United Dressed Beef Co. v. Commissioner

United Dressed Beef Company, et al., 1 Petitioners, v. Commissioner of Internal Revenue, Respondent United Dressed Beef Co. v. Commissioner Docket Nos. 30317, 30318, 30319, 30320, 30321 United States Tax Court 23 T.C. 879; 1955 U.S. Tax Ct. LEXIS 241; February 18, 1955, Filed *241 Decisions will be entered under Rule 50. A corporation engaged in slaughtering cattle and hogs and selling meat invoiced its products to customers at the ceiling prices fixed by the Government. The two owners of all the stock collected cash overceiling payments from customers, measured by the quantity of meat delivered. No record of these collections was maintained. Returns of the corporation prepared by accountants did not include these receipts. The stockholders reported on their tax returns certain amounts as "commissions" or "miscellaneous income from other sources," but less than the amount of the overcollections determined by the respondent. The wives of the stockholders signed returns prepared by accountants reporting their income from their hsubands' earnings pursuant to the community property laws. Held: 1. The amount of overceiling collections determined by respondent is not shown to be erroneous. 2. The overceiling collections were income to the corporation. 3. The stockholders' returns were fraudulent with intent to evade tax. 4. Returns of the stockholders' wives were not fraudulent. 5. Returns of the corporation were not fraudulent. Alva C. Baird, Esq.,*242 Benjamin W. Shipman, Esq., William A. Cruikshank, Jr., Esq., and Albert J. Galen, Esq., for the petitioners. Donald P. Chehock, Esq., for the respondent. Tietjens, Judge. TIETJENS *880 The respondent determined income tax deficiencies and 50 per cent additions to the tax for fraud against the individual petitioners for the calendar years 1943 to 1946, inclusive, in the following amounts: Samuel Rose Borne Benjamin Jean Borne Borne Borne 1943 Deficiency $ 5,635.89 $ 5,635.89 $ 5,396.29 $ 5,415.94 Addition 2,817.95 2,817.95 2,698.15 2,707.97 1944 Deficiency 4,835.35 4,835.35 9,116.73 9,446.73 Addition 4,564.08 4,564.08 4,558.37 4,723.37 1945 Deficiency 4,681.35 4,681.35 4,592.12 4,652.12 Addition 2,340.68 2,340.68 2,296.06 2,326.06 1946 Deficiency 5,505.82 5,505.82 5,434.96 5,510.96 Addition 2,752.91 2,752.91 2,717.48 2,755.48 The respondent also determined deficiencies against United Dressed Beef Company in corporation income tax, declared value excess-profits tax, and excess profits tax, and 50 per cent additions for fraud for fiscal years ended August 31, in 1943, 1944, 1945, 1946, and 1947. Declared Fiscal year Income tax value Excess profits 50 per cent ended in excess profits tax tax additions [1943] $ 3,614.70 $ 1,807.35 $ 28,992.92 14,496.46 [1944] 9,057.80 4,528.90 76,600.59 38,300.30 [1945] 10,722.62 5,361.31 97,919.37 48,959.69 [1946] 29,928.78 14,964.39 $ 29,926.75 14,963.38 [1947] 10,425.68 *243 This proceeding involves amounts collected by Samuel and Benjamin Borne, sole stockholders of the United Dressed Beef Company, in excess of the ceiling prices fixed by the Office of Price Administration upon meat sold by the corporation in the years 1942 to 1946, inclusive. The issues are what were the amounts so collected, whether these amounts constituted income to the corporation, and whether the additions to the tax for fraud were properly asserted against the corporation, the stockholders, and the wives of the stockholders. The returns of all the petitioners for the years involved were filed with the collector of internal revenue at Los Angeles, California. FINDINGS OF FACT. Petitioner Samuel Borne (hereinafter sometimes referred to as Sam) was born in Poland about 1892, came to the United States in 1911, and became a naturalized citizen about 1916. Rose Borne is Sam's wife. Benjamin Borne (hereinafter sometimes referred to as Ben), who is Sam's half brother, came to the United States about 1914. Jean Borne is Ben's wife. Ben engaged in the business of *881 buying cattle and shipping them to Sam at or near Los Angeles, for slaughter. Sam then operated a butcher shop. *244 The two did business as partners for a time. In 1924 Sam and Ben, with others, incorporated United Dressed Beef Company under the laws of California. Since the early 1930's Sam and Ben have been the sole stockholders, each owning 50 per cent of the stock. The corporation has continuously been engaged in the meatpacking and slaughtering business in Vernon, California. The corporation's books were kept and its tax returns were filed on the accrual basis and for fiscal years ending August 31. During the taxable years the corporation owned a plant at 4360 South Soto Street, in Vernon. The offices of the corporation were in the southeastern corner of the plant. On the second floor were the general office and offices for Sam Borne and for Frank Smith, the office manager. Below these on the first floor was a sales office located near the loading dock where meats sold were loaded into trucks for transportation to customers. Behind the loading dock were the coolers in which dressed meat was kept for sale. Sam Borne was president and general manager of the corporation. Ben was vice president. Each received a salary of $ 15,750 for each of the taxable years. Sam supervised operation*245 of the plant and sold meat from the coolers to some of the customers. He also did the buying of hogs. Ben Borne attended to buying cattle and sheep. He spent little time at the plant. The corporation had not more than 35 employees during the taxable years. G. V. Allen was employed by the corporation from about 1928 to 1944. In 1943 and 1944 he was head salesman at the cooler in the plant. His salary then was $ 150 per week. He left about October 1, 1944, and went into the business of buying cattle, which he had slaughtered by another packing company, and selling the meat. George F. Lutz was for a time an outside salesman and later was assistant to Allen as cooler salesman. As an outside salesman his salary was $ 60 per week. When Allen left, Lutz succeeded him as head cooler salesman and was paid $ 125 per week. When meat was delivered to customers the quantity sold was reported to the office and an invoice was sent the customer for the amount due. This amount was usually paid by check. The corporation's tax returns were prepared by Graves and Cobun, certified public accountants, of Los Angeles, from about 1929 to the fiscal year ended August 31, 1947. The returns correctly*246 show the income to the extent it was recorded on the books of the corporation. This accounting firm also prepared the returns for the individual petitioners for calendar years through 1946. These were based upon figures from the corporation's records and other figures furnished by *882 Sam Borne. The returns for Jean Borne and Rose Borne were made in accordance with the community property laws and on the assumption that they had no income separate from that received by their husbands. No books or records of the individual petitioners were furnished to the accountants. During the war years the supply of meat became reduced and the Government required delivery of certain quotas from meat processors. The amount of meat the corporation had available for sale to civilian customers was limited. The Office of Price Administration fixed ceiling prices on meat early in 1942. Ceiling prices on meat were in effect until June 30, 1946, were reinstated about September 1, 1946, and terminated about October 14, 1946. The corporation invoiced meat to its civilian customers at the prescribed ceiling prices and these amounts were paid usually by check. Sometime in the latter part of 1942*247 Sam and Ben Borne adopted a policy of requiring customers to pay additional amounts in cash measured by the quantity of beef delivered. A beef averages 500 pounds in weight. The customers were required to pay $ 5 in cash for each beef purchased, in addition to the ceiling price shown on the invoice. The practice was that these overceiling amounts would be paid in currency, weekly or every other week, to Sam or Ben Borne or to Allen. The currency was delivered by hand, sometimes in an envelope, sometimes in a roll of paper. The customer paid when he came to the plant to get delivery of more meat. The salesman told the customer how much to pay according to the quantity of meat previously delivered as shown by the invoices. No receipts were given. Allen was required to turn over to Sam or Ben Borne collections from the customers he serviced. After Allen left, Lutz made collections from certain of the customers upon orders of Sam Borne and turned over the money to Sam or Ben. Sam kept the currency in a safe at his home and divided it with Ben every 30 or 60 days. Sam and Ben used some for personal expenses and deposited the remainder in their individual bank accounts. None*248 of the currency was turned over to the corporation and the office manager was not informed of the collections. The corporation's books do not record these collections and they were not included as income on the corporation's tax returns. The overceiling payments were not made by all the corporation's civilian customers, but were made by most of them. At some time in 1943 Sam Borne ordered the additional collection raised to $ 10 per beef or 2 cents per pound. This charge was continued until sometime in 1945 when the additional charge was figured at 3 cents per pound. Some of the customers were charged 4 cents or 5 cents a pound in late 1945 or in 1946. Some overceiling collections were made on pork. *883 The returns of the individual taxpayers reported as "commissions" or "miscellaneous income from other sources" an aggregate of $ 129,000 for the years 1943 through 1946. The aggregate amount reported for each year was divided equally among the four individuals. For 1943, a total of $ 30,000 was reported on the four returns. For 1944, none was reported on the original returns, but $ 40,000 was reported on amended returns filed in July or August 1946. For 1945, $ 35,000*249 was reported and for 1946, $ 24,000 on the taxpayers' individual returns. During the period January through August 1943 the corporation's sales of dressed beef to civilian customers amounted to 2,637,832 pounds. During the fiscal years ended in 1944 and 1945, sales of dressed beef were 6,832,233 pounds and 7,113,717 pounds, respectively. For the fiscal year ended in 1946, omitting July and August, such sales were 6,336,633 pounds. In September 1946 and October 1-14, 1946, such sales were 970,623 pounds. During the period January 1943 to October 1946 the corporation's sales of dressed veal were nearly 2,000,000 pounds and the sales of dressed pork amounted to more than 10,000,000 pounds. The overceiling collections were in the following amounts during the fiscal years ended in 1943 to 1947: Year ended in Amount [1943] $ 39,567.48 [1944] 102,483.50 [1945] 106,705.76 [1946] 95,049.50 [1947] 14,559.35 The overceiling collections were made by the corporation and they were distributed to the stockholders. The corporation declared a formal dividend of $ 20,000 in August 1947. No formal dividends were declared in the earlier taxable years. Taking into consideration the current*250 earnings and available surplus of the corporation and the above amounts of income to the corporation and distributions to the stockholders in the fiscal years shown, the corporation made taxable distributions to the stockholders in the calendar years 1943 to 1946 in the following amounts: [1943] $ 69,310.18 [1944] 73,066.72 [1945] 65,220.80 [1946] 68,894.22 In September 1945, and prior to the filing of the corporation's return for the fiscal year ended August 31, 1945, Sam and Ben Borne consulted competent counsel concerning the reporting for tax purposes of the overceiling collections. They were advised that such collections were income to them and should be reported on their individual *884 returns, that they should file amended returns for 1944 reporting collections which they had omitted from their original returns, and that the collections were not income to the corporation. Similar advice was given them in February 1946 by other counsel. The petitioners Sam and Ben Borne intentionally omitted substantial amounts of income from their returns for the calendar years 1943, 1944, 1945, and 1946. The deficiencies in tax of Samuel Borne and Benjamin Borne for such years*251 were due to fraud with intent to evade tax. OPINION. The petitioners admit that Sam and Ben Borne, the sole stockholders of the corporation, received cash collections in excess of the ceiling price of meat sold by the corporation, as fixed by the Office of Price Administration. The amount of such collections is in issue. The respondent determined the deficiencies upon the basis that the collections amounted to $ 358,365.59, while the petitioners contend that they were not in excess of $ 129,000, the amount the individual petitioners reported on their returns. The second issue is whether the respondent erred in treating these collections as constituting income to the corporation and as dividends distributed by the corporation to the stockholders. The petitioners contend that no part of such cash collections was income to the corporation. The third issue is whether the assertion of additions to the tax for fraud was warranted. The petitioners attack the respondent's estimate of the amount of the overceiling collections as being excessive as well as arbitrary and capricious. The records of the corporation showed none of the overceiling collections. No records of Sam or Ben Borne*252 were made available from which the amounts reported in the individual taxpayer's returns could be verified or from which any calculation of the actual amount of the overceiling collections could be made. The corporation's records showed the amount of beef sold, in pounds, for each month during the period from January 1943 so long as price ceilings were in effect. The evidence shows that the rate of overcollections ranged from 1 cent to as much as 5 cents per pound, and that most of the customers paid these amounts. The testimony gave the proportion of the beef sales to civilian customers subject to collection of overceiling amounts, as ranging from 60 to 90 per cent or more. Sam said that 60 per cent of the customers paid. Allen said that he collected on 90 per cent of his sales. Lutz said that he collected from all of the customers assigned to him. Some collections were made on sales of pork and veal. The respondent estimated the amount of the collections by applying a rate of 1 1/2 cents per pound to the quantity of beef sold by the corporation to its civilian customers. The rate of *885 1 1/2 cents was adopted upon consideration of the facts that the rate of overcharge*253 ranged from 1 to 5 cents and for most of the time was at least 2 cents, and that collections were not made on all sales of beef. Collections actually made on sales of pork and veal were disregarded in the respondent's computation. Where a taxpayer's records are inadequate to permit verification of the returns or if the records are unreliable the respondent may determine income by other reasonable means. Hyman B. Stone, 22 T. C. 893, 905 (1954), on appeal (C. A. 1). In the absence of better evidence the method of computation adopted appears reasonable and we have not been persuaded that the income determined thereby is excessive. The petitioners' difficulty is of their own making in failing to keep records of the amounts collected. The petitioners complain that no net worth computation was offered by the respondent for corroboration or comparison. The respondent is under no obligation to make such a computation. The petitioners could have offered evidence of net worth if they believed it would show error in the respondent's computation, but they did not do this. The amounts of the deficiencies are sustained as no error has been proved. The second*254 issue is whether these collections were income to the corporation. The petitioners point out that the corporation received the full ceiling price for its meat, as the customers were billed at the prescribed ceiling prices for the meat delivered, and paid these bills, usually by check, and the overceiling amounts collected did not go into the corporation's accounts. It appears that the corporation's bookkeeper was unaware of such collections until after the years involved. The accountants who prepared the returns did so from the corporation's records and were not told of any additional income to the corporation. While they were told of some additional income of the individual taxpayers the true source of this was not explained to them. The petitioners contend that under these facts the overceiling collections were not income to the corporation since the corporation received all it was legally entitled to receive and the stockholders did not intend that it should receive more. They argue that in receiving these collections Sam and Ben Borne were acting in their individual capacities and not as officers of the corporation, and that the payments were similar to tips for special *255 favors rendered by employees of the company. The overceiling collections were clearly income belonging to the corporation. Sam and Ben Borne, the sole and equal owners of the stock, participated in the collections and shared the proceeds equally. Allen and Lutz, who collected some of the money and paid it over to Sam and Ben, did so on orders of the officers of the corporation which was their employer. The meat sold was owned by the corporation *886 and the amounts collected were measured by the pounds of meat sold to customers of the corporation. The exaction of the payments was possible because of the scarcity of meat and the willingness of buyers to pay more than the fixed prices. These amounts do not resemble tips to a minor employee, for no additional services were rendered as consideration for them and the responsible officers of the corporation directed these collections. On these facts we have found that the overceiling collections were made by the corporation. See United States v. Joliet & Chicago Railroad Co., 315 U.S. 44 (1942); Essex Construction Co., 12 T. C. 1212 (1949); Currier v. United States, (C. A. 1, 1948) 166 F. 2d 346,*256 and Miller-Smith Hosiery Mills, 22 T. C. 581 (1954). The case of Harry Sherin, 13 T. C. 221 (1949), relied upon by the petitioners, is not in point. Sherin owned 50 per cent of the stock of a corporation. The owner of the other 50 per cent arranged to receive cash overceiling payments in return for preferential services to certain new customers. This was without the knowledge of Sherin, who received no part of the payments. Upon learning of the arrangement Sherin repudiated it. Clearly under those facts the arrangement was not a corporate action and the proceeds to the one stockholder were not income to the corporation. Here stockholders of all the stock shared in the collection of overceiling amounts upon the corporation's products. Their action cannot properly be regarded as a venture separate from the corporation's business. The case of United States v. Chapman, (C. A. 7, 1948) 168 F. 2d 997, also cited by the petitioners, does not deny that income of this nature belongs to the corporation. In that case the president and principal stockholder of a corporation was convicted of*257 income tax evasion. It appeared that he collected overceiling amounts on meats sold by the corporation. He contended that such income must be attributed to the corporation and not to him, relying on Commissioner v. Wilcox, 327 U.S. 404 (1946), to the effect that embezzled moneys do not constitute income to the embezzler. In the Chapman case the court observed: Here, there was no question but that the corporation received full payment for all meats sold by it, and the additional income to appellant resulted from the collection of what was in effect a premium for such sales by the corporation which he controlled as president and principal stockholder. We need not decide whether the corporation was entitled to recover those additional payments. However, even if it were shown that appellant collected as agent for the corporation, it would not necessarily follow that there would be no liability on his part for attempted evasion of the taxes due on such collections. * * * The court did not decide that the money was not income to the corporation. The case does not help the petitioners. We hold that the overceiling collections here were income*258 to the corporation. *887 On the fraud issue, the burden of proof is upon the respondent. Sec. 1112, I. R. C., 1939. It is necessary that fraud be proved by convincing evidence. The petitioners Sam and Ben Borne filed individual returns in which they omitted to report substantial amounts of overceiling collections as income. While the individual petitioners reported $ 129,000, the evidence shows that over $ 350,000 was collected. The amounts reported were in round figures and were obviously estimated. In total they amount to less than 1 cent per pound on 60 per cent of the beef sold. We think the evidence is clear that the collections exceeded twice the amounts reported. The amounts omitted were too great to be due to inadvertence. They say they kept records and reported the full amounts actually collected, but no such records were produced and the amounts reported cannot be verified. Where large amounts of income are undoubtedly received and over several successive years are omitted from returns, it is convincing evidence of fraud warranting the 50 per cent addition to the tax. M. Rea Gano, 19 B. T. A. 518. See also Halle v. Commissioner, (C. A. 2, 1949) 175 F. 2d 500;*259 Charles A. Rogers, 38 B. T. A. 16, affd. (C. A. 6, 1940) 111 F. 2d 987; Arlette Coat Co., 14 T. C. 751. As to the petitioners Sam Borne and Ben Borne, the additions to tax for fraud were properly asserted. The petitioners Rose Borne and Jean Borne had no part in the business of the corporation and no part in the collection of overceiling amounts. The returns they signed were prepared for them by accountants from information furnished by their husbands. They did not testify and there is no evidence that they were aware of any omissions of income from these returns. The necessary affirmative evidence of intent to evade tax is lacking as to these petitioners. It follows that the additions to tax for fraud are not warranted as to Rose and Jean Borne. The respondent asserted additions to tax for fraud against the corporation for its omission to report the overceiling collections in its returns. The stockholders took the view that this money was not income of the corporation, but belonged to them individually. The corporation's returns for fiscal years ended in 1943, 1944, and 1945 were prepared*260 by accountants from the books of the corporation, but the accountants were not informed of the source of the additional money reported by the individual taxpayers as commissions. When the stockholders sought legal advice, in 1945 and 1946, they were advised by competent counsel that this money was not income to the corporation. While we consider this advice to have been erroneous, the corporation, in following it in connection with the returns filed for the fiscal years ended in 1945, 1946, and 1947, did not omit income fraudulently with intent to evade tax. Spies v. United States, *888 317 U.S. 492 (1943); C. R. Lindback Foundation, 4 T. C. 652 (1945); Charles C. Rice, 14 T. C. 503 (1950). Nor is it affirmatively shown by the respondent that the responsible officers of the corporation believed the cash collections to represent income to the corporation in the fiscal years ending prior to 1945. As pointed out in the Spies case, supra, it is not the purpose of the law to penalize honest differences of opinion or innocent errors made despite the exercise of reasonable care. *261 We think the evidence is not sufficient to sustain imposition upon the corporation of the additions to tax for fraud. See Charles C. Rice, supra, and L. B. Hirsch, 42 B. T. A. 566, 573 (1940). Decisions will be entered under Rule 50. Footnotes 1. Proceedings of the following petitioners are consolidated herewith: Samuel Borne, Docket No. 30318; Rose Borne, Docket No. 30319; Benjamin Borne, Docket No. 30320; and Jean Borne, Docket No. 30321.↩