Opinion
Docket Nos. 71992 71993.
1963-10-25
DONALD G. CORBETT, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTDONALD G. CORBETT, AS SOLE DEVISEE AND LEGATEE UNDER THE WILL OF GEORGIA C.CORBETT, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Francis J. Butler, for the petitioners. Norman H. McNeil, for the respondent.
Francis J. Butler, for the petitioners. Norman H. McNeil, for the respondent.
Held, statutory notice of deficiency in D's 1945 income tax for addition to tax under section 294(d)(1)(B), I.R.C. 1939, otherwise barred by limitations, was timely since D's return had falsely claimed a prepayment credit of estimated tax and was false and fraudulent with intent to evade tax. Held, further, fraud not established in respect of companion deficiency determined against D's wife, which was therefore barred.
The Commissioner, on November 25, 1957, determined additions to 1945 income tax in the amount of $1,080 each against Donald G. and Georgia C. Corbett pursuant to section 294(d)(1)(B) of the Internal Revenue Code of 1939. The question is whether the 1945 returns filed by them were false or fraudulent with intent to evade tax, section 276(a), so as to render timely the Commissioner's determinations, which would otherwise have been barred by limitations.
FINDINGS OF FACT
A stipulation of facts filed by the parties is incorporated herein by this reference.
Donald G. and Georgia C. Corbett were husband and wife in 1945, for some years prior thereto, and until her death at some undisclosed date in 1961 or 1962. Their principal mailing address was in Spokane, Wash. Donald is the sole devisee and legatee under Georgia's will.
Donald is a physician and surgeon. He received both his academic and medical education at the University of Pennsylvania. Thereafter, he spent 5 years in training in his special field at Johns Hopkins and the University of California. He began his practice in Spokane in 1933 and has continued to practice there until the present time. At the time of the hearing, he was 63 years old. He was a member and at one time president of the Board of Regents of the University of Washington, and is now a senior consultant at the University of Washington Medical School, a position involving teaching.
During 1945 and 1946 Donald employed a bookkeeper-receptionists, a technician, a nurse, and an associate physician at his office. The bookkeeper kept the day-to-day records, including a cash journal.
William F. Field, a public accountant, worked for a public accounting firm for some time until 1946 when, after leaving that employment, he started his own business, operating a bookkeeping service and preparing income tax returns. He performed such services for Donald and Georgia during the years 1940-46, at first while working for his employer and later in the conduct of his own business. He went to Donald's office once a month; he ‘balanced’ the cash journal maintained by the bookkeeper, posted the general ledger, reconciled the bank accounts, and prepared a monthly statement of income, cash receipts, and disbursements. The records were kept on a cash receipts and disbursements basis. Georgia did not have a separate bank account, but had a joint checking account with Donald. She never took an active part in assisting Donald at the office and practically never came to the office.
At one time Donald had a secretary who was authorized to sign checks in the amount of $500 or less. He signed all other checks, and paid all bills by check, including Federal taxes. All of Georgia's bills were paid out of the joint checking account.
Field prepared income tax returns and declarations of estimated income tax for Donald and Georgia. In this connection he relied upon Donald's books and records, as supplemented by information obtained from Donald or the secretary or the bookkeeper.
Donald and Georgia, on March 15, 1945, filed a timely joint declaration of estimated Federal income tax for 1945, showing an estimated tax of $24,000, but that declaration was not accompanied by any payment; nor did Donald or Georgia at any time thereafter pay such estimated tax or at any time make any payment of any part of any installment due in respect of such estimated tax in response to the routine quarterly notices or otherwise. Thereafter, Donald and Georgia timely filed separate individual Federal income tax returns for 1945.
The only income reported by Donald and Georgia for 1945 was attributable to Donald's medical practice, and was treated by them as community income. The 1945 receipts from that practice were reported in the amount of $83,547.26, against which business deductions in the amount of $20552.30 were claimed; other deductions were also claimed in the aggregate amount of $4,229.85. The separate 1945 returns of Donald and Georgia each showed an identical tax, in the amount of $12,773.67. Each such return falsely stated that of the $12,773.67 tax, $12,000 had been paid by payments on 1945 declaration of estimated tax. The first payment of any kind in respect of Donald's and Georgia's 1945 tax liability was made on July 20, 1946, in the amount of $1,547.34 jointly, or $773.67 for each of them. No further payment in respect of the remaining $24,000 jointly, or $12,000 each separately, was in fact made until January 19, 1959, after assessment of the overstated prepayment credits by the district director, as hereinafter set forth.
During 1945 and 1946 Donal and Georgia were delinquent in respect of payment of their Federal income taxes for years prior to 1945. The payments on taxes made by Donald and Georgia during the period when timely installment payments could have been made on their joint declaration of estimated tax for 1945 (March 15, 1945, to January 15, 1946) were as follows:
+---------------------------------------------------------------+ ¦Date 1 ¦Payment ¦Credited to— ¦For taxable year ¦ +----------+---------+----------------+-------------------------¦ ¦ ¦ ¦ ¦ ¦ +----------+---------+----------------+-------------------------¦ ¦3-15-45 ¦$706.68 ¦Donald ¦1943 income tax liability¦ +----------+---------+----------------+-------------------------¦ ¦3-15-45 ¦706.69 ¦Georgia ¦1943 income tax liability¦ +----------+---------+----------------+-------------------------¦ ¦10-31-45 ¦2,500.00 ¦Donald ¦1944 income tax liability¦ +----------+---------+----------------+-------------------------¦ ¦10-31-45 ¦2,500.00 ¦Georgia ¦1944 income tax liability¦ +----------+---------+----------------+-------------------------¦ ¦1-2-46 ¦2,500.00 ¦Donald ¦1944 income tax liability¦ +----------+---------+----------------+-------------------------¦ ¦1-2-46 ¦2,500.00 ¦Georgia ¦1944 income tax liability¦ +----------+---------+----------------+-------------------------¦ ¦Total ¦11,413.37¦ ¦ ¦ +----------+---------+----------------+-------------------------¦ ¦ ¦ ¦ ¦ ¦ +---------------------------------------------------------------+
During the course of an examination in 1957 a revenue agent discovered that the two $12,000 credits claimed on their separate returns as prepaid estimated taxes for 1945 were not in fact supported by payments.
On December 6, 1957, the district director assessed $12,000 in tax plus $8,441.42 in interest against Donald and like amounts against Georgia with respect to the overstated estimated tax prepayment credits claimed for 1945. These assessments were made directly, without the issuance of the usual statutory notice of deficiency, in reliance upon section 6201(a)(3) of the 1954 Code which authorizes assessment of erroneous income tax prepayment credits in the same manner as in the case of a mathematical error appearing on the return (sec. 6213(b)(1)). In making these assessments reliance was also placed on the fraud provisions of the Internal Revenue Code.
Meanwhile, on November 25, 1957, the deficiency notices which are now before this Court for review were sent to Donald and Georgia. Each of these notices asserts an addition to tax for 1945 in the amount of $1,080 under section 294(d)(1)(B) of the 1939 Code for failure to pay installments of estimated tax declared. These deficiency notices do not make any adjustments in any of the items of income or deduction set forth on the returns. The Commissioner relied upon the provisions of the Internal Revenue Code with respect to false or fraudulent returns for his right to claim these $1,080 additions to tax which would otherwise have been barred by limitations. Neither the amount nor the propriety of these additions is in controversy if the necessary fraud is established to render the determinations timely.
Donald and Georgia filed suit in the Federal District Court for the Western District of Washington to enjoin collection of the assessments of the $12,000 prepayment credits and related interest. The Government's motions to dismiss were granted, and the Court of Appeals for the Ninth Circuit affirmed on July 19, 1961. Corbett v. Frank, 293 F.2d 501. On November 7, 1962, Donald, individually and as the sole devisee and legatee of Georgia, paid $100 to the district director to be applied equally on his account and on Georgia's account for 1945. On November 16, 1962, claims for refund of these to $50 payments were filed, and on February 8, 1963, the district director notified Donald that these claims were disallowed.
The 1945 income tax returns of Donald and Georgia were prepared by Field. In preparing returns for the Corbetts it was Field's practice to inquire of Donald about items not obtainable from Donald's records, such as other income, charitable contributions, interest, and taxes. Sometimes he would discuss these matters with Donald orally, but he would also prepare a list of questions on a sheet for Donald to answer. Field never discussed matters with Georgia. With respect to the payment of estimated taxes, it was Field's practice to obtain such information from an examination of checks charged to the bank account and compare the checks to the estimated taxes; if there were no such checks indicating payment he would make inquiry of Donald to find out how much had been paid.
When the returns were completed it was Donald's practice to take them home for Georgia's signature. Georgia did not otherwise participate in the preparation of the returns; ‘She wasn't much interested.’ Donald always looked over the returns with respect to the amounts stated as tax due and estimated tax already paid. It was also his practice to mail both his and Georgia's returns together; the checks in payment of the taxes, drawn upon the Corbetts' joint account, ‘were stapled together and all mailed in at the same time.’
Donald's 1945 Federal income tax return was false and fraudulent with intent to evade tax.
OPINION
RAUM, Judge:
Section 275(a) of the 1939 Code states that ‘except as provided’ in section 276 income taxes must be assessed within 3 years after the return was filed. Accordingly, the deficiency notices herein, dated November 25, 1957, were untimely unless the 1945 returns in question were ‘false or fraudulent * * * with intent to evade tax’ within section 276(a).
The question is one of fact, but it is well settled that the burden is upon the Government to prove fraud by clear and convincing evidence. However, since fraud depends upon a mental state it is rarely provable by direct evidence, and may be established by sufficiently satisfying indirect or circumstantial evidence. We think that the requisite fraud has been proved here in Donald's case.
Decisions will be entered in accordance with the foregoing opinion. SEC. 276(a). FALSE RETURN OR NO RETURN.— In the case of false or fraudulent return with intent to evade tax or of a failure to file a return the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time. -------- Notes:
On January 29, 1945, just prior to the 1945 estimated tax installment period, $5,200 was paid and credited on Donald and Georgia's joint declaration of estimated tax for the taxable year 1944.
Although the record shows that Donald was a busy wartime doctor, he was nevertheless an alert and perceptive person. All of the income in question was derived from his practice of medicine, and he and Georgia filed a timely joint declaration of estimated income tax for 1945 showing an estimated tax of $24,000. Donald handled all tax matters for himself and Georgia, whose participation appears to have been limited to signing the declaration and her own returns. All tax payments were made by check drawn upon their joint checking account, and only Donald signed checks at his office in excess of $500. However, no payment whatever was made upon the $24,000 estimated 1945 tax, either at the time the declaration was filed or in response to the routine quarterly notices of installments due or in any other manner at any other time. Yet, when Donald signed his return for 1945 in the following year, reporting his one-half of the community income and showing a tax in the amount of $12,773.67, he claimed a credit of $12,000 against that tax based upon his one-half of the $24,000 estimated tax on the joint declaration which in fact had not been paid. It is incredible to us that this was merely an oversight or carelessness.
Here was a man with net earnings of $62,994.96 from the practice of medicine ($83,547.26 receipts minus $20,552.30 business deductions), in effect making a representation on his return that $24,000 in estimated tax in respect of those earnings had been paid in behalf of himself and his wife. We find it utterly beyond belief that he thought that the $24,000 had been paid. Its very magnitude in relation to his earnings, and the magnitude of the checks required to discharge that obligation in relation to other checks drawn by petitioner repels the notion that Donald was unaware of the nonpayment of the estimated tax.
The evidence shows that the accountant, Field, prepared the returns for Donald and Georgia, and a substantial portion of testimony before us related to Field's possible sources of information for the representation on the returns that the estimated tax had been paid. And although the matter was not conclusively resolved, the evidence is strong indeed that Donald was the source. Counsel's suggestion that the bookkeeper may have been the source is unacceptable. While the record shows that Field may have obtained some information from the bookkeeper in preparing the returns, it is entirely unreasonable to assume that she told him that $24,000 had been paid in respect of the joint declaration. Since Donald's records were maintained by the bookkeeper on the cash basis there were plainly no entries by her showing any such payment, and it is incredible that she would have given Field any such misinformation. But regardless of where Field got his facts, Donald could have rectified such a flagrantly erroneous statement when he signed his return. The evidence shows that he examined it prior to signing, and we do not accept as worthy of belief any representation that he was unaware of the nonpayment of the estimated tax when he signed the return.
Nor is the matter to be beclouded by the evidence showing that Donald was visited several times by revenue officers in 1945 and that he made various payments of taxes to them. The fact is that Donald and Georgia were delinquent in paying taxes for years prior to 1945, and that these payments were made against their liabilities for such prior taxes. Whether such payments be considered individually or in the aggregate, the amounts were wholly unrelated to the $24,000 estimated tax for 1945, and we find it unreasonable to conclude that Donald could in any was have confused those payments with his obligations in respect of the 1945 declaration of estimated tax. The argument based upon those payments is but another example of the familiar red herring.
Donald's readiness to pervert the truth is further confirmed, if any confirmation be thought necessary, by his sworn verification of the original and amended petitions submitted to this Court as recently as November 1962 in which the flat representation was made that he paid the amount of each installment of the estimated tax on or before the due date thereof. This cannot be brushed aside as mere lawyer's jargon. It was a serious and solemn representation that the estimated tax had been paid when in fact it had not been paid, and when, as late as November 1962, Donald surely knew it had not been paid.
We have found as a fact that Donald's 1945 return was false and fraudulent with intent to evade tax. The deficiency notice as to him was therefore timely.
The matter of fraud in respect of Georgia's return presents an entirely different problem. The record affirmatively shows that Georgia had very little to do with her return apart from signing it and strongly suggests that she knew very little about its contents. The Government's effort to pin fraud upon her personally is based upon the contention that since all checks for taxes were drawn upon the joint account of the Corbetts, she must have known that the estimated tax had not been paid. However, there is no indication that she in any way examined the return before signing it, that she in fact was aware of its contents, or that she was sufficiently familiar with the joint checking account to know what checks her husband had drawn against it. We think that to the extent that fraud must be proved against Georgia the Government has failed to carry its burden and we have therefore not made any finding in its favor in respect thereof. In the circumstances, the deficiency notice against her was untimely.
To be sure, we could find fraud on the part of Donald in respect of her return. Both returns reported Donald's earnings from the practice of medicine, and it was he who handled both returns together. The same fraud that we found in relation to his return is equally applicable to her return. Thus, since he was acting in her behalf there might be room for an argument that the principal is chargeable with the fraud of the agent. Cf. Botwinik Brothers of Mass., Inc., 39 T.C. 988; but cf. Harold B. Franklin, 34 B.T.A. 927, 942; Estate of Helene Simmons, 26 T.C. 409; Estate of Howard T. Roe, 36 T.C. 939. Such an argument might be particularly appealing here where Donald is Georgia's sole devisee and legatee and would thus be the sole beneficiary of his own fraud, contrary to the familiar principle that a wrongdoer will not be permitted to profit by his own wrong. However, no such issue was presented to us, it being assumed by the Government that it was essential to prove Georgia's personal fraud. In this it has failed.