Caldwell v. Commissioner

*169 The respondent determined deficiencies in income taxes and penalties as follows:

In this report petitioner George Caldwell is, for convenience, *730 sometimes referred to as the petitioner.

The issues presented involve two groups of payments: (1) Those made by Louisiana State University pursuant to an arrangement between George Caldwell and its president, by the terms of which Caldwell was to receive a certain percentage based on cost of buildings erected under his supervision, petitioners contending that he was an employee of the state and that the payments so made were exempt from tax; (2) certain payments or "kickbacks" made to Caldwell by contractors and materialmen in connection with the construction of buildings for the university. There is also involved the question of fraud as to George Caldwell.

Other adjustments to petitioners' income made by respondent are not put in issue.

FINDINGS OF FACT.

Petitioners are husband and wife, residing in Baton Rouge, Louisiana. They filed returns on the community property basis for the years 1935, 1936, 1937, and 1938 with the collector of internal revenue for the district of Louisiana.

George Caldwell during the years involved was the superintendent of building at Louisiana State University. As such superintendent he received a salary in the amount of $4,500 for the*731 year 1935, $5,400 for the year 1936, and $6,000 for each of the years 1937 and 1938. Respondent in his determination held this income exempt from taxation as being received by an employee of the state.

Louisiana State University and Agricultural and Mechanical College (hereinafter called the university) is an instrumentality of the State of Louisiana and is governed by a board of supervisors. James Monroe Smith was, during all the years here involved, president of the university and secretary of the board of supervisors. He is now incarcerated in the Louisiana State Penitentiary.

Sometime in 1936 Caldwell and Smith entered into an arrangement by the terms of which Caldwell was to receive 1 percent of the cost of all buildings erected under his supervision. At some later date *170 the percentage was changed to 2 percent. The arrangement was not authorized by the board of supervisors of the university. Smith, as secretary of the board, prepared false minutes of the board purporting to show the authorization of such arrangement. Pursuant to said arrangement petitioner received but did not report payments determined by the respondent to have been $2,420 in 1936, $8,530.62*732 in 1937, and $1,365.65 in 1938. In their returns for 1938 each petitioner returned as taxable income from "salaries and other compensation for personal services" the sum of $30,065.40.

The payments received by George Caldwell from funds of the Louisiana State University in 1936, 1937, and 1938 in excess of his stated salary did not constitute compensation for personal services as an officer or employee of an instrumentality of the State of Louisiana.

Caldwell's work in connection with the building program at the university brought him into intimate contact with contractors and suppliers of materials for the buildings being erected. He made demands on various of these contractors that payments or "kickbacks" be made to him out of the proceeds of certain of the contracts. In some instances the contractors understood that the making of such payments was a condition to securing of the contracts. In other instances contractors would furnish Caldwell with tentative bids on the contracts and he would tell them how much should be added to the bids to cover payments to him. These "kickbacks" or rebates were, at Caldwell's express direction, always paid to him in cash, generally at*733 his office on the campus of the university, and were not paid in the presence of third persons. These "kickbacks" amounted at least to the following sums: $8,254 for 1935, $19,116.79 for 1936, $46,784.90 for 1937, and $36,448.18 for 1938.

In their tax returns for the year 1935 the two petitioners each returned as "other income" the sum of $12,391.05 under the caption "games of chance." For 1936 the sum of $18,223.16 was returned by each under the caption "winnings from games of chance." For 1937 each returned the sum of $48,062 under the caption "gambling." For 1938 each returned the sum of $14,922.75 under the caption "gambling."

On January 12, 1940, George Caldwell was indicted in the United States District Court for the Eastern District of Louisiana, New Orleans Division, for the fraudulent evasion of income taxes for the years 1935 to 1938, inclusive, in the identical amounts of deficiencies set forth above and based upon the same tax liabilities as appear in respondent's notices of deficiencies in these proceedings. In the indictment each year was made the basis of a separate count. On February 12, 1940, George Caldwell, by counsel, entered a plea of guilty to all four*734 counts of the indictment. He was sentenced *171 to a period of imprisonment of two years on each count, the sentences to run concurrently and to pay a fine of $1,000 and costs of prosecution. He was committed to the Federal penitentiary at Atlanta, Georgia. George Caldwell, above referred to, is the petitioner in Docket No. 102547.

All or a part of the deficiencies due from George Caldwell for the years 1935 to 1938, inclusive, are due to fraud with intent to evade tax.

OPINION.

VAN FOSSAN: In the notices of deficiencies respondent increased the petitioners' income from two principal sources: (1) The arrangement between petitioner George Caldwell and James Monroe Smith, president of Louisiana State University, by reason of which Caldwell was paid 1 (later 2) percent of the cost of all buildings constructed under his supervision; and (2) rebates or "kickbacks" from contractors and materialmen.

Although the respondent charges fraud and has the burden of proof on that issue, petitioners have the burden of proof as to the contested items of income. *735 ; ; certiorari denied, .

Petitioners' evidence is almost exclusively directed to the first of these items, i.e., percentage payments by the university. They concede that the "kickback" payments were made, but argue on brief that these payments were reported as gambling gains. They offer no proof whatever to substantiate this claim and it is clearly not self-evident. Except for the percentage payments, the record affords no basis in fact for an argument against the correctness of respondent's determination of the deficiencies.

Respondent held that petitioner George Caldwell was an employee of the state as to his salary from the university. The only question is as to the percentage payments.

We can not shut our eyes to facts established by the record and ignore the background of the percentage arrangement. Thus we know of the scandalous and criminal conduct of James Monroe Smith, the president of the university. We know too of Caldwell's admittedly criminal conduct in regard to his tax accounting, and of his solicitation of rebates*736 and bribe money in connection with the very work here involved. We know that the board of supervisors of the university never suthorized the payment of the percentage to petitioner and that the minutes of the board, prepared and kept by James Monroe Smith, president of the university and secretary of the board of supervisors, purporting to authorize the percentage *172 arrangement, were false. The conclusion is obvious. We are convinced that petitioner and Smith entered into a privately conceived arrangement, separate in legal standing and effect from petitioner's employment as superintendent of building, the consequence of which was the payment of the percentages of cost. We are of the further opinion that by this illegal and unauthorized arrangement petitioner and Smith connived at the defrauding of the university. The payments received by petitioner pursuant to the arrangement are not those of an employee of the state. They were not part of the salary paid petitioner as an employee of the state. We, therefore, sustain respondent in full as to all of the deficiencies.

We likewise sustain the respondent in his finding of fraud. *737 , dismissed without opinion, C.C.A., 5th Cir., May 19, 1939. The proof shows that petitioner George Caldwell was indicted in the United States District Court for the Eastern District of Louisiana on charges of fraudulent evasion of income taxes, the same being the identical taxes and for the same amounts and years as appear in the notice of deficiencies. The record also shows that petitioner pleaded guilty to all four counts of the indictment and was sentenced to a fine and imprisonment and is now incarcerated in a Federal prison. As held by the Board in , this plea of guilty was an admission against interest subject to the taxpayer's right to explain the same or otherwise lessen its weight. Here no explanation was attempted and there is no other evidence to lessen the weight normally to be given such a fact. It is sufficient to sustain the charge of fraud. Moreover, the record contains other clear and convincing evidence supporting the conclusion that petitioner was guilty of fraud. The fraud penalties determined against petitioner George Caldwell are approved.

*738 Decisions will be entered for the respondent.