Court Opinion

ID: 4610959
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:48:00.040519+00
Date Added: 2024-06-11T07:54:09.267430
License: Public Domain

J. D. Ledbetter v. Commissioner.Ledbetter v. CommissionerDocket No. 8143.United States Tax Court1953 Tax Ct. Memo LEXIS 317; 12 T.C.M. (CCH) 354; T.C.M. (RIA) 53105; March 31, 1953*317  Petitioner, a sawmill owner and operator, kept practically no books or records. Respondent increased sales, decreased purchases, and made other adjustments to which petitioner agrees. 1. Held, petitioner has failed to prove his labor expenses were greater than those claimed in his returns and allowed by respondent; 2. Held, further, petitioner understated his taxable net income for 1942 and 1943 with intent to evade tax so that the 50 per cent fraud penalty applies to each year; and 3. Held, further, a 10 per cent penalty for failure to file a declaration of estimated tax for 1943 and a 6 per cent penalty for substantial underestimation of tax for 1943 are applicable.  James B. Estes, Jr., Esq., for the petitioner. Thomas C. Cravens, Jr., Esq., for the respondent.  RICEMemorandum Findings of Fact and Opinion The respondent determined deficiencies and penalties for the taxable years 1942 and 1943 as follows: 50%10%6%YearTaxDeficiencyPenaltyPenaltyPenalty1942Income$6,271.65$3,135.821943Income and Victory2,017.361,008.68$201.74$121.04The questions to be decided are: (1) whether petitioner*318  is entitled to a deduction for "labor-sawmill" expenses for the years 1942 and 1943 in excess of the amounts claimed in his returns and allowed by respondent for those years; (2) whether the petitioner is liable for a 50 per cent fraud penalty for the years 1942 and 1943; (3) whether petitioner is liable for a 10 per cent penalty for failure to file a declaration of estimated tax for the year 1943; and (4) whether the petitioner is liable for a 6 per cent penalty for substantial underestimation of tax for the year 1943. Findings of Fact Petitioner is an individual residing at Willacoochee, Georgia. He filed his income tax return for 1942 and his income and victory tax return for 1943 with the collector of internal revenue for the district of Georgia. During the taxable years, petitioner was a sawmill operator in Willacoochee, owning and operating the Ledbetter Lumber Company. Agents of the respondent began an investigation of petitioner's income tax liabilities for 1942 and 1943 in October 1944. Petitioner's records were meager, consisting solely of a large box in which he had placed numerous papers relating to the operation of his business. He turned this box over to respondent's*319  agents during the investigation. Petitioner's net profits for the years 1942 and 1943, as disclosed by his returns and as corrected by respondent, are as follows: 1942DisclosedIncreaseDecreaseby ReturnCorrectedin Incomein IncomeSales: Timber$107,247.31$114,477.39$ 7,230.08Merchandise02,364.352,364.35Total$107,247.31$116,841.74Cost of Lumber and Timber: Inventory, Beginning: Lumber0$ 1,500.00Timber06,000.00Total0$ 7,500.00Purchases: Logs0$ 1,185.59Timber$ 39,550.0033,240.75Total$ 39,550.00$ 34,426.34Sum of above totals$ 39,550.00$ 41,926.34Less: Inventory, End: Lumber0$ 3,200.00Timber05,766.67Total0$ 8,966.67Cost of Goods Sold$ 39,550.00$ 32,959.67$ 6,590.33Gross Profit$ 67,697.31$ 83,882.07Less: Expenses: Labor - Sawmill$ 24,078.61$ 24,078.61Labor - Contract Sawmills28,286.2523,347.324,938.93Other Labor651.50651.50Truck Repairs618.40Tractor Repairs518.621,137.94$ .92Mill & Office Supplies3,808.623,489.44319.18Gas, oil & fuel oil6,071.326,151.3280.00Fire Insurance330.00330.00Interest Paid1,293.33993.33300.00Feed138.40111.3127.09Taxes0589.67589.67Auto Tags & Use Stamps55.0055.00Telephone & Telegraph0260.00260.00Depreciation02,253.842,253.84Error in Addition( .20).20Total Deductions$ 65,849.85$ 63,449.28Net Profit$ 1,847.46$ 20,432.79$21,769.96$3,184.633,184.63Net increase in income$18,585.331943Sales: Timber$ 98,649.98$102,437.77$ 3,787.99Merchandise00Total$ 98,649.98$102,437.77Cost of Lumber and Timber: Inventory, Beginning: Lumber0$ 3,200.00Timber05,766.67Total0$ 8,966.67Purchases: Logs$ 2,205.07$ 2,090.48Timber14,818.958,112.45Total$ 17,024.02$ 10,202.93Sum of above totals$ 17,024.02$ 19,169.60Less: Inventory, End: Lumber0$ 2,850.00Timber03,228.11Total0$ 6,078.11Cost of Goods Sold$ 17,024.02$ 13,091.49$ 3,932.53Gross Profit$ 81,625.96$ 89,346.28Less: Expenses: Labor - Sawmill$ 35,150.10$ 36,004.17$ 854.07Labor - Contract Sawmills18,637.3418,366.54270.80Other Labor683.65547.42136.23Truck Repairs7,908.84Tractor Repairs1,823.067,654.222,077.68Mill and Office Supplies4,419.854,376.7543.10Gas, Oil and Fuel Oil6,051.146,153.36102.22Fire Insurance150.00190.0040.00Interest Paid1,200.00302.89897.11Feed3,479.682,304.111,175.57Freight and Express1,538.4667.511,470.95Taxes172.28172.28Auto Tags and Use Stamps55.0055.00Telephone and Telegraph260.00260.00Depreciation2,995.242,995.24Loss95.6395.63Total Deductions$ 81,042.12$ 79,545.12Net Profit$ 583.84$ 9,801.16$13,791.76$4,574.444,574.44Net Increase in Income$ 9,217.32*320  The Georgia unemployment compensation tax returns, filed by petitioner for the taxable years, show total wages paid for 1942 and 1943 in the amounts of $24,566.31 and $35,362.95, respectively. In addition, petitioner was required to pay $854.07 for the year 1943 by the Wages and Hours Division of the Department of Labor. Petitioner had no books and records to establish any increase in his "labor-sawmill" expense for the taxable years. At the hearing, some witnesses testified as to approximate amounts which they received from petitioner during such years for services rendered in those years. The names of some of these individuals did not appear in the unemployment compensation tax returns and those that did so appear showed wages of much lower amounts than those they testified to receiving. The following table sets forth a summary of such testimony for the taxable years, giving the approximate amounts these persons testified they received during the taxable years and the amount which appeared in the Georgia unemployment compensation tax returns for those years: 19421943Unem.Unem.Comp.Comp.NameWeeks RateAmountReturnWeeks RateAmountReturnJ. W. Daughaty45 at $50$ 2,25032 at $50$1,600J. C. Gibbs1,700$ 8.40400$ 126.20Clarence Jewell39 at 301,17015.908 at 30240George W. Little47 at 20940180.0015 at 2030080.00Walter Vickers52 at 251,300350.0052 at 251,300773.92Samuel L. Davis26 at 35910Henry D. Powell34 at 2274833.9530 at 22660Lott Powell13 at 1215625 at 12300226.20Isom Powell52 at 1472865.4534 at 14476Tom Powell52 at 201,0405.6030 at 20600Ruben Jewell30 at 351,050Elmer Powell32 at 22704Willie Harper6 at 2213232 at 2270499.20Totals$12,828$659.30$6,580$1,305.52*321  Petitioner had certain persons working for him on a subcontract basis during 1942 and 1943. At least some of the labor expenses of the subcontractors were paid directly by petitioner, and were claimed as a deduction in his income tax returns, under the heading "labor-contract sawmills." When respondent's agents began to investigate petitioner's returns for the taxable years, petitioner informed them that he had made all his sales to one company. Subsequent examination by the agents disclosed that for 1942 petitioner had also sold lumber to a second company, and in 1943 to several other companies. The information as to sales for 1943 was obtained by checking the railway records of shipments of lumber by petitioner to such purchasers, and thereby discovering the names and amounts. Petitioner was not very cooperative with the agents when it came to determining sales which he had made, but was most cooperative with the agents when they worked on his deductible expenses for the taxable years. Petitioner understated his taxable net income for the years 1942 and 1943. Such understatements were made by petitioner with an intent to evade payment of income taxes. There was no reasonable*322  cause for petitioner's failure to file an estimated declaration for the year 1943; and his corrected income tax for that year exceeded his estimated tax by more than 80 per cent. His "labor-sawmill" expenses for the years 1942 and 1943 were in the amounts of $24,566.31 and $36,217.02, respectively. Opinion RICE, Judge: Petitioner agrees that the adjustments made by respondent in his taxable net income for the years here in question are correct. However, he claims that, in his tax returns for such years, he did not deduct the proper amounts for his "labor-sawmill" expenses for each of these years, and that such deductions should be increased by the amounts of $10,837.33 for 1942 and $18,450.88 for 1943. He maintains that timesheet records of a number of his employees for such years were misplaced, and amounts paid them were not included in the Georgia unemployment compensation reports, or deducted in his Federal income tax returns for these years. Thirteen witnesses appeared for petitioner at the trial and testified that they had worked for him during these years. They also testified as to the approximate amounts they had received, and the approximate periods which they had worked. *323  Petitioner also testified that there were another 12 to 15 persons whom he was unable to get to testify.  We have no reason to doubt the testimony of all of these witnesses; however, we feel the petitioner has failed to prove that the amounts paid them were not included in his returns for the taxable years under some deduction other than "laborsawmills." One of the items claimed by petitioner in such returns was "labor-contract sawmills," and amounted to $28,286.25 in 1942 and $18,637.34 in 1943. Respondent decreased such amounts by $4,938.93 for 1942 and $270.80 for 1943. If petitioner were correct in his claims, he would have shown a net profit for 1942 in the amount of approximately $8,000, and a loss in 1943 of about $9,000. Petitioner claims that he discovered the failure to take such deductions approximately two and one-half years prior to the hearing in this case. He did not inform respondent of such claim until several days before the trial. Respondent's agent testified that the amounts allowed by respondent, in his deficiency notice, for "labor-sawmill" expenses were those reported by petitioner in his Georgia unemployment compensation tax returns. The amounts allowed*324  by respondent were $24,078.61 for 1942 and $35,150.10 for 1943. Respondent increased this latter figure by the amount of $854.07, which represented a payment petitioner was required to pay by the Wages and Hours Division of the Department of Labor. The petitioner has failed to sustain his burden of proving the "labor-sawmill" expenses to be greater than those allowed by respondent with one exception. The Georgia unemployment compensation tax returns indicate that such wages amounted to $24,566.31 for 1942 and $35,362.95 for 1943; and, since respondent used these returns as a basis for determining the proper deductions, we have found as a fact that the proper expenses for "labor-sawmill" for the years 1942 and 1943 are $24,566.31 and $36,217.02, respectively. The next question to be considered is whether petitioner is subject to the 50 per cent fraud penalty for the taxable years. Petitioner maintained that he had practically no records for his business, and that the errors which he made in understating sales and overstating purchases were due to his lack of records, and not due to an intent to evade tax. In 1942, he reported a net taxable income of $1,847.46, and in 1943 a net taxable*325  income of $583.84. Respondent, in his notice of deficiency, determined that petitioner had net income for the years 1942 and 1943 in the amounts of $20,238.79 and $9,361.33, respectively, or an increase of over 1,000 per cent for 1942 and approximately 1,500 per cent for 1943. Evidence of a gross understatement of taxable income, while not in and of itself evidence of fraud, is strong evidence of a fraudulent intent to evade tax.  . Considering all the facts of record, respondent has borne his burden of proving that the 50 per cent fraud penalty should apply to the deficiencies for the years 1942 and 1943. Sections 294 (d) (1) (A) and 294 (d) (2) provide penalties for failure to make and file a declaration of estimated tax and for substantial under-estimate of the estimated tax, respectively. In section 294 (d) (1) (A) the penalty can be avoided upon a showing of reasonable cause to the Commissioner for the failure to file a declaration, but section 294 (d) (2) is mandatory in its imposition of the penalty. We can assume from respondent's imposition of the maximum penalty provided in section 294 (d) (1) (A) that no showing of reasonable*326  cause for his failure to file was made by the petitioner. The evidence before us is equally silent as to any reasonable cause for petitioner's failure, and, accordingly, we approve respondent's determination as to these penalties. Decision will be entered under Rule 50.