Court Opinion

ID: 4499363
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:16:25.341375+00
Date Added: 2024-06-11T14:54:17.360370
License: Public Domain

*265OPINION.
Tuttsseel :
With reference to the computation of the deficiencies the difficulties presented by this appeal are negligible. The questions involved are questions of fact, which are very definitely disposed of by the evidence presented at the hearing.
For the year 1919, the only items in issue are sales and purchases, and the books of the taxpayer disclose that sales were correctly reported by the taxpayer on its return. Purchases were reported on the taxpayer’s return in the amount of $114,165.62, whereas the tax*266payer’s books show that total purchases amounted to $114,163.62, resulting in a net understatement of $2.
For the year 1920, the only items involved, so far as the computation of the tax is concerned, are closing inventory and salaries paid to Mr. and Mrs. Swartz. With reference to closing inventory, the taxpayer has admitted that the correct amount is $31,794.25 and that it was erroneously stated on the return as $21,196.30. In the matter of salaries paid to Mr. and Mrs. Swartz, the only point for determination is the i-easonableness thereof, since the record shows that the increases were regularly authorized by the board of directors at a meeting held some time during the year 1919. The exact date of the meeting is not disclosed, due to the fact that the taxpayer could not locate its minute book. Internal Revenue Agent Dewey, a witness for the Commissioner who had previously examined the books- of the taxpayer, stated that he had seen, in the course of his examination, the minute book of the corporation, which disclosed the fact that the increase in the salaries of Mr. and Mrs. Swartz had been duly authorized at a meeting of the board of directors held prior to January 1, 1920. From the evidence, it appears that Mr. Swartz had previously had a great deal of experience in the management of business such as that in which the taxpayer was engaged, and to a very large extent the responsibility for the successful operation of the business rested upon him. From the nature of the business, its size, the previous experience of Mr. Swartz, and the responsibility which rested on him, we see no reason for concluding that the salary of $175 per week paid to him for his services during the year 1920 was unreasonable. With reference to Mrs. Swartz, it appears that during the years in question she devoted her full time to the business of the corporation. She was vice president and assistant buyer, and there is nothing to show that the salary paid to her during the year 1920 was excessive, when considered in connection with the duties and responsibilities of positions such as those held by her; and, in view of the fact that the board of directors saw fit in a regularly conducted meeting to fix her compensation at $115 per week, we must conclude, in the absence of any facts to the contrary, that they properly judged the worth of her services to the taxpayer corporation.
Only one question remains for disposition, that is, whether or not the Commissioner was justified in imposing penalties amounting to 50 per cent of the deficiencies proposed, on the ground that the returns of the taxpayer for the years 1919 and 1920 were false and fraudulent and filed with the intent to evade tax. Sales and purchases reported by the taxpayer on its return for that year were substantially correct, sales being correctly reported and purchases understated in the amount of only $2, and, since these were .he *267only items affecting 1919 income that are in controversy, there is no basis for the assertion of the penalty for that year.
In the case of the 1920 return, the taxpayer has admitted an understatement of closing inventory in the amount of $10,598.15. There is nothing in the record, however, which shows that the understatement was fraudulently made with the intent to evade tax. Furthermore, A. W. Goodman, assistant business manager of the taxpayer corporation during the years 1919 and 1920, testified that a separate statement was attached to the return for the year 1920, showing the correct amount of closing inventory, and when it appeared that such a statement was not attached to the return when introduced in evidence the taxpayer submitted in evidence a statement purporting to be a copy of the statement attached to the return at the time it was filed. This copy disclosed closing inventory for the year 1920 in the correct amount.
During the course of the testimony many references were made by Internal Revenue Agent Dewey, a witness for the Commissioner, to an audit of the taxpayer’s books by an accounting firm, which audit, it was contended, disclosed facts proving that the taxpayer’s returns were false and fraudulent. There is reason to believe from the trend of his testimony that the report of Revenue Agent Dewey, which formed the basis for the assertion of the fraud penalty by the Commissioner, was, to a great extent, based upon such audit by the firm of accountants rather than upon the books of the taxpayer corporation. This belief is strengthened by the fact that the alleged overstatement of purchases for 1919, as disclosed by Revenue Agent Dewey’s report, is based upon purchases as stated by the audit and not upon purchases as stated by the taxpayer’s books.
The alleged understatement of sales for the year 1919 was attributed by Dewey to the omission of sales made during January of that year from total sales for the year, but when confronted with the books of the taxpayer he admitted that total sales reported on the taxpayer’s returns did include January sales and that the understatement was in fact due to the intermingling of sales made by the taxpayer in its business and the sales of the millinery and shoe departments. The books disclosed, however, that sales from the shoe and millinery departments were recorded separately from the sales of the business of the taxpayer and that the taxpayer reported income from the departments mentioned in the form of rentals.
On these facts there is no justification for a conclusion that the taxpayer’s returns for the years 1919 and 1920 were fraudulent and filed with the intent to evade tax.

■Judgment will be entered on 15 days' notice, under Rule 50.