Maxey v. Commissioner

Marvin Maxey and Bernice Maxey, Petitioners, v. Commissioner of Internal Revenue, Respondent Maxey v. Commissioner Docket No. 55416 United States Tax Court 26 T.C. 992; 1956 U.S. Tax Ct. LEXIS 102; August 31, 1956, Filed *102 Decision will be entered for the respondent. Petitioners operated, through a corporation, a taxicab business during 1950 and 1951. They were unable to obtain adequate public liability insurance coverage during those years and large damage claims were pending against the corporation at the end of each year. They, nevertheless, realized both substantial gross and net income from that business as well as from other sources during both years. They filed no declarations of estimated tax and made no payments of estimated tax during either year. Held, petitioners failed to show reasonable cause excusing their failure to file declarations of estimated tax and the respondent properly determined additions to tax as provided in section 294 (d) (1) (A), 1939 Code, for failure to do so and for substantial underestimate of estimated tax as provided in section 294 (d) (2). E. Harold Sheats, Esq., for the petitioners. Robert B. Kollen, Esq., for the respondent. Rice, Judge. RICE *993 This proceeding involves the following deficiency and additions to tax: Income tax Additions to tax under Year deficiency Sec. 294 (d) (1) (A) Sec. 294 (d) (2) [1950] $ 847.60 $ 565.07 [1951] $ 38.50 1,536.42 1,023.26 No error was assigned with respect to the deficiency in income tax and the only issue is whether the respondent erred in imposing the aforementioned additions to the tax. Some of the facts were stipulated. FINDINGS OF FACT. The petitioners, *104 husband and wife, were residents of Atlanta, Georgia, during the years in issue and filed their joint returns for such years with the former collector of internal revenue for the district of Georgia. From 1946, to and throughout the years in issue, Marvin Maxey (hereinafter referred to as the petitioner) was engaged in the taxicab business. Because of petitioner's ill health, his son, Marvin Maxey, Jr., was largely responsible for the management of the taxicab business and prepared the petitioners' returns for the 2 years here in issue. Petitioner operated his taxicab business through a corporation known as Associated Cab Company, Inc. (hereinafter referred to as Associated), of which he was the president and Marvin, Jr., the vice president. Associated was essentially a nonprofit cooperative venture in which several cab owners participated in the following way: The owners of individual taxicabs leased the cabs to licensed drivers who operated them under a written contract with Associated. The driver paid for one-half of the gasoline and retained 50 per cent of the gross fares. The owners, in addition to furnishing the cabs, paid for repairs, batteries, tires, washing, greasing, *105 oiling, and licenses, and also provided public liability insurance when available. Associated provided the owners various services in exchange for a mutually agreed sum. An ordinance of the City of Atlanta, Georgia, required all taxicab owners to give bond for public liability in the amount of $ 10,000 for bodily injury to each person, $ 20,000 for each accident, and $ 5,000 for property damage. In lieu of the bond, the City permitted the substitution of adequate insurance coverage provided by an approved insurance company. From July 1, 1948, to June 30, 1949, Associated was able to obtain so-called excess coverage insurance for the taxicab owners, which *994 coverage provided for payment of damages in excess of $ 5,000 with a maximum payment of $ 15,000. From July 1, 1949, to December 31, 1949, Associated was not able to obtain any kind of insurance coverage for the owners, and from January 1, 1950, until August 1, 1952, it was able to obtain an excess coverage policy similar to the one which it had during 1948. As a result of the inability to obtain adequate insurance coverage, the taxicab owners, through Associated, deposited a bond with the City of Atlanta as required*106 by its ordinance. Petitioner, in fact, deposited the bond because he was the only owner financially able to do so. Associated also required each owner to deposit with it $ 37.50 per month, per cab, to establish a public liability fund. The contribution from the various owners averaged approximately $ 1,800 to $ 1,900 per month, and it was from this fund that the premiums for insurance protection were paid when such protection was available. During the calendar year 1950, $ 26,162.81 was paid out of such fund in settlement of public liability claims for insurance premiums and other costs. During the calendar year 1951, the sum of $ 16,667.12 was paid for similar purposes. From March 15, 1950, to December 15, 1951, inclusive, the total damages claimed against Associated at various times during such period ranged from $ 117,898 to $ 340,898. Many claims against Associated in the amounts of $ 10,000 to $ 50,000 were settled for as little as $ 112.50 to $ 1,250. Petitioner realized the following amounts of net profit from his taxicab business during the years indicated: [1947] $ 10,595.62 [1948] 12,103.86 [1949] 7,505.87 [1950] $ 13,467.95 [1951] 28,408.30 In addition to the *107 net profit realized on such business, petitioner, in 1950 and 1951, had net income from the following sources and in the following amounts: [1951] Salary from Associated Cab Company, Inc $ 5,200.00 $ 5,200.00 Rents 9,416.44 5,368.40 Service station 5,867.44 8,096.01 Net capital gain 1,894.05 675.00 Soft drink sales 913.40 Miscellaneous income 390.67 Petitioner reported adjusted gross income of $ 35,845.88 and paid a tax of $ 10,180.88 for 1950; he reported adjusted gross income of $ 49,051.78 and paid a tax of $ 17,995.76 for 1951. He filed no declarations of estimated tax nor did he make payments of estimated tax in either year. He was fully aware of the requirements for doing so. The respondent determined additions to the tax for petitioner's failure *995 to file declarations of estimated tax and for his substantial underestimate of estimated tax under sections 294 (d) (1) (A) and 294 (d) (2), respectively. There was no reasonable cause excusing petitioner's failure to file declarations of estimated tax during either 1950 or 1951. OPINION. Section 58 (a) 1 provides that every individual whose gross income can reasonably be expected to exceed*108 the amounts set forth in the statute shall file a declaration of estimated tax. The penalty for failure to file, provided by section 294 (d) (1) (A), 2 however, is based on the amount of tax actually due and hence relates to a taxpayer's net taxable income. *109 The petitioners herein stipulated that they "reasonably expected their gross income to exceed $ 600 during each of the years 1950 and 1951." We think the clear import of that stipulation is that they concede they came within the statutory language requiring the filing of declarations of estimated tax, as, indeed, the facts show they did. They argue, however, that even though they might reasonably have expected to receive sufficient gross income to require the filing of declarations, they had reasonable cause for not doing so because by the end of the year they thought their net taxable income would be zero and that they would thus owe no tax. They say this is so because of the large outstanding contingent claims, in the form of damage suits, pending against Associated. We think this argument without *996 merit and insufficient to constitute the reasonable cause contemplated by the statute which would excuse failure to file declarations. What the petitioners did was simply take the chance that, even though they had substantial gross income, they could escape the penalty because they might not owe any tax. Petitioners obviously could have reasonably expected their gross income*110 to have been sufficient to have required the filing of declarations. From 1947, to and throughout the years in issue, they, in fact, realized a substantial profit on their taxicab business. It is to be remembered that in 1948 they had the same type of insurance coverage which they had during the years in issue, and for a part of 1949 they had no insurance coverage; but in both of those years the business yielded a substantial gross and net profit. In addition to that, petitioners received large amounts of gross and net income from four other sources in 1950 and from six other sources in 1951. Furthermore, we do not believe that this record warrants a finding that the amount of the outstanding claims which petitioners or Associated might have paid in either one of the years would have been anything more than a fraction of their face amount. In any event, the possibility of the payment of a contingent liability is no excuse for failure to file the declaration required by the statute. . If petitioners or Associated had, in fact, been required to pay substantial damage claims during the year which would have forecast*111 a substantially reduced tax, they could have filed an amended declaration. But the expectation of little or no net taxable income does not excuse a taxpayer's failure to file a declaration where the amount of his gross income satisfies the statutory requirement for filing. We therefore conclude that the petitioners' failure to file the declarations required by the statute was not due to reasonable causes. See ; and . Where no declarations of estimated tax are filed, the estimate is deemed to be zero and the addition to the tax provided in section 294 (d) (2) 3 for substantial underestimate of estimated tax is mandatory. Reasonable cause is not an available excuse absolving a taxpayer of that penalty. , modified ; , affirmed on other grounds (C. A. 10, 1954). *112 Decision will be entered for the respondent. Footnotes 1. SEC. 58. DECLARATION OF ESTIMATED TAX BY INDIVIDUALS. (a) Requirement of Declaration. -- Every individual (other than an estate or trust and other than a nonresident alien with respect to whose wages, as defined in section 1621 (a), withholding under Subchapter D of Chapter 9 is not made applicable, * * *) shall, at the time prescribed in subsection (d), make a declaration of his estimated tax for the taxable year if -- (1) his gross income from wages (as defined in section 1621) can reasonably be expected to exceed the sum of $ 4,500 plus $ 600 with respect to each exemption provided in section 25 (b); or (2) his gross income from sources other than wages (as defined in section 1621) can reasonably be expected to exceed $ 100 for the taxable year and his gross income to be $ 600 or more.↩ 2. SEC. 294. ADDITIONS TO THE TAX IN CASE OF NONPAYMENT. (d) Estimated Tax. -- (1) Failure to file declaration or pay installment of estimated tax. -- (A) Failure to File Declaration. -- In the case of a failure to make and file a declaration of estimated tax within the time prescribed, unless such failure is shown to the satisfaction of the Commissioner to be due to reasonable cause and not to willful neglect, there shall be added to the tax 5 per centum of each installment due but unpaid, and in addition, with respect to each such installment due but unpaid, 1 per centum of the unpaid amount thereof for each month (except the first) or fraction thereof during which such amount remains unpaid. In no event shall the aggregate addition to the tax under this subparagraph with respect to any installment due but unpaid, exceed 10 per centum of the unpaid portion of such installment. For the purposes of this subparagraph the amount and due date of each installment shall be the same as if a declaration had been filed within the time prescribed showing an estimated tax equal to the correct tax reduced by the credits under sections 32 and 35.↩ 3. 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 * * * exceeds the estimated tax * * *, 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 * * * exceeds the estimated tax so increased, whichever is the lesser. * * *↩