Lister v. Commissioner

*700 The petitioner appeals from the assertion of a fraud penalty of 50 per cent for 1919 and of a delinquency penalty of 25 per cent for 1923, the penalties amounting for 1919 to $2,590.81, and for 1923 to $1,288.98. At the hearing the respondent admitted error with reference to the penalty for 1923, the same having been settled by compromise in March, 1927.

The sole issue is that raised by the allegation of the petitioner that the return filed for 1919 was not fraudulent. Upon motion duly made and granted the*2608 petitioner was permitted to amend his pleading to allege that the computation of the penalty by the respondent is erroneous in that it is based upon the entire additional taxes over and above the tax shown on the return, and therefore it exceeds 50 per cent of the deficiency finally determined.

FINDINGS OF FACT.

The petitioner, now a resident of Wewahitchka, Fla., was a resident of Leakesville, Miss., during the taxable years. He was engaged in the turpentine and resin business. Petitioner's boyhood days were spent in the vicinity of Leakesville, Miss., then a pine woods country. Due to the poverty of his father his eduction in the schools extended no further than the third reader. His experience included logging, rafting on the river, a little farming, running a commissary in connection with a turpentine camp and practical experience in the derivation and manufacture of turpentine and resin. For the 14 years preceding the hearing the petitioner had been in business for himself, doing business under the name of the Lister Turpentine Co., an enterprise in which his wife owned an interest by purchase for cash. The products of the business were derived from leased timber. *2609 A commissary was operated in connection with the turpentining camps. A small stock of supplies was carried on hand by the commissary and sometimes the finished product of the business was carried over into the next year before it was sold. The petitioner carried much of the detail of his business in his head. He deposited with and dealt with several banks. He knew practically nothing of accounting and kept only one book, in which was shown an account with each man in his employ, together with memoranda accounts of the larger sales and purchases; the bank balances were also kept in this book. The productive employees were paid at a unit rate for the number of barrels of product they produced. Inventories were not taken. In 1920 the *701 petitioner sought out one Bearry, whom he considered to be the best bookkeeper in that section, and he engaged Bearry to make out his return for 1919, instructing him to make the return as near right as it could be. Bearry and the petitioner worked at the petitioner's office at night for several nights until the return was completed. A discussion took place between them relative to the propriety of taking inventories in the business*2610 of the petitioner and how to make out the return in view of the fact that inventories had not been taken. The two men decided that only the sales of products manufactured during 1919 should be reported in the return. Sales of the product manufactured in 1918 and sold in February, 1919, were not included in the return. The return was filed on March 15, 1920, and reported a gross income of $36,319.86, expenses of $28,000 and a net income of $8,319.86. The taxes reported on the return amounted to $268.79. This was increased by the respondent in November, 1921, by an additional amount of $56.40, due to a correction of a computation of the surtax.

Beginning in March, 1925, the tax liability of the petitioner for a number of years was investigated by a revenue agent. Before coming into contract with the petitioner the revenue agent ascertained from petitioner's bank connections and larger customers a good deal of information relative to the gross income of the petitioner. Later, when the revenue agent interviewed the petitioner he was not extended very active assistance by the petitioner but the petitioner readily admitted business connections and sales when advised by the revenue*2611 agent of the facts ascertained.

The revenue agent notified the petitioner orally of his purpose to assess additional taxes based upon the gross income he had ascertained, and leaving upon the petitioner the burden of establishing any amount of deductible expenses. Thereupon, the petitioner requested a delay in order to afford him opportunity to employ counsel and accountants and make up the data. This opportunity was accorded him, and public accountants he engaged made up statements of income and expenses for all the years, ascertained from the bank accounts, statements of customers and creditors, and from the memoranda books kept by the petitioner. The report of the accountants was submitted to the revenue agent and he found the amount of gross income to be substantially in agreement with the results he had arrived at independently. At a conference between the accountants and the revenue agent the matter was thoroughly thrashed out and the amount of tax liability settled upon.

The revenue agent found deposits made by the petitioner and the Lister Turpentine Co. in a bank at Leakesville during the year 1919 aggregating $84,004.99. He also found a deposit in a bank at Mobile*2612 in the amount of $15,000. The bank records also showed *702 many withdrawals by check and transfers of funds from one bank to the other. After accounting for duplications and transfers of funds the examining agent reported that the gross income of petitioner for the year 1919 was $63,936.01 and that the allowable deductions for that year were $26,984.99. The respondent accepted these figures with some slight modifications and computed the petitioner's tax liability upon an asserted net income in the amount of $37,041.62.

The petitioner was notified in June, 1925, of an additional tax for 1919 amounting to $5,125.22; this deficiency was assessed in November, 1925, and was paid by the petitioner in January, 1926. The notice to the petitioner of June, 1925, indicated a penalty of 50 per cent computed upon the tax liability in excess of the amount of tax reported on the original return, but this penalty was not assessed in November, 1925. It was reasserted in the deficiency letter under date of January 27, 1926, in the amount of $2,590.81.

An agreement in writing by the petitioner and the respondent under date of March 13, 1925, is on file, providing for an extension*2613 of the period prescribed for the determination, assessment, and collection of the tax for 1919 for a period of one year after the expiration of the statutory limitation.

The petitioner enjoyed a good reputation in business circles. He was incapable, unaided, of making out correctly his return for 1919. The return filed was not fraudulent with intent to evade tax.

OPINION.

TRUSSELL: The petition filed in this case included the years 1919 and 1923. The respondent has admitted that the alleged deficiency for the year 1923 was settled by compromise in March, 1927, and therefore that there is no deficiency for the year 1923.

The issue presented for the year 1919 is confined to the respondent's assertion of a fraud penalty for that year and is governed by the third paragraph of subdivision (b) of section 250 of the Revenue Act of 1918:

If the understatement is false or fraudulent with intent to evade the tax, then, in lieu of the penalty provided by section 3176 of the Revised Statutes, as amended, for false or fraudulent returns wilfully made, but in addition to other penalties provided by law for false or fraudulent returns, there shall be added as part of the tax 50 per*2614 centum of the amount of the deficiency.

As required by section 601 of the Revenue Act of 1928, the respondent assumed the burden of proof and produced as witnesses the representative of one of the banks where petitioner carried a checking account; one of the dealers to whom petitioner sold a part of his product; the person who assisted the petitioner in preparing his 1919 return; and the revenue agent who made the investigation and report.

*703 We have been unable to find in this testimony anything which in our opinion supports an allegation of an actual existing purpose or intent on behalf of the petitioner to evade the payment of income taxes. We are satisfied from the testimony of these witnesses that the gross income of the petitioner for 1919 was understated, but we have also the testimony of the petitioner and of the man who assisted him in the preparation of his return, and their testimony, we think, controverts the allegations of a purpose to evade tax. It shows conclusively that the petitioner was wholly unable to understand or to prepare an income-tax return for 1919; that he sought the assistance of one whom he believed capable of assisting him; that together*2615 they made up a return which, according to their understanding, set out the respective items of gross income and of deductions which the law required the petitioner to report; and that the return was improperly prepared. The record satisfies us that the understatement resulted from inability to understand the requirements of the law and amounted only to an error of law. Ignorance is not the basis of an assertion of a fraud penalty. .

The record further shows that petitioner's accounting methods were crude and inadequate. Cf. ; ; ; .

The record further shows that immediately upon being advised both by the examining revenue agent and accountants employed by himself, the petitioner promptly admitted his error and paid the additional taxes asserted against him for that year. The acceptance and payment of the additional taxes does not sustain a charge of fraud. *2616 .

We therefore conclude, after a careful consideration of the evidence, that there is no basis for the assertion of the penalty for fraud and we must find that there is no deficiency. This renders unnecessary a consideration of the other matters urged in the pleadings and the petitioner's brief.

Judgment will be entered for the petitioner.