Gregory v. Commissioner , 14 B.T.A. 907 ( 1928 )

RHODE H. GREGORY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

HARVEY N. GREGORY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

JOHN M. GREGORY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Gregory v. Commissioner

Docket Nos. 13151-13153.

United States Board of Tax Appeals

14 B.T.A. 907; 1928 BTA LEXIS 2893;

December 21, 1928, Promulgated

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Respondent affirmed for lack of proof of error.

Harry B. Caton, Esq., for the petitioners.

W. F. Gibbs, Esq., and I. W. Swecker, Esq., for the respondent.

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VAN FOSSAN

These proceedings are brought to redetermine deficiencies in the income tax for the year 1920 of Rhode H. Gregory, Harvey N. Gregory, and John M. Gregory, in the sums of $30,601.77, $22,761.55 and $25,528.04, respectively. The cases were consolidated for hearing and opinion, and, with the exception of one point common to the Rhode H. Gregory and Harvey N. Gregory cases, all three proceedings involve the same questions. All three petitioners allege errors on the part of the respondent in rejecting the following deductions from each of their respective gross incomes: (1) The sum of $6,790.80 paid as attorney's fees; (2) the sum of $4,269.33 paid as salaries to office employees; (3) the sum of $4,503.33 paid for advertising and publicity expenses; (4) the sum of $1,000 paid to an auditor in connection with a defalcation by employees; (5) the sum of $3,423.33 paid as office rent in New York, Havana, Boston, Newark and Brooklyn; (6) the sum of $2,000 paid as interest on business loans; (7) the sum of $2,666.66 as a loss in a moving picture venture, charged off during the year; (8) the sum of $2,000 paid for alterations to office quarters and credited in lieu of rent; (9) the sum of $666.66 paid as dues in the consolidated exchange, service charges therein and losses involved in short sales; (10) the sum of $5,000 incurred as traveling expenses by the three petitioners and apportioned equally; (11) the amounts of $744.52 and $5,541.67 in notes and unsecured accounts, respectively, representing loans and advances made to salesmen, agents and brokers, and estimated to be worthless and charged off during the year; (12) the sum of $23,788.72 representing losses incurred by reasons of the defalcation and embezzlement of employees and reimbursed to "clients" who had deposited cash or securities in the said amount; (13) the sum of $16,666.66 representing a loss in the capital investment in Durell Gregory & Co.; (14) the sum of $2,666.66 representing losses involved in dealing in the stock of the Cumor Chemical Co.; and (15) the sum of $666.66 representing a loss involved in dealing in the stock of the Interstate Petroleum Co.

The petitioners further assert that the respondent erred (1) in adding to the income of each of the petitioners the sum of $26,211.16, representing the face value of certain worthless securities received by Durell & Co. in exchange for stock sold across its counter and assigned to the petitioners and included by them in their gross income; and (2) in adding to the incomes of Rhode H. Gregory and Harvey N. Gregory the sum of $5,000 each, representing the return of a capital investment in the Great Southern Sulphur Co.

FINDINGS OF FACT.

In May, 1918, Rhode H. Gregory and his brother, John M. Gregory, formed a partnership, under the firm name of Durell Gregory & Co., for the purpose of conducting a stock brokerage business at 7 Wall Street, New York City. In August, 1919, the other brother, Harvey N. Gregory, joined the enterprise and each of the three brothers shared equally in the profits and losses. The expenses of the partnership were paid by each partner and equalized by the exchange of checks. A corporation under the same name, owned by the three brothers in equal proportions, were organized to deal in stocks and securities on its own account, while the function of the partnership was to buy and sell on a brokerage basis. A seat in the Consolidated Stock Exchange of New York was purchased by the partnership and held in the name of John M. Gregory. In June, 1920, the partnership and the corporation moved their offices to more commodious quarters at 72 Wall Street.

In September or October, 1919, the partnership discovered evidences of shortages and defalcations in its commission department and employed accountants to audit its books for the purpose of ascertaining the losses, tracing the sources of the deficits and procuring evidence against the guilty employees. The services of the auditors extended well into the year 1920. Their investigation resulted in the confession and prosecution of the defaulting employees. Undesirable publicity ensued and the patrons of the partnership made insistent and concreted demands for the settlement of their accounts. A petition in bankruptcy was filed against the partnership. A receiver was appointed and continued for five or six weeks, when he was discharged and the bankruptcy proceedings dismissed on November 5, 1919. During the remainder of 1919 and the greater portion of 1920 the business of the petitioners consisted largely of liquidating their customers' accounts. During that time, however, they attempted to continue the business of Durell Gregory & Co. In the fall of 1920 that corporation entered into a contract with the American Tire Co. to sell its stock. A short time thereafter, in the same year, the Post Office Department instituted an investigation of the American Tire Co.'s stock transactions and incident thereto circularized the customers of the partnership and the corporation owned by the partnership, requesting such customers to disclose all their business relations with the petitioners. This action completed the business downfall of both the partnership and the corporation and resulted in the finding of an indictment against the petitioners on May 2, 1921. On October 5, 1922, they were placed on trial and on November 17 of that year they were acquitted.

By reason of the various investigations, examinations and use made of the books and records of the partnership and Durell Gregory & Co., by accountants, State and Federal authorities, and others, such books were scattered, were held for storage and many were lost. At the time the petitioners filed their income-tax returns in March, 1921, practically no records of the partnership or the corporation were available and they based their returns on personal data and memoranda. Later all books and records which had survived were sold for storage and passed beyond the control and knowledge of the petitioners.

On September 5, 1920, J. F. McCarrier was paid, on behalf of the partnership, $2,362 for special work performed in the year 1920.

OPINION.

VAN FOSSAN: In these cases we meet with a situation in which petitioners have been the victims of extreme misfortune but which, by reason of the inadequacy of proof, we are impotent to relieve. The narrative of petitioners' business experiences leaves the impression that petitioners were probably entitled to substantial deductions from income during the taxable year, but we find ourselves impelled to the further conclusion that with the single exception hereinafter noted petitioners have utterly failed to prove the amounts thereof. The presumption of correctness attaching to respondent's determination places on petitioners the burden of proving not merely the fact of possible error but the extent thereof.

These proceedings deal with a series of complex business transactions involving innumerable items and large amounts of money. All books being lost or destroyed petitioners submitted in lieu thereof their uncertain approximations and hazy recollections. Though precise dates are vital in determining the year of allowance of deductible items the record is almost devoid of dates. This omission is especially important in a case such as this where there is a dispute as to whether certain losses were suffered in late 1919 or early 1920. The record is further confused by the failure to draw a clear line of demarcation between the operations and expenses of the partnership and those of the corporation. Although one of petitioners' witnesses stated that he had a list of securities received by petitioners from the corporation which it is now claimed were improperly included in gross income in the amount of $26,211.16, no such list was submitted and petitioners made no attempt to prove their worthlessness in 1920. Similarly, petitioners Rhode H. and Harvey N. Gregory failed to show that the amounts received by them from the sale of their holdings in the Great Southern Sulphur Co. were in fact return of capital and contained no elements of income. No documentary evidence was introduced no elements of income. No documentary evidence was introduced and although certain checks were shown to witnesses these were neither submitted as exhibits nor read into the record. Moreover, the testimony shows many irreconcilable discrepancies.

The lone exception to the above observations is the item of $2,362 paid to J. F. McCarrier on September 5, 1920, for special work performed in that year. This expense was sufficiently established to justify allowance.

A careful and sympathetic consideration of the remainder of the record leads only to confusion and uncertainty. To attempt to find the correct amount of the other deductions allowable to the petitioners in the taxable years would be sheer speculation in which we can not indulge.

Judgment will be entered under Rule 50.