1928 BTA LEXIS 3709">*3709 1. FRAUD. - Petitioner maintained an inadequate set of books of accounts but did not wilfully file a false and fraudulent return with intent to evade tax.
2. STATUTE OF LIMITATIONS. - There having been no fraud and, the statute having run, there is no deficiency for the year under review.
11 B.T.A. 836">*836 Respondent's deficiency letter dated December 9, 1925, asserted against the petitioner for the fiscal year ended January 31, 1919, an additional income tax in the amount of $700.79, to which there was added a 50 per cent fraud penalty in the amount of $350.40, total tax and penalty, $1,051.19.
The said letter also asserted additional taxes for periods between February 1, 1916, and January 31, 1918, in the amount of $88.86. Counsel for the respondent conceded at the trial that there was no deficiency for said periods.
The petitioner pleaded the bar of the statute of limitations as a complete defense while the respondent's answer contained the following affirmative allegations: That this taxpayer1928 BTA LEXIS 3709">*3710 fraudulently omitted to report as income for the fiscal year ended January 31, 1919, salaries in the amount of $4,471.56; income of minor child in the amount of $1,110; and income from sale of bonds in the amount of $20.20.
11 B.T.A. 836">*837 At the trial the petitioner produced evidence tending to show that his return for the year ended January 31, 1919, was not subject to the charge of being false or fraudulent with the intent to evade taxes. The respondent produced no direct evidence and relied entirely upon cross-examination of petitioner's witnesses.
FINDINGS OF FACT.
At the time of the trial petitioner was residing at Los Angeles, Calif. During the year ended January 31, 1919, and for a considerable number of years prior thereto, he had been a resident of the City of New York, and had been engaged in the business of manufacturing ladies' muslin underwear, in which business he was engaged for about 20 years. During the period here under consideration his factory plant comprised about 75 sewing machines and the employees therein numbered between 50 and 60 people.
For the year here under consideration the closing entries on the taxpayer's journal made as of January 31, 1919, were1928 BTA LEXIS 3709">*3711 as follows:
| January 31, 1919. | ||
| Dr. | Cr. | |
| $2,958.76 | Discount on purchases. | |
| 76.97 | Bank interest. | |
| 120,432.41 | Sales. | |
| 120.00 | Interest on investments. | |
| 1.47 | Interest and discount: | |
| To discount on sales | $6,115.07 | |
| To rent | 1,810.00 | |
| To insurance | 567.17 | |
| To general expense | 5,363.92 | |
| To manufacturing and indirect | 1,016.48 | |
| To purchases | 66,665.33 | |
| To merchandise inventory (old) | 6,208.36 | |
| To claims and allowance | 25.57 | |
| To labor | 24,563.68 | |
| To commission | 4,700.82 | |
| To charity | 125.00 | |
| To profit and loss | 6,428.21 | |
| 123,589.61 | To close out all nominal accounts to last account | 123,589.61 |
| Profit and loss: | ||
| 6,428.21 | To A. Scheer, capital | 6,428.21 |
| To transfer. |
In the petitioner's ledger pertaining to the accounts of his business there appears a personal account with petitioner for the fiscal year ending January 31, 1919, which account indicates a net debit of $2,356.81. In that account there are many debit items aggregating $4,656.81, and among other credit items, collections of what appear 11 B.T.A. 836">*838 to be interest or dividends upon bonds or stocks aggregating $1,110, and an entry indicating that certain1928 BTA LEXIS 3709">*3712 bonds or stocks had been sold at a gain of $20.20. On March 8, 1919, petitioner made and verified an income-tax return on Form 1040, which was filed with the Collector of Internal Revenue for the Second District of New York on March 14, 1919. In Block A of this return petitioner showed income from his business as follows:
| Total sales and income from business or professional services | $123,589.61 | ||
| COST OF GOODS SOLD: | |||
| Labor | $25,580.16 | ||
| Merchandise bought for sale | 66,665.33 | ||
| Plus inventories at beginning of year | 20,275.68 | ||
| TOTAL | 112,521.17 | ||
| Less inventories at end of year | 14,067.32 | ||
| Net cost of goods sold | 98,453.85 | ||
| OTHER BUSINESS DEDUCTIONS: | |||
| Salaries and wages not reported as "Labor" under "Cost of goods sold" | 4,700.82 | ||
| Rent | 1,810.00 | ||
| Other expenses (submit schedule of principal items at foot of page or on separate sheet) | 12,196.73 | ||
| TOTAL OTHER BUSINESS DEDUCTIONS | 98,453.85 | ||
| NET COST OF GOODS SOLD PLUS OTHER BUSINESS DEDUCTIONS | 117,161.40 | ||
| NET INCOME FROM BUSINESS OR PROFESSION | $6,428.21 |
From the income of the business so shown he deducted in Block I, under the head of taxes paid, $60, and returned his net income as $6,368.21, upon which1928 BTA LEXIS 3709">*3713 he computed a tax of $277.55. The respondent's deficiency letter shows modifications of income and tax liability as follows:
| Fiscal year ended January 31, 1919. | ||
| Net income originally reported | $6,368.21 | |
| Add: | ||
| Salaries not reported | $4,471.56 | |
| Income of minor child | 1,110.00 | |
| Income from sale of bonds | 20.20 | |
| 5,601.76 | ||
| 11,969.97 | ||
| Less: | ||
| Depreciation | $746.52 | 746.52 |
| Net income as corrected | 11,223.45 | |
| Summary of tax. | ||
| Tax applicable to 1918 | $918.27 | |
| Tax applicable to 1919 | 60.07 | |
| Total tax assessable | 978.34 | |
| Tax originally assessed | 277.55 | |
| Additional tax due | 700.79 | |
| 50% penalty as provided in section 250(b), Revenue Act of 1918 | 350.40 | |
| Additional tax and penalty due | 1,051.19 |
11 B.T.A. 836">*839 The item of salaries not reported, $4,471.56, which the respondent added to petitioner's income, resulted from an examination of petitioner's books of account by a revenue agent whose report, among other things, contained the following data:
| Salaries paid and | Salaries paid and | |
| charged to labor | charged to general | |
| expense. | ||
| To Abraham Scheer | $2,796.56 | $1,220.00 |
| To Lottie Scheer | 405.00 | 50.00 |
| 3,201.56 | 1,270.00 | |
| 1,270.00 | ||
| Total salary not reported as income | 4,471.56 |
1928 BTA LEXIS 3709">*3714 During the year here under consideration and also during the years prior and subsequent thereto, petitioner paid bonuses to 12 or 15 of his skilled employees who demanded higher wages, but he paid such bonuses secretly so that the other employees would not know of the special agreement. Petitioner's bookkeeper had entire charge of the books of account, made out the pay roll and each week she drew a check for the total amount of the regular pay roll plus any amount requested by petitioner or his wife, Lottie Scheer. The bookkeeper paid off the employees and gave the balance of the money drawn from the bank to petitioner, or in his absence, to Lottie Scheer, and she charged such amounts either to labor account or to general expense account. Such amounts were used by petitioner to pay the secret bonuses; to pay varying sums as salary for Lottie Scheer, who was regularly employed in assisting in the management of petitioner's factory, and also for the payment of little incidental expenses.
Prior to the year in question petitioner had acquired from the profits and savings of his business approximately $20,000 of bonds which he gave to his two daughters, respectively 19 and 17 years1928 BTA LEXIS 3709">*3715 of age in 1918. During the taxable year under review the interest upon the bonds amounted to $1,110, which was credited to petitioner's 11 B.T.A. 836">*840 personal account as collected, but it was put into the hands of Lottie Scheer who spent it for necessities for the two daughters.
Petitioner had no knowledge of bookkeeping and depended entirely upon his bookkeeper to keep accurate accounts of his business, and each month he employed an accountant to check over and balance the accounts. The accountant also made up petitioner's income-tax return which was made in accordance with his books and which petitioner accepted, signed, and filed as a correct return of his income. Petitioner was ignorant of any errors in his books of account or in his income-tax return.
The period of five years from the date of the filing of the return for the fiscal year ended January 31, 1919, had expired at the date in 1925 when respondent determined the deficiency here in question.
OPINION.
TRUSSELL: Assessment and collection of the deficiency here in question is barred by the statute of limitations, unless it be found that petitioner wilfully filed a false and fraudulent return with intent to evade1928 BTA LEXIS 3709">*3716 tax.
The facts establish that petitioner's return was made in accordance with his books of account; that he had no knowledge of accounting; that he depended entirely upon his bookkeeper for an accurate set of accounts, and that he accepted as correct an accountant's audit of his books and preparation of his income-tax return. Petitioner was ignorant of any error in his accounts or in his return for the year under review. We can not find as a fact that petitioner wilfully filed a false and fraudulent return with the intent to evade tax. It is true that petitioner's books of accounts were inadequate and contained mistakes but such fact does not establish fraud as asserted by respondent's answer filed in this proceeding. Cf. ; ; ; and .
There was no fraud on the part of this petitioner and the running of the statute of limitations has barred the assessment and collection of a deficiency in tax, if any, for the fiscal year ended January 31, 1919.
Judgment of no deficiency1928 BTA LEXIS 3709">*3717 will be entered for the petitioner.