Opinion
Docket Nos. 28242 52884 28243 52883.
1956-02-29
PAUL MASTERS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.BILL WILLIAMS (VASILIOS VASILIADES), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Thomas D. McBride, Esq., and Raymond J. Bradley, Esq., for the petitioners. John D. Armstrong, Esq., for the respondent.
Thomas D. McBride, Esq., and Raymond J. Bradley, Esq., for the petitioners. John D. Armstrong, Esq., for the respondent.
1. Held, deficiencies as determined by respondent are approved.
2. Since the tax returns filed by the petitioner in each proceeding for the years respectively involved are false and fraudulent with intent to evade tax and part of each deficiency was due to fraud with intent to evade tax, the assessment and collection of the deficiencies for the years 1943 through 1947 are not barred by the statute of limitations.
Respondent determined deficiencies in income tax of petitioner, Paul Masters, in Docket Nos. 28242 and 52884, and additions thereto for fraud, for years and in amounts as follows:
+----------------------------------------------------+ ¦Year ¦Deficiency ¦50 per cent addition for fraud ¦ +------+------------+--------------------------------¦ ¦1944 ¦$2,455.95 ¦$1,227.98 ¦ +------+------------+--------------------------------¦ ¦1945 ¦4,668.31 ¦2,334.16 ¦ +------+------------+--------------------------------¦ ¦1946 ¦2,679.11 ¦1,339.56 ¦ +------+------------+--------------------------------¦ ¦1947 ¦578.99 ¦289.50 ¦ +----------------------------------------------------+
Respondent also determined deficiencies in income tax of petitioner, Bill Williams, in Docket Nos. 28243 and 52883, and additions thereto for fraud, for years and in amounts as follows:
+----------------------------------------------------+ ¦Year ¦Deficiency ¦50 per cent addition for fraud ¦ +------+------------+--------------------------------¦ ¦1943 ¦$28,878.04 ¦$14,439.02 ¦ +------+------------+--------------------------------¦ ¦1944 ¦40,137.18 ¦20,068.59 ¦ +------+------------+--------------------------------¦ ¦1945 ¦67,862.00 ¦33,931.00 ¦ +------+------------+--------------------------------¦ ¦1946 ¦49,165.36 ¦24,582.68 ¦ +------+------------+--------------------------------¦ ¦1947 ¦23,064.48 ¦11,532.24 ¦ +----------------------------------------------------+
The questions presented for decision are:
1. Whether the petitioner, Masters, in Docket Nos. 28242 and 52884 understated his taxable income for the years 1944 through 1947, and whether the petitioner, Williams, in Docket Nos. 28243 and 52883 understated his taxable income for the years 1943 through 1947.
2. Whether the assessment and collection of any deficiencies in the case of either petitioner are barred by the statute of limitations.
3. Whether the tax returns of each petitioner for the years respectively involved were false and fraudulent with intent to evade tax, and whether any part of any deficiency is due to fraud with intent to evade tax.
The parties are in agreement that, with the exception of the year 1944, all years in controversy are barred by the statute of limitations, provided there is no fraud. As for the year 1944, it is also barred, absent fraud, unless the 5-year statute of limitations provided by section 275(c) of the Internal Revenue Code of 1939 applies.
FINDINGS OF FACT.
The petitioner in Docket Nos. 28242 and 52884 is Paul Masters, a resident of Upper Darby, Pennsylvania, who filed his individual income tax returns for the taxable years 1944 through 1947 with the then collector of internal revenue for the first district of Pennsylvania. The petitioner in Docket Nos. 28243 and 52883 is Bill Williams, formerly known as Vasilios Vasiliades, also a resident of Upper Darby, Pennsylvania, who filed his individual income tax returns for the taxable years 1943 through 1947 with the then collector of internal revenue for the first district of Pennsylvania.
Masters and Williams filed partnership returns for the taxable years 1944 through 1947 with the same collector.
Williams, born Vasilios Vasiliades, is 52 years of age. He was born in Turkey and came to the United States in 1921, when he was 18 years old. He became a naturalized citizen of the United States in 1927. His name was changed by court order. Williams attended school in Turkey until he was 11 years old, at which time he had finished the equivalent of the fifth grade of elementary school. His only other formal education was for a period of approximately 9 months at a night school shortly after his arrival in the United States. Williams' first home in the United States was in New York City. He was employed there as a dishwasher in various hotels. In 1925 he came to Philadelphia where he and another individual not involved in these proceedings operated a small store selling ‘hot dogs and hamburgers.’ He maintained an interest in this establishment until about 1939 or 1940. This store was located at 37 North 13th Street. In 1926, he began to operate a similar business at 11 South 15th Street, Philadelphia; his connection with this place of business was terminated in 1935 or 1936. In 1939 or 1940, Williams and another individual not involved in this case opened a restaurant at 25th Street and Lehigh Avenue, Philadelphia; he sold his interest in this restaurant in 1942 or 1943. Williams is a leader and active participant in the affairs of the Greek community in Philadelphia. He owns his own home in Upper Darby, Pennsylvania, which he acquired in 1940 at a cost of about $9,000. He also owns a farm at Stroudsburg, Pennsylvania. Most of his time each day is spent in attending to the business of his restaurants.
Three restaurants in which Williams owned all or some interest are involved in these proceedings, viz, one at 326 North Broad Street, one at 5221 Frankford Avenue, and one at 6940 Market Street, all of which are located in Philadelphia. For convenience, these restaurants will be hereinafter referred to as the Broad Street, Frankford Avenue, and Market Street restaurants. The Broad Street and Frankford Avenue restaurants were operated, during all of the years here in issue, by Williams in his individual capacity. Masters has never had an interest in either. The Market Street restaurant was owned and operated during all of the taxable years by a partnership composed of Williams and Masters.
Masters became associated with Williams in the restaurant business in 1937 when he and Williams, in partnership with another individual not here involved, opened the Market Street restaurant. At the inception of the partnership, the profits were shared one-fifth by Masters, three-fifths by Williams, and one-fifth by the third partner. In 1941, Williams purchased the interest of the third partner, and since that time the partnership has consisted only of Williams and Masters. Sometime around 1943, Masters' share of the partnership profits was increased to one-third. Each of the restaurants offered both counter and table service. Breakfasts, luncheons, and dinners were served, sandwiches were sold, and food was sold for consumption off the premises. With the exception of the period 1933 to 1935, no alcoholic beverages of any kind have been served or sold at any of these restaurants. Each restaurant was open for business 24 hours a day during the years in question. The customers of these restaurants were, for the most part, persons with low or moderate incomes.
At the Broad Street and Market Street restaurants a book called a ‘diary’ was maintained, by one of the cashiers employed, in which daily entries were made. These entries consisted of the cash receipts for each restaurant determined from the cash register readings and cash disbursements of each restaurant made by the cashier, from the cash register, for food products and other supplies purchased for use in each restaurant. In the back of each diary a record was kept of miscellaneous receipts from music boxes and the sale of grease. (These miscellaneous receipts were sometimes referred to by the witnesses as ‘rebates.’) Each diary covered a period of 1 year. At the Frankford Avenue restaurant the cashier made such a diary record of cash receipts and disbursements on sheets of paper which she turned over to the restaurant manager. Neither the aforementioned diaries nor sheets of paper contained a complete record of all expenditures made for food products.
For each restaurant another or second daily diary was maintained (hereinafter referred to as the second diary), each book of which covered a period of 1 year. This second diary was maintained under the general supervision of Costas Demetriou, a bookkeeper employed by petitioners. The expenses recorded in the original diaries and on the original sheets of paper referred to above were copied without change in the second diaries. In the case of the Market Street restaurant, this copying was done for the most part by the cashiers employed there. In the case of the Broad Street and Frankford Avenue restaurants, the copying was done by Catherine Pappas, an employee of Demetriou, and by Demetriou himself. This second set of books was, under instructions from Williams and Masters, kept open as far as receipts were concerned until the end of the year, at which time Williams told Demetriou how much income to report for the year and gave him various memoranda purporting to contain a record of unrecorded over-ceiling payments he claimed to have made during the year in the case of each of the restaurants. Thereupon, Demetriou computed the amount the daily receipts should be understated to balance such unreported items and the resulting understated receipts were then entered in the second diary for each restaurant. The understatements as determined by respondent were as follows:
+-----------------------------------------------------------------------------+ ¦Understatement¦ ¦ ¦ ¦ ¦ ¦ ¦by: ¦ ¦ ¦ ¦ ¦ ¦ +--------------+----------+--------------+--------------+----------+----------¦ ¦Year ¦Restaurant¦Understatement¦Total ¦Williams ¦Masters ¦ ¦ ¦ ¦per day ¦understatement¦ ¦ ¦ +--------------+----------+--------------+--------------+----------+----------¦ ¦1943 ¦5221 ¦$120 ¦$43,800.00 ¦$43,800.00¦ ¦ ¦ ¦Frankford ¦ ¦ ¦ ¦ ¦ +--------------+----------+--------------+--------------+----------+----------¦ ¦ ¦(326 N. ¦$10 ¦$3,660.00 ¦$3,660.00 ¦ ¦ ¦ ¦Broad ¦ ¦ ¦ ¦ ¦ +--------------+----------+--------------+--------------+----------+----------¦ ¦1944 ¦(5221 ¦100 ¦36,600.00 ¦36,600.00 ¦ ¦ ¦ ¦Frankford ¦ ¦ ¦ ¦ ¦ +--------------+----------+--------------+--------------+----------+----------¦ ¦ ¦(6940 ¦ 60 ¦21,960.00 ¦14,640.00 ¦$7,320.00 ¦ ¦ ¦Market ¦ ¦ ¦ ¦ ¦ +--------------+----------+--------------+--------------+----------+----------¦ ¦ ¦ ¦ ¦$62,220.00 ¦$54,900.00¦$7,320.00 ¦ +--------------+----------+--------------+--------------+----------+----------¦ ¦ ¦(326 N. ¦$40 ¦$14,600.00 ¦$14,600.00¦ ¦ ¦ ¦Broad ¦ ¦ ¦ ¦ ¦ +--------------+----------+--------------+--------------+----------+----------¦ ¦1945 ¦(6940 ¦ FN1 Plus unknown amount of rebates.FN2 Plus rebates of $1,988.31.
90 ¦34,838.31 ¦23,225.54 ¦$11,612.77¦ ¦ ¦Market ¦ ¦ ¦ ¦ ¦ +--------------+----------+--------------+--------------+----------+----------¦ ¦ ¦(5221 ¦125 ¦45,625.00 ¦45,625.00 ¦ ¦ ¦ ¦Frankford ¦ ¦ ¦ ¦ ¦ +--------------+----------+--------------+--------------+----------+----------¦ ¦ ¦ ¦ ¦$95,063.31 ¦$83,450.54¦$11,612.77¦ +--------------+----------+---------------------------------------------------¦ ¦ ¦(326 N. ¦ ¦ ¦ ¦Broad ¦ ¦ +--------------+----------+---------------------------------------------------¦ ¦1946 ¦(5221 ¦$140 ¦$51,100.00 ¦$51,100.00¦ ¦ ¦ ¦Frankford ¦ ¦ ¦ ¦ ¦ +--------------+----------+--------------+--------------+----------+----------¦ ¦ ¦(6940 ¦70 ¦25,550.00 ¦17,033.33 ¦$8,516.67 ¦ ¦ ¦Market ¦ ¦ ¦ ¦ ¦ +--------------+----------+--------------+--------------+----------+----------¦ ¦ ¦ ¦ ¦$76,650.00 ¦$68,133.33¦$8,516.67 ¦ +--------------+----------+---------------------------------------------------¦ ¦ ¦(326 N. ¦ ¦ ¦ ¦Broad ¦ ¦ +--------------+----------+---------------------------------------------------¦ ¦1947 ¦(5221 ¦$80 ¦$29,200.00 ¦$29,200.00¦ ¦ ¦ ¦Frankford ¦ ¦ ¦ ¦ ¦ +--------------+----------+--------------+--------------+----------+----------¦ ¦ ¦(6940 ¦20 ¦7,300.00 ¦4,866.67 ¦$2,433.33 ¦ ¦ ¦Market ¦ ¦ ¦ ¦ ¦ +--------------+----------+--------------+--------------+----------+----------¦ ¦ ¦ ¦ ¦$36,500.00 ¦$34,066.67¦$2,433.33 ¦ +-----------------------------------------------------------------------------+
From the receipts and expenditures recorded in the second diaries, summaries were prepared by Demetriou at the end of each year on work sheets, and from these sheets Demetriou prepared the income tax returns involved herein.
Demetriou has been employed by Williams as an accountant since 1939 and is still so employed. During the years 1943 to 1947, inclusive, his duties were to make monthly statements and prepare Williams' income tax returns. It was also his job to prepare Masters' returns and the partnership returns for the years 1944 to 1947, inclusive.
During the years in issue, prices for most of the food products and supplies used at each of the restaurants and the wages which could legally be paid to the employees thereof were covered by the Emergency Price Control Act of 1942, As Amended, and the Stabilization Act of 1942, As Amended, under which the maximum amounts that could be charged for these commodities and could be paid such employees were fixed. The over-ceiling payments referred to above were those approximated by Williams in excess of prices fixed by law to obtain certain scarce commodities in sufficient quantity for the restaurants and those made to certain employees in the form of extra wages. The black-market overpayments and, in the case of commodities, in some instances the entire purchase price, were not entered as expenses on the records of the restaurants nor were they claimed as deductions on any of the tax returns involved herein. This method of understating receipts to compensate for any over-ceiling payments was devised to circumvent the law and OPA regulations and to keep Williams from having trouble with the Rationing Board in case an examination of his books was made thereby. Williams also did not wish to have trouble with the merchants who were thus supplying him. Social security taxes were neither withheld nor paid on excess wages.
During the years 1945 to 1947, inclusive, Masters made periodic payments to Williams by checks drawn on the bank account of the partnership restaurant, which was in Masters' name, in total amounts as follows:
+------------------+ ¦Year ¦Amount ¦ +------+-----------¦ ¦1945 ¦$27,539.70 ¦ +------+-----------¦ ¦1946 ¦32,125.20 ¦ +------+-----------¦ ¦1947 ¦4,450.68 ¦ +------------------+
The balances in this bank account at the beginning and ending of the years 1945 to 1947, inclusive, and the deposits for these years were as follows:
+---------------------------------------------------+ ¦ ¦1945 ¦1946 ¦1947 ¦ +--------------------+---------+----------+---------¦ ¦Balance January 1 ¦$9,407.21¦$15,565.63¦$5,860.30¦ +--------------------+---------+----------+---------¦ ¦Deposits during year¦78,957.70¦90,620.84 ¦74,779.00¦ +--------------------+---------+----------+---------¦ ¦Balance December 31 ¦15,565.63¦5,860.30 ¦2,517.66 ¦ +---------------------------------------------------+
During the years 1945 to 1947, inclusive, Masters paid business expenses by checks drawn on the account in amounts as follows:
+------------------+ ¦Year ¦Amount ¦ +------+-----------¦ ¦1945 ¦$34,408.83 ¦ +------+-----------¦ ¦1946 ¦49,588.30 ¦ +------+-----------¦ ¦1947 ¦66,595.60 ¦ +------------------+
Masters made the reconciliation of the bank statements for the account of the partnership restaurant.
Williams was indicted on March 6, 1952, in the United States District Court for the Eastern District of Pennsylvania for attempting to defeat and evade income taxes by filing false and fraudulent income tax returns for the taxable years 1945 to 1947, inclusive. He pleaded not guilty to each count. After several days of trial he changed his plea to nolo contendere and was duly convicted. On January 5, 1953, he received a sentence of imprisonment, which was suspended, and was fined $15,000. Masters was also convicted after a plea of nolo contendere of evading income taxes for the years 1945 through 1947, given a suspended sentence, and fined $7,500.
The amount of gross income respectively reported by petitioners and that as reflected in respondent's determination for the years involved is as follows:
+---------------------------------------------------+ ¦Williams¦ ¦Masters ¦ ¦ ¦ +--------+----------+----------+---------+----------¦ ¦Year ¦Reported ¦Determined¦Reported ¦Determined¦ +--------+----------+----------+---------+----------¦ ¦1943 ¦$16,652.63¦$60,452.63¦ ¦ ¦ +--------+----------+----------+---------+----------¦ ¦1944 ¦20,789.93 ¦75,689.93 ¦$5,591.50¦$12,911.50¦ +--------+----------+----------+---------+----------¦ ¦1945 ¦29,361.10 ¦112,811.64¦6,639.73 ¦18,252.50 ¦ +--------+----------+----------+---------+----------¦ ¦1946 ¦30,454.70 ¦98,588.03 ¦6,223.23 ¦14,739.90 ¦ +--------+----------+----------+---------+----------¦ ¦1947 ¦33,039.98 ¦67,106.65 ¦5,419.86 ¦7,853.19 ¦ +---------------------------------------------------+
The tax returns filed by Masters for the years 1944 through 1947 were false and fraudulent with intent to evade the tax and a part of each deficiency for such years was due to fraud with intent to evade tax.
The tax returns filed by Williams for the years 1943 through 1947 were false and fraudulent with intent to evade the tax and a part of each deficiency for such years was due to fraud with intent to evade tax.
OPINION.
VAN FOSSAN, Judge:
While admitting that there was an understatement of gross receipts in each of the taxable years, petitioners urge that there was no understatement of taxable income. That is to say, petitioners naively contend that all understatements of gross receipts are offset by the unaccounted for overceiling payments made by Williams for scarce commodities used by the restaurants and for wages paid in excess of those allowed by law, all of which they allege would enter into the computation of cost of goods sold on the tax returns involved; that none of such expenses were so claimed; and that, therefore, there was no actual omission of taxable income in any of the years in question. We do not agree.
It is obvious that any set of books deliberately designed and kept for the express and admitted purpose of concealing the truth by understatement of costs and receipts and thereby deceiving and defrauding one branch of the Government, cannot speak the truth or accurately reflect the taxpayer's income in any case.
As to petitioners' contention that the omission from expenses paid of the over-ceiling wages would balance the understatement of income, we need but to refer to section 5(a), Emergency Price Control Act of 1942, as amended, P.L. 729, 56 Stat. 765, 767, and Executive Order 9250, October 3, 1942, 1942-2 C.B. 92, which specifically proscribes the recognition of any such payments made in contravention of the then existing wage and salary regulations ‘* * * for the purpose of calculating deductions under the Revenue Laws * * *.’
Albeit the amounts allegedly paid by Williams in excess of the maximum. price fixed by law for commodities used by the restaurants during the years involved, if proved, might be includible in determining the cost of goods sold by the restaurants in such years, Lela Sullenger, 11 T.C. 1076, and I.T. 4104, 1952-2 C.B. 71, this record contains no reliable evidence as to the amounts actually expended for over-ceiling prices of commodities and for extra wages. This being true, the record made affords no basis for our making a reasonable estimate. Cf. Cohan v. Commissioner, 39 F.2d 540. Respondent's determination of the deficiencies herein is therefore approved.
On the question of fraud— upon full consideration of all facts as above set out and all the normal and rational inferences flowing from such facts, we have concluded and therefore found, on clear and convincing evidence, that the taxpayers, Williams and Masters, filed false and fraudulent returns for each of the taxable years with intent to evade tax and to defraud the Government of taxes rightfully due, and that some part of each deficiency here involved was due to fraud with intent to evade tax. Accordingly, the statute of limitations does not bar respondent's action.
Decisions will be entered for the respondent.