Opinion
Docket No. 36458.
1955-12-20
ROY R.YEOMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
George T. Donoghue, Jr., Esq., for the respondent.
RULES OF PRACTICE, RULE 23— SUBSTITUTION OF PARTIES.— Where petitioner dies after filing petition, is not represented at the hearing, and there has been no substitution of parties, held, Tax Court is not divested of jurisdiction to decide case. Held, further, deficiencies and additions to tax for fraud were properly determined. George T. Donoghue, Jr., Esq., for the respondent.
The respondent determined the following deficiencies in income tax and additions to tax for frauds:
+--------------------------------+ ¦ ¦ ¦Additions ¦ +------+-------------+-----------¦ ¦Year ¦Deficiency ¦to tax ¦ +------+-------------+-----------¦ ¦1944 ¦$704.73 ¦$352.37 ¦ +------+-------------+-----------¦ ¦1945 ¦3,262.16 ¦1,631.08 ¦ +------+-------------+-----------¦ ¦1946 ¦2,260.73 ¦1,130.37 ¦ +------+-------------+-----------¦ ¦1947 ¦11,297.53 ¦5,648.77 ¦ +--------------------------------+
There was no appearance by or on behalf of the petitioner at the hearing. The only question is whether the action of the respondent in determining the deficiencies and the additions to tax for fraud were proper.
FINDINGS OF FACT.
Petitioner filed his income tax returns for the calendar years 1944 to 1947, inclusive, with the then collector of internal revenue for the first district of Illinois.
During the years 1944 to 1947, inclusive, petitioner was president, treasurer, and sole stockholder of Yeoman-Henderson, Inc., sometimes hereinafter called the corporation, which operated a jewelry store in Waukegan, Illinois. The corporation was petitioner's sole source of income during the taxable years.
Petitioner personally maintained the corporation's books and records during the years 1944 to 1947, inclusive. A daily record was made on loose sheets of sales, receipts, and cash disbursements. The daily totals shown on these sheets were entered, under a double entry system, in columns in a permanent book similar to a general journal and hereinafter referred to as the journal. No general ledger was maintained. An accounts receivable ledger, hereinafter called Ledger No. 1 was kept. Petitioner kept a second accounts receivable ledger, hereinafter referred to as Ledger No. 2, from early in 1945 until early in 1948, when respondent began his examination. At the time of respondent's examination, all ledger sheets for accounts which had been paid in full had been removed from Ledger No. 2. Downpayments on sales were not entered in it. The books and records of the corporation were not adequate to permit an accurate determination of its net income for the years 1944 to 1947, inclusive.
Petitioner prepared the income tax returns of the corporation for the years 1944 to 1947, inclusive, on an accrual basis, reporting net income as shown in its journal and Ledger No. 1. None of the sales entered in Ledger No. 2 are reported in the returns for the years 1945, 1946, or 1947. Petitioner prepared his own income tax returns for the taxable years involved on a cash basis.
In each of the taxable years, petitioner took for his own use gross receipts from sales made by the corporation. These receipts were not recorded on the books of the corporation or reported in its income tax returns. The following tabulation shows the aggregate amounts received by petitioner from this source during the taxable years 1944 to 1946, inclusive, and the deposits to bank accounts and payments made by petitioner with them:
+-----------------------------------------------------------------------------+ ¦ ¦1944 ¦1945 ¦1946 ¦ +--------------------------------------------+----------+----------+----------¦ ¦Deposits to accounts with First National ¦ ¦ ¦ ¦ ¦Bank, Waukegan, Illinois: ¦ ¦ ¦ ¦ +--------------------------------------------+----------+----------+----------¦ ¦Petitioner's savings account ¦$1,861.00 ¦ ¦ ¦ +--------------------------------------------+----------+----------+----------¦ ¦Petitioner's checking account ¦26,976.91 ¦$48,778.19¦$41,591.91¦ +--------------------------------------------+----------+----------+----------¦ ¦Marion H. Yeoman's (wife of petitioner) ¦2,113.30 ¦1,830.00 ¦2,235.00 ¦ ¦checking account ¦ ¦ ¦ ¦ +--------------------------------------------+----------+----------+----------¦ ¦Payments by petitioner: ¦ ¦ ¦ ¦ +--------------------------------------------+----------+----------+----------¦ ¦Cost of Liberty Bonds purchased ¦200.00 ¦200.00 ¦ ¦ +--------------------------------------------+----------+----------+----------¦ ¦Remaining principal due on mortgage on ¦ ¦ ¦ ¦ ¦petitioner's residence ¦ ¦ ¦ ¦ +--------------------------------------------+----------+----------+----------¦ ¦in Waukegan, Illinois ¦3,500.00 ¦ ¦ ¦ +--------------------------------------------+----------+----------+----------¦ ¦Interest due under the above mortgage ¦210.00 ¦ ¦ ¦ +--------------------------------------------+----------+----------+----------¦ ¦Cost of remodeling and repairs to above ¦8,859.10 ¦ ¦ ¦ ¦residence ¦ ¦ ¦ ¦ +--------------------------------------------+----------+----------+----------¦ ¦Total gross receipts of the corporation ¦$43,720.31¦$50,808.19¦$43,826.91¦ ¦received by petitioner ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+
The above deposits do not include repayments in 1946 of a loan made by petitioner to another, and transfers in 1944 and 1946 to Marion H. Yeoman's account from petitioner's checking account.
During the taxable years, the corporation made purchases of merchandise which were not entered on its books and records or reported in its income tax returns for these years. Petitioner paid for these purchases by withdrawals from his checking account. The following are the totals of these purchases:
+----------------+ ¦1944¦$14,415.36 ¦ +----+-----------¦ ¦1945¦14,838.07 ¦ +----+-----------¦ ¦1946¦31,038.49 ¦ +----+-----------¦ ¦1947¦42,561.45 ¦ +----------------+
All withdrawals from petitioner's checking account during the period from May 19 to December 1, 1944, a period for which petitioner no longer had canceled checks at the time of respondent's examination, have been allowed as payments for purchases of the corporation.
In reconstructing the corporation's net income for the taxable year 1947, respondent applied a markup of 100 per cent to its unrecorded and unreported purchases of merchandise in that year to establish its unrecorded and unreported gross receipts from sales. The corporation's average markup on its purchases was 100 per cent. During 1947, the corporation had unrecorded and unreported gross receipts from sales in the total amount of $85,258.54, which were received by petitioner in that year.
The aggregate amounts received by petitioner in the taxable years from unrecorded and unreported gross receipts from sales of the corporation, after subtraction of the amounts paid by him by withdrawals from his checking account for purchases of the corporation, were as follows:
+----------------+ ¦1944¦$29,304.95 ¦ +----+-----------¦ ¦1945¦35,970.12 ¦ +----+-----------¦ ¦1946¦12,788.42 ¦ +----+-----------¦ ¦1947¦42,629.27 ¦ +----------------+
In his determination, respondent added the above amounts to petitioner's reported adjusted gross income for the respective taxable years as dividends to the extent of the earnings and profits of the corporation.
The accumulated earnings and profits of the corporation at the end of each of the years indicated, after inclusion of the sums diverted, were as follows:
+------------------------+ ¦December 31 ¦Amount ¦ +--------------+---------¦ ¦1944 ¦$3,230.90¦ +--------------+---------¦ ¦1945 ¦10,876.98¦ +--------------+---------¦ ¦1946 ¦9,131.75 ¦ +--------------+---------¦ ¦1947 ¦27,503.88¦ +------------------------+
Petitioner is entitled to the standard deduction of $500 for each of the taxable years.
The corporation's income tax returns for the taxable years involved reported net sales (gross sales less returns and allowances), cost of goods sold, and gross profit from sales as follows:
+-------------------------------------+ ¦ ¦ ¦Cost of ¦Gross ¦ +----+----------+----------+----------¦ ¦Year¦Net sales ¦goods sold¦profits ¦ +----+----------+----------+----------¦ ¦1944¦$51,981.12¦$30,162.97¦$21,818.15¦ +----+----------+----------+----------¦ ¦1945¦30,283.24 ¦11,616.28 ¦18,666.96 ¦ +----+----------+----------+----------¦ ¦1946¦26,590.49 ¦9,605.22 ¦16,985.27 ¦ +----+----------+----------+----------¦ ¦1947¦31,052.56 ¦9,525.16 ¦21,527.40 ¦ +-------------------------------------+
The corporation's actual net sales, cost of goods sold, and gross profit from sales for the taxable years involved were as follows:
+-------------------------------------+ ¦ ¦ ¦Cost of ¦Gross ¦ +----+----------+----------+----------¦ ¦Year¦Net sales ¦goods sold¦profit ¦ +----+----------+----------+----------¦ ¦1944¦$95,701.43¦$44,578.33¦$51,123.10¦ +----+----------+----------+----------¦ ¦1945¦81,091.43 ¦26,454.35 ¦54,637.08 ¦ +----+----------+----------+----------¦ ¦1946¦70,417.40 ¦40,643.71 ¦29,773.69 ¦ +----+----------+----------+----------¦ ¦1947¦116,311.10¦52,154.43 ¦64,156.67 ¦ +-------------------------------------+
In its income tax return for the year 1944, the corporation overstated its total deductions by $2,325, reporting total deductions of $20,242.80 whereas the deductions itemized on the return only amounted to $17,917.80.
Petitioner's income tax returns and those of the corporation for the taxable years involved reported adjusted gross income or net income as follows:
+-----------------------------------------+ ¦ ¦Adjusted gross¦ ¦ +-----------+--------------+--------------¦ ¦Year ¦income of ¦Net income of ¦ +-----------+--------------+--------------¦ ¦ ¦petitioner ¦corporation ¦ +-----------+--------------+--------------¦ ¦1944 ¦$2,160 ¦$1,575.35 ¦ +-----------+--------------+--------------¦ ¦1945 ¦2,160 ¦1,222.08 ¦ +-----------+--------------+--------------¦ ¦1946 ¦2,160 ¦ (1,058.88)¦ +-----------+--------------+--------------¦ ¦1947 ¦2,160 ¦
(67.82) ¦ +-----------+--------------+--------------¦ ¦1 Net loss.¦ ¦ ¦ +-----------------------------------------+
The only gross income reported in petitioner's returns was his salary of $2,160 received by him in each of the taxable years from the corporation.
Petitioner's actual net income and that of the corporation for the taxable years involved were as follows:
+----------------------------+ ¦Year¦Petitioner¦Corporation ¦ +----+----------+------------¦ ¦1944¦$4,890.90 ¦$33,205.30 ¦ +----+----------+------------¦ ¦1945¦12,536.98 ¦37,192.20 ¦ +----+----------+------------¦ ¦1946¦10,791.75 ¦11,729.54 ¦ +----+----------+------------¦ ¦1947¦29,163.88 ¦42,561.45 ¦ +----------------------------+
Petitioner's net worth increased at least as follows during the years 1944 to 1946, inclusive:
+-------------------+ ¦ ¦Increase ¦ +------+------------¦ ¦ ¦in ¦ +------+------------¦ ¦Year ¦net worth ¦ +------+------------¦ ¦1944 ¦$26,719.60 ¦ +------+------------¦ ¦1945 ¦31,211.98 ¦ +------+------------¦ ¦1946 ¦16,808.48 ¦ +-------------------+
Petitioner was charged in two indictments in the United States District Court for the Northern District of Illinois, Eastern Division, on November 28, 1950, with willfully and knowingly attempting to defeat and evade a large part of the income tax due and owing from the corporation and him for each of the years 1944 to 1946, inclusive. The corporation was also a defendant in each of the counts in the indictment for evasion of its income tax. In a trial by a jury, petitioner and the corporation were found guilty as charged. Petitioner was sentenced to a prison term of 1 year and a day and the corporation was fined. The judgments, which were appealed to the Court of Appeals for the Seventh Circuit, were affirmed.- United States v. Yeoman-Henderson, Inc., (C.A. 7, 1952) 193 F.2d 867.
There is a deficiency in petitioner's income tax for each of the taxable years 1944 to 1947, inclusive. Part of the deficiency for each year is due to fraud with intent to evade tax.
OPINION.
TIETJENS, Judge:
As set forth in the preliminary statement there was no appearance by or on behalf of petitioner at the hearing. From the statement of counsel for the respondent made at that time and from statements made by former counsel for the petitioner in motions in this proceeding we gather that petitioner died after the filing of the petition and before the hearing. No substitution of any personal representative of the petitioner has been made and the Court is uninformed as to the identity of petitioner's personal representative.
If we accept the fact of petitioner's death, though no evidence to that effect has been offered other than the statements of counsel referred to, the record presents a possible jurisdictional question, i.e., whether the Court has been ousted from jurisdiction by virtue of petitioner's death and there having been no substitution of any personal representative or other appearance on his behalf at the hearing. See Rules of Practice, Rule 23.
We conclude, however, that the Court has not been divested of jurisdiction. In an early case, James Duggan, 18 B.T.A. 608, where a similar factual situation existed, and counsel had moved to dismiss on the ground the action had abated by virtue of petitioner's death, the motion was denied, and we held that the jurisdiction resulting from an appeal here ‘continues unimpaired until our functions are terminated by decision or dismissal,‘ and that there is ‘no abatement of an appeal upon the death of the appellant.’ And in later proceedings in the same case, 21 B.T.A. 740, 743, while pointing out the desirability from the standpoint of orderly procedure of having before the Court the one authorized to act for the deceased petitioner, we nevertheless said, ‘But there is no absolute necessity for the substitution of any one as party petitioner in this proceeding.’ Accordingly, we hold here that our jurisdiction to decide the case continues despite petitioner's death and the failure to substitute a personal representative.
Proceeding to the other questions before us, the respondent has placed in the record the testimony of a technical advisor in the office of the assistant regional commissioner, appellate, Chicago, Illinois, to whom the case was assigned. This testimony related to the examination made of the income tax liabilities of the petitioner for the taxable years and the disclosures made as the result of the examination which was conducted by a revenue agent and a special agent. The income tax returns of the corporation and the petitioner are in evidence as well as other documents relating to the petitioner's income tax liabilities for the years in question.
In the absence of any evidence to the contrary, the respondent's determinations of the deficiencies in income tax must be upheld.
The only issue remaining is whether the additions to tax for fraud were proper. We think the evidence adduced by respondent is ample to sustain our finding that part of the deficiency for each year is due to fraud with intent to evade tax.
Decision will be entered for the respondent.