Opinion
Docket No. 34172.
1953-12-24
LOIS SELTZER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
John A. Bostwick, Jr., Esq., for the petitioner. R. B. Wallace, Esq., for the respondent.
John A. Bostwick, Jr., Esq., for the petitioner. R. B. Wallace, Esq., for the respondent.
Petitioner filed her income tax return for the year 1945 on or before March 15, 1946. More than 3 years, but less than 5 years after petitioner's return was filed, the Commissioner mailed the deficiency notice to petitioner in which he determined a deficiency in petitioner's income tax for the year 1945 of $1,558.71. Petitioner, among other assignments of error, pleads the 3-year statute of limitations against assessment of the deficiency. Respondent, in his amended answer, pleads the 5-year statute of limitations and affirmatively alleged that petitioner had omitted from her return in excess of 25 per centum of her gross income for 1945. Held, that the burden of proof is on respondent to sustain his affirmative allegations and he has not met that burden of proof. Held, further, that the 3-year statute of limitations provided in section 275(a), Internal Revenue Code, has run and assessment of the deficiency is barred.
The Commissioner has determined a deficiency in petitioner's income tax for the year 1945 of $1,558.71. The deficiency is due to an adjustment which is explained in the deficiency notice, as follows:
(a) It is held that you realized taxable income in the amount of $5,972.84 from the exchange during the calendar year 1945 of your twenty-five percent partnership interest in Arcadia Roller Rink for six percent notes of Leo O. Seltzer having a face value, and a fair market value of $15,000.00. Since you reported no profit on the transaction, your income has been increased in the amount of $5,972.84. Section 22(a) of the Internal Revenue Code.
Petitioner contends: (1) That the deficiency notice was mailed more than 3 years after the return was filed; (2) that the $15,000 was received in settlement of her right to support and maintenance which the decree of divorce expressly provided, as follows:
IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the said Property Settlement Agreement entered into by the parties is in lieu of alimony to the plaintiff and that the plaintiff shall forever be barred from any claim or right to any allowance of alimony for herself;
and that a lump-sum payment in lieu of alimony is not taxable to her under the provisions of section 22(k) of the Code; and (3) that, even if the transaction relied upon by respondent constituted a sale, the adjusted basis of the partnership interest was more than $15,000, and there was no gain from such alleged sale.
With reference to petitioner's plea of the statute of limitations, respondent, in his amended answer, affirmatively alleges:
8. In her income tax return for the taxable year 1945, petitioner failed to include in her gross income certain income received from sales in an amount of at least $5,972.84, which amount is properly includable therein.
9. Petitioner omitted from gross income, as reported in her income tax return for the taxable year 1945, an amount properly includable therein which was in excess of 25 per centum of the amount of gross income reported in said return.
10. That the assessment of the deficiencies for the taxable year 1945 is not barred by the statute of limitations.
FINDINGS OF FACT.
The facts previously found by this Court in a related case, Lois Reynolds Atkins, 15 T.C. 128, have been stipulated and are so found. We state herein such of those facts as we deem necessary to an understanding of the issues to be decided, together with other findings of fact based upon evidence received at the hearing of the instant case.
Petitioner, Lois Seltzer, formerly known as Lois Reynolds Atkins, now resides in Birmingham, Alabama. She filed her individual tax return for the calendar year 1945 on January 14, 1946, in the district of Alabama, Birmingham, Alabama. In the return petitioner reported gross income in the amount of $2,350. The statutory notice of deficiency was mailed to petitioner on February 13, 1951.
On April 19, 1942, petitioner married Leo A. Seltzer. At the time of their marriage petitioner was the record owner of slightly over one-half the capital stock of Arcadia Garden Corporation, a corporation dominated by Leo A. Seltzer. The corporation operated the Arcadia Roller Rink.
The Arcadia Garden Corporation was dissolved in May 1942. Thereafter the Arcadia Roller Rink was operated by a partnership in which the petitioner and Fred Morelli were equal partners. The corporation transferred to the partnership depreciable assets valued on the partnership return for the year 1942 at $19,618.99. Petitioner and Fred Morelli continued as equal partners until January 13, 1944. On that date a new partnership agreement was entered into between petitioner, Leo A. Seltzer, Fred Morelli, and Sol Morelli, whereby all four became partners in the operation of the rink, each having a one-fourth interest.
The composition of the partnership again changed when petitioner was granted a decree divorcing her from Seltzer dated December 11, 1944. The decree incorporated a property settlement entered into by the parties dated November 29, 1944. Among other things, the agreement provided:
(7) That the wife shall sell, assign and set over to the husband all of her right, title and interest in and to a certain partnership in which she is the owner of a twenty-five (25%) percent interest which partnership is now doing business as the ‘ARCADIA ROLLER RINK‘, located at 4444 North Broadway in Chicago, Illinois, said sale and assignment to be subject to all of the presently outstanding liability of said partnership; in consideration of the transfer of the wife's interest in said partnership and the husband shall pay to the wife the sum of Fifteen Thousand ($15,000.00) Dollars, payable in semi-annual installments of Two Thousand Five Hundred ($2,500.00) Dollars each, the first of say payments to be made on or before six months from the date of the entry of the Decree of Divorce between the parties;
The entire $15,000 was paid petitioner by Seltzer in the year 1945. Respondent computed petitioner's profit on the transaction as follows:
+----------------------------------------------------------------------------+ ¦Sales Price ¦ ¦$15,000.00¦ +-------------------------------------------------------+---------+----------¦ ¦Basis: Fair market value of assets received on Jan. 19,¦ ¦ ¦ +-------------------------------------------------------+---------+----------¦ ¦1942, for 50 per cent of stock in Arcadia Roller Rink ¦ ¦ ¦ +-------------------------------------------------------+---------+----------¦ ¦Company ¦$1,000.00¦ ¦ +-------------------------------------------------------+---------+----------¦ ¦Less: One-half given to Leo O. Seltzer on Jan. 13, 1944¦500.00 ¦ ¦ +-------------------------------------------------------+---------+----------¦ ¦ ¦ ¦$500.00 ¦ +-------------------------------------------------------+---------+----------¦ ¦You received your share of partnership profits in cash ¦ ¦ ¦ +-------------------------------------------------------+---------+----------¦ ¦for years 1942 and 1943. Your share of 1944 ¦ ¦ ¦ +-------------------------------------------------------+---------+----------¦ ¦partnership income has been determined as ¦$5,454.33¦ ¦ +-------------------------------------------------------+---------+----------¦ ¦Less: Total 1944 distribution of partnership income to ¦ ¦ ¦ +-------------------------------------------------------+---------+----------¦ ¦you ¦2,900.00 ¦ ¦ +-------------------------------------------------------+---------+----------¦ ¦ ¦ ¦2,554.33 ¦ +-------------------------------------------------------+---------+----------¦ ¦Total basis ¦ ¦$3,054.33 ¦ +-------------------------------------------------------+---------+----------¦ ¦Profit (Sales price minus basis) ¦ ¦$11,945.67¦ +-------------------------------------------------------+---------+----------¦ ¦Taken into account-50 per cent, sec. 117 (b), I.R.C. ¦ ¦$5,972.84 ¦ +----------------------------------------------------------------------------+
The divorce decree which incorporated the property settlement agreement which petitioner and Leo A. Seltzer had entered into prior to their divorce expressly provided:
IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the said Property Settlement Agreement entered into by the parties is in lieu of alimony to the plaintiff and that the plaintiff shall forever be barred from any claim or right to any allowance of alimony for herself;
Respondent offered no evidence to support his computation of petitioner's basis. It has been stipulated that respondent's deficiency notice in Docket No. 22555, Lois Reynolds Atkins, supra, determined that petitioner's share of the partnership profits for the years 1942, 1943, and 1944 was $34,420.94. In our decision in that case we sustained the Commissioner's determination. Of this amount, only $15,680 was withdrawn by or distributed to petitioner and $18,740.94 remained in the partnership as undistributed profits. This $18,740.94 should have been included in the cost basis for petitioner's partnership interest instead of only the part which respondent has included.
OPINION.
BLACK, Judge:
Petitioner's individual tax return for the calendar year 1945, which was due on or before March 15, 1946, was filed on January 14, 1946. The statutory deficiency notice was mailed on February 13, 1951, which was more than 4 years after petitioner's return was filed. Petitioner contends in her amended petition that when the notice was mailed the 3-year limitation period had run under section 275(a) of the Internal Revenue Code. Respondent admits that the 3-year limitation period had run, but argues that section 275(c) applied to give a 5-year limitation period. The applicable statutes are printed in the margin.
Respondent correctly contends that the deficiency notice was mailed within 5 years after the return was considered as filed for the purpose of section 275(c), for under section 275(f) the return shall be considered as having been filed on March 15, 1946. But to invoke the 5-year limitation period under section 275(c), the respondent has the burden of proving that petitioner omitted ‘from gross income an amount properly includible therein which is in excess of 25 per centum of the amount of gross income stated in the return.‘ See C. A. Reis, 1 T.C. 9. In the Reis case, supra, we said:
SEC. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION.Except as provided in section 276—(a) GENERAL RULE.— The amount of income taxes imposed by this chapter shall be assessed within three years after the return was filed, and no proceedings in court without assessment for the collection of such taxes shall be begun after the expiration of such period.(c) OMISSION FROM GROSS INCOME.— If the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 per centum of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 5 years after the return was filed.
We are unable to conceive that the presumption of the correctness of a deficiency notice, which in the ordinary case the petitioner must meet, was intended by Congress to be used as a substitute for evidence in a case where the respondent has the burden of proof as here he has under the various cases first above cited. To adapt a classic to the case, the deficiency notice is a shield, not a sword. It is a defense where the petitioner has the onus of proof, not a weapon where the respondent has the burden. * * * We hold that the respondent herein had the burden of proof, that it has not met, and that the three-year statute of limitation has run. * * *
Later this case was reopened upon respondent's motion and he was permitted to meet his burden of proof by offering additional evidence. See Reis v. Commissioner, 142 F.2d 900.
Petitioner's income tax return for 1945 is in evidence and in this return she reported gross income of $2,350. Respondent contends that petitioner realized additional gross income in 1945 from the sale of a capital asset, a 25 per cent partnership interest. There is no dispute that if there was a sale (which petitioner vigorously contends but which we need not decide) petitioner received $15,000 in return for her partnership interest. But, in order to invoke the 5-year limitation period under section 275(c), respondent must prove that the adjusted basis of the partnership interest was less than $15,000 by an amount sufficient to increase petitioner's gross income for 1945 by more than 25 per cent. The only evidence in the record with respect to the amount of the basis was supplied by the petitioner. This evidence, consisting primarily of petitioner's own testimony, tends to show that the partnership interest had a basis of more than $15,000.
The distributive share of the partnership income to petitioner in the calendar years 1942 and 1943 was $18,396.96 and $10,569.65, respectively. Respondent does not contend that this is not true, but contends that petitioner withdrew these amounts in cash. However, petitioner testified that she withdrew from the partnership $6,150 in the calendar year 1942 and $6,630 in the calendar year 1943. She introduced in evidence certain exhibits showing bank deposits in a joint bank account of herself and husband to substantiate the above figures. There is no evidence to the contrary. In view of this testimony, we think that $12,246.96 ($18,396.96 less $6,150) and $3,939.65 ($10,569.65 less $6,630), respectively, for the years 1942 and 1943 must be treated as undistributed income and a part of petitioner's cost basis for her partnership interest in Arcadia Roller Rink Company.
The Commissioner's determination in his deficiency notice in the instant case shows: ‘Your share of 1944 partnership income has been determined as $5,454.33. ‘ The Commissioner then determined that of the foregoing distributive income of $5,454.33, there had actually been distributed to petitioner $2,900, leaving $2,554.33 undistributed income. This $2,554.33 the Commissioner has added to petitioner's cost basis for her partnership interest which the Commissioner has determined that petitioner sold in her property settlement with her husband. As already stated, however, the Commissioner did not allow petitioner any addition to her cost basis on account of undistributed profits in the partnership for the years 1942 and 1943, his contention being that all of petitioner's profits in the partnership were distributed to her in those 2 years. As we have already stated, petitioner's testimony is to the contrary. Therefore, as we view the whole record, petitioner has established a prima facie case that the cost basis of her interest in the partnership should include:
+-------------------------------------+ ¦1942 undistributed profits¦$12,246.96¦ +--------------------------+----------¦ ¦1943 undistributed profits¦3,939.65 ¦ +--------------------------+----------¦ ¦1944 undistributed profits¦2,554.33 ¦ +--------------------------+----------¦ ¦Total ¦$18,740.94¦ +-------------------------------------+
In view of the foregoing, we think we must hold that respondent has not sustained his burden of proof to show, as affirmatively alleged in his answer:
9. Petitioner omitted from gross income, as reported in her income tax return for the taxable year 1945, an amount includable therein which was in excess of 25 per centum of the amount of gross income reported in said return.
Therefore, we hold that the 5-year statute of limitations provided in section 275(c) of the Code is not applicable in the instant case. We further hold that the statute of limitations provided in section 275(a) of the Code is applicable and that assessment of the deficiency determined by the Commissioner against petitioner is barred by the statute of limitations.
Decision will be entered for the petitioner.