Hirschman v. Commissioner

Aaron Hirschman, Petitioner, v. Commissioner of Internal Revenue, Respondent. Leon P. Clair, Petitioner, v. Commissioner of Internal Revenue, Respondent. David C. Clair, Petitioner, v. Commissioner of Internal Revenue, Respondent Hirschman v. Commissioner Docket Nos. 19338, 19339, 19340 United States Tax Court 12 T.C. 1223; 1949 U.S. Tax Ct. LEXIS 144; June 30, 1949, Promulgated *144 Decisions will be entered for the respondent. Prior to March 15, 1944, petitioners, members of a partnership, with intent to evade tax, filed false and fraudulent partnership and individual income tax returns for the taxable year 1943. In these returns they included the costs but not the receipts of partnership sales in the amount of $ 30,909. On November 6, 1944, petitioners learned of the respondent's investigation of the tax returns of a customer to whom a large portion of these sales had been made. On November 9, 1944, petitioners filed amended partnership and individual income tax returns, reporting the $ 30,909 as income for 1943, and each petitioner paid the resulting increase in tax for that year. Held: (1) That the petitioners, having originally filed fraudulent income tax returns, may not by the subsequent filing of amended returns and the payment of the taxes due, eliminate the fraudulent elements from their original returns and thereby bar the respondent from assessing in respect thereto 50 per cent additions to the tax for fraud under section 293 (b) of the Internal Revenue Code. (2) That the "total deficiency," for the purpose of computing the 50 per cent*145 additions to the tax under section 293 (b), is the difference between the tax liability and the amount shown on the original return of each petitioner for 1943. Maitland A. Wilson, 7 T. C. 395, followed. Alfred Cerceo, Esq., for the petitioners. J. Richard Riggles, Esq., for the respondent. Arundell, Judge. ARUNDELL *1224 These proceedings, which have been consolidated*146 for trial and decision, involve the following deficiencies in income tax for the taxable year ended December 31, 1943: Docket Additions No. Tax tax A. Hirschman 19338 $ 1,263.52 $ 4,065.32 L. P. Clair 19339 1,272.30 4,078.91 D. C. Clair 19340 1,274.62 4,101.40 Petitioners herein challenge the correctness of the respondent's imposition under section 293 (b) of the Internal Revenue Code of a 50 per cent addition to the tax of each petitioner for the taxable year 1943. FINDINGS OF FACT. Petitioners Aaron Hirschman, Leon P. Clair, and David C. Clair are individuals engaged in the business of a selling agent for men's underwear and sportswear, doing business as a partnership under the name of Clair & Hirschman, with principal offices in New York, New York. The firm does no manufacturing and carries no inventories. On March 11, 1944, the partnership filed with the collector of internal revenue for the second district of New York its partnership return of income for the year 1943, in which it reported gross receipts of $ 1,209,399.88 and net income of $ 100,902.59. Its distribution of profits was reported as follows: Leon P. Clair $ 33,634.20 David C. Clair 33,634.20 Aaron Hirschman 33,634.19 Total 100,902.59 *147 *1225 Prior to March 15, 1944, petitioners filed with the collector of internal revenue for the second district of New York individual income and victory tax returns for 1943 disclosing the following income: Partnership income Interest Total Aaron Hirschman $ 33,634.19 $ 62.42 $ 33,696.61 Leon P. Clair 33,634.20 63.84 33,698.04 David C. Clair 33,634.20 62.42 33,696.62 Each of these returns was filed on the accrual basis. On November 6, 1944, Sidney J. Reich, a practicing accountant of New York City, and Morris Weisenfeld, of Dallas, Texas, conferred with Hirschman and one of the other petitioners at the offices of Clair & Hirschman concerning purchases made by Weisenfeld from the partnership. Reich advised the petitioners that certain purchases made by Weisenfeld from the partnership had not been reported in Weisenfeld's books of account and that he had estimated that approximately $ 25,000 had been paid by Weisenfeld to the partnership during the years 1942 and 1943 in connection with such purchases. Petitioners stated that they would need time to check the accuracy of Reich's figures, but at that time the figures appeared to be too high. Reich *148 also informed the petitioners that Weisenfeld was going to make a disclosure to the Government and that his purpose was to verify the figures so that an agreement could be reached with respect to the tax owed by Weisenfeld. On November 9, 1944, the partnership filed with the collector of internal revenue for the second district of New York an amended partnership return of income for the year 1943 in which it reported gross receipts of $ 1,240,308.88 and net income of $ 131,811.59. Its distribution of profits was reported as follows: Leon P. Clair $ 43,937.20 David C. Clair 43,937.20 Aaron Hirschman 43,937.19 Total 131,811.59 On November 9, 1944, each of the petitioners filed with the collector of internal revenue for the second district of New York amended individual income and victory tax returns for the year 1943 which reported their income as follows: Partnership income Interest Total Aaron Hirschman $ 43,937.19 $ 62.42 $ 43,999.61 Leon P. Clair 43,937.20 63.84 44,001.04 David C. Clair 43,937.20 62.42 43,999.62 *1226 On December 17, 1945, an investigation of the original and amended returns of the partnership and the petitioners *149 for the years 1942 and 1943 was commenced by the respondent. The net income reported in the amended income tax return filed by the partnership for the year 1943 exceeded that reported in the original return by the amount of $ 30,909. This difference in reported income was due to the fact that certain sales made by the partnership in 1943 had been omitted from the original return. These sales which were not recorded on the partnership books of account represented sales made to Weisenfeld and over-the-counter cash sales, and one sale to a customer in Los Angeles, California, as indicated in the following schedule. The cost of the merchandise involved in these sales was reflected in the original partnership returns. Date Customer Amount 4-26-43 Morris Weisenfeld, Dallas, Texas $ 6,000.00 5-19-43 do 162.50 8-16-43 do 644.00 8-19-43 do 210.00 8-24-43 do 406.00 9-8-43 do 420.00 9-22-43 do 420.00 9-23-43 do 1,350.00 10-4-43 do 850.00 10-20-43 do 850.00 10-21-43 do 1,062.50 11-10-43 do 2,142.00 12-25-43 do 1,800.00 12-6-43 do 450.00 12-13-43 do 1,494.38 12-27-43 do 900.00 11-4-43 Nasef Ellis, Los Angeles, Calif 575.00 Various 1943 dates Miscellaneous cash sales 11,172.62 Total 30,909.00 *150 A conference was held on October 28, 1946, at the partnership's offices in New York, New York, which was attended by representatives of the respondent and the petitioners and their accountants. At this meeting, the difference between the original and the amended returns was discussed and the petitioners admitted that sales in the amount of $ 30,909 had not been reported on the partnership books of account and explained that they had withheld that amount for the purpose of entering into a syndicate for the purchase of scarce materials in the black market. In the deficiency notice herein the respondent increased the net income of the partners and the petitioners for 1942 by disallowing a claimed bad debt and partially disallowing the travel and entertainment expenses claimed. Respondent increased the net income of the partnership and the petitioners in 1943 by adding to the net income as disclosed in the original returns the unreported sales of $ 30,909 and by disallowing a portion of the travel and entertainment expenses claimed in that year. Respondent also increased the earned income credit of each petitioner for 1942 and 1943. *1227 On the basis of these adjustments and *151 by giving effect to the provisions of the Current Tax Payment Act of 1943, respondent recomputed petitioners' tax liability for 1943. Against the total tax so computed he applied the taxes paid by petitioners with their original and amended returns. The additions to tax for fraud were computed by respondent as 50 per cent of the difference between the amount of tax shown on and paid with the petitioners' original returns and the total amount of tax for 1943 as computed by the respondent, without regard to the tax paid by way of the amended return. Each of the petitioners willfully and fraudulently, with intent to evade tax, failed to report in his income tax return for 1943 his true and correct share of partnership income. A part of the deficiency of each petitioner for the year 1943 is due to fraud with intent to evade tax. The deficiency in tax for 1943 of each of the petitioners is as follows: Aaron Hirschman $ 8,130.63 Leon P. Clair 8,157.83 David C. Clair 8,202.81 The amount of the tax liability, the tax paid with the original return, the tax paid with the amended return, and the net deficiency of each petitioner are as follows: Tax paid Tax paid Tax liability with original with amended return return Aaron Hirschman $ 23,058.43 $ 14,927.80 $ 6,867.11 Leon P. Clair 23,258.34 15,100.51 6,885.53 David C. Clair 23,674.57 15,471.76 6,928.19 *152 Total Net deficiency Aaron Hirschman $ 21,794.91 $ 1,263.52 Leon P. Clair 21,986.04 1,272.30 David C. Clair 22,399.95 1,274.62 OPINION. The sole question presented herein is whether the respondent was correct in imposing, in respect to the tax of each petitioner for 1943, a 50 per cent addition to tax for fraud under section 293 (b) of the Internal Revenue Code. It is undisputed that the original 1943 partnership return of Clair & Hirschman and the individual income tax returns of the petitioners filed in March 1944 failed to include income in the amount of $ 30,909. The amounts and sources of this income have been shown by the respondent and are not challenged by the petitioners. On November 6, 1944, petitioners learned that the respondent was investigating the tax returns of Morris Weisenfeld of Dallas, Texas, a customer of the petitioners. Three days thereafter, on November 9, 1944, petitioners filed an amended partnership return for 1943, disclosing the $ 30,909 omitted from the original return, and amended individual income tax returns reflecting the resulting increase in their distributive shares of partnership income for 1943. It is clear that the $ 30,909*153 omitted *1228 from the partnership's income in 1943 largely represented sales made by the petitioners to Weisenfeld and that these sales had not been recorded on the partnership's books. Petitioners did not appear at the hearing of this case and offered no testimony or other evidence in their own behalf. The only explanation of the failure to disclose the unreported $ 30,909 in their original returns is found in the testimony of respondent's agent, who stated that the petitioners admitted that the money was held back to enable them, as participants in a syndicate, to purchase scarce materials in the so-called "black market." Clearly, such a purpose would in no way relieve the petitioners of their duty to report their full income for Federal income tax purposes. The uncontroverted facts produced by the respondent clearly support the conclusion that the petitioners willfully and fraudulently, with intent to evade tax, failed to report the true and correct partnership income for 1943 and their individual distributive shares thereof. Cf. F. W. Lukins, 3 B. T. A. 204. Petitioners claim that the respondent has no legal basis for the imposition of the*154 50 per cent additions to tax for fraud, regardless of any finding of fraud which may be made in respect to their failure to report the $ 30,909 in their original returns. Essentially, petitioners' contention is that the deficiency in income tax for 1943 assessed against each petitioner in the deficiency notice bears no relation to the $ 30,909 withheld from income on their original returns, but stems solely from the respondent's adjustment of deductions which were admittedly not fraudulently claimed. From this they conclude that no part of the deficiency asserted against each in the notice of deficiency is due to fraud, and submit that the respondent has no basis in section 293 (b) for imposing the additions to tax. We are of the opinion that our holding in Thomas J. McLaughlin, 29 B. T. A. 247, disposes of the petitioners' contention. In that case the taxpayer failed to file an income tax return for each of the years 1924 to 1929, inclusive. A revenue agent subsequently prepared returns, which were executed by the taxpayer, and the taxes, delinquency penalties, and interest were paid. Thereafter, the taxpayer was indicted for fraud in each year *155 and pleaded guilty in respect to the years 1927, 1928, and 1929. Deficiencies consisting only of additions to tax for fraud for the years 1927, 1928, and 1929 were sustained by this Court. In that case we held with respect to section 275 (b) of the Revenue Act of 1926 and section 293 (b) of the Revenue Act of 1928, which were in substance identical with section 293 (b) of the Internal Revenue Code, that: These provisions, on their face, contain nothing that would require respondent to enforce penalties simultaneously with the assertion of a tax liability or forever *1229 after prevent him from asserting a penalty liability. The statute treats the penalties as "additions to the tax" and the only requirements as to enforcement proceedings is that they shall be "assessed, collected, and paid, in the same manner" as if they were deficiencies. It is obvious that, even if we are to accept petitioners' argument that the deficiency in tax assessed against petitioners stems only from the respondent's adjustment of the nonfraudulent deductions, the deficiency in tax due to the omission of $ 30,909 from the original returns was eliminated solely by virtue of the payment of tax accompanying*156 the amended returns. However, the holding in the McLaughlin case indicates to us that the fact that the true tax liability of a fraudulent taxpayer has been discharged by the subsequent filing of an amended return and the payment of the tax due does not bar the respondent from assessing a deficiency consisting only of additions to tax for fraud. Therefore, it is of no importance that the deficiencies in income tax for 1943 sought to be recovered in the instant proceeding under petitioner's theory are attributed only to the nonfraudulent elements of their returns. Petitioners further challenge the respondent's determination, arguing that in each case the only deficiency before the Court in these proceedings was the amount set forth in each deficiency notice and that the additions to tax assessed by the respondent in each case are in excess of 50 per cent of that amount. They claim that the difference between the tax reported in the original return and the amended return of each petitioner does not constitute a "deficiency" subject to the addition to tax imposed by section 293 (b)1 and that the respondent erred in including that amount in the deficiency from which the additions*157 to tax were computed. Section 271 (a) 2 generally defines a deficiency as the difference between the tax liability and the amount shown on the return. Whatever doubt there might be as to the meaning of the term "deficiency" as used in section 293 (b) is dispelled by the decision of this Court in Maitland A. Wilson, 7 T. C. 395. In that case the taxpayer contended that the term "deficiency" as used in section 293 (b) means that part *1230 of the tax remaining unpaid as set forth in the notice of deficiency. In rejecting that argument we stated: * * * it would seem that the phrase "total deficiency" as used in section*158 293 (b) where fraud is present can only mean the amount which is the difference between the tax liability and the amount shown on the return. The return referred to undoubtedly means the original return due at the times provided by law. We also held that: There is not the slightest indication in the history of section 271 (a) of the 1932 and 1934 Acts, in which the term "deficiency" is defined, that it was intended to change the existing scheme for imposing*159 a fraud penalty and reduce the penalty imposed under prior laws by 50 per cent of the amount of the understatement in tax which had been paid prior to the discovery of the fraud or the assertion of a penalty. The construction for which petitioner argues would assume an intent on the part of Congress to relieve from any penalty a taxpayer, guilty of fraud, who, finding the collector had discovered his fraud, quickly filed an amended return and paid the tax before the deficiency notice could be mailed. [See also Garden City Feeder Co., 27 B. T. A. 1132; reversed on other grounds, 75 Fed. (2d) 804.] The Commissioner has held that the "additional tax shown on an 'amended return', so called, filed after the due date of the return for the taxable year, is a deficiency within the meaning of the Code." Regulations 111, sec. 29.271-1; Mim. 3428, 1926 C. B. V-1, p. 119. Cf. Mim. 3374, 1926 C. B. V-1, p. 118. Moreover, a taxpayer's return is to be dealt with as a whole; the deficiency may not be divided and different penalties applied to its various parts. J. S. McDonnell, 6 B. T. A. 685; see also Mertens, *160 Law of Federal Income Taxation, sec. 55.14, vol. 10, p. 27. As the deficiency subject to the 50 per cent addition to tax for fraud consists of the difference between the tax liability and the amount shown on the original return ( Maitland A. Wilson, supra), and such additions to tax can be assessed regardless of the fact that a taxpayer may have paid the tax prior to the mailing of the deficiency notice ( Thomas J. McLaughlin, supra), it follows that the petitioners are liable for the 50 per cent additions to the tax for fraud as determined by the respondent in the notice of deficiency. Counsel for petitioners indicated at the hearing that he regarded the adjustment made by the respondent in the deductions claimed by petitioners to be in issue. The petition alleged no error in respect to these deductions and no evidence relating to such deductions was introduced at the hearing, nor were they discussed by the petitioners on brief. Therefore, the deficiencies and additions to tax as set forth in the notice of deficiency are sustained. Decisions will be entered for the respondent. Footnotes 1. SEC. 293. ADDITIONS TO THE TAX IN CASE OF DEFICIENCY. * * * * (b) Fraud. -- If any part of any deficiency is due to fraud with intent to evade tax, then 50 per centum of the total amount of the deficiency (in addition to such deficiency) shall be so assessed, collected, and paid, in lieu of the 50 per centum addition to the tax provided in section 3612 (d) (2).↩ 2. SEC. 271. DEFINITION OF DEFICIENCY. (a) In General. -- As used in this chapter in respect of a tax imposed by this chapter, "deficiency" means the amount by which the tax imposed by this chapter exceeds the excess of -- (1) the sum of (A) the amount shown as the tax by the taxpayer upon his return, if a return was made by the taxpayer and an amount was shown as the tax by the taxpayer thereon, plus (B) the amounts previously assessed (or collected without assessment) as a deficiency, over -- (2) the amount of rebates, as defined in subsection (b) (2), made.↩