Opinion
Docket Nos. 30980 30981 30982.
1953-06-25
H. R. SMITH AND MARY ILO SMITH, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.JUANITA ALLEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.HUGO ALLEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Robert Ash, Esq., for the petitioners. Frank C. Allen, Esq., for the respondent.
1. Section 294(d)(2) of the Internal Revenue Code construed and held to contain no express or implied provision for avoiding the penalty provided for therein, upon a showing by the taxpayer of reasonable cause for making a substantial underestimation of estimated tax.
2. Assuming that the statute could be so construed, held, further, under the facts, that no showing of reasonable cause was made by petitioners to avoid imposition of additions to the tax. Robert Ash, Esq., for the petitioners. Frank C. Allen, Esq., for the respondent.
These proceedings were consolidated for hearing and involve a deficiency in income tax and penalties for 1946, imposed for under-estimations of estimated tax, as follows:
+---------------------------------------------------------------+ ¦Docket No.¦Petitioner ¦Deficiency¦Penalty ¦ +----------+------------------------------+----------+----------¦ ¦30980 ¦H. R. Smith and Mary Ilo Smith¦$815.02 ¦$21,905.70¦ +----------+------------------------------+----------+----------¦ ¦30981 ¦Juanita Allen ¦ ¦313.92 ¦ +----------+------------------------------+----------+----------¦ ¦30982 ¦Hugo Allen ¦ ¦313.92 ¦ +---------------------------------------------------------------+
The sole issue common to all of the proceedings is whether the penalties were properly imposed under the provisions of section 294(d)(2) of the Code.
FINDINGS OF FACT.
The stipulated facts are so found.
The petitioners in Docket No. 30980 and in Docket Nos. 30981 and 30982 are, respectively, husband and wife, residing in Alice, Texas. Their declarations of estimated tax and returns for 1946 were filed with the collector of internal revenue for the first district of Texas.
Petitioner H. R. Smith filed an income tax return for 1945 in which he reported net income of $140,184.78 and a tax liability of $79,865.73, of which he reported had been paid, $3,121.60 by withholdings and $57,677.95 on declarations of estimated tax. Included in the $141,140.28 of adjusted gross income reported in the return was $26,800 from dividends, $27,849.48 from operation of leases, and $9,302.90 from royalties.
On March 15, 1946, Smith and his wife filed a declaration of estimated tax in which they showed as estimated tax for 1946 the amount of $3,121.60, a figure equal to the tax withheld from wages of the husband for 1945. The declaration of H. R. Smith was prepared by a public accountant.
During 1946, H. R. Smith, J. E. Mowinckle, E. T. Mowinckle, Hugo Allen, the petitioner in Docket No. 30982, J. M. Ponder, and E. W. Sparger were members of a partnership doing business as H. R. Smith Special Partnership, hereinafter sometimes referred to as the partnership. In May 1946, the partnership had long-term capital gain on sales of property of which $232,066.30 was allocable to Smith and $105,939.23 to Allen.
On June 11, 1946, H. R. Smith filed an amended declaration for 1946 showing an estimated tax of $60,046.60, against which he took credit for $3,121.60 for estimated withholding, and of the remainder of $56,925, paid $18,975 at the time of filing.
In July 1946, H. R. Smith and Hugo Allen realized long-term capital gain of $134,939.30 and $61,336.32, respectively, from the partnership, and Smith, $1,352,262.18 from sales of leases and stock. In August 1946, sales by the partnership resulted in long-term capital gains of $990 and short-term gains of $673.63 allocable to Smith.
No amended declaration of estimated tax was filed by H. R. Smith on September 15, 1946, but on that date he made a payment of $18,975 on his estimated tax for 1946.
On January 15, 1947, H. R. Smith filed an amended declaration of estimated tax for 1946 in which he reported estimated tax of $80,000, credits of $3,121.60 for withholding, and $37,950 for payments, leaving a balance of $38,928.40, which he paid at the time of filing the amendment.
On March 15, 1947, petitioner H. R. Smith and his wife filed a joint return showing tax liability of $442,627.03 and payments thereon of $78,348.65 consisting of $1,470.25 by withholding and $76,878.40 by payments on declarations, leaving a balance of tax due in the amount of $364,278.38. The return reported adjusted gross income of $892,536.81 and net income of $891,121.74. Included in the adjusted gross income was $860,041.20 for taxable net long-term capital gain, which included the gains realized before September 1946, $18,080 for dividends, $15,528.57 from operation of leases, and $11,497.49 of royalty income.
Petitioners Hugo Allen and Juanita Allen filed separate income tax returns for 1945 in which they reported community income of $32,799.49 and a total tax liability of $10,289.74, of which $800 was shown as having been paid on declarations of estimated tax. Of the income reported, $29,575.74 was shown as taxable gain from sale of capital assets, $274.44 from rents and royalties, and $2,949.31 partnership profits.
The separate declarations filed by the Allens on March 15, 1946, showed their estimated tax for 1946 to be zero. Each filed an amended declaration on June 4, 1946, showing an estimated tax of $7,500, of which each paid $2,500. They did not file amended declarations on September 15, 1946, or January 15, 1947, but on each of the dates each made tax payments in the amount of $2,500.
On or about March 15, 1947, the Allens filed separate income tax returns for 1946, showing in each adjusted income of $31,793.68, tax liability of $12,731.98, and a balance of tax due of $5,231.98. Included in the income was the husband's share, totaling $167,275.55, of the long-term capital gains realized by the partnership on sales made in May and July 1946.
Petitioner H. R. Smith was engaged in the business of drilling contractor, producing oil and gas, and farming. In and after 1942 he was a member of several partnerships in addition to other business activities. In 1942 George T. Shumate entered the employ of the group as a bookkeeper and in May 1946 became office manager for Smith, in which capacity he had the responsibility of advising Smith in regard to matters connected with his Federal income tax liability.
During the first half of 1946 Smith was comparatively inactive in the oil business, but during the last half he was unusually active because of the drilling of two discovery wells in separate fields in July and August and the development of the properties by the drilling of about 60 more wells. The fields were operated by partnerships in which Smith had an interest. The development work required a substantial amount of bookkeeping. Shumate could not at any time prior to the close of 1946 accurately estimate the amount of ordinary income Smith would have in that year.
The amended declaration of estimated tax filed by H. R. Smith in June 1946 was prepared by Shumate. He was aware at that time that the partnership had realized capital gain in the previous month from sales of producing properties. He did not prepare an amended declaration of estimated tax for H. R. Smith in September 1946 because due to the drilling operations then being conducted it would have been very difficult to estimate the tax, and he thought that the filing of an amended declaration in January 1946 would comply with the applicable statute. When he prepared the declaration filed by H. R. Smith on January 15, 1947, he was of the opinion that the showing of an amount in excess of the tax for 1945 would meet the requirements of the statute. His opinion was based upon his interpretation of the statements appearing on pages 3976 and 76,137 of the Prentice-Hall Federal Tax Service for 1946. On January 15, 1946, H. R. Smith had about $1,375,000 on deposit in a bank on which no interest was payable. He acted on the advice of Shumate in regard to compliance with the taxing statute.
Shumate prepared the declarations of estimated tax and amendments thereto which were filed by the Allens for 1946. He showed no tax liability on the declarations filed in March 1946 because it was impossible for him to estimate the amount of income the husband would have in that year. He estimated the amount of $7,500 shown in the amendments filed in June 1946 on the amount of tax that would be payable on the husband's share of capital gain realized in May 1946 on sales made by the partnership. Shumate did not file amended declarations of estimated tax on September 15, 1946, and January 15, 1947, because the amendment filed in June 1946 showed tax liability in excess of the husband's tax for 1945 and it would have been difficult to estimate in September 1946 what his income would be for the year. On January 15, 1947, Hugo Allen had sufficient cash on deposit in a bank to pay his income tax for 1946.
Shumate attended Texas A. & M. for 2 years. He has done considerable studying of accounting by correspondence and has worked with certified public accountants and assisted them in preparing tax returns. He has had about 13 years of experience in that type of work. During his employment by H. R. Smith, Shumate had occasion to study tax laws, rulings, and procedure.
Shumate prepared declarations of estimated tax for 1946 and amendments thereto for other members of the partnership, except E. T. Mowinckle. J. E. Mowinckle received as much as H. R. Smith of the capital gain realized from sales made by the partnership in July 1946. The amended declaration prepared by Shumate for and filed by J. E. Mowinckle and his wife on September 15, 1946, showed tax liability within 80 per cent of the final tax for 1946. J. E. Mowinckle had an overpayment of tax for 1946. It was more difficult to estimate the tax of H. R. Smith and Hugo Allen than other members of the partnership because the former were more active in the operation of the partnership and as members of the H. R. Smith partnership.
The penalties were imposed by the respondent under section 294(d)(2) of the Code because 80 per cent of the tax determined was in excess of the tax paid under declarations, plus amounts withheld from salaries.
The failure of the petitioners to comply with the terms of section 294(d)(2) of the Code was not due to reasonable cause.
OPINION.
JOHNSON, Judge:
The broad question presented for decision is whether the penalties imposed under the provisions of section 294(d)(2) for under-estimations of estimated tax were properly determined. The applicable statutory provision, to the extent material, reads as follows:
SEC. 294. ADDITIONS TO THE TAX IN CASE OF NONPAYMENT.
(d) ESTIMATED TAX.
(2) SUBSTANTIAL UNDERESTIMATE OF ESTIMATED TAX.— If 80 per centum of the tax (determined without regard to the credits under sections 32 and 35), in the case of individuals other than farmers * * * , exceeds the estimated tax (increased by such credits), there shall be added to the tax an amount equal to such excess, or equal to 6 per centum of the amount by which such tax so determined exceeds the estimated tax so increased, whichever is the lesser. This paragraph shall not apply to the taxable year in which falls the death of the taxpayer, nor, under regulations prescribed by the Commissioner with the approval of the Secretary, * * * to the taxable year in which the taxpayer makes a timely payment of estimated tax within or before each quarter * * * of such year * * * in an amount at least as great as though computed (under such regulations) on the basis of the taxpayer's status with respect to the personal exemption and credit for dependents on the date of the filing of the declaration for such taxable year * * * but otherwise on the basis of the facts shown on his return for the preceding taxable year. * * *
The pertinent part of the regulations provides as follows:
The addition to the tax for substantial underestimate of the estimated tax shall not apply to the taxable year in which the taxpayer makes a timely payment of estimated tax within or before each quarter of such year in an amount at least as great as though such estimated tax were computed under the law applicable to the taxable year on the basis of the taxpayer's status with respect to the personal exemption and credit for dependents on the date of filing the declaration, and on the basis of the tax withheld, and reasonably expected on the date of the filing of the declaration to be withheld, on wages received during the calendar year ending with or within the taxable year, but otherwise as though such estimated tax were computed on the basis of the net income and the surtax net income shown on the taxpayer's return for the preceding taxable year, adjusted to conform to the law applicable to the taxable year. * * * (Regulations 111, section 29.294-1(b)(3)).
The facts relating to declarations filed and tax payments, briefly stated, are these:
+--------------------------------------------------------------------------+ ¦ ¦ ¦ ¦Hugo and ¦ ¦ +----------------------------+-----------+----------+------------+---------¦ ¦ ¦H. R. Smith¦Payment ¦Juanita ¦Payment ¦ +----------------------------+-----------+----------+------------+---------¦ ¦ ¦ ¦ ¦Allen (Each)¦ ¦ +----------------------------+-----------+----------+------------+---------¦ ¦Net income 1945 ¦$140,184.78¦ ¦$16,399.75 ¦ ¦ +----------------------------+-----------+----------+------------+---------¦ ¦Tax ¦79,865.73 ¦ ¦5,144.87 ¦ ¦ +----------------------------+-----------+----------+------------+---------¦ ¦Declaration 3/15/46 ¦3,121.60 ¦ ¦Zero ¦ ¦ +----------------------------+-----------+----------+------------+---------¦ ¦Amended declaration 6/15/46 ¦60,046.60 ¦$18,975.00¦7,500.00 ¦$2,500.00¦ +----------------------------+-----------+----------+------------+---------¦ ¦Amended declaration 9/15/46 ¦None ¦18,975.00 ¦None ¦2,500.00 ¦ +----------------------------+-----------+----------+------------+---------¦ ¦Amended declaration 12/15/46¦None ¦None ¦None ¦None ¦ +----------------------------+-----------+----------+------------+---------¦ ¦Amended declaration 1/15/47 ¦80,000.00 ¦38,928.40 ¦None ¦2,500.00 ¦ +----------------------------+-----------+----------+------------+---------¦ ¦Return 3/15/47 ¦442,627.03 ¦364,278.38¦12,731.98 ¦5,231.98 ¦ +----------------------------+-----------+----------+------------+---------¦ ¦Withholding ¦ ¦1,470.25 ¦ ¦ ¦ +--------------------------------------------------------------------------+
During May and July 1946, H. R. Smith and Hugo Allen had long-term capital gains in the following approximate amounts:
+--------------------------------+ ¦ ¦H. R. Smith ¦Hugo Allen ¦ +----+--------------+------------¦ ¦May ¦$232,000 ¦$106,000 ¦ +----+--------------+------------¦ ¦July¦1,487,000 ¦61,000 ¦ +--------------------------------+
It is evident that there was no compliance by the petitioners with the terms of the statute and regulations. There were no timely quarterly payments during the taxable year of amounts of at least as much as the tax liability for the preceding taxable year. None of the taxpayers paid any amount on March 15 or December 15 and no amended declarations were filed to reflect tax liability for the capital gains realized in large amounts in July. The respondent concedes that the failure to meet the conditions of the statute could have been cured without liability for the penalties if the petitioners had filed returns on or before January 15, 1947, and paid the balance of the amount of tax shown to be due therein. See section 58(d)(3) of the Code.
Petitioners argue that under the facts of the cases it would be ‘unconscionable to approve‘ the penalties. The premise for their contention is that it would be logical to interpret the governing statute as not applicable upon a showing by the taxpayer of reasonable cause for failure to come within its express terms. To so construe the provision would, in our opinion, amount to judicial legislation.
Section 5 of the Current Tax Payment Act of 1943 amended section 294(a) of the Code to provide for penalties upon failure to file a declaration of estimated tax and pay an installment thereof, and for under-estimations by more than 20 per cent of estimated tax. The provisions contained no exceptions except that the penalty for under-estimations was not to ‘apply to the taxable year in which falls the death of the taxpayer.‘
Statements appearing in reports of committees of Congress disclose that the addition to tax for under-estimations was considered a reasonable sanction to insure payment during the year of an amount closely approximating actual tax liability in view of the privilege granted to revise estimates of tax quarterly during the year as late as December 15. H. Rept. No. 401, 78th Cong., 1st Sess., Committee on Ways and Means, p. 38; S. Rept. No. 221, 78th Cong., 1st Sess., Committee on Finance, p. 41; Conference report, H. Rept. N0.510, 78th Cong., 1st Sess., p. 56.
The provisions were stricken by section 118 of the Revenue Act of 1943, and in lieu thereof it was provided that the penalties for failure to file a declaration and pay an installment of estimated tax would not be applicable upon a showing by the taxpayer of reasonable cause and not willful neglect for the failure. No like provision was inserted in subsection (d)(2) for under-estimations of estimated tax. The only additional exception made in the new law provided for non-application of the penalty, if, in general, timely quarterly payments were made at current rates of tax on income for the preceding year.
The applicable provision is unambiguous and contains nothing implying legislative intent that it does not apply when the taxpayer can show reasonable cause for his underestimation of estimated tax. To the contrary, the amendments made of the section in the Revenue Act of 1943 disclose that the omission of any reference to reasonable cause or similar terms as a condition for non-application of the statute was deliberate. If there could be any doubt about the intent of Congress in that regard, it is completely removed by the reports of committees of Congress.
The amendments were made by the Committee on Finance. In its report, S. Rept. No. 627, 78th Cong., 1st Sess., the committee, after referring to the ‘reasonable cause and not to willful neglect‘ provisions inserted in the act in connection with penalties for failure to file a declaration and pay an installment of estimated tax, said, at p. 48:
Under section 294(d), as added by your committee bill, it is further provided that, under regulations prescribed by the Commissioner with the approval of the Secretary, this addition to the tax shall not apply to the taxable year in which the taxpayer makes a timely payment of estimated tax within each quarter of such year (or in the case of farmers exercising an election under section 60(a), within the last quarter) in an amount at least equal to an amount computed on the basis of the net income of the taxpayer shown on his return for the preceding taxable year at the rates applicable to the taxable year.
The report of the conferees is to the same effect. See Conference report, H. Rept. No. 1079, 78th Cong., 2d Sess., p. 44.
We can not agree with petitioners that approval here of respondent's determination is ‘unconscionable.‘ Respondent enforced the law as prescribed by Congress and under its terms he could not have done otherwise. He could not read into it provisions and exceptions not there contained, neither can we, in construing the law. Stephan v. Commissioner, 197 F.2d 712, relied upon by petitioners, is distinguishable. There, the Commissioner read into the act an increase or multiplication of the penalty beyond its terms. Here, the Commissioner followed the plain and unambiguous provisions of the act.
The sections of the Code in question give the taxpayer specifically three different ways of avoiding the imposition of the penalty, all of which he wholly ignored.
Assuming that the statute could be construed in the manner proposed by petitioners, from the showing made here we would not be justified in finding as a fact that the under-estimations of estimated tax were due to reasonable cause. Petitioner H. R. Smith had tax liability of about $80,000 in 1945, yet estimated his tax liability for 1946 in his first declaration to be the small amount of $3,121.60 withheld on his salary for 1945. Each of the Allens had tax liability of about $5,150 for 1945, notwithstanding which they filed declarations in March 1946 showing no tax liability for that year. All of the petitioners disregarded for current tax payments the large capital gains realized in July 1946 of about $1,500,000 in the case of Smith, and $61,000 in the case of the Allens. These failures to file original declarations having a reasonable relationship to tax liability for the prior year, and amendments thereto to reflect income known to have been realized, reflect gross negligence, if not lack of desire, to comply with the current payment feature of the statute rather than reasonable cause to come within its terms to avoid penalty. The purpose and effect of the law would be completely thwarted if under the facts here petitioners are forgiven for their noncompliance.
Reviewed by the Court.
Decisions will be entered for the respondent.