Decisions in all dockets will be entered under Rule 50.
Dahar Cury was the proprietor of a number of department stores. He and his wife filed joint income tax returns for the years 1941-1944. She died early in 1945. In 1946, the business was incorporated and Dahar Cury became the owner of all of the corporate stock, later selling one-tenth of the stock to one of his sons. Nearly all of the inventory records of the business were unavailable to the Court. Dahar Cury died on February 7, 1948, leaving his entire estate to his ten children and directing that the business be operated by three of his sons as executors and trustees for the benefit of all of the children for a period of 20 years after his death. A controversy developed among the executors, and the children split into two groups of five each. One group agreed to purchase the interests of the other group at a fixed price. The executors resigned and a local court declared the testamentary trust invalid and ordered the estate transferred to the ten children. Five of the children thereupon sold their interests to the other five, in accordance with their agreement.
Held: 1. Deficiencies in income tax with respect to the 1954 U.S. Tax Ct. LEXIS 38">*39 liability of Dahar and his wife for 1941-1944 (when they filed joint returns) and of Dahar alone from 1945 until the date of his death may properly be determined by using the net worth method.
2. At least part of the deficiencies determined against Dahar Cury's estate and the estate of his wife was due to fraud with intent to evade tax.
3. Each of the ten children of Dahar Cury is liable as a transferee of the estate of each of the parents for income taxes, additions to tax, and interest found owing by each estate. Transferee liability of each child is measured by the amount agreed to have been received from the mother's estate and by one-tenth of the value of the father's estate on the date it was transferred to each.
4. Method for computing value of Dahar Cury's gross estate determined.
5. Method for computing basis of each one-tenth interest in Dahar Cury's estate determined.
6. Additions for fraud with respect to deficiencies in income tax against the corporation approved. Downward adjustment to be made in computing transferee liability with respect to such deficiencies approved.
23 T.C. 305">*306 The respondent determined deficiencies in income tax and additions to tax under section 293 (b) of the Internal Revenue Code of 1939 against the estate of Dahar Cury and the estate of Elizabeth Cury for the years 1941 to 1944, inclusive, and deficiencies in income tax and additions to tax under section 293 (b) against the estate of Dahar Cury for the years 1945 to 1947, inclusive, and the period from January 1, 1948, to February 7, 1948. He further determined that each of the ten children of Dahar and Elizabeth Cury (George L. Cury, Robert L. Cury, A. B. Cury, Neal Gene Cury, Dahar Cury, Jr., Ruth Agnes Cury, Sol W. Cury, Ann Cury Romanus, Elizabeth Cury Ely, and Mary Cury Salaita) was liable as a transferee of the estates of Dahar and Elizabeth for income taxes and additions to tax due from the estates. 21954 U.S. Tax Ct. LEXIS 38">*41
The Commissioner also determined that there was a deficiency in the estate tax due from the estate of Dahar Cury.
23 T.C. 305">*307 He also determined deficiencies in income tax for 1948 against five of the children involving primarily the alleged gain realized by them on the sale of their interests in the estate of Dahar Cury.
He also determined deficiencies in income tax and additions to tax under section 293 (b) against D. Cury's, Incorporated, for the fiscal years ended July 31, 1947, and July 31, 1948, and further determined that Sol W. Cury and Ann Cury Romanus are liable for these taxes as transferees.
The issues will appear in the Opinion.
FINDINGS OF FACT.
Two stipulations of facts have been filed. These stipulations and exhibits annexed thereto, as well as any facts stipulated during the trial, are found as facts and incorporated herein by reference.
Dahar Cury (hereinafter also referred to as the decedent) was born in Syria. He married Elizabeth Haddad in 1899. He came to this country in about 1902 and became a citizen of the United States in 1914. He had only a few days of formal education 1954 U.S. Tax Ct. LEXIS 38">*42 but was able to read and write printed English, and, to some extent, written English. He dictated letters in English, but when writing himself used Arabic. His wife was unable to read or write English, except for her own name which she learned to write in about 1942.
Dahar and Elizabeth Cury had ten children who were as follows: George L. Cury, Dahar Cury, Jr., A. B. Cury, Neal Gene Cury (sometimes referred to as Gene Cury), Sol W. Cury, Robert L. Cury, Ann Cury Romanus, Elizabeth Cury Ely, Ruth Agnes Cury, and Mary Cury Salaita.
In about 1906 or 1907, Dahar Cury commenced business as a retail merchant in Portage, Pennsylvania. In 1910, he moved to Norton, Virginia, and there established a retail dry goods business or department store which he operated as a sole proprietorship under the name of D. Cury's until August 1, 1946. From time to time branch stores were opened within about a 50-mile radius of Norton, but the original store at Norton (hereinafter sometimes referred to as the Norton store) continued to be the main store in the enterprise. On August 1, 1946, the business was incorporated under the name D. Cury, Incorporated, and on August 27, 1946, the name was changed to 1954 U.S. Tax Ct. LEXIS 38">*43 D. Cury's, Incorporated. The business which was operated as a corporation from August 1, 1946, will also hereinafter be referred to as the corporation. The corporation was dissolved on June 30, 1949, and the business was thereafter operated by Sol W. Cury. During the years 1940 to 1950, inclusive, the stores which were owned and operated by Dahar Cury, as a sole proprietor, by the corporation, and thereafter by Sol. W. Cury were as follows: 23 T.C. 305">*308
| Closing or | |||
| Store | Location | Opening date | sale date |
| (if any) | |||
| D. Cury's Dept. Store | Norton, Va | Prior to 1940 | |
| The Leader Store | Norton, Va | Prior to 1940 | March1943 |
| D. Cury's Dept. Store | St. Paul, Va | Oct. 1940 | May31, 1950 |
| D. Cury's Dept. Store | Appalachia, Va | Mar. 1941 | Mar.14, 1949 |
| D. Cury's Dept. Store | Clintwood, Va | Mar. 1942 | Feb.1, 1950 |
| D. Cury's Dept. Store | Jonesville, Va | Sept. 1942 | Mar.23, 1950 |
| D. Cury's Dept. Store #1 | Coeburn, Va | Mar. 1943 | May1, 1947 |
| D. Cury's Dept. Store | Pennington Gap, Va | Aug. 1943 | Mar.23, 1950 |
| D. Cury's Dept. Store | Lebanon, Va | Sept. 1944 | June1, 1948 |
| D. Cury's Dept. Store #2 | Coeburn, Va | Aug. 1945 | |
| D. Cury's Dept. Store | Richlands, Va | Aug. 1946 | Mar.14, 1949 |
| D. Cury's Dept. Store | Wise, Va | Sept. 1946 | Mar.1, 1948 |
Each of the tax returns involved in each of the petitions 1954 U.S. Tax Ct. LEXIS 38">*44 herein was filed with the collector of internal revenue for the district of Virginia at Richmond, Virginia.
During the period from January 1, 1941, to August 1, 1946, while the Cury stores were being operated as a sole proprietorship, certain books and records were maintained for the business. These included a cash receipts journal, a cash disbursements journal, a sales journal, an accounts receivable and payable journal, and a book entitled "Beat Yesterday" which recorded daily, weekly, and monthly sales for each of the five preceding periods for the purpose of quick comparison with current sales. Such records were kept in the main store at Norton, Virginia, under the supervision of Al Zay, a bookkeeper, and George L. Cury, the supervisor of the office. No general ledger was maintained by the proprietorship. Daily and weekly reports were sent from the branch stores to the Norton store. The income tax returns of Dahar Cury were prepared from such books and records of the Norton store and the branch stores.
The special agent of the Bureau of Internal Revenue, while conducting his investigation, did not receive, for his examination, (a) expense records of the Norton store for periods 1954 U.S. Tax Ct. LEXIS 38">*45 prior to the formation of the corporation; (b) sales records for the branch stores for the tax years prior to 1944; (c) expense records for the branch stores for years prior to 1944; (d) inventory records for any of the years that the business was operated as a sole proprietorship; and (e) inventory records of the corporation for the fiscal years ended July 31, 1947, and July 31, 1948. He did receive, for his examination, (a) checks for the years 1943, 1944, and 1945 and the period from January 1, 1946, to July 31, 1946; (b) sales records of the Norton store beginning with the year 1940; (c) sales and expense records of the branch stores beginning with the year 1944 and continuing to the date of the formation of the corporation; (d) a general ledger and cash receipts and disbursements journals of the corporation; and (e) inventory record of the Norton store and five branch stores dated June 30, 1949. 23 T.C. 305">*309 Dahar Cury maintained a combined cash journal relating to real estate receipts, proceeds of salary checks, and interest and expenses for the year 1947 and the period from January 1 to February 7, 1948.
A short time prior to the hearing in these proceedings business books and records, 1954 U.S. Tax Ct. LEXIS 38">*46 which had previously been missing, were presented to the Commissioner. Such records disclosed the following information regarding sales, purchases, and expenses of the sole proprietorship for the years 1941 to 1945, inclusive, and the period from January 1, 1946, to July 31, 1946:
| Reconstructed | ||||
| purchases | ||||
| Year | Sales | Purchases, | including | Expenses |
| cash basis | freight in, | |||
| 1 accrual basis | ||||
| 1941 | $ 164,840.29 | $ 152,485.22 | $ 145,156.53 | $ 22,378.86 |
| 1942 | 277,646.00 | 228,994.34 | 222,279.28 | 44,718.52 |
| 1943 | 459,187.13 | 373,166.54 | 348,393.55 | 70,454.05 |
| 1944 | 566,118.77 | 411,348.37 | 411,553.42 | 96,291.78 |
| 1945 | 677,714.47 | 524,687.32 | 515,258.83 | 113,605.79 |
| 2 1946 | 531,244.55 | 416,214.62 | 481,756.85 | 91,650.93 |
The respondent admits that these figures accurately reflect what appears in the books and records, but he does not admit that they are correct.
During the years 1944 and 1945, an agent of the Bureau of Internal Revenue conducted an examination of the income tax returns 1954 U.S. Tax Ct. LEXIS 38">*47 filed by Dahar Cury for the years 1941-1944. The returns were verified by the agent from Dahar Cury's books and records and adjustments were made in the returns for each year, resulting in deficiencies for 1941 and 1943 and an overassessment for 1944. The agent attempted to check all of the items on the returns. He dealt with Dahar Cury, George L. Cury, and Al Zay. The principal adjustment had the effect of placing sales on an accrual basis. The agent, in his opinion, was able to determine income from the books and records as adjusted by him although they did not accurately reflect income as they were maintained. He found nothing which led him to believe that there was anything of a fraudulent nature in the returns. The determinations of deficiencies herein were based upon a considerably more extended investigation subsequently conducted by a special agent.
The business known as D. Cury's, when operated both as a sole proprietorship and as a corporation, took physical inventories of all merchandise on hand at the end of each tax year. At the time of the trial, the only detailed inventory record available was an inventory as of January 1, 1941, purporting to contain the inventory 1954 U.S. Tax Ct. LEXIS 38">*48 of the 23 T.C. 305">*310 Norton store, Leader store, and St. Paul store. No itemized list of merchandise was shown for the St. Paul store, but the amount of $ 5,101.23 appears on the page allotted for the inventory of that store. The total amount shown for inventory of the three stores is $ 26,239.40. The general ledger of the corporation showed the following amounts purporting to be inventory value as of the dates indicated:
| Aug. 1, 1946 | $ 67,208.74 |
| July 31, 1947 | 80,402.26 |
| July 31, 1948 | 74,316.79 |
| June 30, 1949 | 51,407.60 |
The inventories taken in each of the Cury stores at the end of the taxable years were generally taken by physical count at retail or retail marked-down prices taken from the price tickets. A code indicating the cost of each item appeared on each price ticket and was also recorded by the employees taking the inventory. This information was sent by the branch stores to the Norton store where it was then recorded.
The foregoing inventory of January 1, 1941, and an inventory taken by fire adjusters as of July 2, 1948, hereinafter described, were the only inventories covering the years here involved presented to the Court. No other inventories for those years were available and their absence 1954 U.S. Tax Ct. LEXIS 38">*49 was not satisfactorily explained.
A fire occurred in the Norton store on July 2, 1948. The store was closed as a result of the fire from that day until July 15, 1948.
On July 4, 1948, a representative of the Underwriters Salvage Company of New York arrived in Norton and began taking an inventory to determine the amount of loss due to the fire. The inventory was taken at the selling price marked on the price tickets. The taking of the inventory was completed on July 9, 1948.
For insurance purposes it was necessary to divide the Norton store into three "departments" and take a separate inventory for each department. The inventory value for the Norton store found by the insurance adjusters was as follows:
| Inventory | |
| value | |
| (at retail | |
| or retail | |
| Department | marked-down) |
| Main store | $ 113,383.70 |
| Men's store | 88,780.36 |
| Receiving department | 21,512.40 |
| Total | $ 223,676.46 |
An examination of the invoices and a spot check of merchandise by the adjusters indicated that the average markup of merchandise was 50 per cent, which markup would produce a 33 1/3 per cent gross profit on sales. The adjusters and George L. Cury agreed that the inventory 23 T.C. 305">*311 value found by the adjusters be reduced 33 1/3 per cent to arrive at the 1954 U.S. Tax Ct. LEXIS 38">*50 cost of the inventory. The cost thus determined was as follows:
| Inventory | |
| Department | (at cost) |
| Main store | $ 75,589.13 |
| Men's store | 59,186.91 |
| Receiving department | 14,341.60 |
| Total | $ 149,117.64 |
After negotiations between the adjusters and George L. Cury, the amount of loss for each department was agreed upon as follows:
| Department | Loss |
| Main store | $ 28,345.92 |
| Men's store | 29,593.46 |
| Receiving department | 6,181.79 |
| Total | $ 64,121.17 |
After the occurrence of the fire on July 2, 1948, the management of the corporation sent wires and letters to its suppliers canceling and postponing merchandise shipments since it did not want any merchandise arriving and being mixed with soiled and damaged merchandise. As a result, some of the merchandise on order at the time was not shipped until after the fire sale. The Norton store was reopened on July 15, 1948, and a large fire sale was conducted actively for about 2 weeks. This sale resulted in the largest volume of business in the history of D. Cury's at Norton. During the sale merchandise was reduced from 25 to 75 per cent of the normal retail price. Some damaged goods were also sent to the branch stores, and such stores also conducted fire sales. Comparative sales records 1954 U.S. Tax Ct. LEXIS 38">*51 for the months of July 1947 and July 1948 are as follows:
| July 1947 | July 1948 | |
| Norton | $ 15,885.87 | $ 38,574.99 |
| St. Paul Store | 8,577.71 | 9,315.12 |
| Appalachia | 5,295.12 | 6,232.77 |
| Clintwood | 4,184.12 | 6,729.67 |
| Jonesville | 1,975.88 | 3,869.61 |
| Pennington Gap | 4,919.88 | 4,456.92 |
| Coeburn No. 2 | 7,012.88 | 7,813.86 |
| Richlands | 6,544.38 | 10,395.06 |
| Wise | 2,514.24 | 3,882.32 |
| Totals | $ 56,910.08 | $ 91,270.32 |
During the years involved most merchandise sold by D. Cury's was bought by and shipped to the main store at Norton. Although the branch stores maintained a relatively complete stock, they received their supplies from the main store in Norton. Usually, necessary merchandise could be delivered to the branch stores from the Norton 23 T.C. 305">*312 store within 24 or 48 hours. A part of the merchandise on hand at the Norton store at the time of the fire was merchandise held in stock intended for use at the branch stores.
It was the policy of D. Cury's to reduce its stock as low as possible on inventory dates. The inventory fluctuated considerably during the year, the lowest point being December 31 and the next lowest July 31. For a month or two before the time that inventory was to be taken, merchandise was ordered for delivery after the inventory date. Clearance 1954 U.S. Tax Ct. LEXIS 38">*52 sales and other forms of sales promotion were used to reduce inventory prior to the time that inventory was to be taken. Some of the merchandise in the Norton store on July 31, 1948, was obsolete, damaged, or spoiled.
D. Cury's had a good credit rating, and it had from 10 to 90 days to pay invoices for goods received. It was the policy of the corporation to pay all invoices due before the end of the fiscal year in order to simplify bookkeeping and the compilation of reports.
The number of stores in operation, inventory reported on tax returns, and the inventory per notice of deficiencies for the respective periods involved are as follows:
| Number | Inventory | Inventory per | |
| Date | of | reported on tax | notice of |
| stores | returns | deficiency | |
| Jan. 1, 1941 | 3 | $ 26,239.40 | $ 37,275.42 |
| Dec. 31, 1941 | 4 | 50,892.06 | 67,573.30 |
| Dec. 31, 1942 | 6 | 63,764.22 | 97,836.22 |
| Dec. 31, 1943 | 7 | 78,299.41 | 124,743.23 |
| Dec. 31, 1944 | 8 | 65,123.81 | 143,878.98 |
| Dec. 31, 1945 | 9 | 66,678.50 | 187,825.35 |
| Aug. 1, 1946 | 9 | 67,208.74 | 300,131.37 |
| July 31, 1947 | 10 | 80,402.26 | 354,639.44 |
| July 31, 1948 | 8 | 74,316.79 | 413,876.00 |
| June 30, 1949 | 6 | 51,407.60 | 343,440.06 |
Inventories at cost or market, whichever was lower, of the sole proprietorship of Dahar Cury were as follows on the dates indicated:
| Jan. 1, 1941 | $ 28,000 |
| Dec. 31, 1941 | 56,000 |
| Dec. 31, 1942 | 72,000 |
| Dec. 31, 1943 | 81,000 |
| Dec. 31, 1944 | 74,000 |
| Dec. 31, 1945 | 91,000 |
| July 31, 1946 | 180,000 |
Inventories, 1954 U.S. Tax Ct. LEXIS 38">*53 at cost or market, whichever was lower, of D. Cury's, Incorporated, were as follows on the dates indicated:
| Aug. 1, 1946 | $ 180,000 |
| July 31, 1947 | 195,000 |
| July 31, 1948 | 216,000 |
| June 30, 1949 | 117,500 |
23 T.C. 305">*313 D. Cury's, Incorporated, was organized under the laws of the State of Virginia on August 1, 1946. Its original officers and directors were as follows:
| Officers | Board of directors | |
| Dahar Cury | President | Dahar Cury |
| Sol W. Cury | Vice president | George L. Cury |
| George L. Cury | Secretary and treasurer | Al Zay |
| Sol W. Cury | ||
| A. B. Cury |
At the time of the incorporation Dahar Cury transferred to the corporation the following assets at the following stated values:
| Cash on hand and in banks | $ 5,464.88 |
| Accounts receivable | 11,665.31 |
| Inventory of merchandise | 67,208.74 |
| Delivery equipment | 3,074.14 |
| Furniture and fixtures | 6,087.44 |
| Goodwill | 7,106.99 |
| Total assets | $ 100,607.50 |
In exchange therefor he received all of the capital stock of the corporation, 1,000 shares, and the agreement of the corporation to assume accounts payable by him in the amount of $ 607.50.
The accounting firm of Dent K. Burk Associates installed a set of books and records for the corporation as of August 1, 1946. The opening figures, those set forth above, were obtained by 1954 U.S. Tax Ct. LEXIS 38">*54 the accountants from available records of the sole proprietorship operated by Dahar Cury. No audit was made of the books and records of the sole proprietorship as of the date of the opening of the books of the corporation. The accounts payable item in the amount of $ 607.50 was adjusted by the accountants to $ 61,463.34, after an analysis of canceled checks for the years 1941 to 1946, inclusive, in order to reflect the cost of merchandise on hand at the time of the formation of the corporation which had not been included in the opening balance sheet. The reconstruction of purchases from the canceled checks was made necessary because no purchase records for the years 1941 to 1946, inclusive, were available to the accountants.
George L. Cury purchased 100 shares of stock in the corporation from his father. As payment for this stock, on July 31, 1947, George L. Cury made a deposit totaling $ 9,000 to the account of D. Cury's, Incorporated. This deposit consisted of his personal check for $ 5,500, 3 cashier's checks for $ 1,000 each, and 1 cashier's check for $ 500. The 4 cashier's checks totaling $ 3,500 represented money given to George by his father, Dahar Cury, to be used at 1954 U.S. Tax Ct. LEXIS 38">*55 an auction sale in Knoxville, Tennessee. The money was not used at the sale and the cash was converted 23 T.C. 305">*314 into the cashier's checks referred to above. George did not reimburse his father for the $ 3,500. The cost basis to George of the 100 shares of stock in the corporation was $ 5,500.
The cost to Dahar Cury of 1,000 shares of stock in D. Cury's, Incorporated, was $ 142,963.20. In 1947 Dahar Cury sustained a loss on the sale to his son, George L. Cury, of 100 shares of this stock in the amount of $ 8,796.32.
Dahar Cury died testate on February 7, 1948, posssessing an estate consisting of both real and personal property. His will was probated in the clerk's office in the Circuit Court of Wise County, Virginia, on February 12, 1948, and pursuant thereto, George L. Cury, Sol W. Cury, and Dahar Cury, Jr., were appointed executors of the will and trustees thereunder. His will provided, in part, "that all the property belonging to my estate * * * be kept and held together and my estate be managed by my executors * * * as a going concern * * * for a period of twenty years after my death * * *" and "At the end of said period of twenty years, then I direct my Executors to divide my estate 1954 U.S. Tax Ct. LEXIS 38">*56 equally, share and share alike, between my children that shall survive me at my death * * *."
Shortly after Dahar Cury's death, a bitter controversy developed among the executors of Cury's will, with George and Dahar, Jr., on one side, and Sol on the other. The ten surviving children of Dahar Cury divided their loyalties in this controversy as follows:
| Group I | Group II |
| George L. Cury | Sol W. Cury |
| Dahar Cury, Jr. | Ann Cury Romanus |
| Ruth Cury | Mary Cury Salaita |
| Robert L. Cury | A. B. Cury |
| Neal Gene Cury | Elizabeth Cury Ely |
For convenience, the children listed under the heading "Group I" will be sometimes referred to as the "George L. Cury group" and those listed under "Group II" will be sometimes referred to as the "Sol W. Cury group."
As a result of this controversy, a chancery suit was instituted on April 16, 1948, by A. B. Cury, Elizabeth Cury Ely, Ann Cury Romanus, and Mary Cury Salaita against the executors and other heirs of Dahar Cury. On October 14, 1948, the argument of a demurrer in that action was scheduled at the courthouse of the Circuit Court of Wise County, Virginia. Both groups were represented by counsel. All of the children met at the courthouse and attempts were made, through counsel 1954 U.S. Tax Ct. LEXIS 38">*57 for both groups, to arrive at a settlement of the estate. After some negotiation, it was agreed that the Sol W. Cury group should propose a price at which each child in the group would be willing to sell his interest in his father's estate or purchase the 23 T.C. 305">*315 interest of a child in the George L. Cury group, giving George's group the option to decide whether to sell its interests or purchase those of Sol's group at the price thus proposed by Sol's group. It was understood that the group which would ultimately purchase the estate would assume the liabilities thereof. After deliberation, the children in the Sol W. Cury group offered either to purchase the interests of the children in the other group or to sell their interests for the amount of $ 55,000 for each one-tenth interest in the estate. Almost immediately after this offer was transmitted to the George L. Cury group, the children in that group accepted the offer as an offer to purchase and agreed to sell their interest to those in the Sol W. Cury group.
A written agreement, dated October 14, 1948, was entered into and signed by all of the children of Dahar Cury, and their respective spouses, as well as by Robert S. Graham, who 1954 U.S. Tax Ct. LEXIS 38">*58 was guardian ad litem for Neal Gene Cury, a minor, and by George L. Cury as guardian for Neal Gene Cury. This agreement provided, in part, as follows:
Whereas, the first parties [the Sol W. Cury group] has this day agreed to purchase from the second parties [the George L. Cury group] all of the rights, title and interest of the second parties in and to the estate of Dahar Cury, deceased, * * * and said second parties do agree to sell all their said interests in said estate to the first parties for the following considerations and upon the following terms and conditions, to-wit:
(1) The first parties agree to pay to * * * [the George L. Cury group] the sum of Fifty-five Thousand ($ 55,000.00) Dollars, each; one-half (1/2) of which said sums are to be paid in cash upon the delivery of the deeds hereinafter mentioned, and the balance of said sums to be evidenced by negotiable notes executed by the first parties payable to the respective second parties, in three (3) equal installments due six (6), twelve (12) and eighteen (18) months after date, with interest from date until payment, at the rate of six (6%) per cent per annum; said notes to be secured by a first mortgage (excepting inheritance 1954 U.S. Tax Ct. LEXIS 38">*59 taxes against the estate) upon all of the real estate owned by Dahar Cury during his lifetime and located in the Commonwealth of Virginia and the Commonwealth of Kentucky.
* * * *
(3) It is understood and agreed that George L. Cury is the owner of One Hundred (100) shares of the common stock of D. Cury's Incorporated, and said George L. Cury does hereby agree to sell and properly assign said One Hundred (100) shares of stock to * * * [the Sol W. Cury group] in consideration of Thirteen Thousand Seven Hundred and fifty ($ 13,750.00) Dollars, to be paid in cash upon the delivery of said stock certificates.
* * * *
(5) It is understood and agreed between all the parties to this contract that the payment of the considerations herein set forth and the fulfillment of the conditions and stipulations herein contained shall release and forever discharge * * * [the George L. Cury group] from any and all liability or liabilities of whatever nature to or on account of the estate of their father, Dahar Cury, deceased, (excepting and reserving, however, an indebtedness due from George L. Cury, to D. Cury's Incorporated, in the sum of Thirteen Thousand 23 T.C. 305">*316 Seven Hundred and Fifty ($ 13,750.00) Dollars, 1954 U.S. Tax Ct. LEXIS 38">*60 which he hereby agrees to pay forthwith); and further excepting personal accounts at wholesale owing by the parties of the second part to D. Cury's Incorporated, it being specifically understood and agreed that * * * [the Sol W. Cury group] assume, agree to pay, and to save the second parties harmless with regard to all liabilities of the estate of Dahar Cury, deceased, and or D. Cury's Incorporated, to the United States Government, the Commonwealth of Virginia, the Commonwealth of Kentucky, and any other political subdivision with reference to inheritance and estate taxes, including current taxes, and which they agree to pay when the liability therefor is fixed and ascertained, against said estate or corporation or any property of same.
(6) It is further understood and agreed between the parties hereto that this agreement constitutes a release and settlement in full of all claims of * * * [the Sol W. Cury group] or the estate of Dahar Cury, deceased or D. Cury's Incorporated, or the estate of Elizabeth Haddad Cury, deceased, against * * * [the George L. Cury group] and or Norco Corporation, it being the intention of the parties that this shall constitute a full, final and complete 1954 U.S. Tax Ct. LEXIS 38">*61 settlement of all controversial matters between the parties hereto, and Norco Corporation, to this date, except as hereinabove set forth. It is further agreed between the parties hereto that the Norco Corporation which now occupies a building in Norton, Virginia, belonging to the estate of Dahar Cury, may continue to lease said building for a period of not less than six (6) months, upon the same rental that they are now paying. It is further understood and agreed between the parties that * * * [the George L. Cury group does] hereby release * * * [the Sol W. Cury group] from any and all claims and demands or actions of whatsoever nature which they may now have against said parties or either of them to this date.
(7) It is further understood and agreed by Sol W. Cury, George L. Cury and Dahar Cury, Jr., who were appointed and have qualified as co-executors of the estate of Dahar Cury, deceased, that all three (3) of said co-executors shall forthwith tender their resignations as such co-executors and trustees under the will of Dahar Cury to the Circuit Court of Wise County, Virginia, in the pending chancery cause therein. That upon the submissions of said resignations to the Court that 1954 U.S. Tax Ct. LEXIS 38">*62 this agreement shall be submitted to the Court and a decree requested ratifying and confirming this agreement sofaras [sic] the interest of Gene Cury, infant, is concerned.
* * * *
(9) Whereas, George L. Cury, Dahar Cury, Jr., and Robert L. Cury, are officers and directors of D. Cury's Incorporated; upon the consummation of this agreement, said directors and officers do agree to resign their respective offices with said corporation and said co-executors and trustees set forth above do agree to assign the stock of D. Cury's Incorporation [sic] to * * * [the Sol W. Cury group].
(10) It is further agreed * * * that the trust created by the will of their father, Dahar Cury, deceased, is a trust of a personal and confidential nature and that upon the resignation of the co-executors and trustees appointed by the will, the trust fails and that the Circuit Court of Wise County shall be requested to so decree and adjudicate, and to further decree a vesting of the said estate in the respective beneficiaries as of the date of execution of this contract.
On November 17, the executors of the will of Dahar Cury filed a "Report of Executors" with the Circuit Court of Wise County, Virginia, 23 T.C. 305">*317 and on the 1954 U.S. Tax Ct. LEXIS 38">*63 same day submitted to the court their resignations as executors. The agreement of October 14, 1948, was also submitted to the court on November 17, 1948, and was approved by decree entered on that day in the aforementioned chancery action. The resignations of the executors were also accepted by the court in the decree. The decree also provided, in part:
2. That the purported trust attempted to be set up and established under the will of Dahar Cury, deceased, was a confidential and discretionary trust, the administration of which was, by the express provisions of said will and by its clear and unambiguous intent and purport, vested solely and exclusively in George L. Cury, Dahar Cury, Jr. and Sol W. Cury, and that the court is, therefore, without authority to appoint substitute executors or trustees to administer the same, and that said trust must, therefore, fail for the lack of executors or trustees to administer the same, and it is expressly, therefore, adjudged, ordered and decreed that the trust attempted to be set up under the will of Dahar Cury, deceased, whereby his executors, George L. Cury, Dahar Cury, Jr. and Sol W. Cury were to operate his estate as a going business for 1954 U.S. Tax Ct. LEXIS 38">*64 a period of twenty years after his death, has now failed and been rendered invalid because of the resignation of George L. Cury, Dahar Cury, Jr. and Sol W. Cury, the executors named in said will, and it is further expressly adjudged, ordered and decreed that the entire estate of Dahar Cury, deceased, of every kind and character, shall, immediately upon the entry of this decree, vest equally and jointly in the ultimate beneficiaries under said will, to-wit: George L. Cury, Dahar Cury, Jr., Ruth Cury, Robert L. Cury, Gene Cury, A. B. Cury, Elizabeth C. Ely, Sol W. Cury, Ann C. Romanus and Mary C. Salaita, and that the ten named beneficiaries now each own, absolutely and in fee simple, a one-tenth undivided interest in the estate of Dahar Cury, deceased, regardless of the nature, amount, or location thereof and are free to sell, barter, trade, lease or dispose of their interest therein, or to contract with reference thereto, the same as though it had never been impressed with a trust and had been devised absolutely and in fee simple to them under the last will and testament of Dahar Cury, deceased; and,
3. That the estate of Dahar Cury, deceased, both real and personal property, having 1954 U.S. Tax Ct. LEXIS 38">*65 been appraised by three competent appraisers, which appraisal appears to be fair, reasonable and just, has a total valuation of Four Hundred and Forty-three Thousand, Five Hundred and Eleven Dollars and Fourteen Cents ($ 443,511.14), making a valuation of Forty-Four Thousand, Three Hundred and Fifty-one Dollars and Eleven Cents ($ 44,331.11) [sic] to each of the ten beneficiaries; that in order to compromise and settle between the parties all matters now in controversy, a contract has been entered into, dated October 14, 1948, * * * whereby * * * [the Sol W. Cury group has] purchased the interests of * * * [the George L. Cury group] for the sum of Fifty-Five Thousand Dollars ($ 55,000.00), with the purchasers to pay all taxes due from the estate of Dahar Cury to the United States Government, the Commonwealth of Virginia, the Commonwealth of Kentucky, and any other political subdivision with reference to inheritance and estate taxes, including current taxes; that Gene Cury, one of the parties to said contract is an infant and that the amount agreed to be paid to the said Gene Cury, infant, for his share is in excess of the valuation placed thereon by the appraisers and as hereby fixed, 1954 U.S. Tax Ct. LEXIS 38">*66 and that it is therefore advantageous to said infant that said contract be ratified and confirmed so that the same may be consummated in accordance with its terms and conditions, 23 T.C. 305">*318 it is further adjudged, ordered and decreed that said contract dated October 14, 1948, * * * be, and the same hereby is ratified and confirmed, in all its terms and provisions as to the infant, Gene Cury, and said infant is expressly authorized, directed and empowered to sell and convey all of his right, title and interest in the real and personal estate of which Dahar Cury died, seized and possessed, * * *
After entry of this decree, Dahar Cury, Jr., George L. Cury, Robert L. Cury, Ruth Cury, and William T. Bowen, special commissioner for Gene Cury, by deed dated November 17, 1948, conveyed to the members of the Sol W. Cury group the undivided five-tenths interest of the grantors in the real and personal property of the estate of the decedent. Concurrently with the making and delivery of that deed, the members of the Sol W. Cury group and their respective spouses made and delivered a deed of trust, also dated November 17, 1948, to William T. Bowen, trustee, as party grantee, conveying all of the real property 1954 U.S. Tax Ct. LEXIS 38">*67 formerly owned by the estate of Dahar Cury in trust to secure the payment of the deferred purchase money notes referred to in the agreement of October 14, 1948.
After the completion of the aforementioned transactions on November 17, 1948, letters of administration were granted Sol W. Cury and Ann Cury Romanus appointing them coadministrators of the estate of Dahar Cury.
On November 17, 1948, George L. Cury, Dahar Cury, Jr., Al Zay, and Robert L. Cury resigned as directors and officers of the corporation. Certificates of stock representing 900 shares of stock of the corporation then owned by the estate were transferred to the members of the Sol W. Cury group. At the same time, George L. Cury transferred a certificate representing 100 shares of stock of the corporation to the members of the Sol W. Cury group. The stock certificates were surrendered to the corporation and a new stock certificate for 200 shares was issued to each of the members of the Sol W. Cury group. A stockholders' meeting was then held and each of the five members of the Sol W. Cury group was elected a director of the corporation. Thereafter at a meeting of the board of directors, the following officers of the 1954 U.S. Tax Ct. LEXIS 38">*68 corporation were elected:
| Sol W. Cury | President |
| A. B. Cury | First vice president |
| Ann C. Romanus | Second vice president |
| Elizabeth Cury Ely | Secretary |
| Mary Cury Salaita | Treasurer |
On November 17, 1948, the members of the George L. Cury group each received a payment of $ 27,500 representing one-half the purchase price for their respective interests in the estate of Dahar Cury. Some of the money used by the Sol W. Cury group to make that payment 23 T.C. 305">*319 was obtained from assets of the estate. It was contemplated by the Sol W. Cury group, in offering to buy the interests of the other group, that estate assets would be used to some extent to pay the purchase price thereof. Each of the members of the George L. Cury group also received, on November 17, 1948, three notes each in the amount of $ 9,166.67 payable 6, 12, and 18 months after October 14, 1948, representing the balance of the purchase price for his interest in the estate of Dahar Cury.
On November 17, 1948, the Sol W. Cury group sold to the corporation a piece of real estate in Norton, Virginia, which had been owned by the estate of Dahar Cury. The selling price of that real estate was $ 53,312.50 and the proceeds were used in part to make the first 1954 U.S. Tax Ct. LEXIS 38">*69 payment, referred to above, to the George L. Cury group. On January 25, 1949, the Sol W. Cury group also sold to the corporation real property in Norton, which was known as the National Bank Building, for $ 72,500, on terms of $ 50,000 in cash and two deferred purchase notes in equal amounts for the balance.
After November 17, 1948, until March 14, 1949, the capital stock of the corporation was held individually by each of the members of the Sol W. Cury group. The remainder of the property which had constituted the estate of Dahar Cury was held jointly by them as individuals. Between the above stated dates, none of the members of the Sol W. Cury group received anything from the jointly held assets or the corporation except the regular salary which was approved for those who worked in the business.
On March 14, 1949, A. B. Cury resigned as director and vice president of the corporation. He also entered into an agreement with the corporation and Sol W. Cury, Ann Cury Romanus, Elizabeth Cury Ely, and their respective spouses, whereby the corporation agreed to give to A. B. Cury:
1. D. Cury's store in Richlands, Virginia, including all stock in trade, merchandise, furniture and fixtures, 1954 U.S. Tax Ct. LEXIS 38">*70 accounts and notes receivable, cash on hand, goodwill, the lease on the building, and all other assets of said store, provided that in operating the store the vendee should not use the name "D. Cury's," and,
2. Goods and merchandise from the Norton store of a value of $ 5,000, value to be ascertained at invoice prices, plus transportation charges.
3. Cash in the amount of $ 10,000 on August 15, 1949.
In consideration for the foregoing, A. B. Cury agreed to deliver to the corporation the 200 shares of capital stock which he had received on November 17, 1948, and to sell to the corporation whatever right, title, and interest in the assets of the estate of Dahar Cury which he may then have owned. The corporation and Sol W. Cury, Ann Cury 23 T.C. 305">*320 Romanus, Elizabeth Cury Ely, and their spouses agreed to assume all liabilities of the decedent's estate. On March 14, 1949, the 200 shares of capital stock of D. Cury's, Incorporated, were assigned and transferred by A. B. Cury to D. Cury's, Incorporated.
Pursuant to the contract and by appropriate deed, A. B. Cury conveyed to the corporation his entire interest in all real and personal property formerly owned by decedent.
A. B. Cury valued the assets 1954 U.S. Tax Ct. LEXIS 38">*71 received by him under the contract of March 14, 1949, as follows:
| Merchandise from Norton store | $ 5,000 |
| Notes payable | 10,000 |
| Merchandise in Richlands store | 10,200 |
| Furniture and fixtures | 1,200 |
| $ 26,400 | |
| Value of goodwill and lease on building | None stated |
An actual inventory of merchandise contained in the Richlands store was not taken by the corporation at the date of sale.
On March 14, 1949, Mary Cury Salaita resigned as an officer and director of the corporation. She also entered into an agreement with the corporation and Sol W. Cury, Ann Cury Romanus, Elizabeth Cury Ely, and their respective spouses. This contract was identical in all respects to the contract with A. B. Cury of the same date, with the exception of the consideration received by Mary Cury Salaita. Under the contract she received the following:
1. D. Cury's store in Appalachia, including all assets, goodwill, and going concern value of the business.
2. Goods and merchandise of the Norton store of a value of $ 10,000.
In consideration for the foregoing, Mary Cury Salaita agreed to deliver to the corporation the 200 shares of the capital stock of D. Cury's, Incorporated, received by her on November 17, 1948, and to sell to the corporation 1954 U.S. Tax Ct. LEXIS 38">*72 whatever right, title, and interest in the assets of the estate of Dahar Cury which she may have then owned. The corporation and Sol W. Cury, Ann Cury Romanus, Elizabeth Cury Ely, and their spouses, agreed to assume all liabilities of the estate of the decedent. On March 14, 1948, a certificate for 200 shares of the capital stock of D. Cury's, Incorporated, was assigned and transferred by Mary Cury Salaita to D. Cury's, Incorporated. No inventory of the merchandise on hand in this store was taken at the date of sale on March 14, 1949.
On March 14, 1949, Elizabeth Cury Ely resigned as a director and officer of the corporation. She also entered into an agreement with the corporation, the provisions of which were as follows:
23 T.C. 305">*321 1. She agreed to transfer and deliver to D. Cury's, Incorporated, the 200 shares of capital stock of D. Cury's, Incorporated, which were received by her on November 17, 1948. 3
2. She agreed to transfer to the corporation all her right, title, and interest in and to the assets of the estate of decedent.
3. The corporation1954 U.S. Tax Ct. LEXIS 38">*73 agreed to pay to her $ 40,000 in 7 installments, the first in the amount of $ 10,000 payable 4 months from date, and the remaining installments in the amount of $ 5,000 each, the first of the $ 5,000 installments payable 6 months from date and a like installment every 3 months thereafter until all installments were paid, together with interest at the rate of 4 per cent per annum from date, the payments to be evidenced by 7 negotiable notes secured by a deed of trust on the real estate owned by D. Cury's, Incorporated.
4. The corporation agreed to assume all liabilities of the estate of Dahar Cury, deceased, and the liabilities owed by the five purchasing heirs to the George L. Cury group.
Pursuant to this contract and by appropriate deed, Elizabeth Cury Ely conveyed to the corporation her entire interest in all the real and personal property formerly owned by decedent, and the corporation executed a deed of trust on all real property owned by the corporation to secure the payment of the installment notes.
After the transactions with A. B. Cury, Mary Cury Salaita, and Elizabeth Cury Ely, the outstanding stock of the corporation was held equally by Sol W. Cury and Ann Cury Romanus. On 1954 U.S. Tax Ct. LEXIS 38">*74 March 14, 1949, a meeting of the directors of the corporation was held and the following were elected as directors and officers of the corporation to fill vacancies created by the resignations above referred to:
| Directors | Officers |
| Sol W. Cury | Ann Cury Romanus, Vice president |
| H. J. Romanus (husband of Ann | Doris Benton, Secretary |
| Cury Romanus) | |
| Doris Benton |
Thereafter the transactions described above were approved by the corporation.
On March 14, 1949, Ann Cury Romanus and Sol W. Cury each, by appropriate deed, conveyed to the corporation all of his right, title, and interest in the real estate formerly owned by Dahar Cury. The consideration for each such transfer was $ 22,443.05 which was to be paid by a credit in the amount of $ 2,750 to be allowed each transferor and the balance of $ 19,693.05 by non-interest-bearing notes payable to each on demand. The transaction was accepted and approved by the corporation.
23 T.C. 305">*322 As a result of all of the transactions on March 14, 1949, the corporation was the owner of all of the real estate formerly owned by Dahar Cury, and the corporation, Sol W. Cury, and Ann Cury Romanus had assumed all of the liabilities of the estate of Dahar Cury and the unpaid obligations 1954 U.S. Tax Ct. LEXIS 38">*75 to the George L. Cury group as a result of the October 14, 1948, contract.
Payments on the obligations represented by the three series of notes due the George L. Cury group as a result of the October 14, 1948, contract were made as follows:
| Date | Principal | Interest | Total | How paid |
| Apr. 16, 1949 | $ 45,833.33 | $ 1,365.02 | $ 47,208.35 | Check signed by Sol W. Cury |
| and Ann Cury Romanus as | ||||
| executors of the estate of | ||||
| Dahar Cury. | ||||
| Dec. 14, 1949 | 45,833.33 | 2,281.64 | 48,124.97 | Check signed by H. J. Romanus. |
The third group of installment notes due the members of the George L. Cury group on April 14, 1950, has not been paid. H. J. Romanus applied for a loan for the purpose of making the payment, offering real estate formerly belonging to Dahar Cury as security. The loan was not made because the lender required title insurance on such real estate and such insurance was not obtainable because of a cloud on the title to the property.
On June 27, 1949, Sol W. Cury and Ann C. Romanus, who each owned in equal amounts all of the stock of D. Cury's, Incorporated, executed a "Unanimous Consent to the Dissolution of the Corporation." At a special meeting of the stockholders on that day, it was resolved that the corporation be 1954 U.S. Tax Ct. LEXIS 38">*76 dissolved and a final liquidating dividend, consisting of all of the corporate assets as of June 30, 1949, be declared. It was contemplated that all of the assets of the corporation be distributed equally to the stockholders and that corporate liabilities be assumed by them in accordance with a contract by the stockholders in which they were to agree to assume liability for the corporate indebtedness. The stockholders also authorized the officers and directors of the corporation to act as trustees in the dissolution of the corporation.
On June 30, 1949, Sol W. Cury and Ann Cury Romanus were in agreement, in principle, on the manner in which the corporate liquidation was to take place. The general basis of the agreement was that Ann was to receive the real estate owned by the corporation and Sol was to receive the mercantile business, and that an appropriate assumption of liabilities would be made so as to equalize the distribution between the two. Pursuant to that agreement, at a meeting of the board of directors on June 30, 1949, it was resolved that the book value and fair market value of the assets be determined as early as possible 23 T.C. 305">*323 so that a final agreement could be reached. 1954 U.S. Tax Ct. LEXIS 38">*77 By October 12, 1949, a final understanding had been reached between Sol W. Cury and H. J. Romanus, representing his wife, Ann Cury Romanus. In arriving at the division of the property, the valuation placed on the real property was that of a public appraiser and was accepted by both parties. By mutual agreement the book value of the furniture and fixtures was increased. The value of the inventory of the seven stores operated by the corporation was placed originally at $ 51,407.60 by Sol W. Cury. H. J. Romanus did not agree with this valuation and the difference was finally resolved by the parties by an adjustment increasing the goodwill of the corporation by the amount of approximately $ 52,800.
The final agreement was executed by Sol W. Cury and Ann C. Romanus on October 12, 1949. A summary of the division of assets and liabilities as agreed to by them, and as reflected in paragraph 7 of the final agreement entitled "Proof of Transactions, June 30, 1949" is as follows:
| Ann C. | |||
| Sol W. Cury | Romanus | ||
| Assets received in corporate liquidation | |||
| (per schedule) | $ 167,284.28 | $ 248,846.65 | |
| Assets received in estate distribution | |||
| (per schedule) | 2,955.00 | 4,475.18 | |
| Note received from Sol W. Cury | 20,420.39 | ||
| Total assets received | $ 170,239.28 | $ 273,742.22 | |
| Obligations payable: | |||
| Accounts payable | $ 750.00 | ||
| Mortgage note payable -- Elizabeth C. Ely | 40,000.00 | ||
| Mortgage note payable -- George L. Cury et al | $ 91,666.65 | ||
| Accrued interest on above | 477.81 | 3,872.73 | |
| Note payable -- A. B. Cury | 10,000.00 | ||
| Accrued taxes -- other than income | 1,858.74 | ||
| Accrued income taxes | 48,529.50 | ||
| Accrued estate taxes | 130,000.00 | ||
| Note payable to Ann C. Romanus | 20,420.39 | ||
| Total obligations payable | 122,036.44 | 225,539.38 | |
| Excess of assets over obligations payable | $ 48,202.84 | $ 48,202.84 |
1954 U.S. Tax Ct. LEXIS 38">*78 The amounts of $ 2,955 and $ 4,475.18 listed as "assets received in estate distribution (per schedule)" do not represent a part of the assets of D. Cury's, Incorporated, subject to distribution and therefore do not enter into a computation of any liability of transferees of the corporation.
After the execution of the agreement on October 12, 1949, appropriate action was taken to dissolve the corporation; bills of sale transferring the personalty and deeds transferring the realty were executed 23 T.C. 305">*324 pursuant to the contract. All of the corporate assets were distributed without consideration to Sol W. Cury and Ann Cury Romanus on June 30, 1949. As a result the corporation had no assets with which to pay its Federal income taxes. Sol W. Cury and Ann Cury Romanus are liable as transferees for Federal income taxes, additions to tax, and interest owed by the corporation as determined herein in Docket No. 34969, to the extent of the value of the assets received by them.
Elizabeth Haddad Cury, the wife of Dahar Cury, was a frugal woman. She owned a building in Norton, Virginia, from which she collected rent. She also received money for household expenses from Dahar Cury. A portion of such money 1954 U.S. Tax Ct. LEXIS 38">*79 received was saved by her. Prior to 1941, she carried her savings on her person, first in a petticoat, and later in a corset specially provided with pockets to hold the money. On August 6, 1941, a safe-deposit box in the First National Bank of Norton was opened in her name and her savings were placed therein. She died on February 9, 1945, and when her safe-deposit box was thereafter opened it contained $ 23,640 in currency. The same amount of cash was in the safe-deposit box on December 31 of each of the years 1941 through 1944. She also had personal savings in the same amount on January 1, 1941.
On April 20, 1944, Dahar Cury and his son George L. Cury each acquired a one-half interest in a building and land known as the St. Paul Apartment for the total amount of $ 37,500. At the time of this acquisition George L. Cury paid to his father the amount of $ 7,500 in cash. During the period from July 6, 1944, to January 21, 1948, George paid to his father the balance of the cost of his one-half interest in the St. Paul Apartment. Legal title to this property was taken in the name of Dahar Cury at the time of acqusition because divorce proceedings were then in progress between George 1954 U.S. Tax Ct. LEXIS 38">*80 and his wife. Title to a one-half interest in the St. Paul Apartment was conveyed by Dahar Cury to George on March 4, 1946.
The net worth of Dahar and Elizabeth Cury (based upon depreciated cost of property) was as follows on the dates indicated:
| December 31 | |
| 1940 | $ 139,171.62 |
| 1941 | 164,228.16 |
| 1942 | 177,442.87 |
| 1943 | $ 221,722.84 |
| 1944 | 260,161.01 |
Dahar Cury's net worth (based upon depreciated cost of property) was as follows on the dates indicated:
| Dec. 31, 1945 | $ 288,778.45 |
| Dec. 31, 1946 | 336,608.54 |
| Dec. 31, 1947 | $ 332,608.57 |
| Feb. 7, 1948 | 339,222.06 |
Living expenses of Dahar Cury and his family, which were paid for by him, were as follows: 23 T.C. 305">*325
| 1941 | $ 4,200 |
| 1942 | 4,500 |
| 1943 | 4,500 |
| 1944 | 4,500 |
| 1945 | $ 4,500 |
| 1946 | 5,000 |
| 1947 | 6,000 |
| 1 1948 | 600 |
The foregoing living expenses do not include amounts expended in connection with the education of Dahar Cury, Jr., Ruth, and Robert, or related expenses or gifts to them, hereinafter set forth.
Dahar Cury, Jr., attended the Virginia Military Institute from September 1938 to May 1942 and the University of Virginia Medical School from June 1942 to June 1945. While at the University of Virginia from September 1943 to June 1945, he was in a program sponsored by the United States 1954 U.S. Tax Ct. LEXIS 38">*81 Army and received from the Army salary and subsistence allowances. His tuition was also paid for by the Army. He interned at the DePaul Hospital in Norfolk, Virginia, from July 1945 to June 1946. He was in the United States Army from August 1946 to September 1948. The following amounts were received by Dahar Cury, Jr., from his father for educational, living, and transportation expenses, and as gifts, during the years indicated:
| 1941 | $ 1,500 |
| 1942 | 1,500 |
| 1943 | 1,800 |
| 1944 | 500 |
| 1945 | $ 500 |
| 1946 | 500 |
| 1947 | 0 |
Ruth Cury attended Notre Dame College in Baltimore, Maryland, from September 1944 to June 1945, and the University of Miami at Coral Gables, Florida, from September 1945 through December 1948. All of her expenses while attending those schools were paid by her father. Those expenses were as follows during the years indicated:
| 1944 | $ 1,500 |
| 1945 | 1,700 |
| 1946 | $ 1,700 |
| 1947 | 1,700 |
Robert Cury was drafted into the United States Army in July 1944 and remained in the Army until December 1946. He had no living expenses while in the Army but received numerous packages from home for incidentals for which he normally would have spent money. He attended the University of Virginia at Charlottesville, Virginia, beginning 1954 U.S. Tax Ct. LEXIS 38">*82 in February 1947. Most of his expenses at the University of Virginia were paid for out of his Government allowance of $ 65 or $ 75 per month. He did receive some money from his father for personal living expenses while at the university and while there he also had the use of a car which he assumed was his father's. During the year 1947 Dahar Cury gave $ 600 to his son Robert. During the month of November 1945 Dahar Cury purchased 4 United States Government Bonds, Series E, in the face amount of $ 1,000 each at a total cost of $ 3,000 for his son Robert. Of that total cost, $ 500 represented 23 T.C. 305">*326 earnings of Robert Cury received from the Army and sent home to his father; the remaining $ 2,500 was contributed by Dahar.
In 1944, a United States Government Bond was purchased, at a cost of $ 375, for Ann Cury Romanus with funds belonging to Elizabeth Cury.
In 1945, Ruth Cury received a United States Government Bond in the face amount of $ 500. The bond had a cost of $ 375, which was paid by Dahar Cury.
On December 24, 1947, George L. Cury purchased a home in Norton for $ 25,000, making a downpayment therefor of $ 500. The balance of the purchase price was paid as follows:
| Funds acquired through loan from D. Cury's, Incorporated | $ 13,750.00 |
| Funds acquired through repayment of loan received from Dahar | |
| Cury, Jr | 5,000.00 |
| Personal check | 1,452.40 |
The 1954 U.S. Tax Ct. LEXIS 38">*83 record does not explain the difference between the purchase price of $ 25,000 and the total of the foregoing payments. The respondent determined that this difference was a gift to George L. Cury from his father, Dahar Cury.
On February 7, 1948, George L. Cury had in his possession the amount of $ 15,000 which had been given to him by his father or mother. Respondent determined that this amount was a gift to George from his father made during the year 1947.
Net income reported by Dahar Cury and Elizabeth Haddad Cury for the years 1941 to 1944, inclusive, was as follows:
| 1941 | $ 6,080.90 |
| 1942 | 14,378.12 |
| 1943 | 1 $ 22,276.08 |
| 1944 | 34,504.91 |
Net income reported by or on behalf of Dahar Cury for the years 1945 to 1947, inclusive, and the period from January 1, 1948, to February 7, 1948, was as follows:
| 1945 | $ 44,580.55 |
| 1946 | 35,835.15 |
| 1947 | $ 18,793.67 |
| 1 1948 | 3,402.10 |
Net income reported by D. Cury's, Incorporated, was as follows for the periods indicated:
| Aug. 1, 1946 -- July 31, 1947 | $ 29,405.97 |
| Aug. 1, 1947 -- July 31, 1948 | 57,419.50 |
Dahar 1954 U.S. Tax Ct. LEXIS 38">*84 and Elizabeth Cury had net income in the following amounts during the years indicated:
| 1941 | $ 31,766.02 |
| 1942 | 20,725.39 |
| 1943 | $ 56,898.82 |
| 1944 | 56,756.06 |
23 T.C. 305">*327 The income for each of the above years was understated and a part of the resulting deficiencies for each of the years was due to fraud with intent to evade tax.
Dahar Cury had the following amounts of net income for the periods indicated:
| 1945 | $ 63,025.94 |
| 1946 | 80,483.39 |
| 1947 | $ 23,723.11 |
| 1 1948 | 6,492.14 |
Income for each of the above periods was understated and a part of the resulting deficiencies for each of the years was due to fraud with intent to evade tax.
A part of the deficiencies in income tax of D. Cury's, Incorporated, for the fiscal years ended July 31, 1947, and July 31, 1948, was also due to fraud with intent to evade tax.
Consents fixing the period of limitation upon assessment of income and profits tax (Form 872) were executed by or on behalf of Dahar Cury as follows:
| Period for | ||
| assessment | ||
| Date of consent | Tax years | extended to |
| Dec. 20, 1946 | 1943 | June 30, 1948 |
| Jan. 4, 1951 | 1945 | June 30, 1952 |
| Mar. 8, 1950 | 1946 | June 30, 1951 |
On July 18, 1950, D. Cury's, Incorporated, through its president, Sol W. Cury, executed a similar consent extending 1954 U.S. Tax Ct. LEXIS 38">*85 the time for assessment of income taxes for the taxable years ended July 31, 1947, to June 30, 1951.
On or about January 25, 1949, Sol W. Cury and Ann Cury Romanus, co-administrators, filed a Federal estate tax return for the estate of decedent. They included in this return all assets owned by the decedent as of February 7, 1948. Such property was valued in the return as follows:
| Real estate, including accrued rent | $ 247,880.41 |
| 900 shares D. Cury's, Incorporated, common stock, par value $ 100 | 270,000.00 |
| United States Government Bonds, including accrued interest | 29,932.50 |
| Mortgages, notes, and cash | 13,847.43 |
| Life insurance | 34,644.60 |
| Miscellaneous property | 20,528.42 |
| Total gross estate | $ 616,833.36 |
The fair market value of all bonds held by decedent as of February 7, 1948, was $ 32,818.75 plus accrued and uncollected interest on such bonds of $ 58.50, making a total fair market value of $ 32,877.25.
The fair market value of all mortgages, notes, and cash held by decedent as of February 7, 1948, was $ 13,847.43, as shown in the estate tax return of decedent.
23 T.C. 305">*328 The fair market value of all life insurance of decedent as of February 7, 1948, was $ 34,644.60, as shown in the estate tax return.
The fair 1954 U.S. Tax Ct. LEXIS 38">*86 market value of all miscellaneous property held by decedent as of February 7, 1948, was $ 20,528.42, as shown in the estate tax return.
The fair market value of all real estate (including accrued rent) owned by the decedent at the time of his death was $ 247,880.41 as shown in the estate tax return.
The debts of decedent which were known to the co-administrators and determinable at the time the estate tax return was filed are as shown in Schedule K of the return in the amount of $ 4,709.11.
Funeral and administration expenses known at the time the estate tax return was filed are set forth in Schedule J therein in the amount of $ 22,365.27. The notice of deficiency does not challenge these expenses.
The notice of deficiency does not explain the basis for respondent's determination of a gross estate of $ 765,326.48. Counsel for respondent stated at the trial that the determination was based on the agreement of October 14, 1948, and that respondent took ten times $ 55,000, or $ 550,000, and added thereto Federal estate tax in the amounts of $ 188,252 and expenses of the estate in the amount of $ 27,074.48.
Final determination of the amount of inheritance tax due the Commonwealth of Virginia 1954 U.S. Tax Ct. LEXIS 38">*87 by the estate of decedent has not been made and the case is being held open by the Department of Taxation, Commonwealth of Virginia, pending a final determination with respect to the Federal estate tax.
The estate of decedent has received a "Notice of Assessment of Omitted Income Taxes" for the years 1945, 1946, and 1947, from the Department of Taxation, Commonwealth of Virginia, in the respective amounts as follows:
| 1945 | $ 6,547.37 |
| 1946 | 4,679.29 |
| 1947 | 5,220.56 |
It is within the power of the Commonwealth of Virginia to assess against the estate of decedent income taxes in addition to those set forth above.
On August 4, 1950, Sol W. Cury and Ann Cury Romanus paid the law firm of Kiser, Vicars & Kiser $ 250 for legal services rendered, for use of office, and for stenographic help during the time of the court action in Wise County.
On January 2, 1950, Sol W. Cury and Ann Cury Romanus paid the law firm of Greer, Bowen, Mullins & Winston $ 158.05 for legal services in drawing deeds conveying the real property when the five purchasing heirs bought from the five selling heirs.
23 T.C. 305">*329 Between December 16, 1950, and April 10, 1951, Sol W. Cury and Ann Cury Romanus paid the law firm of New & Merrell $ 1,532.50 1954 U.S. Tax Ct. LEXIS 38">*88 for legal services on matters pertaining to the income tax and estate tax liability of the estate of decedent.
Between January 5, 1950, and October 2, 1952, Sol W. Cury and Ann Cury Romanus paid the firm of Dent K. Burk Associates $ 7,500 for accounting services rendered to the estate of decedent in connection with decedent's income tax liability.
On August 2, 1950, Sol W. Cury and Ann Cury Romanus paid R. E. Stauber and Ernest Cummings, the respective amounts of $ 180 and $ 25, and on August 4, 1950, they paid D. Cury's $ 115.63. All of these payments were for the expense of taking inventory to determine the value of the estate in connection with the estate tax liability.
On May 24, 1949, Sol W. Cury and Ann Cury Romanus paid C. P. Moore & Associates $ 250 for a supplemental appraisal report for use in matters pertaining to the estate of decedent.
Funds used to pay the amounts set forth above were those of H. J. Romanus and Sol W. Cury. They used the estate bank account as a matter of convenience, but the funds were supplied by them personally.
Sol W. Cury and Ann Cury Romanus have not been discharged as co-administrators of the estate of decedent.
Elizabeth Haddad Cury died on February 1954 U.S. Tax Ct. LEXIS 38">*89 9, 1945. Thereafter, each of her ten children received, without consideration, assets of her estate in the amount of $ 2,963.48. After this distribution there were no assets remaining in her estate. As a result of the receipt of such assets, each of the ten children is liable as a transferee of the assets of the estate of Elizabeth Cury, deceased, for Federal income taxes, additions to tax, and interest determined in Docket No. 34961 to be due for the taxable years 1941 to 1944, inclusive, to the extent of $ 2,963.48.
As a result of the decree of the Virginia court on November 17, 1948, the entire estate of Dahar Cury was transferred equally to his ten children, leaving the estate without assets to meet its obligations, including Federal taxes. The value of the assets thus transferred on November 17, 1948, was not less than the value of the assets composing the estate on the date of decedent's death, February 7, 1948. As a result of the receipt of such assets, each of the ten children is liable as a transferee of the assets of the estate of Dahar Cury, deceased, for Federal income taxes, additions to tax, and interest determined in Docket Nos. 34961 and 34962 to be due for the 1954 U.S. Tax Ct. LEXIS 38">*90 taxable years 1941 to 1947, inclusive, and the period from January 1, 1948, to February 7, 1948, to the extent of one-tenth of the value of the assets of the estate on November 17, 1948.
23 T.C. 305">*330 OPINION.
Dahar Cury, a native of Syria, settled in Norton, Virginia, in 1910 with his wife, Elizabeth Haddad Cury. In the course of time he established a department store in Norton, and, up to his death on February 7, 1948, had opened branch stores in various towns within a 50-mile radius of Norton. His wife died on February 9, 1945. Dahar and Elizabeth filed joint income tax returns for the years 1941 to 1944, inclusive; individual income tax returns were filed by Dahar or on his behalf for the years 1945 to 1947, inclusive, and for the period from January 1, 1948, to February 7, 1948. Dahar was survived by ten children. The department stores had been operated under the name of D. Cury's as a sole proprietorship until July 31, 1946, when the business was incorporated and later known as D. Cury's, Incorporated. Dahar became the owner of all of the stock at that time, 90 per cent of which he continued to own up to the time of his death. He sold the remaining 10 per cent to his son George Cury. 1954 U.S. Tax Ct. LEXIS 38">*91 Income tax returns were filed on behalf of the corporation for the fiscal years ended July 31, 1947, and July 31, 1948.
The will of Dahar named his sons George, Dahar, Jr., and Sol as executors, and provided for the operation of the estate for a period of 20 years, when it was then to be divided among his heirs, the ten children or their successors. A bitter controversy developed among the executors, with George and Dahar, Jr., uniting against Sol. The remaining seven children were sharply divided in their loyalties to these three brothers, with the result that there were two camps, of five children each, in what has been described as a family feud. Litigation between these two groups promptly ensued in 1948 over the estate of their father. The pleadings in that litigation disclose a high degree of antagonism between the two opposing factions. On October 14, 1948, an agreement of settlement was reached between the parties. As a result of negotiations it was agreed that the group headed by Sol would make an offer, fixing the amount at which one faction would buy out the other, but that the other faction would have the option of determining whether it would buy or sell at that 1954 U.S. Tax Ct. LEXIS 38">*92 figure. The understanding was that the purchasing group would take over the entire estate subject to all liabilities. Sol's group fixed the amount at $ 275,000, or $ 55,000 for each child. The other group promptly accepted the offer as an offer to sell to Sol's group at that price, and a contract was executed on that day, October 14, 1948. Thereafter, on November 17, 1948, the three executors having meanwhile resigned, the State court ruled that the provisions in Dahar's will for operating the estate for 20 years were ineffective. It decreed that the entire estate should vest immediately, equally and jointly, in the ten children, 23 T.C. 305">*331 and that each of them owned absolutely a one-tenth undivided interest in the estate. In the same decree, the court approved the contract of October 14, 1948, whereby Sol's group had agreed to purchase the interests of the children in George's group for $ 55,000 each, the purchasers undertaking to pay Federal and local taxes. After entry of the decree, the children in George's group conveyed their interests in the estate to Sol's group, pursuant to the contract of October 14, 1948, as approved by the court.
The business and other properties of the decedent 1954 U.S. Tax Ct. LEXIS 38">*93 were operated as a unit on behalf of the five purchasing heirs until March 1949, when, by contract, three of them took certain assets, leaving the remainder of property, subject to debts, in the hands of the two remaining children, Sol Cury and Ann Cury Romanus. In June 1949, D. Cury's, Incorporated, was dissolved, and its assets were distributed to Sol and Ann, the sole stockholders at that time, in accordance with an agreement between them.
The cases before us resolve themselves into the following major controversies: (1) Deficiencies in income tax, including additions for fraud, asserted against the estates of Dahar and Elizabeth Cury with respect to the years 1941 to 1944, inclusive. (2) Deficiencies in income tax, including additions for fraud, against the estate of Dahar Cury with respect to the years 1945 to 1947, inclusive, and the period from January 1, 1948, to February 7, 1948. (3) Transferee proceedings against the ten children with respect to Elizabeth's liability for deficiencies in income tax for the years 1941 to 1944, inclusive, to the extent of distributions received by them from the estate of Elizabeth. (4) Transferee proceedings against the ten children with respect 1954 U.S. Tax Ct. LEXIS 38">*94 to Dahar's liability for deficiencies in income tax for the years 1941 to 1947, inclusive, and the period from January 1, 1948, to February 7, 1948, to the extent of alleged distributions from his estate. (5) Deficiency in estate tax liability with respect to the estate of Dahar Cury. (6) Deficiencies in income tax, including additions for fraud, asserted against D. Cury's, Incorporated, for the fiscal years ended July 31, 1947, and July 31, 1948. (7) Transferee proceedings against Sol and Ann with respect to the income tax liability of D. Cury's, Incorporated, for the fiscal years ended July 31, 1947, and July 31, 1948. (8) Deficiencies in income tax for 1948 asserted against the five selling heirs (the George L. Cury group) in which the principal issue is the basis to be allocated to the portion of Dahar's estate sold by each of them for $ 55,000. (An additional issue is present in George's case involving the basis of his 10 per cent interest in D. Cury's, Incorporated, which was also sold as part of the over-all settlement of the 1948 litigation.)
23 T.C. 305">*332 (1) and (2). Deficiencies in income tax, including additions for fraud, asserted against the estates of Dahar and Elizabeth Cury 1954 U.S. Tax Ct. LEXIS 38">*95 with respect to the years 1941 to 1944, inclusive, and against the estate of Dahar Cury with respect to the years 1945 to 1947, inclusive, and the period from January 1, 1948, to February 7, 1948.
The asserted deficiencies referred to above were determined by computing the increase in net worth of Dahar Cury and Elizabeth Cury for each of the years 1941-1944, and the increase in net worth of Dahar Cury for each of the years 1945-1947 and the period from January 1, 1948, to February 7, 1948, adding thereto expenditures or losses which are nondeductible for tax purposes, thus arriving at amounts purporting to be net income for each of the taxable years. 41954 U.S. Tax Ct. LEXIS 38">*96 The petitioners contest the propriety of resorting to that method in the circumstances present here. Their argument is that section 41 of the Internal Revenue Code of 1939 precludes the Commissioner from the use of the net worth method where the taxpayer has books and records utilizing a method of accounting and that method clearly reflects his income. Such conditions exist, contend the petitioners, in the instant case. We do not agree that the use of the net worth method is foreclosed here by section 41.
While it is true that certain books and records were kept, inventory records, which are of crucial importance in determining income in a department store business, were unavailable. Despite requests made by the special agent who conducted the investigation, no such records were turned over to him, and the only detailed inventory maintained by the business which was presented to the Court was an incomplete inventory as of January 1, 1941. There was some testimony concerning the keeping of inventory records but we are left in the dark as to how complete or accurate such records may have been, and we were given no convincing explanation for their unavailability. Moreover, other evidence before us is persuasive that the inventory figures appearing in the returns were false. In the circumstances, we do not have before 1954 U.S. Tax Ct. LEXIS 38">*97 us a set of books of such character as would afford the basis for confidently determining net income without resort to extrinsic evidence. It is quite true that there was evidence, presented by the Government, based upon an inventory taken by fire adjusters, from which we were able to compute inventories for each of the critical dates. But this fact can hardly operate to prevent a determination of net income by the net worth method in the circumstances of this case, where the inventory records are in fact missing and the 23 T.C. 305">*333 situation with respect to the inventories is highly persuasive of the existence of fraud.
In any event, even if all the inventory records were present, the use of the net worth method would not be foreclosed by section 41. Section 41, to the extent pertinent here, provides that net income shall be computed in accordance with the "method of accounting" regularly employed by the taxpayer in keeping his books, but if no such method has been employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. These provisions deal 1954 U.S. Tax Ct. LEXIS 38">*98 merely with methods of accounting. Thus, if a taxpayer keeps his books on the cash basis, and if that method clearly reflects his income, the Commissioner may not compute the income by another method of accounting. Or, if the taxpayer keeps his books on the cash basis, and if that method does not clearly reflect his income (as, for example, in cases where inventories are a factor), then the Commissioner may require the income to be computed by a different method of accounting, such as the accrual method. But there is nothing in section 41 that prevents the Commissioner from showing, by any kind of competent evidence, that a taxpayer's income has been falsely reported, regardless of the method of accounting employed.
It is quite possible that a taxpayer may have a complete set of books and may employ a method of accounting which is capable of accurately reflecting the taxpayer's income. Yet, if false or incorrect entries are made in such books -- such as overstated purchases, understated sales, overstated expenses, and the like -- it is plain that the income determined from the books would not be the taxpayer's true income. Furthermore, there may be almost countless ways in which 1954 U.S. Tax Ct. LEXIS 38">*99 incorrect entries may be made in an otherwise complete and suitable set of books, and it may therefore be difficult, if not impossible, to pinpoint the particular entry or entries that are incorrect or false. But section 41 in no way operates as a bar to foreclose the Commissioner from showing that the end result is incorrect or false. And one way of demonstrating that such a situation exists is to show that the taxpayer's increase in net worth and his nondeductible expenditures during the period in question are substantially in excess of the income appearing on his books, and that such excess cannot reasonably be explained as coming from gifts or other nontaxable sources. This, in essence, is the so-called net worth method. It is not a method of accounting at all. As we stated in Estate of W. D. Bartlett, 22 T.C. 1228, 1230:
the net worth method is not a system of accounting such as is referred to in section 41 of the Internal Revenue Code of 1939; it is merely evidence of income. 23 T.C. 305">*334 See Morris Lipsitz, 21 T.C. 917. Even where the taxpayer presents a set of books that appear superficially adequate, the application of the net worth method may show such a substantial variance with 1954 U.S. Tax Ct. LEXIS 38">*100 the reported income as to suggest the untrustworthiness of the books. * * *
In Morris Lipsitz, 21 T.C. 917, 931, we said:
when the increase in net worth is greater than that reported on a taxpayer's returns or is inconsistent with such books or records as are maintained by him, the net worth method is cogent evidence that there is unreported income or that the books and records are inadequate, inaccurate, or false. It is not correct to say that the use of the net worth method is forbidden where the taxpayer presents books from which income can be computed, for the net worth method itself may provide strong evidence that the books are unreliable. * * *
No taxpayer is permitted under section 41 to keep books on a "net worth basis," nor is the Commissioner empowered by section 41 to require that a taxpayer keep his books on that basis. The net worth method is merely a method of marshaling evidence to show that the amount of income actually realized was in fact greater than disclosed by the entries made in the taxpayer's books. Nothing in section 41 precludes the use of such evidence, provided that it is otherwise competent. And where the employment of the net worth method reveals a 1954 U.S. Tax Ct. LEXIS 38">*101 substantial gap between reported income and the increase in net worth, the latter may be taken as a guide for determining the amount of income actually received. Such is the plain import of the Bartlett and Lipsitz cases. Cf. Michael Potson, 22 T.C. 912, 927; H. A. Hurley, 22 T.C. 1256, 1261.
In the instant case, many of the items necessary in using the net worth method have been stipulated. Evidence was introduced as to contested items and we have made findings accordingly. The amounts of net income shown in our findings were arrived at by using the net worth method and the disparity between such amounts and the amounts reported as income was convincing evidence as to the inaccuracy of the latter. On any theory, this case is a proper one in which to use the net worth method.
In the application of the net worth method to the instant controversy, certain problems arise. The disputed items, to a large extent, present questions of fact resolved by our findings, which are based not only upon observation of the witnesses as they testified, but also upon a careful study of the entire voluminous record. It would serve no useful purpose to analyze such findings in detail here, but 1954 U.S. Tax Ct. LEXIS 38">*102 we shall comment upon some of the items.
Inventories. A major dispute between the parties, and one that is involved in many of the issues presented, concerns the valuation of inventories of the stores operated first by Dahar Cury, as a sole 23 T.C. 305">*335 proprietorship, and later, by the corporation, D. Cury's, Incorporated. No records of inventories for the years involved were introduced into evidence, except one purporting to be a record of the inventory as of January 1, 1941, of the three stores then owned by Dahar Cury. And that record was incomplete in that it did not contain any detailed itemizations of inventory for one of those stores.
It was necessary then to reconstruct, in some manner, inventories for the beginning and end of each of the taxable periods involved. This was made possible by the fortuitous occurrence of a fire at the Norton store on July 2, 1948, which was followed by the taking of a careful inventory at that store by insurance adjusters in connection with the determination of the amount of the loss which was covered by insurance. The respondent has used the inventory taken by the insurance adjusters as a starting point and by a series of computations has arrived at 1954 U.S. Tax Ct. LEXIS 38">*103 inventory valuations for the beginning and end of each of the taxable periods.
Counsel for at least one group of petitioners before us recognize the necessity of reconstructing the inventories, and indeed, on brief, "urge this Court to utilize the method advocated by Respondent as one basis for the determination of inventories." However, counsel attack the reconstruction made by the respondent, in that they urge that he has applied his method in an unfair manner to the facts of this case by failing to make certain adjustments that would operate in petitioners' favor. We think that petitioners are justified in large part in their criticisms of respondent's reconstruction, and have taken them into account in making our own findings. For example, the so-called inventory as of July 2, 1948, for the Norton store included "warehouse" merchandise being held not only for the Norton store but also for the branch stores. 51954 U.S. Tax Ct. LEXIS 38">*105 The respondent's reconstruction eliminated only the merchandise in the receiving department applicable to the Norton store; he failed to make a corresponding adjustment for a portion of the goods kept on the upper (storage) floors of the Norton store, which, we are persuaded, 1954 U.S. Tax Ct. LEXIS 38">*104 were similarly being held as supplies for both the Norton and branch stores. Our findings have given appropriate weight to this factor. Again, petitioners complain that the inventory was computed at cost, without allowance for any decline in market value below cost by reason of obsolete or damaged goods. We have taken this factor into account in making our findings. Petitioners also urge that respondent erroneously treated the July 2, 1948, inventory as the basis for determining the July 31, 1948, inventory, 23 T.C. 305">*336 without giving appropriate consideration to the events occurring between July 2 and July 31, 1948. We think that much of this criticism is warranted. 61954 U.S. Tax Ct. LEXIS 38">*106 After giving due weight to these and other adjustments required by the evidence, and adopting in substance the method employed by respondent, which, as already noted, was approved by counsel for some of the petitioners herein, we have made findings as to inventories reflecting the various factors involved.
Undeposited cash. Petitioners contend that Elizabeth Haddad Cury, the wife of Dahar, had in excess of $ 30,000 in cash on hand on January 1, 1941. The respondent has refused to allow credit for such cash in any amount. When Elizabeth died early in 1945, $ 23,640 was found in her safe-deposit box. We were presented with credible evidence that Elizabeth was a frugal woman, that she saved money over the years out of her household allowance, and that she had income from certain real estate which she likewise saved. She also had purchased some war bonds after January 1, 1941. 71954 U.S. Tax Ct. LEXIS 38">*107 Although we do not believe that she had as much as $ 30,000 on January 1, 1941, we are satisfied that she had a substantial amount at that time, which in our best judgment, was the same as the amount found in her box at her death, namely, $ 23,640. To the extent that she saved money between January 1, 1941, and the date of her death, such savings, in our judgment, are reflected in the war bonds which she purchased.
Family and personal living expenses. It is plain that some amounts were spent each year for family and personal living expenses. We had no direct evidence of the precise amounts involved. However, we know the size of the family generally from the record, and some index of the scale of living is furnished by evidence as to automobiles. The evidence suggests that there were at least several automobiles in the family. It is our best judgment, on the record, that the living and family expenses determined by the respondent are generally reasonable, 23 T.C. 305">*337 and, except for one year (1947), 8 we have accepted them in making our findings.
Educational expenses 1954 U.S. Tax Ct. LEXIS 38">*108 of Dahar Cury, Jr., Ruth Cury, and Robert Cury. We are satisfied on the record that the amounts attributed by respondent to this item are excessive. However, we cannot accept at face the testimony of each of these three persons as to what amounts were actually expended. Taking into account the credibility of the witnesses and the circumstances of record surrounding their education and support, we have made findings as to the amounts which, in our best judgment, were expended on their behalf by their father.
Gifts to George L. Cury. The respondent's net worth statement charged $ 19,075 to Dahar Cury as representing gifts made by Dahar to his son George in 1947. Of that amount $ 4,075 relates to part of the purchase price of a house acquired by George in 1947. We have no convincing evidence that Dahar made any such gift to George. As to the remaining $ 15,000, we have no evidence whatever that any such gift was made in 1947. In the circumstances, this item must be eliminated.
Gifts to children of United States Government Bonds. The evidence does not support the full amount of expenditures which respondent has attributed to Dahar and Elizabeth representing gifts of war bonds to 1954 U.S. Tax Ct. LEXIS 38">*109 their children. The evidence does show, and we have found as a fact, that a bond was purchased in the name of Ann Cury Romanus at a cost of $ 375 with funds belonging to Elizabeth in 1944; that Dahar spent $ 375 in purchasing such bonds for Ruth in 1945; and, also, that in 1945 Dahar purchased such bonds at a total cost of $ 3,000 for Robert. However, of the amount spent for Robert's bonds, some portion represented part of Robert's Army pay which he had sent home, and we have found that portion to be $ 500, thus leaving a net expenditure of $ 2,500 by Dahar on behalf of Robert. Accordingly, the only gifts of war bonds made by Dahar and Elizabeth to their children were $ 375 in 1944 and gifts in the aggregate amount of $ 2,875 during the year 1945.
Fraud. We have made a finding that a part of the deficiencies for each of the taxable years 1941 to 1947, inclusive, and the period from January 1, 1948, to February 7, 1948, is due to fraud with intent to evade tax. Such finding we think is supported by clear and convincing evidence.
23 T.C. 305">*338 The inventories for the Cury enterprise were persistently false; as a result, the income of the business was also understated. The differences between 1954 U.S. Tax Ct. LEXIS 38">*110 income reported and what we have found to be the correct income are substantial. Except for an incomplete inventory as of January 1, 1941, no inventory records maintained by the business were produced at the trial and their absence has not been satisfactorily explained. 9 In the circumstances, we think that the respondent has established by clear and convincing evidence that the deficiencies were due, at least in part, to fraud. Accordingly, the statute of limitations has not run on any of the years involved.
(3) Transferee proceedings against the children of Dahar and Elizabeth with respect to Elizabeth's liability for deficiencies in income tax for the years 1941 to 1944, inclusive, to the extent of distributions received by them from the estate of Elizabeth.
At the trial, counsel for all of the petitioners represented in these transferee cases have admitted transferee liability to the extent of $ 2,963.48 each if there are any deficiencies in the tax of the transferor. 1954 U.S. Tax Ct. LEXIS 38">*111 We have decided above that there are such deficiencies. Accordingly, transferee liability with respect to the deficiencies against Elizabeth's estate has been established.
(4) Transferee proceedings against the children of Dahar with respect to Dahar's liability for deficiencies in income tax for the years 1941 to 1947, inclusive, and the period from January 1, 1948, to February 7, 1948, to the extent of distributions from his estate.
Petitioners Sol W. Cury and Ann Cury Romanus agree that they are liable for Dahar Cury's income tax as transferees of assets of the estate of Dahar Cury if there are any deficiencies in such taxes. Petitioners George L. Cury, Dahar Cury, Jr., Robert Cury, Neal Gene Cury, and Ruth Cury however contend that they received no assets of the estate of Dahar Cury and therefore cannot be held liable as transferees. We do not agree.
The order entered by the Virginia court on November 17, 1948, provided for the immediate vesting of Dahar's entire estate, equally and jointly, in the ten children, and it decreed that each of them was then the owner, "absolutely and in fee simple," of a one-tenth undivided interest in the estate. The five selling heirs promptly undertook 1954 U.S. Tax Ct. LEXIS 38">*112 to deal with their interests, and, pursuant to the contract of October 14, 1948, sold their interests to the other five heirs. The estate of Dahar Cury, as such, ceased to have any property. When the administrators were thereafter appointed they had no assets to administer, the court order of November 17, 1948, having effectively disposed of the 23 T.C. 305">*339 assets to the ten children. There was just as complete a distribution of the estate to the ten children on November 17, 1948, as would have been the case had each of them physically received assets of the estate worth one-tenth of its total value. The estate was then stripped of all assets and unable to pay its debts, including Federal taxes. All ten children were transferees of the estate, each in the amount of one-tenth of its total value, and each is therefore liable as transferee to that extent.
The fact that the five members of George's group promptly sold the assets thus transferred to them is an immaterial consideration. Does a transferee cease to be such by selling the transferred property 5 years later? One year later? One day later? Or even on the same day? We think not. The price at which he may sell the property is not 1954 U.S. Tax Ct. LEXIS 38">*113 the measure of his liability. His liability is measured by the value of the property that was transferred to him. 101954 U.S. Tax Ct. LEXIS 38">*114
The mere fact that the five purchasing heirs may have assumed contractually all liability for the taxes of the transferor cannot relieve the five selling heirs of their transferee liability when the Government seeks to collect the taxes due from the estate. Such liability cannot be contracted away. The rights of the various transferees inter sese are irrelevant when transferee liability is asserted against one of them. Phillips v. Commissioner, 283 U.S. 589">283 U.S. 589, 283 U.S. 589">604. The transferees held accountable may thereafter successfully seek contribution from other transferees (cf. Phillips-Jones Corp. v. Parmley, 302 U.S. 233">302 U.S. 233), or indeed complete reimbursement if local law or contractual rights justify such result. But the existence of 1954 U.S. Tax Ct. LEXIS 38">*115 such rights among the transferees cannot prevent the assertion of transferee liability against any one of them to the extent of property received by him, where the result of the distribution is to leave the taxpayer without assets to meet its obligations. 283 U.S. 589">Phillips v. Commissioner, supra.Such was the situation here, since the estate was left without assets as a result of the decree of November 17, 1948, and we can find no escape from the conclusion 23 T.C. 305">*340 that each of the five members of George's group is liable as a transferee, regardless of any possible rights of reimbursement that he may subsequently assert against any or all of the other five children.
Petitioner A. B. Cury submitted a brief contesting his liability as a transferee of assets of the estate of his father. What we have said above in regard to the arguments of the George L. Cury groups applies similarly to the contentions made by him.
(5) Deficiency in estate tax liability with respect to the estate of Dahar Cury.
The respondent determined the deficiency in estate tax by computing a valuation based on the $ 55,000 contract price at which each of the children in George's group sold his one-tenth interest to the children in 1954 U.S. Tax Ct. LEXIS 38">*116 Sol's group. The Government did not undertake to value the estate by valuing the various items of property constituting the estate. However, the parties have stipulated the fair market value of most of the assets includible in the gross estate as of the date of Dahar Cury's death. The only items not so stipulated are the decedent's real estate and the 900 shares of stock in D. Cury's, Incorporated, owned by the decedent at his death.
The administrators contend that although the estate can be valued by the method employed by the respondent, the more proper method in the circumstances of this case would be to value the individual assets of the estate. We agree with the administrators.
As to the real estate, we are satisfied on the evidence that the value reported in the estate tax returns, namely, $ 247,880.41, was the correct fair market value of the real estate (including accrued rent) owned by the decedent on the date of his death, and we have so found as a fact.
As to the stock, the administrators appear to be in agreement with the Government that the method used by the Government on brief to determine the fair market value of the stock of D. Cury's, Incorporated, is a proper one. 1954 U.S. Tax Ct. LEXIS 38">*117 In order to determine this fair market value, the Government made a computation of the book value of the assets of the corporation on July 31, 1947, adjusting the asset values to reflect the inventory figure contended for by the Government, and adding to the book value so determined, earnings prorated for the period from August 1, 1947, to February 7, 1948.
In criticizing respondent's computations the administrators first point out that the proper adjustment for inventory value is the value to be found by this Court, and not the one urged by respondent. We agree. Petitioners next urge that liabilities should be increased by the amount of corporate tax liability for the fiscal year ended July 31, 1947, as determined in these proceedings, in order to reflect accurately the book value of the stock. We agree that this adjustment is also a proper one.
23 T.C. 305">*341 The administrators next contend that the amount of earnings for the period from August 1, 1947, to February 7, 1948, as contended for by respondent, should be adjusted to reflect our findings in these proceedings. We think they are also correct in this objection to respondent's computation. The correct earnings and tax liability of the 1954 U.S. Tax Ct. LEXIS 38">*118 corporation for the fiscal year ended July 31, 1948, will be determined under Rule 50. The amounts so arrived at can be used in accordance with respondent's method to compute the prorata part of such earnings from the beginning of the fiscal year to the date of Dahar Cury's death. All such computations can be made under Rule 50.
The respondent, on brief, does not contest the various deductions sought by petitioners in computing the net estate, and they can be taken into account in the computations under Rule 50.
(6) Deficiencies in income tax, including additions for fraud asserted against D. Cury's, Incorporated, for the fiscal years ended July 31, 1947, and July 31, 1948.
The only errors alleged by petitioner D. Cury's, Incorporated, are (a) that the inventories determined by the respondent were incorrect, and (b) that any resulting deficiencies were due to fraud with intent to evade tax. We have made findings of fact concerning the inventories of the corporation and what we have said above as to the determination of inventories applies here as well. The inventory figures appearing in the returns were false, and we are satisfied on the record that the deficiencies are due, in part 1954 U.S. Tax Ct. LEXIS 38">*119 at least, to fraud. We think that the gross understatement of inventories and resulting understatement of income have been shown clearly to be due to more than the honest conservatism of a business man, as contended by petitioners. The evidence that such understatements were due to fraud is convincing and we have so found.
(7) Transferee proceedings against Sol W. Cury and Ann Cury Romanus with respect to income tax liability of D. Cury's, Incorporated, for the fiscal years ended July 31, 1947, and July 31, 1948.
Petitioners Sol W. Cury and Ann Cury Romanus concede that they are liable as transferees of assets of D. Cury's, Incorporated, if there are taxes due from the corporation. They contend and respondent agrees, on brief, that certain assets received in the estate distribution, on the liquidation of the corporation, are not includible in the valuation of assets which were transferred to them by the corporation. The parties are also in agreement that the value of the assets received must be adjusted to reflect the correct inventories on June 30, 1949.
There appears to be only one dispute between the parties on this issue. This concerns whether the amount of $ 130,000 appearing 1954 U.S. Tax Ct. LEXIS 38">*120 in the "Proof of Transactions, June 30, 1949" as estate tax liability was a 23 T.C. 305">*342 contingent or fixed liability. Respondent contends that it was contingent and should not be taken into account in determining the value of assets received by the petitioners. We do not agree. The liability was one which the petitioners had obligated themselves to discharge. Moreover, those corporate assets (real estate) which had previously been part of the assets of Dahar Cury's estate were subject to a lien for such taxes. Sec. 827 (a), I. R. C., 1939. In the circumstances, we think that the liability must be regarded as fixed and can be taken into account in computing the value of the assets transferred to the petitioners.
(8) Deficiencies in income tax for 1948 asserted against the five selling heirs (the George L. Cury group) involving principally the basis to be allocated to the portions of Dahar Cury's estate sold by them.
There is no real dispute between the parties on this issue. The deficiencies were determined, as a protective measure, by allowing a zero basis for the interests in Dahar Cury's estate owned by these heirs. Respondent and these petitioners agree that the basis for a one-tenth 1954 U.S. Tax Ct. LEXIS 38">*121 interest in the estate should be one-tenth of the value of the estate. This is to be determined in accordance with our findings and Opinion above.
One other issue is present in the case of the deficiency determined against George L. Cury. It involves his basis for the 100 shares of stock owned by him and sold to the Sol W. Cury group. We have found that his basis for the stock was $ 5,500. He gave a $ 5,500 check therefor, and there is no satisfactory evidence before us that he paid anything more, out of his own funds, for the stock. Accordingly, his basis cannot be in excess of $ 5,500.
Decisions in all dockets will be entered under Rule 50.
Footnotes
1. These proceedings include the following consolidated cases: Estate of George L. Cury, Deceased, Robert L. Cury, Administrator, Alleged Transferee, Docket Nos. 34165, 34953 (George L. Cury died on May 15, 1954; on October 18, 1954, an order was entered substituting the administrator of the estate as petitioner in his place and the captions in all cases involving him were accordingly changed); Estate of George L. Cury, Robert L. Cury, Administrator, Docket No. 40703; Dahar Cury, Jr., Alleged Transferee, Docket No. 34388; Robert Cury, Alleged Transferee, Docket No. 34715; Robert Cury, Alleged Transferee, Docket No. 34716; A. B. Cury, Alleged Transferee, Docket No. 34842; A. B. Cury, Alleged Transferee, Docket No. 34843; Neal Gene Cury, Alleged Transferee, Docket No. 34863; Neal Gene Cury, Alleged Transferee, Docket No. 34864; Dahar Cury, Jr., Alleged Transferee, Docket No. 34865; Ruth Cury, Alleged Transferee, Docket No. 34906; Ruth Cury, Alleged Transferee, Docket No. 34907; Estate of Dahar Cury, Deceased, Sol W. Cury and Ann C. Romanus, Co-Administrators, Docket No. 34961; Estate of Dahar Cury, Deceased, Sol W. Cury and Ann C. Romanus, Co-Administrators, Docket No. 34962; Sol Cury, Alleged Transferee, Docket No. 34963; Sol W. Cury, Alleged Transferee, Docket No. 34964; Ann Cury Romanus, Alleged Transferee, Docket No. 34965; Ann Cury Romanus, Alleged Transferee, Docket No. 34966; Elizabeth Cury Ely, Alleged Transferee, Docket No. 34967; Elizabeth Cury Ely, Alleged Transferee, Docket No. 34968; D. Cury's Incorporated, Docket No. 34969; Sol W. Cury, Alleged Transferee, Docket No. 34970; Ann C. Romanus, Alleged Transferee, Docket No. 34971; Estate of Dahar Cury, Deceased, Sol W. Cury and Ann C. Romanus, Co-Administrators, Docket No. 38412; Dahar Cury, Jr. and Madeline Cury, Docket No. 40704; Robert Lee Cury, Docket No. 40705; Ruth Agnes Cury, Docket No. 40706; Neal Gene Cury, Docket No. 40782.↩
2. Mary Cury Salaita did not file a petition in determinations involving her. Elizabeth Cury Ely filed petitions but no appearance at the hearing was made on her behalf.
1. Not shown on books and records; the books were incorrectly kept on a cash basis, and the reconstruction shown in this column was made so as to permit use of the accrual system of accounting. Such reconstruction was based in part, at least, upon cancelled checks.↩
2. January 1 to July 31.↩
3. Those shares were reissued to Hugh A. Ely, and, on June 3, 1949, his shares were transferred to the corporation to carry out this part of the agreement.↩
1. January 1 to February 7.↩
1. Income tax net income. Victory tax net income reported was $ 22,926.08.↩
1. January 1 to February 7.↩
1. January 1 to February 7.↩
4. The respondent allowed an additional offset against the amounts thus determined for nonbusiness deductions, in some cases using in lieu of amounts claimed on the tax returns, the allowable optional standard deduction. No explanation is given for such an allowance, but Exhibit 46-TT, stipulated by the parties, contemplates such an adjustment. But cf. Michael Potson, 22 T.C. 912, 927↩, footnote 1.
5. It was necessary to determine the inventory of the Norton store separately, so that by comparing gross sales of the Norton store with those of the branch stores, a basis could be obatined for determining the inventories of the branch stores.
6. A fire sale was conducted, with the result that the Norton store had sales in the amount of $ 38,574.99 during July 1948. Respondent attempts to justify ignoring these sales on the ground that they, and other adjustments sought by petitioners for the period from July 2 to July 31, 1948, were more than offset by purchases in the amount of $ 103,206.69 during July 1948, which he similarly ignored. But we are satisfied on the evidence that such purchases do not in fact represent in their entirety merchandise received during July. The evidence was that the business took up to 90 days to pay for its goods, and that after the fire it canceled orders or postponed deliveries of merchandise on order. We are satisfied that although part of that merchandise was delivered during July, a substantial portion of the $ 103,206.69 represented merchandise delivered prior to July and already reflected in the fire inventory. And, of course, as to the merchandise delivered during July, only a portion was applicable to the Norton store, the remainder being held for or delivered to the branch stores.
In making our findings we have given full weight to all events occurring between July 2 and July 31, 1948, including an adjustment for the $ 64,121.17 loss due to the fire itself.
7. The purchase of these bonds is reflected in the stipulated facts which we have incorporated in our findings by reference.
8. Except for 1947, the living and personal expenses determined by respondent were in rounded figures: $ 4,200 for 1941, $ 4,500 for each of the years 1942-1945, $ 5,000 for 1946, and $ 7,382.30 for 1947. We are wholly without information as to the unusual figure for 1947, and have not been told why there was such a marked increase over 1946. Taking into account the general increase in cost of living during the postwar period, we have found as a fact that the family and personal living expenses for 1947 were $ 6,000.↩
9. Sol W. Cury testified that the records were not turned over to him when his group acquired control of the business. George L. Cury testified that the records were left with the business and were not in his possession.↩
10. The same five petitioners (members of George's group) contend that the respondent has not established the value of the assets received by them. This value is susceptible of computation. The value of the estate of Dahar Cury is also in issue for estate tax purposes, and it will be determined pursuant to the decision herein. There is no dispute between the parties that such value, when determined, is to be used to compute the basis of the one-tenth interest of each of the members of George's group in establishing the amount of gain, if any, realized by them on the sale of their interests at $ 55,000 each, and the same valuation can be used as a basis for the determination of the value of the assets received by each of the ten children for purposes of transferee liability. In view of earnings realized and undistributed by the corporation during the period from February 7 to November 17, 1948, and in view of rents accruing on the real estate during that same period, we are satisfied on the record that the value of the assets transferred to the ten children on November 17, 1948, was no less than the value of such assets as of February 7, 1948, the date of death. But since the burden of proof is upon the respondent in transferee cases to establish the value of the assets transferred, and since respondent has not established how much higher the value of the assets should be as of November 17, 1948, the transferees cannot be charged with transferee liability measured by any value in excess of the value as of February 7, 1948.