when intoxicated he abused, mistreated, and threatened her. Just how often this occurred is not clear. Nor is it clear that he indulged in any such conduct at times other than when he was intoxicated. Some specific instances of abuse and mistreatment mentioned by her had no connection with the filing of any of the joint income tax returns.
Beginning in 1948 the split income provisions were enacted into law thereby enabling married couples to obtain favorable tax treatment by filing joint returns. Plainly, the decedent's desire to file joint returns beginning with 1948 was with a purpose to take advantage of the new law. Mrs. Aylesworth's testimony, however, indicated a reluctance on her part to sign the returns because the returns reported a ‘salary’ paid to her. Such ‘salary’ was in fact paid to her, but since she performed no services therefor she resented being designated as an employee of her husband and felt that it was done to humiliate her. The reporting of such salary had no effect taxwise on the joint returns because, to the extent that it was ascribed as income to Mrs. Aylesworth, there was a corresponding deduction with respect to the decedent's business expenses, and the two items would thus neutralize each other.
The record contains evidence suggesting numerous ugly incidents which occurred between the Aylesworths. In connection with the 1948 return she testified:
He told me if I did not sign it, that I would be very, very sorry. He told me that he would destroy my father. He hold me that he would mutilate my face, and when I told him I would divorce him rather than sign it, he said, ‘You haven't got a chance. I will go to Bruce Bromley and see— I will go anywhere, to everyone, and your word against Merlin Aylesworth's will never stand.’ And I think he was probably right. She testified that when she signed the 1949 return she was ‘just a wreck’ and was still being threatened. She made no similar statement as to the threats made or the state of her mind when she signed the 1950 return, except that, in response to a question whether the signing of that return was ‘a free act on * * * (her) part,‘ she replied, ‘It was not.’
In connection with the 1951 return, the evidence discloses a tempestuous episode in the evening of April 8, 1952, when the decedent had much to say about his wife's failure to sign the returns. The decedent was then very inebriated. He was abusive, he tore her clothes, and pulled her hair so severely that some came out. She, on the other hand, countered with a hat pin, and summoned police assistance. The following morning, April 9, 1952, she went to decedent's office and signed the 1951 return on his secretary's desk and in her presence. She did not see the decedent that morning or at any time thereafter until August 1952 at a hospital a short time prior to his death.
We cannot hold that Mrs. Aylesworth's signature on the 1948-1951 joint returns must be treated as a nullity. There is no evidence that she filed any separate returns on her own behalf for any of those years, notwithstanding that, at least for the year 1951, she realized $17,500 in income as capital gain. She continued to live with the decedent and indeed contributed her own property and funds towards the construction of their Connecticut home, after the alleged coercive acts during some of the years had taken place. Moreover, she began to consult legal counsel as early as 1949 about her marital difficulties. The filing of joint returns resulted in a substantially reduced tax burden for the couple as a result of the split income provisions, and we should be very slow to conclude that the signature of the wife is to be regarded as having been obtained by fraud or duress. We are not convinced on the evidence before us that her signature was not voluntary, regardless of her reluctance to sign and regardless of the domestic frays that may have occurred at about the time. We are of the opinion that when she in fact signed the returns they were her voluntary, although perhaps distasteful, acts. So far as we know she never undertook to disavow her signature on any of the returns within a reasonable time so that the Government might promptly have proceeded against the husband for increased tax by reason of the higher brackets that would be applicable to his individual return; and, as noted above, she filed no separate return of her own, particularly for the year 1951. We find and hold that her signature on each return in question was not procured by duress or fraud, and that section 51(b) of the Internal Revenue Code of 1939 providing for joint and several liability of the spouses on a joint return is applicable here.
4. The final issue relates to the respondent's disallowance of a portion of the amounts claimed in the joint returns as deductions for traveling and entertainment expenses for 1947, for contributions for the taxable years 1947 to 1951, inclusive, for a loss by theft in 1949, and for sales tax for 1951. The respondent's determination was based upon the petitioners' failure to substantiate the expenditures claimed to the extent of the disallowances. Decedent's secretary testified that the figures shown in the returns for the deductions claimed were given to her by the decedent. The loss by theft will be hereinafter considered. As to the other items, no convincing evidence was introduced to substantiate the deductions claimed in the returns and to establish that the respondent erred in disallowing a portion of them. In these circumstances we must hold that the petitioners have not sustained their burden of proving that the respondent's disallowance of a portion of the deductions claimed was erroneous.
In the 1949 return a loss from theft of a fitch cape in the amount of $600 was claimed as a deduction. Caroline Aylesworth testified that she purchased this cape with her own money in 1945 or 1946 for $500 and that it was in very good condition when it was stolen on December 24, 1949. She was unable to explain why a loss of $600 was claimed in the 1949 return for a cape that cost $500. The respondent disallowed $250 of the amount claimed. In view of the fact that the cape was 3 or 4 years old at the time it was stolen, we think his action was reasonable and it is approved.
Decision will be entered for the respondent.