21 T.C. 123">*123 The Commissioner determined deficiencies in income tax and additions under section 293 (b) for fraud as follows:

1953 U.S. Tax Ct. LEXIS 41">*42 The issues for decision are as follows:

(1) What are the amounts of sales, purchases, and business expenses of Jack M. Chesbro, Carl Silverstein, Morris Silverstein, the various partnerships in which they were interested, and Smiling Jack Chesbro, Inc., for the taxable years involved herein?

(2) Did Jack, Carl, and Morris receive a dividend from Smiling Jack Chesbro, Inc., in the year 1947?

(3) Did Smiling Jack Chesbro, Inc., sustain a loss resulting from the demolition of a building during the fiscal year ended June 30, 1947?

21 T.C. 123">*124 (4) Is Smiling Jack Chesbro, Inc., entitled to a deduction for a New York State franchise tax during the fiscal year ended June 30, 1947?

(5) Were any of the alleged deficiencies of Jack, Carl, Morris, and Smiling Jack Chesbro, Inc., due to fraud with intent to evade tax?

(6) Were bank deposits in excess of reported income made by Cecily Silverstein during the taxable years taxable income to her?

FINDINGS OF FACT.

The petitioners Jack M. Chesbro, Carl Silverstein, Cecily Silverstein, and Morris Silverstein are individuals residing in Buffalo, New York. Smiling Jack Chesbro, Inc., is a New York corporation which was organized on June 18, 1946. All1953 U.S. Tax Ct. LEXIS 41">*43 returns were filed with the collector of internal revenue for the twenty-eighth district of New York.

Jack, Carl, and Morris, as equal partners, formed the Smiling Jack Chesbro partnership in December 1945 and continued it until June 30, 1946. Its purpose was to buy and sell used cars. The three equal interests were exchanged for shares in Smiling Jack Chesbro, Inc., when the partnership was dissolved.

Smiling Jack Chesbro, Inc., commenced operations on July 1, 1946. Its sole purpose was to buy and sell used cars. It operated from several lots located in or about Buffalo, New York. Morris was president, Carl, secretary-treasurer, and Jack, vice president. Each held one-third of the stock of the corporation. The corporation used an accrual method of accounting.

Theatre Motor Garage was operated as a sole proprietorship by Morris prior to April 1, 1946, when it was succeeded by Theatre Motor Sales, a partnership consisting of Morris and Carl. The partnership is still in existence and operating. However, its main used car lot became part of Smiling Jack Chesbro, Inc., at some point not disclosed by the record.

Jack, Carl, and Morris were engaged at all times material hereto 1953 U.S. Tax Ct. LEXIS 41">*44 in the business of buying and selling used cars through the various business entities enumerated above. Their businesses were subject to the restrictions imposed by the Emergency Price Control Act of January 30, 1942, which limited the prices which could be charged for used cars. Those regulations were in existence during 1945 and up to July 1, 1946, and again during the period August 1, 1946, to November 19, 1946, when the regulations permanently went out of existence. The petitioners were engaged in black market dealings, and many sales and some purchases were at prices in excess of those permitted by O. P. A. regulations.

21 T.C. 123">*125 The petitioners maintained a "revolving fund" which began with cash originally contributed equally by Jack, Carl, and Morris. This fund was used to pay over-ceiling amounts on automobiles which they purchased and was augmented by over-ceiling amounts received on automobiles which they sold. No funds in the "revolving fund" were ever reflected on books of the businesses. Occasionally, other money from the businesses was mingled with the "revolving fund." Jack, Carl, and Morris had access to the fund and kept individual memos of transactions which1953 U.S. Tax Ct. LEXIS 41">*45 they made with the fund. The lot managers would get necessary cash from Jack, Carl, and Morris and return extra cash to them. Jack, Carl, and Morris would get together every few days and settle among themselves for monies taken in and paid out from the fund and then the individuals' memos were thrown away. No records were kept of the "revolving fund." The "revolving fund" system was used with respect to all of the business entities involved herein. It was adopted when O. P. A. regulations came into effect and helped to evade those regulations by avoiding entries on the books recording payment or receipt of over-ceiling prices. The petitioners continued that method of operation and bookkeeping after the O. P. A. regulations went out of existence.

The various businesses kept daily purchase and sale books which were required by the State of New York. They were books of original entry. A separate book was kept for each used car lot. The information for those books, including name and address of the vendor or vendee, description of the car, and the sales price, was supplied at the main office by Jack, Carl, and Morris and at the other lots by the lot managers. The information 1953 U.S. Tax Ct. LEXIS 41">*46 was supplied on O. P. A. forms during the periods of O. P. A. existence and on slips of paper afterwards. The sales price, which was entered in the books, never exceeded the O. P. A. ceiling price during the periods of O. P. A. The sales and purchase prices shown on the books after O. P. A. went out varied in the same way from the actual prices and were determined by Jack, Carl, and Morris. No fixed percentage of the actual price was shown in every case. The accountant used those books to make up the various journals and other records and tax returns of the businesses. The accountants were never told about the additional purchase and sales amounts handled in the "revolving fund" but not entered in the books.

Most purchases and sales were paid for by a combination of cash and check. The check was normally in the amount of the maximum O. P. A. price or the price shown on the books, and the cash represented the over-ceiling or over-book amount. The check was shown on the corporation's books and the cash was handled through the "revolving fund." The ceiling price was usually entered on books if only cash was 21 T.C. 123">*126 paid. However, checks in the amount of the ceiling price were1953 U.S. Tax Ct. LEXIS 41">*47 sometimes drawn to the order of the vendor when cash was paid for cars, and the checks were endorsed by someone other than the vendor and cleared through the petitioner's banks in order to have a record of the purchases as if at ceiling price. There was no fixed ratio between the amounts in cash and in checks that followed through all sales.

The Commissioner's determinations, after adjustments by stipulation, are that the petitioners understated sales on their books in the following amounts:

The Smiling Jack Chesbro partnership understated certain purchases in the amount of $ 405 for the year 1946. Smiling Jack Chesbro, Inc., understated certain purchases in the amount of $ 3,973 for the fiscal year ended June 30, 1947. The record shows no other understated purchases. The Smiling Jack Chesbro partnership overstated certain purchases in the amount of $ 200 and Smiling Jack Chesbro, Inc., overstated certain purchases in the amount of $ 440 for the same periods.

The Commissioner, in determining the1953 U.S. Tax Ct. LEXIS 41">*48 deficiencies, disallowed for lack of substantiation miscellaneous business expenses claimed by the petitioners. Many of those deductions are represented by checks payable to cash or to one of the partners or lot managers. Those checks covered miscellaneous business expenses, including gas, parts, license plates, repairs, petty cash, commissions, gratuities, and tires. The Smiling Jack Chesbro partnership had business expenses of $ 1,400.27 for the period January 1 through June 30, 1946, which were not allowed by the Commissioner in determining the deficiencies. Theatre Motor Sales had business expenses in the amount of $ 314.25 for the period April 1 through December 31, 1946, and $ 257.21 for the period January 1 through June 30, 1947, which were not allowed by the Commissioner in determining the deficiencies.

The Commissioner determined that the income of Smiling Jack Chesbro, Inc., for the fiscal year ended June 30, 1947, should be increased by $ 1,950 due to lack of substantiation of checks payable to cash and cash purchases. The record does not show that he erred in that determination.

The Commissioner's determination, after reduction by concessions, increases the income1953 U.S. Tax Ct. LEXIS 41">*49 of Morris Silverstein from his sole proprietorship, Theatre Motor Garage, by $ 1,893.72 for 1945 and by $ 559 for 1946. Theatre Motor Garage had miscellaneous business expenses of $ 118.50 during 1945 which were not allowed by the Commissioner.

21 T.C. 123">*127 The Commissioner disallowed deductions claimed for travel and entertainment expenses. No records or receipts to substantiate those items are in existence. They were estimated on the tax returns. The record does not show that the disallowance of the travel and entertainment expenses was in error.

The Commissioner disallowed deductions for gas and oil in the amount of $ 350 claimed by Carl Silverstein on his return for 1946. No evidence was introduced to support that deduction.

The Commissioner determined that all of the additional profits of Smiling Jack Chesbro, Inc., as determined by him, were distributed as dividends during 1947 to Jack, Carl, and Morris. Those profits represented the understated sales of the corporation which were received in cash and handled through the "revolving fund." Jack, Carl, and Morris received that cash, periodically divided it equally among themselves, and at all times had complete control of it. 1953 U.S. Tax Ct. LEXIS 41">*50 It was not paid out for purchases or other business purposes. All unreported profits of Smiling Jack Chesbro, Inc., for the taxable year were thus paid to Jack, Carl, and Morris as dividends.

The property used as the main car lot of Smiling Jack Chesbro, Inc., had on it an old frame residence. The intention, when the property was acquired and for some time thereafter, was to continue to rent that residence. The Fire Department of Buffalo eventually required improvements for which material could not be obtained and, as a result, the corporation obtained permission from the rent control authority to evict the tenants and demolished the building. Smiling Jack Chesbro, Inc., sustained a loss of $ 10,132.42 during its fiscal year ended June 30, 1947, from the demolition of the building.

The Commissioner, in determining the deficiency against Smiling Jack Chesbro, Inc., made several adjustments which increased the net income of the corporation and allowed a deduction for the New York State franchise tax which the petitioner would be required to pay on the resulting increased income. Smiling Jack Chesbro, Inc., is entitled to a deduction for the taxable year for the New York State1953 U.S. Tax Ct. LEXIS 41">*51 franchise tax accruable on the increased income resulting from the disallowance of "legal expenses $ 250" and "organization expense $ 175.55" which were not contested by the petitioner. The franchise tax based on the contested items is not accruable in the taxable year.

A part of each deficiency against Jack, Carl, and Morris and Smiling Jack Chesbro, Inc., for the taxable years, was due to fraud with intent to evade tax.

Cecily was the wife of Carl. She filed separate income tax returns for the taxable years. The Commissioner determined that deposits in her bank account in excess of the income reported by her for each year were additional income to her. Those deposits did not represent income to her.

21 T.C. 123">*128 The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.

OPINION.

The books maintained for the various businesses were obviously incorrect and intentionally false. They contained many entries showing amounts as sales prices which were not the actual sales prices. Jack, Carl, and Morris had the books show only O. P. A. ceiling prices while the O. P. A. restrictions were in effect, although they admit that most of the sales were made1953 U.S. Tax Ct. LEXIS 41">*52 at prices in excess of those permitted by O. P. A., and they now claim that most of their purchases were likewise made at costs greater than they were permitted to pay under the O. P. A. restrictions. They continued the false book entries after the O. P. A. restrictions were removed. They had their accountant prepare their returns solely from the books without telling him that the book entries were false and without telling him what the actual prices had been. Since the books were false and unreliable, the Commissioner had to resort to some other method in trying to find out what the true income from each of the various businesses was. The methods adopted by him and the results reached by him are not arbitrary and capricious under the circumstances created by the petitioners themselves.

The petitioners concede that sales were understated in their books and returns and show no error in the Commissioner's determination, after adjustments by stipulation, of the book understatement of sales of the Smiling Jack Chesbro partnership for 1946, of Smiling Jack Chesbro, Inc., for the 12 months ended June 30, 1947, and of Theatre Motors sales for 1946 and 1947, as set forth in the Findings1953 U.S. Tax Ct. LEXIS 41">*53 of Fact, so those figures must be taken as established in the record for all purposes. The petitioners claim, however, that their purchases of automobiles were understated on their books by substantially equivalent amounts. The Smiling Jack Chesbro partnership books understated a few purchases in the total amount of $ 405 during 1946, but also overstated certain purchases by $ 200 during that same year. The Smiling Jack Chesbro, Inc., books understated purchases for its taxable year in the total amount of $ 3,973, and for the same year overstated others in the amount of $ 440. The record shows no other book understatement of purchases during the taxable years which would be material hereto. Witnesses for the petitioners testified to about 45 transactions, but less than half of those were tied into the books of the businesses to show that the purchases involved were understated on those books. Such understatements as were established by the testimony have been incorporated in the Findings of Fact. The Commissioner proved that in 4 transactions the purchase prices had been 21 T.C. 123">*129 overstated on the books and also introduced evidence to show that in 59 transactions the actual1953 U.S. Tax Ct. LEXIS 41">*54 purchase price corresponded with that shown on the books. The Court is unwilling to accept the general statements of Jack, Carl, and Morris that the understatement of purchases on the books offset the understated sales to a greater degree than is disclosed by the Findings of Fact. The Commissioner has clearly established that the sales of these businesses were grossly understated and has likewise shown that the purchases were not understated in amounts at all comparable thereto. That was sufficient for his purposes, and if the purchases were understated to a greater extent, it was incumbent upon the petitioners to prove the understatements and that they have failed to do.

The petitioners claim that they are entitled to certain additional deductions which the Commissioner has disallowed or has failed to allow, and findings to support the petitioners' claims have been made wherever the evidence has justified such findings. No evidence was introduced in connection with a number of the items and, of course, no finding favorable to the petitioners could be made in such cases. No approximations are justified because in those cases where no findings favorable to the petitioners have1953 U.S. Tax Ct. LEXIS 41">*55 been made the evidence fails to show that any amount was expended which would give rise to a deduction or an elimination of income.

The Commissioner determined that Jack, Carl, and Morris had received amounts from the corporation during its taxable year which were taxable to them as dividends. They originally denied that they had received any amounts from the corporation except their salaries which they had reported, but in their reply briefs admitted that each had received $ 5,000 from the corporation in addition to his salary. The Commissioner has determined that the earnings and profits of the corporation for its taxable year in excess of taxes were taxable to Jack, Carl, and Morris as dividends. The corporation had income in excess of the amount reported. Its books fail to show that it retained those additional earnings or spent them for any business purpose. The three men were the only stockholders of the corporation and had complete charge of and dominion over its funds. They personally received the amounts from the sale of cars in excess of the prices shown on the books and through that method each retained an equal portion of the additional income of the corporation 1953 U.S. Tax Ct. LEXIS 41">*56 for the taxable year. No dividends were actually declared but the amounts were taxable as dividends to the three stockholders. Leo G. Hadley, 6 B. T. A. 1031, affd. 36 F.2d 543; Paramount-Richards Theatres, Inc. v. Commissioner, 153 F.2d 602.

The Commissioner has taken the position that no deductible loss resulted from the demolition of the building on the corporation's parking lot during its taxable year for the reason that the property 21 T.C. 123">*130 was acquired solely as a parking lot and with an original intention of demolishing the building. The evidence shows that there was no intention in the beginning to demolish the building but a decision was reached to demolish it only after the corporation was unable to comply with requirements of the Buffalo Fire Department and the corporation, as its only alternative, demolished the building. The amount of the loss is not in dispute.

One of the adjustments made by the Commissioner in determining the deficiency against the corporation was the allowance of additional New York franchise tax in the amount of $ 8,526.34 accruable upon the additional1953 U.S. Tax Ct. LEXIS 41">*57 income which he determined was taxable to the corporation. He filed an amended answer alleging that he had erred in allowing the additional deduction for New York State franchise tax and claiming the additional deficiency which would result from its disallowance. The corporation, using an accrual method of accounting, is entitled to accrue additional franchise tax based upon any adjustment made by the Commissioner increasing its income which is proper and which it has not contested, but it is not entitled to accrue franchise tax on additional income improperly added by the Commissioner or added by the Commissioner and contested by the taxpayer. Curran Realty Co., 15 T.C. 341. It has not contested two adjustments in the total amount of $ 425.55 and may take deductions for the additional franchise tax due thereon. It has contested all other adjustments made by the Commissioner and is not entitled to any deduction for New York State franchise tax based upon additional income involved in those adjustments.

The Commissioner has the burden of proving his contention that a part of each deficiency, except in the case of Cecily, was due to fraud with intent1953 U.S. Tax Ct. LEXIS 41">*58 to evade tax, and the Court has had this burden in mind as it considered the evidence bearing upon this issue of fraud. The Commissioner has sustained his burden by clear and convincing evidence. Jack, Carl, and Morris deliberately arranged to have the books contain false entries which would not show the true sales prices and in some instances would not show the true purchase prices. They argue that they did that only to deceive the Office of Price Administration but without any intention whatsoever of defrauding the Government out of the income taxes lawfully due it. It was pointed out that they had continued the system of fraudulent book entries after the O. P. A. restrictions were removed, and their explanation for that was that all of those with whom they did business had become accustomed to having the purchase price paid partly by check and partly by cash and they were forced to continue the bookkeeping method as before. Both of those arguments are obviously fatuous.

The evidence clearly shows that the total excess received for cars over the amounts shown on the books far exceeded the total excess paid 21 T.C. 123">*131 for cars over the amounts shown on the books, and those excess1953 U.S. Tax Ct. LEXIS 41">*59 profits went directly into the pockets of the individual owners of the business. They used the "revolving fund" to assist them in pocketing the earnings and they also made distributions by two checks. Their fraudulent motives are also shown by checks made out to persons from whom they had purchased cars, but endorsed by others than those vendors and turned back into the business, all for no apparent purpose except to make it appear that they had paid more for the car than they had actually paid. The additional income realized by the businesses and by the individuals was not reported on the tax returns for the taxable years. The failure to report it was, in each instance where the Commissioner determined a deficiency, due to fraud with intent to evade tax. A substantial understatement was involved in each deficiency. The conclusion is inescapable that each deficiency was due to fraud with intent to evade tax as determined by the Commissioner.

The Commissioner, in determining the deficiencies against Cecily, increased her income by certain amounts shown as bank deposits. She earned some income of her own but received no other income. The deposits were of money given to her by1953 U.S. Tax Ct. LEXIS 41">*60 her husband and an amount transferred from another account. The record as a whole supports the conclusion that the deposits in question were not income to Cecily.

Some of the adjustments made by the Commissioner were not contested in the petitions and others contested have been conceded to be correct by stipulation or statements in the record. The parties have stipulated in regard to other adjustments and the Commissioner conceded one item in the petitioners' favor, all of which can be taken care of in the recomputations to be submitted under Rule 50.

Decisions will be entered under Rule 50.