Court Opinion

ID: 4628797
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:04:03.77887+00
Date Added: 2024-06-11T07:59:56.792561
License: Public Domain

ALFRED A. NAHMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Nahman v. CommissionerDocket No. 23145.United States Board of Tax Appeals21 B.T.A. 121; 1930 BTA LEXIS 1914; October 29, 1930, Promulgated *1914  In 1922 and 1923 the petitioner was a member of a partnership engaged in an export brokerage business.  The partnership was dissolved in 1924, and the books of account abandoned.  The Commissioner determined deficiencies due from the petitioner upon the basis that the partnership realized a taxable income in 1922 and 1923 of 2 per cent on the sales.  Held that the petitioner's returns for 1922 and 1923 properly reflected his distributable portion of the partnership profits.  A. C. Frodel, Esq., and Dean H. Stanley, Esq., for the petitioner.  C. H. Curl, Esq., for the respondent.  SMITH *121  This is a proceeding for the redetermination of deficiencies in income tax for 1922 and 1923 of $6,469.83 and $256.53, respectively.  The issues are (1) the correct net income of the partnership of which the petitioner was a member for the taxable years involved, and (2) the right of the petitioner to deduct from gross income in his tax return for 1922 an alleged loss of $2,202.75 sustained on transactions in foreign exchange.  FINDINGS OF FACT.  In February, 1919, the petitioner with one J. J. Modiano entered into a partnership for the conduct*1915  of an export brokerage business.  Each partner invested $38,000 in cash.  The partnership was to continue for a period of five years and it conducted the business under the name of American Co. for International Commerce.  The partnership made income-tax returns for 1919 to 1923, inclusive.  The return for 1919 showed sales of $2,189,665.73 and net profits of $36,131.68, one-half of which was reported as the income of each partner.  Modiano's capital at December 31, 1919, was $46,057.52, and the petitioner's, $52,130.70.  The return for 1920 showed sales of $2,061,503.44 and a net loss for the year of $60,624.94.  Modiano's capital at December 31, 1920, was $19,687.53, and the petitioner's, $19,687.53.  The return for 1921 showed sales of $2,908,451.02 and net profits of $40,097.  Each partner had a capital investment in the business at the close of 1921 of $39,736.03.  The return for 1922 showed sales of $3,900,713.59 and net profits of $17,119.68.  Modiano's capital at the close of 1922 is shown as $37,210.31 and the petitioner's at $31,516.39.  The return for 1923 showed sales of $2,341,109.92 and net profits of $6,672.59.  Modiano's capital at the close of 1923 is shown as $21,443.68, *1916  and the petitioner's, $7,713.78.  The operations *122  of the partnership not having proved sufficiently large to warrant the continuation of the partnership, it was liquidated at the close of business March 31, 1924.  The petitioner received upon liquidation $5,000 in cash.  He also purchased from the partnership a small amount of office furniture.  Modiano, who was an Italian, went to France.  The petitioner took a small office in Wall Street and continued to conduct the business under the trade name of American Co. for International Commerce, which he has continued to the present time.  Upon the liquidation of the partnership all of the accounts were properly collected and all of the debts paid.  The petitioner took from the records of the partnership a list of the foreign customers and the kind of goods sold to them.  He deemed that these were the only records that would be of any value to him in the conduct of his individual business.  The partnership's books and records were left at the former office occupied by the partnership and they can not now be located.  The business conducted by the partnership consisted principally of the purchase of goods ordered by a foreign*1917  consignee.  The partnership charged a small brokerage commission for its services over and above the expenses.  The petitioner also in some instances kept a small amount of goods on hand in order to fill orders promptly for certain classes of merchandise.  Some of this merchandise owned in its own name was held at foreign ports.  A part of the export business consisted of the purchase on order of refined sugar and other items of merchandise in which there was great competition and upon which the brokerage commissions obtainable were small.  The petitioner's income-tax returns for 1919, 1920, and 1921 were audited by the Commissioner and they were found to be correct.  The Commissioner did not attempt to audit the tax returns filed for 1922 and 1923 until 1926, at which time it was impossible for the Commissioner to check the returns by any books of account kept by the partnership.  In lieu of such check the Commissioner determined that the partnership had realized a profit of 2 per cent upon gross sales, and upon the basis of such determination computed the deficiencies.  The partnership return for 1922 shows the deduction from gross sales of administrative expenses of $39,580.39, *1918  included among which is a charge for charity of $635.  It shows also a loss from the purchase of 1,000 marks at $2,569 and the payment in execution of a judgment obtained against the partnership of $5,170.  The return for 1923 shows a loss from dealings in foreign exchange of $21,933.41 and the payment of administrative expenses of $29,137.41, among which is a donation of $17.50.  In the petitioner's individual income-tax return for 1922 he deducted from gross income $2,202.75, which was claimed as a loss on dealings in foreign exchange.  This was computed upon a sale of a *123  million Polish marks in December, 1922, to one Erick Aman for $56, which had been purchased by the petitioner in July, 1921, from C. R. Richardson Co., bankers of New York, for $1,225.  The loss resulting from this transaction was $1,169.  OPINION.  SMITH: The principal question presented by this proceeding is the net income of the partnership of American Co. for International Commerce for the years 1922 and 1923.  The returns filed by the partnership show the net profits to be $17,119.68 and $6,672.59, one-half of which belonged to petitioner and one-half to his partner, one Modiano.  The respondent*1919  audited these returns in 1926 and, inasmuch as he was not able to find the books of account of the partnership from which the accuracy of the returns could be determined, he assumed that the partnership made a net profit of at least 2 per cent upon its sales and computed the deficiencies accordingly.  He represents to this Board that his determinations are prima facie correct and that inasmuch as there are no books of account available to the petitioner to combat the correctness of the deficiency determined, there is no evidence before the Board which shows that his determinations are incorrect.  Although there is presumption that the deficiencies found by the respondent are correct, this is not a conclusive presumption.  In rebuttal of that presumption the petitioner comes before the Board and details the facts relating to the manner in which the books of account of the partnership were kept and states the circumstances under which the books of account were lost or abandoned.  Although the abandonment or destruction of the books of a taxpayer would in many cases raise a suspicion that they were destroyed merely for the purpose of making it impossible to audit them, we are convinced*1920  from a consideration of the entire record made in this proceeding that there was no ulterior motive on the part of the petitioner in not retaining the books of account of the partnership.  The petitioner testified that the partnership business was almost entirely a cash business and that upon the liquidation of the partnership there were no accounts to be collected.  All of the debts of the partnership were promptly paid in full and the assets divided among the two partners.  The petitioner saw no need for retaining the books of account of the partnership and did not have storage space for them.  They were therefore not taken by the petitioner from the old offices occupied by the partnership.  We are satisfied from the testimony of witnesses that the books of account were carefully kept and that the returns filed reflected the operations of the partnership.  Consequently, we are of the opinion *124  that the position taken by the respondent throughout the course of this proceeding can not be maintained.  The basis of his action apparently has been suspicion, not conviction.  It is noted that the respondent accepted the figures reported on the partnership returns as reflecting*1921  sales, but at the same time refused to admit the accuracy of any of the other figures contained therein.  It would appear that the logic of the situation would necessitate a refusal to accept figures representing sales as well as his refusal to accept the others.  Furthermore, it is noted that the partnership return for the year 1923 reflects a loss from dealings in foreign exchange and foreign bonds amounting to $21,933.41.  Complete details of the transactions are set forth in the schedule of transactions attached to the return, but we have had no intimation from the respondent that such transactions were investigated.  In view of what has been said, we are of the opinion that the petitioner has overcome the prima facie correctness of the determinations made by the respondent, with the exception of an item of $635 for charity claimed as a deduction on the partnership return for 1922, and an item of $17.50, a donation, claimed as a deduction on the partnership return for 1923.  No proof was offered as to these items and in the absence thereof they can not be allowed as deductions.  Otherwise, we think that the partnership returns for 1922 and 1923 reflected the net profits of the*1922  business taxable to the partners.  In the petitioner's income-tax return for 1922 he claimed a deduction from gross income of an alleged loss of $2,202.75, which represented the difference between the price paid for foreign exchange in 1922 and the price at which sold in November, 1922.  The return shows that the loss sustained was $1,169.  This amount was a legal deduction from the gross income of 1922, and the deficiency determined for that year should be recomputed accordingly.  Judgment will be entered under Rule 50.