*2101 In the year 1919 the taxpayer was authorized to and did draw a total salary of $88,000, and received on account of back salary $3,933.34. Without further explanation he reported as his salary for that year $58,733.34. He caused $25,000 to be transferred from his account to that of his wife after all of the above-mentioned withdrawals were completed, and his wife returned as salary income of her own $25,000. Held, that the return of the taxpayer for the year 1919 was intentionally false and fraudulent.
*1258 Before JAMES, LITTLETON, SMITH, and TRUSSELL.
This is an appeal from the determination of deficiencies in income tax for the years 1919 and 1920 in the amounts, respectively, of $8,030.70 and $1,545.93, a total of $9,576.63.
The taxpayer alleges two errors on the part of the Commissioner: (1) That the Commissioner erred in including in taxable income for the year $25,000 on account of salary, which amount it is alleged was relinquished by the taxpayer and paid to May Ascher in 1919, pursuant to resolutions adopted on*2102 December 30, 1919, by the board of directors of the Columbia Fastener Co.; and (2) that the Commissioner erred in disallowing the deductions for the years 1919 and 1920, respectively, of $1,287.86 and $7,473,47, alleged to have been debts ascertained to be worthless and charged off in each of the said taxable years. No evidence was introduced by the taxpayer upon the second point.
At the close of the hearing counsel for the Commissioner moved "that a 50 per cent fraud penalty be found against the taxpayer for the years in question under section 250(b) of the Revenue Act of 1918 on the ground that the returns for those years were willfully understated for the purpose of evading taxes."
FINDINGS OF FACT.
The taxpayer resides in Chicago, Ill., and was, during the years 1918 and 1919, the president of the Columbia Fastener Co., an Illinois corporation doing business in Chicago as a manufacturer of fasteners for women's garments.
The corporation, the Columbia Fastener Co., originated by reason of conditions incident to the World War. Prior to the beginning of the war in 1914, substantially all fasteners for women's dresses and other clothing were made in Europe, on special*2103 machinery which constituted a trade secret of the manufacturers of such machinery and of such fasteners. When the conditions incident to hostilities shut off the importation of fasteners into this country, Ascher sought to find some one sufficiently familiar with fastner manufacturing machinery to enable him to begin the manufacture of such fasteners in this country. He finally found two mechanics- Simek by name - who had some knowledge of the fastener machines as used in Europe, and Ascher and Frank Simek afterward developed *1259 machinery adequate to the manufacture of fasteners and established, in the name of the Columbia Fastener Co., a highly profitable enterprise in that line.
Both Ascher and his wife actually worked in the factory and in the business in the early developing stages, his wife beginning at a salary as low as $15 a week and being paid a salary in 1919 of $35 a week. The growth of Ascher's salary is best set forth by several resolutions of the board of directors of the company.
At a special meeting on March 1, 1917, of the board of directors of the Columbia Fastener Co., the following resolution was adopted:
Be it resolved that the following named*2104 officers shall receive as their salary and compensation, per month, to date from the organization of the corporation until December 31, 1917, the amounts set opposite their respective names:
Fred Ascher, President, $1,666.66; Frank Simek, Vice-President, $1,333.33; Leo. S. Kositchek, Secretary, $500.00; Edward Oplatka, second Vice-President, $166.67.
On the minute book of the corporation there appears, under date of March 1, 1919, minutes of a special meeting of the board of directors at which the following resolution is reported as having been adopted:
Be it resolved that the following named officers shall receive as their salary and compensation per month from January 1, 1919 until December 31, 1919, the amounts set opposite their respective names:
Fred Ascher, President, $6,666.66; Frank Simek, Vice-President, $5,333.33; Leo S. Kositchek, Secretary, $2,000; Edward Oplatka, second vice-president, $166.67.
In the minute book of the corporation there appears what purport to be the minutes of a special meeting of the board of directors on December 30, 1919, the material provisions of which read as follows:
The President announced that the meeting was held in pursuance*2105 of a waiver of notice, signed by all the directors, and that it was desired that certain changes be made in salaries for 1919.
The President also announced that demands had been made for recognition of salaries of members of the institution on account of services they have rendered who consider themselves underpaid, and have made demands for increase in salaries as follows:
May Ascher, in addition to her other duties has assisted materially in the increased production of the manufacturing department, by her ideas, counsel and advice in such a manner that the profits of the business have been largely enhanced thereby; and in consequence thereof, it is suggested that her salary be increased for the year 1919 by $25,000.
Bohumil Simek, in addition to his other duties has been of valuable assistance in the manufacturing department, in designing machinery and improvements thereon, which have largely been responsible for the increased production and low cost of production; and it is suggested that he also receive additional compensation for the year 1919, to the extent of $20,000.00.
*1260 Mr. Ascher further states that he is in favor of granting these increases in salaries, *2106 but as he feels that the other stockholders might suffer therefrom, he would be willing to relinquish $25,000.00 of his salary, if $20,000 of the salary of Frank Simek was also relinquished to the firm. Frank Simek signified his consent.
Upon a motion made by Leo S. Kositchek, duly seconded, it was unanimously agreed that the salary of May Ascher be increased $25,000.00 for the year 1919, and the salary of Bohumil Simek be increased $20,000.00 for the year 1919; the salary of Fred Ascher be decreased $25,000.00 for the year 1919, and the salary of Frank Simek be decreased $20,000 for the year 1919.
The account of Fred Ascher for the year 1919, both as to debits and credits, appeared on the books of the Columbia Fastener Co. as follows:
| Date | Folio | Charges |
| 1919 | ||
| Jan. 4 | 132 | $200.00 |
| 11 | 133 | 200.00 |
| 16 | 134 | 200.00 |
| 25 | 135 | 200.00 |
| 30 | 137 | 1,000.00 |
| 31 | 137 | 200.00 |
| Feb. 8 | 139 | 200.00 |
| 15 | 140 | 200.00 |
| 21 | 142 | 200.00 |
| Mar. 1 | 144 | 200.00 |
| 8 | 145 | 200.00 |
| 11 | 146 | 2,000.00 |
| 15 | 146 | 200.00 |
| 22 | 148 | 200.00 |
| 29 | 150 | 200.00 |
| Apr. 2 | 3 | 4,000.00 |
| 5 | 4 | 200.00 |
| 12 | C7 | 200.00 |
| 15 | 9 | 5,000.00 |
| 19 | 11 | 200.00 |
| 26 | 15 | 200.00 |
| May 3 | 17 | 200.00 |
| 6 | 19 | 5,000.00 |
| 10 | 21 | 200.00 |
| 17 | 25 | 200.00 |
| 24 | 27 | 200.00 |
| 31 | 31 | 200.00 |
| June 6 | 33 | 200.00 |
| 11 | 36 | 5,000.00 |
| 14 | 39 | 200.00 |
| 21 | 43 | 200.00 |
| 24 | 43 | 10,000.00 |
| June 24. Notes receivable | 900.00 | |
| 28 | 45 | 200.00 |
| July 5 | 49 | $200.00 |
| 12 | 53 | 200.00 |
| 17 | 55 | 5,000.00 |
| 19 | 57 | 200.00 |
| 26 | 59 | 200.00 |
| 29. Notes receivable | 1,475.00 | |
| Aug. 2 | 65 | 200.00 |
| 9 | 69 | 200.00 |
| 11 | 69 | 10,000.00 |
| 16 | 73 | 200.00 |
| 21 | 75 | 10,000.00 |
| 23 | 75 | 200.00 |
| 30 | 79 | 200.00 |
| Sept. 6 | 83 | 200.00 |
| 13 | 85 | 200.00 |
| 20 | 89 | 200.00 |
| 27 | 93 | 200.00 |
| Oct. 1 | 97 | 1,000.00 |
| 4 | 97 | 200.00 |
| 11 | 99 | 200.00 |
| 18 | 103 | 200.00 |
| 25 | 105 | 200.00 |
| Nov. 1 | 111 | 200.00 |
| 8 | 113 | 200.00 |
| 15 | 117 | 200.00 |
| 22 | 121 | 200.00 |
| 29 | 123 | 200.00 |
| Dec. 1 | 127 | 400.00 |
| U.S. Liberty Bds | J80 | 7,500.00 |
| 20 | C131 | 200.00 |
| 24 | 135 | 5,658.34 |
| 27 | 135 | 200.00 |
| 83,933.34 |
| Date | Folio | Credits |
| 1919 | ||
| Jan. Balance | $3,933.34 | |
| 31 | J45 | 1,666.67 |
| Feb. 28 Feb | 47 | 1,666.67 |
| Mar. 31 Mar | 50 | 1,666.66 |
| Apr. 30 Apr | J53 | 1,666.67 |
| May 31 May | 56 | 1,666.67 |
| June 30 June | 60 | 1,666.66 |
| July 6 mos. adjust | 62 | 30,000.00 |
| 1919 | ||
| July 31 | 63 | $6,666.67 |
| Aug. 30 | J67 | 6,666.67 |
| Sept. 30 | 71 | 6,666.67 |
| Oct. 31 | 74 | 6,666.67 |
| Nov. 21 | 78 | 6,666.66 |
| Dec. 31 | 83 | 6,666.66 |
| 83,933.34 |
The total of the debits, all being entries, with three exceptions, from the cash book of the corporation, upon the foregoing account for the year 1919, is $83,933.34, and the total of the credits is the same amount. The account was balanced and ruled off at the close *1261 of the year. Fred Ascher received from the Columbia Fastener Co., on account of compensation in and during the year 1919, a total amount of $83,933.34. His records were kept and his return made on the basis of cash receipts and disbursements.
Upon the same sheet and below the bookkeeper's ruling off of the account for the year 1919, there is a debit to the account of Fred Ascher as follows:
| Folio. | Charges. | |
| 1919 Dec. 30 | J82 | $25,000.00 |
As indicated by the folio*2108 notation, this entry, unlike the preceding ones, was made from the journal.
The account of Fred Ascher for the year 1920, following the above debit, is as to debits and credits as follows:
| Date. | Folio. | Charges. |
| 1920. Jan. 3 | 139 | $200.00 |
| 10 | 141 | 200.00 |
| 17 | 143 | 200.00 |
| 24 | 145 | 200.00 |
| 29 | 147 | 1,600.00 |
| Mar. 23 | 167 | 2,400.00 |
| 1919. Dec. 31 Int. on Lib'ty Bds. | J87 | 76.73 |
| 1920. June 5 | C199 | 1,600.00 |
| Aug. 14 | 225 | $1,600.00 |
| 27 | 231 | 2,000.00 |
| Sept. 29 | 243 | 5,000.00 |
| Nov. 27 | 263 | 5,000.00 |
| Dec. 18 | 269 | 756.60 |
| 45,833.33 |
| Date. | Folio. | Credits. |
| 1920. Jan. 31 | J91 | $4,583.33 |
| Feb. 28 | 93 | 4,583.33 |
| Mar. 31 | 96 | 4,583.34 |
| Apr. 30 | 100 | 4,583.33 |
| May 31 | 104 | 4,583.33 |
| June 30 | 107 | 4,583.34 |
| July 31 | 108 | $4,583.33 |
| Aug. 31 | 111 | 4,583.33 |
| Sept. 30 | 113 | 4,583.34 |
| Oct. 30 | 115 | 4,583.33 |
| 45,833.33 |
The total of the debits of the foregoing account for the year 1920 is $45,833.33, and the total of the credits is the same amount.
Upon the books of the Columbia Fastener Co. there appears an account with May Ascher, wife of Fred Ascher, which account in its debits and credits is in full as follows:
| Date. | Folio. | Credits. | Date. | Folio. | Charges. |
| 1919. Dec. 30 | J82 | $25,000.00 | 1919. Dec. 26 | J82 | 700.00 |
| 31 | 84 | 700.00 | 31. Balance | 25,000.00 |
| Date. | Credits | Date. | Folio. | Charges. |
| 1920. Balance | $25,000.00 | 1920. Apr. 27 | C181 | $825.00 |
| 29 | 181 | 4,175.00 | ||
| May 13 | 187 | 2,100.00 | ||
| 18 | 189 | 2,900.00 | ||
| 25 | 193 | 2,400.00 | ||
| June 1 | 197 | 1,000.00 | ||
| 2 | 197 | 1,600.00 | ||
| 22 | 205 | 5,000.00 | ||
| Aug. 24 | 229 | 5,000.00 | ||
| 25,000.00 |
*1262 The payments to May Ascher entered in the cash book and on the above ledger account, in a total amount of $25,000 from April 27 to August 24, 1920, were actually made to Fred Ascher, who received the checks and deposited them in his own bank account.
In his income-tax return for the year 1919 Fred Ascher, under Schedule B, made the following entry without explanation either in that place or elsewhere on or in connection with his return:
| B. Income from salaries, wages, commissions, bonuses, director's fees, | |||
| and pensions. | |||
| 1. By whom received. | 2. Occupation. | 3. Name and address | |
| of employer. | 4. Amount. | ||
| Myself | President | Columbia Fastener Co | $58,733.34 |
On his income-tax return for the year 1920, Fred Ascher reported in Schedule B, under headings substantially identical with those*2110 above in 1919, salary received $45,833.33, without further notations in connection therewith.
May Ascher filed a return for 1919 and paid tax on $27,300, but did not, during either the year 1919 or the year 1920, receive $27,300 on account of salary in the Columbia Fastener Co. or any other amount in excess of $2,300.
Fred Ascher, on or about March 15, 1920, filed with the collector of internal revenue at Chicago, Ill., an income-tax return for the year 1919, which contained a statement of income which was false and fraudulent and was so made with intent to evade the tax properly due upon his income for 1919.
DECISION.
The deficiencies should be computed in accordance with the following opinion. Final determination will be settled on 15 days' notice, in accordance with Rule 50.
OPINION.
JAMES: The taxpayer received during the year 1919 and should pay tax upon the total amount withdrawn as salary as above set forth in the findings of fact. ; ; *2111 ; ; ; ; .
For the year 1920 Ascher correctly stated the amount of salary received, and no adjustment in that year is involved, the deficiency *1263 determined by the Commissioner being in all respects as to that year approved without the addition of penalty, and the Commissioner's motion for the imposition of a penalty in that year is denied.
In respect of the year 1919 the evidence shows that Ascher received $83,933.34 as salary from the Columbia Fastener Co. The evidence further shows that a resolution purporting to have been adopted December 30, 1919, undertook, on behalf of the corporation, to transfer $25,000 of this salary already received by him from Ascher to his wife. The ledger account of Ascher shows that his account had been closed and ruled off before this afterthought was carried into effect and that the adjustment was clumsily made by a journal entry some time between*2112 December 27 and January 3. It further appears that, after having credited May Ascher with $25,000 by a charge to her husband's account, the bookkeeper found it necessary to close that account in some manner and did so by charging a portion of Ascher's own withdrawals for salary for the year 1920 to May Ascher's account.
The evidence shows that Ascher filed an income-tax return for the year 1919 which made no disclosure of any fact except that he claimed to have received a salary of only $58,733.34 for the year 1919, which statement was false and was known by him to be false. The deficiency should be computed upon the basis of the actual salary withdrawn by Ascher as above set forth, and to the said deficiency there should be added a penalty of 50 per cent.