Summary
holding that if a taxpayer executes a consent after the expiration of the 3–year limitations period, the Commissioner bears the burden of proving that a longer limitations period applies and that the consent was obtained within such longer period
Summary of this case from Carpenter Family Invs. LLC v. Comm'r of Internal RevenueOpinion
Docket No. 49090.
1956-01-26
RALPH ROMINE, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
C. J. Lambert, Esq., for the petitioner. Thomas A. Steele, Jr., Esq., for the respondent.
C. J. Lambert, Esq., for the petitioner. Thomas A. Steele, Jr., Esq., for the respondent.
1. On December 8, 1949, petitioner and respondent executed consent agreements (Form 872) which provided that taxes due under petitioner's 1945 and 1946 returns might be assessed at any time on or before June 30, 1951. With respect to 1945, this consent was executed more than 3 but less than 5 years after the return for that year was filed. The consent with respect to 1946 was executed within 3 years after the 1946 return was filed. Additional consents to extend the time of assessment under either return to June 30, 1953, were subsequently executed by the parties. The statutory notice of deficiency was sent to petitioner under date of March 9, 1953. The waivers were introduced into evidence as a part of Exhibits A and B, without objection, but without separate identification. Upon respondent's motion, which was granted, a further hearing was held at which said waivers were reintroduced into evidence. Held, that such waivers are properly a part of the record before us for consideration. Held, further, upon consideration of said waivers relating to the year 1946, that the statute of limitations does not bar assessment for that year.
2. Petitioner did not omit from gross income in his 1945 return an amount properly includible therein in excess of 25 per centum thereof within the meaning of section 275(c), I.R.C. 1939. Held, that assessment of deficiency for 1945 is barred by limitations.
3. Petitioner owned and operated a farm and shared crops on farms owned by each of his parents. Records of his farming transactions during the years 1945 and 1946 (with the exception of canceled checks and bank records) were lost or discarded by him after returns for those years were filed. During the years in question, petitioner deposited in his bank account substantially more money than he can now account for (a) as gross receipts reported in his tax returns for those years, or (b) as items not includible in gross income. Held, that determination of unreported income by the bank deposit method is proper under the circumstances.
4. Petitioner failed to report in returns filed for the years in question certain costs of purchased livestock sold by him during those years. Held, that such unreported costs are deductible from the gross receipts attributable to such sales in determining gross profits from farming.
5. Petitioner and a livestock wholesaler dealt with each other under a well established practice that petitioner would collect at his convenience in person for livestock sold to the latter at any time after delivery. There is no evidence that there was every any dispute between them concerning amounts due, or that petitioner's requests for payment were ever refused. On December 30, 1946, a shipment of hogs was sold by petitioner to the wholesaler who entered the purchase on its books as of that day and reported payment therefor in its 1946 tax return. On January 2, 1947, the first time petitioner was present at the wholesaler's place of business following the sale, he received payment by check dated that day. Held, that the payment was constructively received by petitioner in 1946 and was subject to tax in that year, taxpayer having failed to meet the burden of proof to the contrary.
6. Held, in the absence of evidence of cost or other basis to the donor, that petitioner has not established that an expense deduction is allowable for corn donated to him which he fed to his livestock.
7. Petitioner's son was on active Army duty during 1946 until July 4. Thereafter, until he left for college in mid-September of that year, he performed 700 hours of farming services for petitioner. There was no agreement that the son was to be paid for his services. Held, in the absence of evidence to the contrary, that respondent's determination that the son was not a dependent within the meaning of section 25(b)(3), I.R.C. 1939, is sustained. Held, further, that petitioner's expenditures on the son's behalf for clothing, insurance, and college were of a personal or family nature and not payments for services rendered.
8. Respondent determined that the deficiency in tax for 1946 was due in part to petitioner's negligence. Held, on the facts, that petitioner failed to meet his burden of proof to the contrary.
Respondent determined deficiencies and additions to income tax under section 293(a) of the Internal Revenue Code of 1939 as follows:
+--------------------------------+ ¦ ¦ ¦5 per cent ¦ +------+------------+------------¦ ¦Year ¦Deficiency ¦penalty ¦ +------+------------+------------¦ ¦1945 ¦$1,658.24 ¦$82.91 ¦ +------+------------+------------¦ ¦1946 ¦1,708.67 ¦85.43 ¦ +------+------------+------------¦ ¦Totals¦$3,366.91 ¦$168.34 ¦ +--------------------------------+
The issues presented are: (1) Whether the statue of limitations on assessments had run at the time of the issuance of the statutory notice of deficiency; (2) whether respondent's determination of unreported income by the bank deposit method was proper under the circumstances; (3) whether payment in 1947 for hogs sold in 1946 was constructively received and therefore subject to tax in the earlier year; (4) whether an amount attributable to corn donated to petitioner by his parents and fed to livestock during 1946 is allowable as an expense deduction; (5) whether petitioner's son was a dependent during 1946 or whether an expense deduction is allowable in 1946 for wages paid to him by petitioner; and (6) whether part of the deficiency determined by respondent is due to petitioner's negligence.
FINDINGS OF FACT.
Petitioner is a farmer who resides on his 140-acre farm 6 miles northeast of Keota, Iowa. He filed timely income tax returns on a cash basis for the years 1945 and 1946 with the then collector of internal revenue for the district of Iowa.
Each return bears the following handwritten notation in the space on the return for the signature of the person (other than taxpayer or agent) preparing return: ‘Assisted in office of Attorney B. J. Byrne.’ Petitioner kept records of his farming and livestock activities but he lost or discarded them all, with the exception of canceled checks and bank statements, after each year's tax return was filed.
In addition to farming his own land during the years in question, petitioner farmed an 80-acre tract owned by his mother and a 160-acre tract owned by his father. The understanding between petitioner and each of his parents was that he would provide labor and machinery, that the parent would provide half of the seed corn and all of the grass seed, and the crops would be split evenly between them.
During the years in question, petitioner maintained a checking account with the Farmers Savings Bank of Keota, Iowa. He also borrowed money from this bank by giving promissory notes and by issuing overdrafts on his account during the years in question. It was petitioner's practice to have a bank official make out the deposit slip whenever he wished to make a deposit. The items to be deposited were listed on the slip by the official who subtracted from the gross deposit the amounts, if any, which petitioner then withdrew in cash or which the bank then withheld to be applied on petitioner's indebtedness. The resulting net deposit was credited to petitioner's account. Petitioner's gross deposits during the years in question were determined as follows:
+------------------------------------------+ ¦ ¦1945 ¦1946 ¦ +--------------------+----------+----------¦ ¦Net deposits ¦$37,397.33¦$40,327.07¦ +--------------------+----------+----------¦ ¦Plus: Cash withdrawn¦581.89 ¦555.62 ¦ +--------------------+----------+----------¦ ¦Amounts withheld ¦3,031.60 ¦2,507.08 ¦ +--------------------+----------+----------¦ ¦Gross Deposits ¦$41,010.82¦$43,389.77¦ +------------------------------------------+
There were a number of items deposited in petitioner's bank account during the years in question which are not includible in his gross income. These items are as follows:
(a) During 1945, petitioner borrowed $7,000 from the Farmers Savings Bank of which $6,000 was deposited in his account. During 1946, $5,000 was so borrowed and deposited.
(b) A gift of $200 from his father was deposited by petitioner on May 21, 1945.
(c) A gift of $400 from his mother was deposited by petitioner on July 21, 1945.
(d) During 1945, the Standard Livestock Company overpaid petitioner for cattle he had sold them. The overpayment was deposited in his account. On October 11, 1945, petitioner issued that company a check for $205 as a refund on the overpayment.
(e) On April 10, 1946, petitioner deposited a check from his father in the amount of $115. This check was either a gift to petitioner or the repayment for grass seed purchased by petitioner on his father's behalf. Petitioner did not claim cost of grass seed purchased by him on behalf of his parents as an expense deduction in his 1945 and 1946 tax returns.
(f) On June 17, 1946, petitioner deposited a check from his father in the amount of $194.88 which was to repay petitioner for grass seed purchased by him on his father's behalf.
(g) During each year petitioner purchased horses on behalf of friends and neighbors, and he was subsequently reimbursed therefor without gain. All checks for reimbursement were deposited in petitioner's bank account. Allowances for such deposits are discussed further below. See schedule D and note thereto, infra.
A recapitulation of deposits are which are not includible in petitioner's gross income is as follows:
+----------------------------------------------+ ¦SCHEDULE A ¦ +----------------------------------------------¦ ¦Nontaxable Deposits ¦ +----------------------------------------------¦ ¦Item ¦1945 ¦1946 ¦ +-----------------------------+------+---------¦ ¦Borrowed funds, (a) above ¦$6,000¦$5,000.00¦ +-----------------------------+------+---------¦ ¦Gift, (b) above ¦200 ¦ ¦ +-----------------------------+------+---------¦ ¦Gift, (c) above ¦400 ¦ ¦ +-----------------------------+------+---------¦ ¦Cattle overpayment, (d) above¦205 ¦ ¦ +-----------------------------+------+---------¦ ¦Check from father, (e) above ¦ ¦115.00 ¦ +-----------------------------+------+---------¦ ¦Seed repayment, (f) above ¦ ¦194.88 ¦ +-----------------------------+------+---------¦ ¦Totals ¦$6,805¦$5,309.88¦ +----------------------------------------------+
It was petitioner's practice to sell hogs to J. W. Stewart and Sons, a firm located in Keota, Iowa. Usually the hogs were picked up at petitioner's farm and delivered to the firm by a commercial trucker, and petitioner subsequently was given a check in payment for the hogs whenever he next went in person to the company's office. Frequently, petitioner would not collect for the hogs until a few days after they had been delivered.
On December 30, 1946, petitioner contracted to sell hogs to the Stewart firm and the hogs were delivered to Stewart that day by a commercial trucker. Had petitioner gone to the Company's office at any time thereafter, he could have received its check in payment for the hogs. Petitioner, however, did not go into town during business hours on or after December 30, 1946, until January 2, 1947, at which time he received a check dated that day from the Stewart firm in the amount of $1,214.40 in payment for the hogs. The company entered the transaction on its books as of December 30, 1946, and reported the cost of the hogs in its 1946 income tax return. Petitioner reported the receipts from the sale in his 1947 return. Respondent determined that the payment was taxable to petitioner in 1946.
In the returns filed for the years in question petitioner reported receipts from various sources in the total amounts of $28,598.81 and $32,730.39 respectively. Petitioner's total unreported gross receipts are as follows:
+-----------------------------------------------------------------------------+ ¦SCHEDULE B ¦ +-----------------------------------------------------------------------------¦ ¦Unreported Gross Receipts ¦ +-----------------------------------------------------------------------------¦ ¦Item ¦1945 ¦1946 ¦ +---------------------------------+---------------------+---------------------¦ ¦Gross deposits, supra ¦ ¦$41,010.82¦ ¦$43,389.77¦ +---------------------------------+----------+----------+----------+----------¦ ¦Plus: Sale to J. W. ¦ ¦ ¦ ¦ ¦ +---------------------------------+----------+----------+----------+----------¦ ¦Stewart & Sons ¦ ¦ ¦ ¦1,214.40 ¦ +---------------------------------+----------+----------+----------+----------¦ ¦Less: Reported receipts ¦$28,598.81¦ ¦$32,730.39¦ ¦ +---------------------------------+----------+----------+----------+----------¦ ¦Nontaxable deposits (from Sch. A ¦6,805.00 ¦ ¦5,309.88 ¦ ¦ ¦above) ¦ ¦ ¦ ¦ ¦ +---------------------------------+----------+----------+----------+----------¦ ¦ ¦ ¦35,403.81 ¦ ¦38,040.27 ¦ +---------------------------------+----------+----------+----------+----------¦ ¦Unreported gross receipts ¦ ¦$5,607.01 ¦ ¦$6,563.90 ¦ +-----------------------------------------------------------------------------+
In his tax returns for 1945 and 1946, petitioner failed to report the cost of certain livestock purchased by him which livestock was sold during the years in question. These costs are as follows:
(1) On November 24, 1944, petitioner purchased 40 gilts (young sows) which he used for breeding purposes. About half of these gilts were sold in 1945 and the remainder in 1946. The sale of half is attributable to each of the said years.
Petitioner paid $1,200 for the gilts, and this livestock cost was not reported in any of his tax returns. One-half of such cost, or $600, is attributable to each of said years.
Some of the unreported livestock costs are attributable to horses purchased by petitioner on behalf of friends and neighbors during the years in question. Although checks to reimburse petitioner for these horses were deposited in his bank account, we are unable to determine the precise amount of these nontaxable deposits. See paragraph (g) above. Accordingly, they are reflected in petitioner's unreported gross receipts. Since the costs of such horses are included above in unreported livestock costs, however, the reimbursement checks are thereby eliminated from the unreported gross profits determined for each year.
The potential margin of error in so attributing the sales as between the 2 years is too slight to have a material effect upon our ultimate determination. 2. It is noted that petitioner reported in his 1945 return losses from the sale or exchange of capital assets in the total amount of $124.50. Since ‘capital losses form no part of the gross income, ‘ Leslie H. Green, 7 T.C. 263, 277, affd. 168 F.2d 294, no consideration has been given to them in the instant case.
(2) During the month of December 1944, petitioner purchased some horses which he sold during 1945 and for which he paid partly in cash (see paragraph (4) infra) and partly by check. The checks were in the total amount of $490 which amount was not reported in any of petitioner's tax returns.
(3) During 1945, petitioner purchased other horses which he also sold during that year. These horses were also paid for partly in cash (see paragraph (4) infra) and partly by check. The checks issued by petitioner for this purpose during 1945 were in the total amount of $4,964.37. In his 1945 return, petitioner reported only $4,508 as the total cost (cash and checks) of horses sold by him during that year. The difference between the total reported cost and that part of the actual cost paid by petitioner by check, $456.37, is additional cost of livestock sold during 1945.
(4) During 1945 petitioner sold 110 horses which had been purchased by him during December 1944 and 1945. In purchasing half of these horses, petitioner had given the seller a cash deposit in the average amount of $7.50 per horse and had paid the balance by check. The total amount of cash paid out by petition, $412.50, is additional livestock cost which was not reflected in his reported costs for 1945 for which adjustment was made in paragraph (3) above.
(5) During 1946 petitioner purchased 246 horses partly for cash and partly by check, which horses he also sold during that year. The checks issued for this purpose were in the total amount of $12,096.43. In his 1946 return, however, petitioner reported only $11,102.50 as the total cost (cash and checks) of horses sold by him during that year. The difference, $993.93, is additional livestock cost.
(6) In 1946, as in 1945, petitioner made an average cash deposit of $7.50 per horse for half of the horses which he purchased. Thus, $922.50 is additional livestock cost which was not reflected in his reported costs for 1946 for which adjustment was made in paragraph (5) above.
A recapitulation of petitioner's unreported cost of livestock sold during the years in question is as follows:
+---------------------------------------------------------------------------+ ¦SCHEDULE C ¦ +---------------------------------------------------------------------------¦ ¦Unreported Livestock Costs ¦ +---------------------------------------------------------------------------¦ ¦Item ¦1945 ¦1946 ¦ +-------------------------------------------------------+---------+---------¦ ¦Gilts, (1) above ¦$600.00 ¦$600.00 ¦ +-------------------------------------------------------+---------+---------¦ ¦Horses acquired in 1944, (2) above ¦490.00 ¦ ¦ +-------------------------------------------------------+---------+---------¦ ¦Unreported horse costs paid by check, (3) and (5) above¦456.37 ¦993.93 ¦ +-------------------------------------------------------+---------+---------¦ ¦Unreported horse costs paid in cash, (4) and (6) above ¦412.50 ¦922.50 ¦ +-------------------------------------------------------+---------+---------¦ ¦Totals ¦$1,958.87¦$2,516.43¦ +---------------------------------------------------------------------------+
Petitioner's unreported gross profits during the years in question, determined by subtracting the above unreported livestock costs from unreported gross receipts, are as follows:
+-----------+ ¦SCHEDULE D ¦ +-----------¦ ¦ ¦ ¦ ¦ +-----------+
Unreported Gross Profits 1945 1946 Unreported gross receipts, Schedule B above $5,607.01 $6,563.90 Unreported livestock costs, Schedule C above 1 1,958.87 2,516.43 Total unreported gross profits $3,648.14 $4,047.47
Petitioner reported in his returns for 1945 and 1946 net farm profit of $2,648.55 and $2,854.17, respectively. He reported as his farming gross profit (after deducting reported livestock costs from his reported gross receipts) $16,339.35 and $17,107.39, respectively. He reported in his 1946 return additional gross income of 59 cent attributable to the sale of a pickup truck held for more than 6 months. The amounts of gross income stated in his returns for the years in question are, therefore, as follows:
+-------------------------------------------+ ¦ ¦1945 ¦1946 ¦ +---------------------+----------+----------¦ ¦Reported gross income¦$16,339.35¦$17,107.98¦ +-------------------------------------------+
During 1945 and 1946, petitioner's parents gave him 500 and 550 bushels of corn, respectively, which petitioner fed to his livestock. The fair market value of the corn at the time of each gift was not less than $1.50 per bushel, or $750 and $825, respectively. No amount attributable to the corn was claimed by petitioner as a farm expense on his tax return for either year involved herein.
During 1946, until July 4 thereof, petitioner's son, Roger, was on active duty with the United States Army. Between July 4 and mid September 1946, when he left the farm to go to college, Roger performed 700 hours of farm services for petitioner. Such services were worth $1 per hour. There was no agreement or understanding between them that Roger would be paid for his services.
After Roger returned home from the Army, petitioner spent $150 to buy him new civilian clothing. By check dated August 16, 1946, petitioner paid an insurance premium for Roger in the amount of $322.30. By check dated September 7, 1946, he paid $140 to Central College in Roger's behalf. By check dated October 4, 1946, petitioner gave Roger $30. No part of any of these expenditures was payment to Roger for services rendered to petitioner.
On December 8, 1949, petitioner and respondent executed consent agreements (Form 872) in which petitioner agreed that taxes due under his 1945 and 1946 returns might be assessed at any time on or before June 30, 1951. With respect to 1945, this consent was executed more than 3 but less than 5 years after the return for that year was filed. The consent with respect to 1946 was executed within 3 years after the 1946 return was filed. Additional consents to extend the time of assessment under either return to June 30, 1953, was subsequently executed by the parties. The notice of deficiency sent to petitioner in the instant case is dated March 9, 1953.
Petitioner did not omit from gross income in 1945 an amount properly includible therein which is in excess of 25 per centum of the amount of gross income stated in the 1945 return.
OPINION.
FISHER, Judge:
Respondent determined deficiencies in petitioner's income taxes for 1945 and 1946 and further determined that such deficiencies were due in part to petitioner's negligence, applying to such deficiencies the 5 per cent additions provided for in section 293(a). Petitioner's first contention is that assessment is barred for both of the years by the statute of limitations.
The statutory notice of deficiency for both years, 1945 and 1946, was sent on March 9, 1953. Petitioner, by appropriate pleading, raised the issue of limitations. Respondent, by way of answer, affirmatively alleged the timely execution of waivers in respect to 1946 within 3 years of the filing of the return for that year, and in respect to 1945 within 5 years of the filing of the return for such year (under the provisions of section 275 (c)), extending the period of limitations for both years to June 30, 1953.
Immediately following the opening statements of counsel at the trial herein, petitioner's returns for 1945 and 1946, with copies of the alleged waivers for such years attached, were admitted into evidence. The pertinent portion of the transcript is as follows:
MR. LAMBERT (counsel for petitioner): If the Court please, Mr. Steele and I agreed the other day, I think, that the Photostatic copies he had of the 1945 and 1946 returns might be entered in evidence. * * *
MR. STEELE: I am offering in evidence respondent's exhibit A pursuant to the suggestion of petitioner's counsel, the petitioner's return for 1945, a Photostatic copy, and a Photostatic copy of his return for 1946, as respondent's exhibit B.
MR. LAMBERT: No objection.
THE COURT: They will be received, I understand, by agreement.
Subsequent to hearing respondent moved to reopen the record for ‘the sole purpose of permitting (him) properly to identify and to offer in evidence separately the written agreements of petitioner and respondent extending the period for assessment of the deficiencies involved herein until June 30, 1953.’ In pertinent part, said motion was as follows:
Moves the Court for an order reopening the record in the above-entitled proceeding for the sole purpose of permitting respondent properly to identify and to offer in evidence separately the written agreements of petitioner and respondent extending the period for assessment of the deficiencies involved herein until June 30, 1953.
5. For the convenience of petitioner, and upon the suggestion of his counsel, at the commencement of petitioner's case in chief herein respondent offered in evidence as Exhibits A and B photostatic copies of petitioner's income tax returns for the years 1945 and 1946, said photostats for each year including photostatic copies of the consecutive consents (Forms 872) executed by petitioner and respondent for the extension of the assessment period to June 30, 1953 * * *. Exhibits A and B were received as offered, by agreement, and with petitioner indicated no objection * * *
6. In a conference between respondent's and petitioner's counsel held several days before the instant trial, the photostatic copies of petitioner's returns and of the consents (Forms 872) for the years 1945 and 1946 (associated and attached together precisely as they now are as respondent's Exhibits A and B, respectively), were examined and agreed to by petitioner's counsel * * *.
7. The fact that during the hearing apparently neither petition nor respondent considered that there was any remaining question concerning the agreement between the parties to extend the assessment period with respect to the year 1945— the only year relating to which the statute of limitations had been raised in the pleadings * * * (until amendment thereof subsequent to) is strongly indicated by the absence of any reference to said subject in the opening statement of either party, by petitioner's failure to object to the composition or contents of Exhibits A and B and by petitioner's failure to specify in the record the dates when his 1945 and 1946 returns were filed * * *
8. At the hearing respondent did not specifically refer to those portions of Exhibits A and B which consist of photostatic copies of the consents or agreements to extend the assessment period for the years 1945 and 1946; and he did not have petitioner identify said agreements by acknowledging his signature thereon;
9. In his original brief * * * and again in his reply brief * * * petitioner still argues the statute of limitations question; in fact, on page 21 of his reply brief petitioner suggests that said consent agreements extending the assessment period may have been added to Exhibits A and B after they had been received in evidence;
10. To correct any technical defect existing in the record with respect to whether the above-described consent agreements are properly in evidence as parts of Exhibits A and B, the Court is respectfully requested to order that the record be reopened for the sole purpose of permitting respondent properly to identify and separately to offer in evidence the respective consent agreements (Forms 872) which are now affixed to Exhibits A and B. Cf. Commissioner v. Estate of J. B. Williams et al (C.A. 4, 1954) 216 F.2d 598;, — A.F.T.R.— ; Griffiths v. Commissioner (C.C.A. 7th 1931) 50 F.2d 782; 10 A.F.T.R. 106.
By answer thereto petitioner resisted the granting of said motion, which we, nevertheless, granted to the extent indicated in the part of our order reading as follows:
ORDERED: That this case is re-opened for the limited purposes set out in paragraph ‘10.‘ of the respondent's said motion, with the additional rights and reservations to petitioner made by the Court at said hearing and which will be found in the transcript of the hearing, * * *
Thereafter, at a separate hearing, respondent introduced into evidence the originals of the consent agreements purportedly executed by petitioner and Roy Barber, chief of the Internal Revenue Service field auditing branch for the State of Iowa, testified that such documents were taken from the files of the Service and that what purports to be petitioner's signature appears thereon. Barber was not personally present at the time the instruments were allegedly signed by petitioner. Petitioner's counsel objected to the admission of the consents and was overruled. Photostatic copies of duplicate-originals were then substituted therefor, being the instruments originally submitted into evidence in this proceeding attached as part of Exhibits A and B (petitioner's returns for 1945 and 1946).
Petitioner's counsel seems to suggest first that because the original transcript (pertinent portions of which have been set out, supra) does not indicate that the consents (the photostatic copies of the duplicate-originals) were physically attached to the returns when the latter were accepted in evidence, he is not sure they were so attached. The onus of such intimation clearly falls upon petitioner. When in the normal course of a proceeding before this Court exhibits are admitted in evidence and retained in our files just as they were so admitted, and finally come before us as in the instant case, with the consents attached to the returns, we think that there can be little, if any, doubt, that they were first admitted in just such form as they ultimately appear in our files. We do not think that petitioner's counsel has any basis for believing that respondent has had or availed himself of the opportunity to add pages to an exhibit which was not within his custody but ours. If petitioner or his counsel persist in such belief, they must establish the basis therefor if they expect to benefit from their position.
The second argument urged on behalf of petitioner is likewise without foundation. It appears to be advanced earnestly, however, and we deal with it accordingly. Petitioner asserts that respondent could not, under our order, offer into evidence at the reopened hearing the originals of the photostatic copies of the duplicate-originals attached to the 1945 and 1946 returns or otherwise prove at that time any agreements or obtain acknowledgment of the signatures thereon. He contends that our order only ‘gave the respondent the privilege of correcting any technical defects existing in the record with respect to whether the (aforementioned) consents and agreements (were) properly in evidence’ wither alone or as parts of Exhibits A and B (the 1945 and 1946 returns). We think that a cursory reading of our order belies such construction. The order plainly indicates that the purposes for which the record may be reopened are those expressed in paragraph 10 of the respondent's motion. This obviously means for all of the purposes there expressed. The manner of reference and expression of the scope of the order was merely a convenient means of granting what the respondent requested without unduly laboring the order.
Having been permitted to reopen the record for the particular purposes heretofore outlined, respondent proceeded at the time of hearing in the manner indicated supra. Our order plainly permitted respondent to ‘identify and separately to offer in evidence the respective consent agreements * * * (then) affixed to Exhibits A and B.’ The respondent did so by first introducing into evidence the original consent agreements and identifying them as such taken from the files of the Internal Revenue Service. He then substituted therefor the photostatic copies of the duplicate-originals previously attached to Exhibits A and B.
Petitioner further contends, however, that the consent agreements so introduced were not properly admitted since they were not ‘properly . identified.’ In essence, petitioner argues that respondent did not prove the validity of Romine's signature on the consent agreements by offering the testimony of a witness who knew his signature, or by expert testimony based upon comparison of the signature on the consents with signatures known to be those of Romine, or by calling to the stand Romine (who was then in the courtroom) to identify such signatures.
Since respondent established through the witness Barber that the documents were taken from the files of the Internal Revenue Service, and purported to be signed by petitioner, and since the waivers were regular on their face, we think a sufficient foundation was laid for their admission into evidence. In this connection, in Wausau Sulphate Fibre Co. v. Commissioner, (C.A. 7, In this connection, in Wausau Sulphate Fibre Co. v. Commissioner, (C.A. 7, 1932) 61 F.2d 879, affirming a Memorandum Opinion of the Board of Tax Appeals, the Court, under circumstances resembling those of the instant case, said (page 880):
Where the paper is regular in form and is in possession of the proper government bureau, it is presumptively genuine and therefore admissible in evidence. * * *
In McCormick on Evidence, ch. 22, sec. 191, p. 403 (1954), the author says, in part:
If a writing purports to be an official report or record and is proved to have come from the proper public office where such official papers are kept, it is generally agreed that this authenticates the offered document as genuine. This result is founded on the probability that the officers in custody of such records will carry out their public duty to receive or record only genuine official papers and reports. * * *
See also Concrete Engineering Co. v. Commissioner, (C.A. 8, 1932) 58 F.2d 566, and Ennals Waggaman, 29 B.T.A. 473 (1933), affd. (C.A., D.C., 1935) 78 F.2d 721.
We do not find it necessary, however, to rest our decision solely upon the foregoing. We have carefully examined the signatures (admittedly those of petitioner) on the petition, amended petition, and photostatic copies of income tax returns, and have compared them with the signatures appearing on the photostatic copies of the consent agreements, and we have no doubt that the latter as well as the former are the signatures of petitioner. In this connection, in Wausau Sulphate Fibre Co., supra, the Court of Appeals said (again at page 880):
If it be deemed that further proof of the genuineness of the waivers was necessary, the record afforded such proof. In the files of the case there were several original papers of the taxpayer, including the petition itself, whereon the signature of the taxpayer's president appears. These files were of course before the Board, which then had opportunity for comparison of the signature thereon with those on the waivers purporting to be by the same president. When the Board found, as it did, that the taxpayer made the waivers, it had before it the evidence which was afforded by these signatures. Such comparisons with the signature on documents admittedly in the files may properly be made by the trier of the facts. 37 Stat. 683, 28 USCA 638; Citizens' Bank & Trust Co. of Middlesboro, Ky., v. Allen (C.C.A.) 43 F.(2d) 549; Smythe v. New Providence Tp., Union County, N.J. (C.C.A.) 263 F. 481.
On the basis of the foregoing, we have no doubt that the consents were properly admitted into evidence. We are likewise convinced that the signatures, he would have called petitioner (who was, as shown by the record, in the courtroom) to the stand to deny that they were genuine, and to demonstrate to the Court his own proper signature.
Since we have held that the consent agreements are genuine and properly a part of the record before us, it is apparent that assessment for the year 1946, for which consents were signed within 3 years from the filing of the return— and within which period of extension the deficiency notice was mailed, is not barred. Other issues relevant to the deficiency and the penalty will be considered below.
With respect to the year 1945, for which consents were first signed more than 3 years but less than 5 years after the filing of the return, we must further consider whether there has been an omission from gross income of an amount properly includible therein in excess of 25 per cent of the amount of gross income stated in the return, in accordance with the provisions of section 275(c). Here, the burden of proof is upon the respondent. Lois Seltzer, 21 T.C. 398 (1954).
Respondent's determination of unreported income is based on application of the so-called bank deposit method. Petitioner was unable to produce any books or records for the investigating agents, other than canceled checks and bank statements, or to account for a substantial portion of the discrepancy between the total amount of his gross deposits and his reported gross receipts for each year. Application of the bank deposit method was proper in the circumstances of this case.
In schedule A of our Findings of Fact, we have compiled all of the items deposited to petitioner's bank account which were established not to be properly includible in his gross income for the years in question. In schedule B we adjusted petitioner's gross deposits to reflect these nontaxable items in determining the amounts of his unreported gross receipts for the years in question. In the absence of any evidence to justify attributing the remaining unreported amounts to other sources, we hold that petitioner has not sustained his burden of proving that such amounts were other than additional receipts from his farming activities. Halle v. Commissioner, (C.A. 2, 1949) 175 F.2d 500, affirming 7 T.C. 245.
The amount of gross income stated in petitioner's return for 1945 is the amount of ‘gross profits' reported therein, in the amount of $16,339.35. See Regs. 111, sec. 29.22(a)-7; McCulley v. Kelm, (D. Minn., 1953) 112 F.Supp. 832; H. Leslie Leas, 23 T.C. 1058 (1955); John E. Goodenow, 25 T.C. 1 (9155).
It is clear from the record that petitioner during 1945 deposited in his bank account $5,607.01 more than he can account for either as gross receipts reported in his return or an nontaxable items, (see schedule B, supra). Such amounts represents unreported receipts, as we have held. Gross receipts in the case of a farmer, however, are not equivalent to ‘gross income’ within the meaning of section 275(c) to the extent that such receipts from the sale of purchased livestock are other than profits from such sales. Cost or other basis of such livestock which is sold must be subtracted from the sales receipts. The amount of unreported receipts attributable to sales of purchased livestock, therefore, must be reduced to reflect any unreported costs of such livestock.
Petitioner herein has proved that he failed to report in his 1945 return a total amount of $1,958.87 representing additional costs of hogs and horses sold by him during that year (see schedule C of our Findings of Fact). Respondent, who has the burden of proof in this regard, on the other hand has not shown that the unreported receipts were derived from sources other than sales of purchased livestock, nor does he so contend. We note that petitioner's 1945 return discloses that over two-thirds of his reported receipts were derived from sales of purchased livestock. We believe, therefore, in the absence of evidence to the contrary, that we may reasonably infer that some unreported receipts are attributable to sales of purchased livestock during 1945, and that such receipts are in an amount not less than the unreported additional costs of such livestock. The amount of unreported gross receipts of $5,607.01 must thus be reduced by the unreported additions cost of the livestock sold, or $1,958.87, leaving an amount of $3,648.14 as unreported gross profits.
The amount of unreported additional livestock costs include $600 and $490 for gilts and horses, respectively, which were purchased in 1944 but sold by petitioner during 1945. Though petitioner reports on the cash basis, he is, nevertheless, required to deduct such costs from the sales price in the year in which the sale takes place. See D. E. Alexander, 22 T.C. 234. We have considered these livestock costs as a part of the total of such costs paid by petitioner during the year in question in determining the above-set-forth amount of unreported gross profits. It is immaterial that the payment of the costs in 1944 was not out of the unreported gross receipts as reflected by the unaccounted-for bank deposits made during 1945. The bank deposits during 1945 are evidence of petitioner's unreported gross receipts during that year, but those receipts must be adjusted as above indicated in order to determine the amount of unreported gross income ‘properly includible’ in the return for that year.
Since the above-determined amount of $3,648.14, representing unreported gross profits (income) ‘properly includible therein’ within the meaning of section 275(c), is less than $4,084.98, an amount which is 25 per centum of the reported gross income, respondent has failed to meet his burden of proof. The statute of limitations on assessment had run at the time of the issuance of the statutory notice deficiency as to the year 1945, and we hold that there is no deficiency in tax or penalties for that year. Sec.1117(e).
We return now to the remaining substantive issues before us with respect to the amount of the deficiency for the year 1946. An amount of $1,214.40 was first collect by petitioner on January 2, 1947, but respondent has determined that such amount, representing payment for hogs sold by petitioner to J. W. Stewart and Sons on December 30, 1946, was includible in petitioner's income in 1946. We agree with respondent's determination in this respect for the reasons set out below.
The sales price for the sale of livestock by petitioner to the Stewart firm was always arranged beforehand. Such livestock was then delivered to the company either by petitioner or by a commercial trucker. Petitioner would thereafter collect in person from the company at his convenience. Such was petitioner's long standing practice. There is no evidence that there was ever any dispute between the parties concerning amounts due petitioner for any transactions conducted in this manner, or that the company ever refused full payment to petitioner upon his request therefor.
As far as the specific transaction here involved is concerned, the hogs were sold to the Steward firm on December 30, 1946, and were delivered to it by a commercial trucker. Petitioner did not follow the hogs and request payment that day, though if he had done so and gone to the company to request payment on that day or during business hours the following day (December 31, 1946), he would have collected the sales price in full. Petitioner did not, in fact, go into town during business hours until January 2, 1947, at which time he received a check dated that day from the company in payment for the hogs. The check was deposited in his bank account and he reported the amount in his 1947 income tax return as a portion of his 1947 sales of livestock raised. The Stewart Company entered the transaction on its books as of December 30, 1946, and reported the payment for the hogs in its tax return for 1946.
In the particular circumstances of the instant case, we think that petitioner constructively received such payment in 1946.
The doctrine of constructive receipt is well established (Regs. 111, sec. 29.42-2, Ross v. Commissioner, (C.A. 1, 1948) 169 F.2d 483), and is to the effect that income which is unqualifiedly available and subject to the demand of a cash basis taxpayer is treated as having been received at the time it became so available regardless of the time of actual receipt. We think that the circumstances of the instant case fall within the ambit of that rule. The purchase from petitioner was entered on Stewart's books on December 30, 1946. The company was both willing and able to make payment to the petitioner that day. Petitioner, however, did not seek payment until January 2 of the following year. Petitioner obviously controlled completely the time of collection of the matured right to income which he could have obtained upon request. Under such circumstances, we think it evident that petitioner has not satisfied his burden of proving that the money was not unqualifiedly available to him and subject to his demand in 1946.
While application of the doctrine of constructive receipt depends in each case upon the particular circumstances involved, the basic principles to be applied have been frequently expressed. In Loose v. United States, (C.A. 8, 1934) 74 F.2d 147, the taxpayer was physically incapacitated and could not remove bonds from his safety-deposit box in order to clip and cash the matured interest coupons. It was held, however, that the income was unconditionally available to him and that the reason why the taxpayer did not or was unable to reduce the income to actual possession was irrelevant. The court said (page 150):
However, the strongest reason for holding constructive receipt of income to be within the statute is that for taxation purposes income is received or realized when it is made subject to the will and control of the taxpayer and can be, except for his own action or inaction, reduced to actual possession. The matter is in no wise dependent upon what he does or upon what he fails to do. It depends solely upon the existence of a situation where the income is fully available to him. Here the circumstances are peculiar and perhaps harsh in their consequences, but ‘that it was not convenient and was perhaps physically impossible for him to appear at the offices of the various corporations before the year closed and demand the cash did not destroy his legal right to do so.’ Commissioner of Internal Revenue v. Bingham (C.C.A. 6) 35 F.(2d) 503, 504, certiorari denied 281 U.S. 729, 50 S.Ct. 246, 74 L.Ed. 1146. So far as the income itself was concerned it was entirely available to him and could have been reduced to actual possession and realization.
See Aramo-stiftung v. Commissioner, (C.A. 2, 1949) 172 F.2d 896, affirming on this point 9 T.C. 947.
All of the arrangements for the amount of payment had been made prior to delivery and only the petitioner's own voluntary act of failing to go into town or otherwise arranging for payment upon delivery prevented actual receipt of the funds until 1947. No third party or other outside control or practice delayed such receipt. See Frank W. Kunze, 19 T.C. 29 (1952), affirmed per curiam (C.A. 3, 1953) 203 F.2d 957, where the only reason a check representing a dividend payment was mailed to the taxpayer and receipt thereby delayed until a later year was because of his specific request that the corporation do so and his refusal to accept delivery by any other means. There was no fixed corporate policy which required the corporation to mail all dividends to each of its stockholders, without exception. Compare Avery v. Commissioner, 292 U.S. 210 (1934), where a dividend was payable on December 31, but it was the corporate practice to mail or deliver the dividend checks. Such checks could not have been received by the stockholder until the following year, and no unconditional right to the income existed prior to such receipt. See also Commissioner v. Fox, (C.A. 3, 1954) 218 F.2d 347, affirming 20 T.C. 1094 (1953).
In James E. Lewis, 30 B.T.A. 318 (9134), where the taxpayer obtained a check in 1929 for certain profits, the Board of Tax Appeals held that the petitioner constructively received his portion of the syndicate profits in 1928 at which time funds were available to pay him such profits had he but demanded payment. The transaction giving rise to such profits and the amount thereof was fully completed and computed in 1928. The Board said (page 325):
It is our opinion, * * * that the facts point to but one conclusion, namely, that petitioner could have obtained his portion of the profits by merely asking for them in 1928. That he passively awaited their receipt cannot alter the fact that the proceeds were available. * * *
See also Hine v. Brodrick, (D. Kans., 1951) 99 F.Supp. 582, where the taxpayer sold some wheat and caused the purchaser to delay payment therefor. The purchaser customarily made such payments at the time of sale and was willing and able to pay in full at that time. The District Court held that the taxpayer constructively received the income nonetheless, since the failure to actually receive the money was due entirely to his own volition. There is no evidence that the petitioner herein arranged with the purchaser to delay payment, or delayed receiving payment for any ulterior purpose. We think, nevertheless, that the delay was in fact of his own volition. Under the established practices of the petitioner and J. W. Stewart and Sons, once the price was agreed upon, and delivery made and accepted, the petitioner alone controlled the date of payment. As far as the ate was concerned, he could collect at will.
We hold, under all the circumstances, that the proceeds of the sale of livestock constituted a part of petitioner's unreported gross receipts for 1946.
Petitioner's total unreported gross receipts in 1946 were $6,563.90, including the $1,214.40 received from the sale of livestock. Such amount, however, needs to be reduced by the amount of unreported costs of purchased livestock. Our Findings of Fact in this respect (see schedules C and D) indicate that petitioner's unreported gross profits for 1946 were $4,047.47.
Petitioner contends that in computing the amount of his unreported net income from the farm for 1946, he should also be allowed as a deduction the fair market value of corn given to him by each of his parents during that year. No amount attributable to the corn, which petitioner fed to his livestock in 1946, was claimed by him on his 1946 tax return as a farm expense. The total fair market value of the corn was not less than $825 at the time of the gifts. Petitioner is not entitled to an expense deduction therefor.
While the Cost of feed for livestock is generally allowable as an expense deduction, where the feed is donated to a farmer, as in the instant case, its ‘cost’ for Federal tax purposes is the donee's basis, which is the same as that in the hands of the donor. Sec. 113(a)(2). Catharine G. Shatzer, 3 T.C. 914 (1944). The corn in question was grown by petitioner on land owned by each of his parents under an arrangement whereby the crops were divided evenly between them. The corn, therefore, was in the nature of a portion of each parent's rent for petitioner's use of the land. Since it was stored in cribs on the farms, however, for tax purposes the rental income was never realized by the respective parent. Regulations 111, section 29.22(a)-7, provides in part as follows:
Rents received in crop shares shall be returned as of the year in which the crop shares are reduced to money or the equivalent of money.
In the instant case, the corn was not reduced to money or the equivalent of money, and its value did not become taxable income to the parent who owned it. And the giving of the corn to petitioner did not cause a realization of any income by the donors. See Estate of W. G. Farrier, 15 T.C. 277 (1950); Rev. Rul. 531, I.R.B. 1955-34, 17, clarified in part, I.R.B. 1956-8, 42, revoking I.T. 3932, 1948-2 C.B. 7. The basis of the corn to the donors was its cost to each of them, respectively. Sec. 113(a). There is nothing in the record to indicate any cost to either parent. Petitioner having failed to prove that the basis of the corn in the hands of the parents was other than zero has likewise failed to show any basis therefor in his hands, and no expense deduction is allowable.
We add that if the receipt of the corn by each of petitioner's parents was more in the nature of income from their own use of the land in cooperation with their son than rent received by them for permitting the son to use their land, since the corn was not sold, there was likewise no realization of reportable income. Regs. 111, sec. 29.22(a)-7. Thus, on this theory, neither of them acquired any basis therefor. Cf. Samuel Towers, 24 T.C. 199, 223-224 (1955). See also John L. Seymour, 14 T.C. 1111, 1117 (1950); Maurice P. OMeara, 8 T.C. 622, 632 (1947) (and cases cited therein); Ruth B. Rains, 38 B.T.A. 1189 (1938); Charles A. Collin, 1 B.T.A. 305 (1926). Accordingly, we must find a zero basis in the hands of the petitioner.
The next issue involves petitioner's contentions, in the alternative, that he should either be allowed to claim his son, Roger, as a dependent during 1946, or be allowed an additional expense deduction of at least $700 for wages paid to the boy during that year. Relative to the claim of dependency, the facts of record indicate only that Roger was on active duty with the United States Army until July 4, 1946, and that he was in college, apparently under the so-called G.I. Bill, after mid-September. In the absence of evidence that petitioner furnished over half of Roger's support during the year (petitioner concedes this failure of proof), we sustain respondent's determination that Roger was not a dependent within the meaning of section 25(b)(3).
With respect to petitioner's alternative contention that he be allowed an expense deduction for wages paid to Roger during 1946, we are unable to find any support for this view in the record. Although Roger performed 700 hours of farming services for his father during 1946, the evidence clearly establishes that there was no agreement between them or that the son was to be paid for those services. Moreover, there is no evidence that Roger was in fact paid therefor. We think that petitioner's expenditures on Roger's behalf for clothing, insurance, and college were of a personal or family nature as distinguished from payments for services rendered. Accordingly, no deduction is allowable with respect thereto. Sec. 24(a)(1).
Respondent has determined that part of the deficiency for 1946 is due to petitioner's negligence. The burden of proof is upon the petitioner.
The 1946 return bears the notation ‘assisted in office of Attorney B. J. Byrne,‘ but there is no indication in the record of the extent or quality of this assistance. The record only shows that petitioner had some records of his transactions at the time the return was prepared, but such records were subsequently lost or discarded by him. In view of the large amount of unreported gross income in the instant case and in the absence of evidence of due care on the part of petitioner, we hold that the imposition of a negligence penalty under section 293(a) is not unwarranted.
In determining the amount of unreported net income (i.e., ‘net increase to farm profits') in the statutory notice of deficiency, respondent also increased petitioner's depreciation allowance. This and other adjustments consistent with our Opinion will be taken into account under the Rule 50 computation.
Decision will be entered under Rule 50.