Opinion
Docket No. 28469.
Promulgated June 30, 1952.
Sums received by petitioner from a third person as petitioner's participation in the proceeds of a fraudulent scheme practiced on petitioner's employer held not exempt from tax under the doctrine of Commissioner v. Wilcox, 327 U.S. 404; Rutkin v. United States, 343 U.S. 130, followed.
Edwin F. Hunter, Jr., Esq., and Joseph V. DiRosa, Esq., for the petitioners.
Joseph P. Crowe, Esq., and D. Z. Cauble, Jr., Esq., for the respondent.
Respondent determined deficiencies in income tax for the years 1943 to 1947, inclusive, of $945.09, $2,710.06, $3,117.65, $1,405.73 and $3,089.13, respectively. Not all of those amounts are in dispute since certain adjustments are not contested. Respondent determined fraud penalties, all of which are in controversy, in the amounts of $472.55, $1,355.03, $1,558.83, $702.87 and $1,544.57, respectively, for the same years. The principal issues are whether amounts received, but not reported by petitioners, were not taxable income because they constituted proceeds of embezzlement, and whether part of the deficiencies are due to fraud with intent to evade tax under section 293 (b), Internal Revenue Code. Some of the facts were stipulated.
FINDINGS OF FACT.
The stipulated facts are hereby found accordingly.
Petitioners Henry C. Boucher and Nova E. Boucher, hereinafter called petitioner and petitioner's wife, respectively, are residents of Springhill, Louisiana. They filed joint income tax returns for each of the years involved with the collector of internal revenue for the district of Louisiana.
Petitioner's wife is a graduate of high school and college, holding an A. B. degree in accounting. From 1929 to September 1937, she was employed by various business schools as a teacher of commercial subjects. From September 1937 to September 1941 she was employed by an insurance agency, her duties consisting of writing insurance policies, typing, and keeping the books. From September 1942 until January 1943, she was employed as a high school teacher of commercial subjects. Between 1940 and May 30, 1950, she operated a night business school. From 1943 to May 1950, she engaged in the preparation of income tax returns, holding herself out to the public as qualified in that respect.
Petitioner is 38 years of age. He completed grade school and high school. He has attended business school. He has held various jobs since 1934. From 1937 to 1939, he was employed by a lumber company as assistant bookkeeper and assistant cashier, his duties consisting of keeping subsidiary ledgers, preparing pay rolls, social security reports and invoices on lumber shipments, and doing general office clerical work.
In November 1939 petitioner secured employment at the Springhill, Louisiana, mill of the International Paper Co., hereinafter called the Company. During his first 6 months of employment he worked with an engineer to establish a cost system on paper-finishing and shipment expenses. Thereafter he was transferred to the shipping department where he worked first as a "tally writer," rewriting invoice statements, and then as a production clerk, weighing paper. Subsequently he held positions in other parts of the plant, as a shipping foreman and as a loading foreman. In 1942 petitioner was transferred to the accounting department of the Company where he became a "wood clerk" and later the "chief wood clerk."
E. B. Smith is a pulpwood contractor. Since 1938 he has supplied the Company with pulpwood. At the beginning of the period here involved he was operating as a sole proprietor. Subsequently, during the years in question, he organized a partnership known as Smith Campbell, which included his bookkeeper, Campbell, as a partner.
Prior to the period here involved petitioner and Smith became acquainted, and thereafter they became close friends. Early in 1943, petitioner and Smith agreed upon a scheme to defraud the Company.
The plan called for manipulation by petitioner of the company records so that Smith might be paid for pulpwood not actually delivered. It involved the following accounting procedures of the company: When a supplier delivered pulpwood to the receiving yard, a Company "wood scaler" measured the wood and recorded the measurements. The wood scaler made an original and two copies of that record upon a form known as a "wood scale ticket" or "scale record." One copy was kept in the receiving yard; a second copy was given to the supplier; and the third copy was sent to the accounting department of the Company. During the years in question it was petitioner's function as "wood clerk" in the accounting department to convert the measurements into cubic feet, to calculate the total cordage, and to record those figures on the scale records. Each week it was petitioner's duty to compute the total deliveries of pulpwood for each supplier and to enter these upon individual "wood settlement statements" which he submitted to the "mill agent" who handled payments. The mill agent acted as business manager of that branch of the company, the accounting department being under his supervision. Subordinate to the mill agent was a chief accountant and an assistant accountant, the latter being petitioner's immediate superior.
The plan agreed upon by petitioner and Smith called for petitioner to increase figures upon scale records in the accounting department which showed the quantity of wood deliveries made by Smith's firm, and to divide between them the overpayments which would then be made by the Company. The final agreement was that Smith would retain 60 per cent and petitioner would receive 40 per cent of all amounts thus obtained. Petitioner had first proposed to divide the proceeds equally, but Smith stated that since he was in a high income tax bracket he desired a greater allocation, and finally they agreed upon the above arrangement. Smith did not state that he would pay petitioner's Federal income tax, and he had no intention of doing so. Petitioner did not know Smith's income tax bracket or the amount of tax Smith would have to pay.
During the taxable years in controversy that plan was carried out and moneys were thus obtained from the Company. There was no definite arrangement as to the time or manner of division of such amounts. Occasionally petitioner would visit Smith and request his share. Smith's payments to petitioner were principally in cash. A few payments were made by check, and twice they took the form of payments by Smith for automobiles for petitioner. In 1945 petitioner's wife learned of the conspiracy. For several months during the taxable years she worked as a bookkeeper for Smith's firm. She stated to petitioner and to Smith her objection to their practices, and for a period she left petitioner.
In late 1947 or early 1948 these transactions were discovered by the Company. A comparison of records in the receiving yard with those in the accounting department showed that the latter had been altered. The Company engaged the firm of Heard Lacy, certified public accountants of Shreveport, Louisiana, to make an audit, which was submitted under date of April 28, 1948. It reported that during the period from April 28, 1943, through February 28, 1948, the Company had made actual overpayments to Smith's firm aggregating $72,144.52, plus estimated overpayments of $6,831.68 during 16 weeks in that period for which records were incomplete.
On March 3, 1948, the Company notified petitioner that the overpayments had been discovered. Several days later he informed Smith that he feared the transactions would be checked and that he desired to file amended income tax returns. Subsequently knowledge of the transactions became widespread in the community. On May 10, 1948, accompanied by Smith and Smith's partner, Campbell, petitioner went to consult with one Griffiths, a certified public accountant of Shreveport, Louisiana, who handled Smith's accounts. Campbell stated that no tax had been paid on the portion of the funds received by petitioner. Petitioner was advised by Griffiths that those amounts were taxable, and that an amended return should be filed. Griffiths called in one Martin, an employee of the Bureau of Internal Revenue in Shreveport, Louisiana. Martin stated that an investigation of petitioner had already begun. However, he suggested that amended returns might be accepted.
On May 17, 1948, petitioners filed amended joint returns for the years 1943 to 1947, inclusive, reporting payments received from Smith's firm in those years in the amounts of $3,720.06, $4,456.74, $8,807.48, $5,100.86, and $9,038.34, respectively. The figures were computed by Griffiths. Those amounts had been received from Smith as a result of the overpayments made by the Company. None of these payments had been reported by petitioners in their original returns.
Subsequently, Smith agreed on behalf of his firm to reimburse the Company for its loss by paying $25,000 in cash and the balance at the rate of 50 cents a cord on future deliveries by him of pulpwood to the Company. Within 18 months thereafter he completed the repayments. When the Company informed Smith that the transactions had been discovered, Smith approached petitioner to request repayment of moneys received by the latter. Petitioner's reaction was negative, and Smith abandoned hope of reimbursement. Smith has received no reimbursements and he expects no reimbursement from petitioner of any portion of the amount paid by him to the Company in satisfaction of the loss suffered by the latter due to the overpayments. He considers the matter to be closed. Campbell, Smith's partner, has stated that he never expected to obtain reimbursement from petitioner.
On September 20, 1940, Frost Lumber Industries, Inc., sold certain real property to petitioners for a consideration of $300. In 1945 petitioners sold that property to McAdoo A. Curtis and his wife Margaret Cox Curtis for the sum of $7,000. The gain on the sale was not reported on petitioners' 1945 return.
Respondent's notice of deficiency determined, among other matters, that during the years 1943 to 1947, inclusive, petitioners received additional amounts of unreported income of $3,720.06, $9,124.65, $10,179.97, $5,100.86, and $10,016.72, respectively.
Petitioners received taxable income, which they failed to report in their original returns, in the amounts of $3,720.06, $9,124.65, $10,179.97, $5,100.86, and $10,016.72, respectively, during the years 1943 to 1947, inclusive.
Part of the deficiency for each of the years in controversy is due to fraud with intent to evade tax.
OPINION.
With the limitation of Commissioner v. Wilcox, 327 U.S. 404, "to its facts," Rutkin v. United States, 343 U.S. 130, nothing remains of petitioner's contention in opposition to the deficiencies. His was not a case of embezzlement, but of participation in the proceeds of a fraud. Rutkin v. United States, supra. And the loss has been recovered by his victim and accepted by his accessory. Cf. Commissioner v. Wilcox, supra. Other proper or illicit sources of petitioner's income may be dubious, but he has scarcely even attempted to sustain his burden if he claims the deficiencies were not correctly arrived at. We find no error in this aspect of respondent's action.
On the fraud issue we are also compelled to sustain the determination. Petitioner was concededly in receipt of large sums which he failed to report as income without any satisfactory explanation. Although the burden is upon respondent on this aspect of the case, we conclude that it has been sustained. Arlette Coat Co., 14 T.C. 751; Harry Sherin, 13 T.C. 221; Aaron Hirschman, 12 T.C. 1223.
Decision will be entered for the respondent.