Opinion
Docket Nos. 46745 46746 46747.
1954-03-29
LEO SANDERS and JESSIE H. SANDERS, PETITIONERS, v. COMMISSIONERS OF INTERNAL REVENUE, RESPONDENT.LEO SANDERS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.JESSIE H. SANDERS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Herman J. Galloway, Esq., and John E. Marshall, Esq., for the petitioners. E. G. Sievers, Esq., for the respondent.
Herman J. Galloway, Esq., and John E. Marshall, Esq., for the petitioners. E. G. Sievers, Esq., for the respondent.
1. TAXABILITY OF INCOME— SETTLEMENT DID NOT INCLUDE SETTLEMENT OF TAXES.—The settlement of the petitioner's claims for additional compensation arising from a contract to perform work for the United States Government did not include the settlement of the petitioner's income tax liability.
2. CAPITAL GAIN OR ORDINARY INCOME— CONTRACT SETTLEMENT.— The amounts paid in a settlement of the petitioner's claims for additional compensation arising from a contract to perform work were ordinary income to the petitioner and not capital gain.
3. DEDUCTIONS— DEPRECIATION— SEPARATELY OWNED PROPERTY.— Deductions for depreciation on separately owned property, the income from which falls into the marital community, are to be equally divided between the spouses and may not be taken in their entirety by the owner of the property.
4. FAILURE TO FILE TIMELY RETURN— REASONABLE CAUSE— WIFE'S RELIANCE UPON HUSBAND— SEC. 291(a), I.R.C.— The failure to file timely returns is not shown to be due to reasonable cause and not due to willful neglect. A wife who filed a separate return for one year on a community property basis and joined with her husband in a joint return for another year is not relieved of delinquency liability under section 291(a) because she relied upon her husband who had no special qualifications in tax matters.
The Commissioner has determined the following deficiencies in income tax and additions for delinquency against Leo and Jessie H. Sanders:
+-------------------------------------------------------+ ¦Docket¦ ¦ ¦ ¦Sec.291 (a)¦ +------+--------------+--------+------------+-----------¦ ¦No. ¦Petitioner ¦Year ¦Deficiencies¦delinquency¦ +------+--------------+--------+------------+-----------¦ ¦ ¦ ¦ ¦ ¦ ¦ +------+--------------+--------+------------+-----------¦ ¦46745 ¦Leo and Jessie¦ 1943¦$18,733.69 ¦$14,083.58 ¦ +------+--------------+--------+------------+-----------¦ ¦46745 ¦Leo and Jessie¦ FN1 The record does not show why the 1943 and 1944 deficiencies were determined against Leo and Jessie jointly.
1944¦1,415.73 ¦353.93 ¦ +------+--------------+--------+------------+-----------¦ ¦46745 ¦Leo and Jessie¦1949 ¦688,273.66 ¦189,273.61 ¦ +------+--------------+--------+------------+-----------¦ ¦46746 ¦Leo ¦1946 ¦20,785.22 ¦11,345.77 ¦ +------+--------------+--------+------------+-----------¦ ¦46747 ¦Jessie ¦1946 ¦238.06 ¦11,201.58 ¦ +-------------------------------------------------------+
The issues for decision are:
(1) Whether ‘The Commissioner erred in taxing $940,000.00 accrued or paid to Leo Sanders by the United States in the year 1949 upon claims arising out of * * * the construction of the Oklahoma Aircraft Assembly Plant‘ and if there was no error, whether it was taxable as a long-term capital gain or as ordinary income;
(2) Whether the Commissioner erred in failing to allow to Leo for the years 1946, 1947, and 1948 the full depreciation on his separately owned property which was used in the construction business (the years 1947 and 1948 are involved because the deduction for depreciation affects a loss carry-back to 1946); and
(3) Whether the Commissioner erred in determining that a 25 percent delinquency penalty under section 291(a) of the Internal Revenue Code was due for each taxable year.
FINDINGS OF FACT.
Leo Sanders and Jessie H. Sanders, husband and wife, filed their tax returns for the calendar years in question with the collector of internal revenue for the district of Oklahoma. Their returns were filed on the community property basis for the years 1946 and 1947.
Leo has been engaged for many years in the general contracting and construction business. He used an accrual method of accounting. Leo entered into a contract with the United States on June 6, 1942, for excavating and concrete work at the site of the Oklahoma Aircraft Assembly Plant. Leo started work in accordance with this contract immediately and completed the job by early 1943. The United States made various changes in the plans and specifications during the course of the work as permitted by the contract. The petitioner was entitled to make claims for additional compensation as a result of those changes and many such claims were made. The claims were originally made to the contracting officer in charge of the project and appeals from his adverse decisions could be taken to the Board of Contract Appeals. Some of the rulings rendered were favorable to the petitioner and some were unfavorable. Several years elapsed while Leo pressed these claims and, to avoid the effect of the statute of limitations, he filed a petition on May 17, 1949, in the United States Court of Claims, Leo Sanders v. The United States, No. 49159, in which he sought $2,254,420.37 from the United States. The Department of Justice took charge of the case for the United States after the petition was filed in the Court of Claims and further negotiations for the purpose of settlement were carried on with that department.
Congress appropriated approximately $1,600,000 to pay the claims of the petitioner to be availed only through June 30, 1949. Leo and his attorneys, accountants, and engineer held many conferences during June 1949 with the attorneys and accountants from the Department of Justice and representatives of the Corps of Engineers in order to work out a mutually satisfactory settlement of Leo's claims.
It was finally agreed on June 29, 1949, that the United States would pay and Leo would accept the sum of $940,000, plus a bond premium of $14,100, and a retained percentage of $1,001.71, for a total of $955,101.71 in full settlement of his claims. Leo made a written offer to the Attorney General of the United States to accept that sum ‘in full settlement of all claims which are included in the above-entitled suit and of all claims growing out of contract W-957-eng-968 and of the construction of the Oklahoma Aircraft Assembly Plant.‘ This offer was accepted by the United States on June 29, 1949, in a letter which stated that ‘the acceptance of your offer of compromise * * * covers all claims arising out of the contract whether or not they are set forth in the petition. ‘ A motion to dismiss the suit in the Court of Claims was placed in escrow to be filed upon the receipt by the petitioner of payment by the United States. Leo signed a supplemental agreement on June 30, 1949, which modified the original contract in accordance with the compromise settlement agreed upon by the parties. That supplemental agreement stated that ‘upon payment of the above amount agreed to as a compromise settlement, and retained percentage in the amount of $1,001.71, all matters between the Contractor and the Government arising by reason of or in connection with Contract No. W-957-eng-968 will have been settled, and, the Contractor hereby releases the Government from any and all claims now filed or to be filed in the future, arising from or in connection with Contract No. W-957-eng-968 as amended.‘
The United States paid Leo the $955,101.71 on June 30, 1949.
The settlement between Leo and the United States did not include settlement of or relieve Leo from income taxes on the amounts received by him.
The petitioners in their return for 1949, filed on September 12, 1952, reported $940,000 of the amount received as a capital gain and the $15,101.71 remainder as ordinary income. The Commissioner ‘determined that the $940,000.00 settlement received from the Government of the United States during 1949 in connection with work performed on the Oklahoma Aircraft Assembly Plant constituted ordinary income.‘ The Commissioner eliminated the capital gain reported by the petitioners for 1949 in connection with this payment and increased income by $940,000.
The $940,000 was ordinary income.
Leo, prior to July 26, 1945, the date of the Oklahoma Community Property Statute, purchased various pieces of construction machinery and equipment which were his separate property and which were used in the construction business until they were sold. Pieces of this equipment were sold during each of the years 1946, 1947, and 1948. Leo and Jessie each reported one-half of the long-term capital gain from the sale of this property and each claimed a deduction for one-half of the depreciation sustained on that property for the year 1946.
The Commissioner determined that the full amount of the long-term capital gains derived from the sale of Leo's separately owned property in the years 1946 and 1947 was taxable to Leo, but allowed one-half of the depreciation on that property to Leo, and One-half to Jessie, as claimed. The Commissioner allowed a net operating loss carry-back from the years 1947 and 1948 to 1946.
Leo signed and filed Forms 1040 for the years 1943, 1944, and 1946 which were blank except for his name and address and amounts shown as the tax due. Leo and Jessie filed a similar form for 1949 on September 15, 1950. Separate returns showing income and deductions for Leo for the years 1943, 1944, and 1946, and for Jessie for 1946 were filed on July 16, 1952. A joint return showing income and deductions for Leo and Jessie for 1949 was filed on September 12, 1952, and the tax shown thereon of $235,768.93 was paid at that time. The $940,000 received in the settlement described above was reported in that return as a long-term capital gain.
The Commissioner determined additions of 25 percent for delinquency under section 291(a) of the Internal Revenue Code against the petitioners for the years 1943, 1944, 1946, and 1949.
The petitioners failed for each taxable year to file the returns required by law within the time prescribed by law and they have not shown that failure in any instance was due to reasonable cause and not due to willful neglect.
OPINION.
MURDOCK, Judge:
The following allegation in the petition filed February 3, 1953, is the basis of the petitioner's first contention:
One of the matters between the petitioner and the government arising by reason of or in connection with Contract No. W-957-eng-968 was the taxability of claims in the year 1949, which was settled in one of a series of acts or steps in one entire transaction, as aforesaid.
Leo and his administrative assistant testified, in effect, that Gaines V. Palmes, the Justice Department attorney who had been assigned to represent the United States in the Court of Claims proceeding and who was participating in the negotiations for the settlement, had remarked to Leo in the course of the negotiations that Leo would not have any income taxes to pay and would not have any renegotiation if he accepted the settlement then being proposed by Palmes. Leo said that he understood from that time forward that he would have no taxes to pay on whatever amount he received in the settlement and was confirmed in that belief by a remark of the Acting Deputy Attorney General that all claims between him and the Government would be settled by the agreement. This contention of the petitioners and the testimony of Leo and his administrative assistant are inconsistent with the petitioners' return for 1949 filed on September 12, 1952, in which they reported the $14,100 and the $1,001.71 received in the settlement as ordinary income and the $940,000 as income taxable as a capital gain. They have never contended in this proceeding that the $14,100 and the $1,001.71 were not taxable income although the reason why those amounts would be treated differently under the settlement than the $940,000 is not apparent.
Palmes testified that he never told Leo that he would not have any taxes to pay if he accepted the proposed settlement but, on the contrary, remarked to Leo at one stage of the proceeding that he should not be so concerned about claiming additional amounts because he would have a tax problem as a result of whatever settlement was made and had better get a good tax lawyer. Palmes also testified that he had no knowledge of what Leo's tax situation might be for the year 1949 or any other year when in June 1949 he was negotiating for the settlement of the claims of Leo against the Government. He had at one time asked to see Leo's income tax files to check costs being claimed by Leo, but the forms were blank and he obtained no information from those files. He and the other representatives of the Government who participated in the negotiations all testified that they never even considered as a factor in the settlement the taxes which Leo might have to pay as a result of the settlement and never had the slightest intention of agreeing in the settlement that he would have no taxes to pay on the amount which he was to receive. The Bureau of Internal Revenue was never represented in the negotiations of Internal Revenue was never represented in the negotiations. Neither Palmes nor any of the other representatives of the Government who participated in the settlement had any authority to agree that Leo would not be subject to income tax on the amount which he was to receive or to enter into any agreement with relation to his taxes. There is also evidence that they were well aware of their lack of that authority. The claims made by Leo made no reference to taxes, neither he nor his representatives in the negotiations ever in any way raised a question of taxes, and there is no mention of taxes in any of the settlement documents. Leo was represented in the negotiations by both legal and accounting counsel but they did not bring taxes into the discussions or require taxes to be mentioned in the settlement documents. There is no indication that they were ever aware that Leo thought his taxes were being settled. The claims being settled were those of Leo against the Government. The Government was not making any claim against Leo nor was it attempting to settle any claim against him. The representatives of the Government in the negotiations could have had no more than a vague idea of what the tax consequences of the payment to Leo might be and it is unreasonable to believe, in the light of all of the evidence, that they had any thought of relieving him of taxes on the amount he was to receive.
The Commissioner argues that those who represented the Government in the settlement could not have entered into an agreement which would prevent the properly constituted tax collecting officers of the Government from collecting from the petitioners whatever taxes would be due as a result of Leo's receipt of the amount in settlement of his claims. There is no necessity for going into the merits of that contention because the evidence fails to show that the settlement agreement actually entered into by Leo relieved him of any liability for income taxes on the amount received or to be received as a result of the settlement.
The petitioners argue in the alternative that the $940,000 constitutes a long-term capital gain received in exchange for claims against the Government which were capital assets held for more than 6 months. Actually, the petitioners' claims were settled rather than sold or exchanged and section 117 would not apply in any event. R. W. Hale, 32 B.T.A. 356, affd. 85 F.2d 819; Charles E. McCartney, 12 T.C. 320, 324; West Coast Securities Co., 14 T.C. 947, 961. Likewise fatal to the petitioners' contention is the fact that the claims were for work performed by Leo in the ordinary course of his business under a contract with the Government and the belated payment for that work through the settlement was ordinary income to Leo just as it would have been had the Government paid him as the work was completed. Payments for work performed made to the person who performs the work by the person who engaged him to perform the work can not be changed from ordinary income into capital gains by the payor resisting the payee's efforts to collect for a period of time. Swastika Oil & Gas Co., 40 B.T.A. 798, affd. 123 F. 2d 382, certiorari denied 317 U.S. 639; Durkee v. Commissioner, 162 F.2; 184; Nicholas W. Mathey, 10 T.C. 1099, affd. 177 F.2d 259, certiorari denied 339 U.S. 943. Cf. Charles T. Fisher, 19 T.C. 384.
Leo and his wife claimed one-half of the depreciation on separate property of Leo which he used in his business and parts of which he sold in the years 1946, 1947, and 1948 and each reported one-half of the gain from the sales. The Commissioner allowed the deductions for depreciation to be divided between the two but included the entire gain in the income of the husband. Leo does not contest the action of the Commissioner in taxing the entire gain on this separate property to him but insists that he then should be allowed to deduct all of the depreciation. Unfortunately for him it has been held that in States which had community property laws similar to those of Oklahoma in effect during the years 1946 through 1948 (John Miller Kane, 11 T.C. 74,78), the deductions pertaining to the separate property of one spouse are divided equally between husband and wife where the income from the property is community income taxable one-half to each spouse. Mellie Esperson Stewart, 35 B.T.A. 406, 411, affd. 95 F.2d 821. The petitioners must take the tax disadvantages along with the tax advantages pertaining to taxpayers living in community property States.
The 1040 forms originally filed by the petitioners for each of the taxable years within the alloted time did not qualify as returns within the meaning of section 51 of the Internal Revenue Code in that they did not state specifically the items of gross income and the deductions and credits allowed. Harrington Co., 6 T.C. 720, 724, 727. No returns for any of the taxable years which would qualify as returns under that section were filed until July 16, 1952, and September 12, 1952. Therefore, the additions to the tax for delinquent filing, as provided in section 291(a), were proper and must stand unless the petitioners have shown that their failure to make and file a return within the time prescribed by law was ‘due to reasonable cause and not due to willful neglect.‘ Michael Downs, 7 T.C. 1053, 1060, affirmed on other grounds 166 F.2d 504, certiorari denied 334 U.S. 832.
The principal excuse offered by the petitioners for failing to file adequate returns on time for the years 1943, 1944, 1946, and 1949 is that Leo was without funds after 1942 to have his books kept in accordance with the method theretofore established and that that situation continued until he received the money in the settlement on June 30, 1949. The books on the accrual method being used were completed in 1952 for the years 1943 through 1949 apparently on the basis of records of each receipts and disbursements and supporting data kept currently during those years. It is not clear that acceptable returns might not have been timely filed on the basis of the information available at the end of each of the taxable years; but however that may have been, nevertheless, the question still remains as to why returns for 1943, 1944, and 1946 were not filed shortly after the June 30, 1949, settlement and why a return for 1949 was not filed on time. The excuse for this seems to be that the accountants whom the petitioner employed were busy with other work and did not complete Leo's books until 1952. The record does not show that the accountants were at fault in this connection or that the petitioners exercised due diligence and ordinary care and industry in seeing that the posting of Leo's books was completed promptly and the returns filed as soon as possible. The length of this delay is in itself sufficient to justify the full amount of the additions determined under section 291(a) and the record fails to show that it was due to reasonable cause or that it was not due to willful neglect.
There is some evidence in the record to indicate that this delay, as well as the earlier period of delinquency, was due to willful neglect on the part of Leo. He concedes that he had income of about $95,000 for 1943, net income of about $13,000 for 1944, and income of about $160,000 for 1946 so that it is difficult to believe his contention that he had insufficient money during those years to maintain a proper set of books. Leo, during this period, was representing to the collector at Oklahoma City and also to a revenue agent attempting to investigate his tax liabilities for those years that he was short of funds, his books were incomplete, and consequently they would have to wait for examinations, returns, and taxes.
Leo may suggest that he relied upon the advice of accountants during the taxable years and that that was reasonable cause for his delay in filing the returns. The evidence does not show the qualifications as a tax adviser of any accountant employed by Leo during the taxable years or the advice, if any, which Leo relied upon. He employed a new firm of accountants in May 1949 who worked on his books and prepared the returns which were filed in 1952. He also employed a lawyer as tax counsel in 1949 but the record does not show that he relied upon advice of any of these people or received any advice from them which influenced him in not filing the returns earlier. West Side Tennis Club, 39 B.T.A. 149, 160, affd. 111 F.2d 6, 9, certiorari denied 311 U.S. 674; Home Guaranty Abstract Co., 8 T.C. 617, 622. Cf. William H. Gross, 7 T.C. 837, 848; Safety Tube Corporation, 8 T.C. ,57, 767, affirmed on other grounds 168 F.2d 787.
Leo offers as another excuse the fact that his pending claims on the Oklahoma Aircraft Assembly Plant contract were not settled until June 1949 and that, in some way which he does not disclose, prevented him from determining what his income was for 1943, 1944, and 1946. The record shows that he completed the work on that contract early in 1943 and it does not appear that it affected his income for 1944 or 1946. He could have reported for 1943 the income from that contract which was not in dispute and other income properly accruable in that year. The inadequacy of this excuse is further disclosed by the fact that the returns were not filed until 3 years after the settlement was effected. All excuses have been carefully considered and have been found inadequate upon analysis.
The record does not show why the 1943 and 1944 deficiencies and additions were determined against Leo and Jessie jointly, for which years Leo filed separate returns and Jessie filed no returns. However, no point is made of this by the petitioners. Jessie was required to file a return for each of the years 1946 and 1949. She filed a separate return for 1946 on the community property basis and joined with Leo in the joint return for 1949. Taxpayers who are required to file returns must take full responsibility for any delinquency in filing those returns. A wife required to file a return because of income of her husband in a community property State or who joins in a joint return can not shed the responsibility for delinquency by saying that she relied entirely upon her husband, not a specially qualified tax authority; otherwise Congress would be frustrated in the purpose behind section 291(a).
Decisions will be entered for the respondent.