1951 U.S. Tax Ct. LEXIS 261">*261
1. Fraud. -- The Commissioner sustained his burden of proof and showed that a part of the deficiency against each taxpayer for each year was due to fraud with intent to evade tax.
2. Fraud -- Addition under Section 293 (b). -- The addition to the tax under section 293 (b) is 50 per cent of "any" deficiency and is not dependent upon the determination of a deficiency by the Commissioner.
3. Jurisdiction -- Notice of Fraud Penalty Only. -- A statutory notice from the Commissioner, in which no deficiency is determined but advising the taxpayer that the 50 per cent addition provided by section 293 (b) is due, is a notice upon which a proceeding in the Tax Court can be based.
16 T.C. 511">*512 The Commissioner determined deficiencies in income tax and additions for fraud under section 293 (b) as follows:
Herbert Eck | Martin M. Karlan | |||
Year | ||||
Deficiency | Fraud addition | Deficiency | Fraud addition | |
1942 | $ 11,359.52 | $ 5,679.76 | $ 11,393.20 | $ 5.696.60 |
1943 | 6,220.01 | 5,999.27 | ||
1944 | 1,172.47 | 7,363.29 | 1,059.70 | 7,144.32 |
Cosimo Perrucci | ||
Year | ||
Deficiency | Fraud addition | |
1942 | $ 11,618.89 | $ 5,809.45 |
1943 | 6,343.01 | |
1944 | 1,148.90 | 7,484.26 |
The only issue for decision is whether any part of any deficiency for the taxable years was due to fraud with intent to evade tax.
The petitioners were equal partners in Rae Metal Products Company, a partnership organized on April 1, 1942, for the purpose of manufacturing metal stampings.
Original partnership returns for the calendar years 1942, 1943, and 1944 were timely filed with the collector 1951 U.S. Tax Ct. LEXIS 261">*263 of internal revenue for the second district of New York. Herbert Eck and his wife timely filed joint income tax returns for the calendar years 1942, 1943, and 1944 with the collector of internal revenue for the fourteenth district of New York. Martin M. Karlan timely filed individual income tax returns for the calendar years 1942, 1943, and 1944 with the collector of internal revenue for the second district of New York. Cosimo Perrucci timely filed individual income tax returns for the calendar years 1942, 1943, and 1944 with the collector of internal revenue for the second district of New York. All of those returns contain deliberate understatements of income in substantial amounts.
Rae Metal Products Company filed amended returns on August 29, 1945, for the calendar years 1942, 1943, and 1944, reporting net income in a much larger amount for each year than had been reported on the original returns. Herbert Eck and his wife filed amended returns on August 30, 1945, for the calendar years 1942, 1943, and 1944, reporting net income in a much larger amount for each year than had been reported on the original returns. Martin M. Karlan filed amended returns on August 29, 1945, for1951 U.S. Tax Ct. LEXIS 261">*264 the calendar years 1942, 1943, and 1944, reporting net income in a much larger amount for each year than had been reported on the original returns. Cosimo Perrucci filed amended returns on August 29, 1945, for the calendar years 1942, 1943, and 1944, reporting net income in a much larger amount for each year than had been reported on the original returns. The additional taxes shown to be due on the amended returns were paid.
A part of a deficiency as to each of the three petitioners and as to each year was due to fraud with intent to evade tax.
16 T.C. 511">*513 OPINION.
The partnership income for each of the 3 years was understated on the original returns by amounts varying from $ 60,000 to $ 68,000. Those understatements were carried into the returns filed by the three partners. The partnership books were falsified in an effort to conceal the true amount of income earned in each year. Sales in substantial amounts in each year were not reported and purchases were overstated in substantial amounts for each year. The falsification of the accounts was with the knowledge of and, in many instances, at the direction of Karlan. The false and fraudulent accounting for the partnership business1951 U.S. Tax Ct. LEXIS 261">*265 and the false and fraudulent reporting of the partnership income on the returns was all part of a scheme suggested to the partners by Milton Trager, a certified public accountant. He also prepared most of the returns. The purpose of the scheme was to evade taxes.
Trager had been employed by a predecessor of the partnership. Eck was instrumental in retaining his services so that he could look after Eck's interest in the Rae Metal Products Company. The partners, at Trager's direction, withdrew partnership earnings in large equal amounts on checks taken from the back of the partnership check book out of chronological order and without any entries on the checks or stubs to show what they were for. The partners received those amounts and used them for their own purposes. The books of the partnership did not account for the withdrawals. The books contained many false entries. Later, futile attempts, including the raising of checks, were made to "reconcile" the accounts. Finally, when it appeared that the plan might get the partners into trouble, they hired a new accountant and upon his advice filed the amended returns.
Karlan was directly responsible for a number of the false entries1951 U.S. Tax Ct. LEXIS 261">*266 in the books. He well knew Trager's scheme was dishonest, the partnership income was far greater than was reported in the original partnership returns, and his own income was much larger than he reported in any of his original returns. He deliberately filed a false return for each year. It is clear beyond a reasonable doubt that a part of a deficiency against him for each year was due to fraud with intent to evade tax.
The evidence indicates that Eck and Perrucci had little, if anything, to do with the entries made in the books, and it is argued that all of the falsifications and fraud went on without their knowledge so that they were victims of the machinations of others. However, it is inconceivable that Eck could have carried on the important part of the business entrusted to him without being sufficiently familiar with that business to know that his share of the income for each year 16 T.C. 511">*514 was far in excess of what he was reporting. He participated in Trager's scheme, at least to the extent of signing checks for the withdrawal of and receiving large amounts of income of the partnership which he did not report. The Court, after observing him, listening to his testimony1951 U.S. Tax Ct. LEXIS 261">*267 and studying it in the light of the entire record, is satisfied that he was aware of what was going on and deliberately filed false and fraudulent returns with intent to evade tax. The record justifies the finding made that a part of a deficiency against him for each of the 3 years was due to fraud with intent to evade tax.
Cosimo Perrucci likewise participated in the scheme, at least to the extent of signing checks and receiving large amounts of income of the partnership which he did not report. He had not had much formal education but he was not stupid. The Court, after observing him, listening to his testimony in the light of all other evidence in the record, is unable to believe that he was so dense that he did not appreciate what was going on. The evidence indicates, on the contrary, that he too knew that his income for each year from the partnership, which he was required to report for Federal income tax purposes, was far in excess of the amount which he actually reported and justifies the finding that a part of a deficiency against him for each year was due to fraud with intent to evade tax.
The relief granted in the Current Tax Payment Act of 1943 does not extend to a 1951 U.S. Tax Ct. LEXIS 261">*268 taxpayer to whom additions to the tax for the taxable year are applicable by reason of fraud. See section 6, Current Tax Payment Act of 1943. It follows that the Commissioner did not err in determining deficiencies and penalties for 1942. Otherwise, the petitioners do not contest the deficiencies.
A jurisdictional question arises in each of these cases of which the Eck case will serve as an example. The question is whether the Tax Court has any jurisdiction based upon a statutory notice in which the Commissioner does not determine a deficiency in tax for 1943 but merely gives notice to the taxpayer of his determination that the latter is liable for the 50 per cent addition to the deficiency by reason of the application of section 293 (b). Eck filed an original return for 1943 showing tax due in the amount of $ 3,467.89. A tax of $ 15,907.91 was imposed on his income for that year by Chapter 1 with the result that a $ 12,440.02 deficiency, as defined in