Griffiths v. Commissioner , 15 B.T.A. 252 ( 1929 )

JOHN GRIFFITHS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Griffiths v. Commissioner

Docket No. 18162.

United States Board of Tax Appeals

15 B.T.A. 252; 1929 BTA LEXIS 2888;

February 7, 1929, Promulgated

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1. Held that the evidence does not establish error on the part of the respondent in determining that the petitioner was taxable in 1919 on account of amounts credited to him in that year.

2. In the light of the circumstances in this case held that the tax return filed for 1919 was wilfully fraudulent, and that the petitioner is liable to the assessment of the penalty provided by the statute for the filing of a fraudulent return.

P. Tinkoff, Esq., for the petitioner.

James A. O'Callaghan, Esq., for the respondent.

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TRAMMELL

In this proceeding petitioner seeks a redetermination of a deficiency in income taxes for the calendar year 1919 in the amount of $37,455.55. He alleges error on the part of the Commissioner in holding that $87,926.63 was taxable income for the year 1919 instead of at the time when the liability of the corporation, John Griffiths & Son Co., arose to pay the petitioner compensation for the services rendered in signing surety bonds covering contracts entered into by the corporation.

At the hearing the respondent amended his answer to allege that the 1919 return of the petitioner was false and fraudulent and that the petitioner was subject to the 50 per cent fraud penalty.

FINDINGS OF FACT.

Petitioner is an individual residing at Chicago, Ill. He is president of John Griffiths & Son Co., an Illinois corporation engaged in the general contracting business. Petitioner is about 87 years of age and has been engaged in the contracting business for over 50 years, but has been inactive for approximately 8 years.

Prior to 1911 the contracting business was carried on by a partnership consisting of the petitioner and his son. Subsequently, the corporation, John Griffiths & Son Co., was formed, all of the stock of which, except one qualifying share, was owned by the petitioner and his son; the petitioner owning at all times at least 81.6 per cent of the capital stock, and his son owning the balance. The officers of the corporation were John Griffiths, president and treasurer; George W. Griffiths, vice president and assistant treasurer; and Louis C. Joyer, secretary.

From 1910 John C. Reuttinger has acted as general manager in charge of construction. At all times he held one qualifying share of stock in the corporation and also participated in the profits of the company under the terms of a contract of employment at rates varying from 10 per cent to 18 per cent.

The petitioner and his son, George W. Griffiths, and John C. Reuttinger made up the board of directors of the corporation. Practically all of the meetings of the board of directors were informal and were not recorded in the minutes of directors' meetings except in the case of annual meetings.

In the general contracting business in which John Griffiths & Son Co. was engaged it was often necessary to make to the owners a surety bond guarantying performance in respect to the contract. During the year 1916 petitioner's son, George W. Griffiths, suggested that in many cases surety bonds signed individually by himself, the petitioner and John C. Reuttinger would be acceptable to owners and that by becoming personal surety for the company these individuals could secure themselves the amounts that would otherwise be paid to surety companies. In accordance with this suggestion, at an informal meeting of the directors of John Griffiths & Son Co. it was decided that three individuals go surety on bonds in cases where such bonds would be acceptable, and that the individuals would receive for such services an amount equal to the premium charged by surety companies in like instances and payable at the same time. It was further agreed that the amounts thus earned by the individuals should be divided between the three individuals in certain proportions, John C. Reuttinger being entitled to receive the same percentage of such amounts as he received from the profits under his contract of employment, and John Griffiths and George W. Griffiths having shares in the balance in accordance with the stock ownership.

No amounts were placed on the books of the corporation to the credit of the individuals on account of these services until July 31, 1919, at which time George W. Griffiths instructed the bookkeeper to place upon the books amounts to which the individuals were entitled, and that in computing such amounts he was to consult Mr. Douaire, who was giving surety bonds for John Griffiths & Son Co., to find out what a surety company would have charged for the same services. The bookkeeper thereupon credited the accounts with the following amounts:

John Griffiths	$ 87,926.63
George W. Griffiths	14,313.64
J. C. Reuttinger	22,442.98
Total	124,683.25

The contracts upon which these amounts were computed were as follows:

Name of contract	Date of execution	Date of completion
(1) Paris Island	July 7, 1918	1919
(2) Camp Ross	June 27, 1918	1918
(3) Chicago Union Station Co., caissons	Feb. 24, 1919	1920
(4) Butler Building, caissons	Dec. 21, 1917	1924
Butler Building	Apr. 9, 1919	1924
(6) Chicago Telephone Building	Mar. 20, 1917	1920
(7) Contagious disease hospital	Oct. 30, 1917
(8) Cook County power house	Aug. 31, 1916	1921
(9) Morrison Hotel, sec. 2	Sept. 16, 1916	1917-1922

Name of contract	Amount	Final cost to	Amount
	of bond	owner	charged in
			1919 as bond
			premium cost
			to contract
(1) Paris Island	$565,000.00	$2,142,182.95	$29,959.45
(2) Camp Ross	40,200.00	139,033.08	2,352.92
(3) Chicago Union Station Co., caissons	150,000.00	423,595.78	6,223.50
(4) Butler Building, caissons	100,000.00	308,829.27	4,641.88
(5) Butler Building	150,000.00	3,652,582.62	47,841,63
(6) Chicago Telephone Building	300,000.00	1,619,184.47	16,226.49
(7) Contagious disease hospital	125,000.00		3,775.82
(8) Cook County power house	50,000.00	347,996.02	3,601.93
(9) Morrison Hotel, sec. 2		973,960.12	10,059.63

Name of contract	Was
	surely
	bond
	given	Name of principal and sureties
(1) Paris Island	Yes	John Griffiths & Son Co.; John
		Griffiths, George W Griffiths.
(2) Camp Ross	Yes	John Griffiths & Son Co.; John
		Griffiths, John C. Ruettinger.
(3) Chicago Union Station Co., caissons	Yes	John Griffiths & Son Co.
(4) Butler Building, caissons	Yes	John Griffiths & Son Co.; John
		Griffiths & Son Co.
(5) Butler Building	Yes	John Griffiths, who deposited
		in escrow, pre contract,
		$ 150,000 worth market value
		Liberty bonds.
(6) Chicago Telephone Building	No	Bond not executed as per
		contract; waived by Chicago
		Telephone Co.
(7) Contagious disease hospital	Yes	John Griffiths & Son Co.; John
		Griffiths, John C. Ruettinger.
(8) Cook County power house	Yes	John Griffiths & Son Co.; John
		Griffiths, John C. Ruettinger.
(9) Morrison Hotel, sec. 2	No	Bond specifically waived in the
		contract.

In the case of a surety company the premium on surety bonds became due and payable within 30 or 60 days after the signing of the bond. The ordinary rate for premiums, beginning with 1917, was $1.50 per $100 at contract price, and was based upon the full amount of the contract and not on the amount of the bond. Prior to that time the rate was $1 for each $100 on the amount of the contract.

As shown by the books of John Griffiths & Son Co. the balances due John Griffiths during various years were as follows:

December 31, 1917	$ 369,200.00
December 31, 1918	388,290.00
December 31, 1919	185,027.06
December 31, 1920	87,027.46

The surplus of John Griffiths & Son Co. and the cash balances were as follows:

Year	Surplus	Cash balances
1916	$735,003.74	$756,752.44
1917	475,023.58	537,547.81
1918	764,596.72	1,133,058.06
1919	920,028.10	679,604.29

During the years 1916 to 1919 the accounting work of the corporation was handled by Louis C. Joyer and his assistant, Clarence Reeves, except during the year 1918 when Reeves was in military service. During a larger part of this period the corporation was engaged in the construction of various large projects outside the City of Chicago, including the Great Lakes Naval Training Station, Paris Island Marine Barracks, and Camp Ross.

During the years 1915 and 1916 dividends were declared by formal action of the board of directors, but such dividends were not recorded upon the books of the company nor credited to the accounts of the stockholders until December 31, 1917.

During the years 1916 to 1919, inclusive, John Griffiths & Son Co. reported income for Federal income-tax purposes on the basis of completed contracts to the extent of the cash actually received at the time the contract was completed. In the examination of the books of John Griffiths & Son Co. by an internal revenue agent in 1921, the amount of $124,683.25 of bond premiums above referred to was allowed as an expense to the corporation chargeable against the various jobs affected, and such charges were reallocated to the years in which the respective contracts were completed. During the period prior to 1919 no accounting was had or calculation made by the petitioner or the corporation to determine what amounts were due to the petitioner on account of the bond premiums.

The amount of $87,926.63 credited to John Griffiths was not withdrawn by the petitioner until after 1919.

Petitioner was at all times empowered to control cash disbursements of John Griffiths & Son Co. and could withdraw at any time any cash he might desire. During the year here involved the petitioner filed his income-tax return on a cash receipts and disbursements basis. He did not include in his return for the year 1919 the $87,926.63 placed to his credit upon the books of the corporation July 31, 1919, nor did he include any part thereof.

The tax return of the petitioner was prepared by the bookkeeper who made up the income from the check book of the petitioner upon which was entered all of his receipts and disbursements. The $87,926.63 was not entered in the check book in 1919, since it had not been actually received by the petitioner. The bookkeeper submitted the return to the petitioner's attorney, who in turn delivered it to the petitioner for signature. Petitioner did not personally check up the return, but relied on the bookkeeper and his attorney.

The return of the petitioner was false and fraudulent and made with the intent to evade the tax.

OPINION.

TRAMMELL: The first question is whether the petitioner is taxable in 1919 on all the bond premiums to which he was entitled, or whether a portion of the amount should be taxable in previous years.

George W. Griffiths testified that the matter of permitting the directors to sign bonds for the company and to receive the premiums ordinarily allowed surety companies for such services first arose in 1916 and that a meeting was called at which such an agreement was reached. He also testified that even in years prior to 1916 the directors probably signed such bonds. He testified as follows: "Now before 1916 did the members of this corporation sign surety bonds for the corporation?" A. "I imagine they did. I can not say. I really do not remember that. I imagine they did."

The contention is made that the contract was made in 1916 by which the directors were to receive these premiums for signing bonds and that, since Griffiths was in control of the corporation and could at any time have withdrawn any assets due him, the amounts were constructively received by him in the years when the bonds were signed.

The testimony in this case is so conflicting and repugnant to facts shown by the records of the corporation that we are not convinced by a preponderance of the evidence in the first place that the agreement was actually made in 1916 as alleged or that it was made at any time prior to 1919.

Aside from the testimony of Griffiths, we have the testimony of Ruettinger and Joyer. Griffiths does not specifically state that the agreement was made in 1916, but only that the question arose in that year and that a meeting of the directors was called. Whether it was called in 1916 the witness did not state. The fact that bonds were signed in 1916 is not convincing as to the date when it was agreed that the directors should receive premiums therefor. From the testimony it appears that even prior to 1916 these bonds had sometimes been signed in the same way. Ruettinger's testimony in a way corroborated Griffiths, but his testimony is in conflict with the facts established by documentary evidence submitted by the petitioner. Reuttinger testified that he signed bonds when the evidence showed that bonds were waived and no bonds were signed by any one. Reuttinger, according to documentary evidence, signed only three bonds, while he testified that he signed from six to ten. Joyer's testimony is so conflicting and uncertain that we can give little or no weight to it.

The amount of $87,926.63 on account of these bond premiums was credited to the petitioner's dividend account in 1919 and includes his pro rata share according to his stockholdings of premiums on bonds in connection with the contracts of the Chicago Union Station Co. - the Butler Building-Caissons, the Chicago Telephone Building, and the Morrison Hotel, when in none of those contracts were there any sureties on bonds. In the latter two contracts bonds were waived and none were given, yet book entries were made crediting to the accounts of the petitioner and other directors bond premiums for bonds as if bonds had been signed. In connection with the first two contracts above mentioned, credits were made to the petitioner for premiums when he signed no bonds.

While there was testimony to the effect that the entries crediting the bond premiums to dividend account were erroneous, there is some evidence which would warrant such action, but there is no contention here made that the amounts were dividends in so far as the petitioner is concerned. That question was not made an issue in the case and no testimony was directed to such question.

The respondent determined that the amounts of the bond premiums which were credited to the petitioner in 1919 were constructively received by him in that year, while the petitioner contends that a portion was constructively received in previous years.

There is a presumption that the determination of the Commissioner is correct until it is overcome by the preponderance of the testimony. There is uncontradicted testimony to the effect that the amounts were credited to the petitioner on the books of the corporation in 1919, that the amounts were not ascertained or determined until that year. The corporation claimed no deduction on account of such amounts until 1919 and we are not convinced that prior to 1919 there was any definite agreement with respect thereto. There is no evidence which convinces us that any memorandum or any record was made until that year of any agreement. Reuttinger held only one qualifying share of stock and was, if the contract had been made in 1916, entitled to share in the bond premiums signed by him to the extent of 18 per cent, in accordance with his interest in the profits according to his contract of employment, yet he received nothing nor were any amounts credited to him until 1919, in so far as these premiums were concerned. Joyer testified that in 1919 he was first given a memorandum with respect to the book entries to be made by him, while the following day he was recalled to the stand after a conference with counsel for the petitioner and changed his testimony. On the previous day he had repeatedly stated that this occurred in 1919, and when asked by the Board member if he was confused about the matter, stated that he was not.

Considering all the testimony, we are not convinced that the determination of the respondent was erroneous.

At the hearing the respondent asserted the fraud penalty for wilfully filing a false or fraudulent return. There was no contention on the part of the petitioner that the return should not in any event have included a portion of the bond premiums credited to the petitioner's account in 1919. The contention was that only a portion of the entire amount should have been included in previous returns, but the petitioner did not report any part of the amount in his returns for any of the years 1916, 1917, 1918, or 1919, nor was any disclosure of the facts made in any of the returns. Even if the petitioner's contentions had been sustained in every respect, still, according to the petitioner's own testimony, a considerable portion of income admittedly taxable was omitted from his return. According to the petitioner's own theory and contention as supported by one exhibit, the amount of $38,126.73 out of the total of $87,926.63 was properly taxable in 1919. According to the dates of contracts in another exhibit, an amount in excess of $50,000 was properly taxable to petitioner under his own theory in 1919. The explanation offered as to why no amount whatever of bond premiums was included in the return is the fact that the bookkeeper for the corporation made out the return and submitted it for approval to an attorney and that the petitioner merely signed it; that the petitioner filing his return on a cash receipts and disbursements basis and the amounts not having been received in cash, the return should not be held to be fraudulent on account of the omission of such amount. We have heretofore held that a taxpayer can not avoid his responsibility by having his return prepared by another. The taxpayer is responsible for his return under oath regardless of whether he personally makes it.

There is no testimony, however, to the effect that the petitioner did not consider the amounts taxable because they were not received in cash.

On the other hand, the theory of the petitioner's case is that the amounts were taxable before received in cash and it is not contended that he should have waited until he withdrew the cash before reporting them in his income. Under the evidence he clearly could have received the entire amount in cash in 1919 if he had desired. All that he had to do was to take it.

Considering all the evidence, it is our opinion that the petitioner's return for 1919 was wilfully false and fraudulent and made with the intent to evade the tax.

Reviewed by the Board.

Judgment will be entered under Rule 50.

MURDOCK

MURDOCK, dissenting: I dissent from that portion of the foregoing opinion which holds that the fraud penalty should be asserted, for the reason that I think the facts indicate no more than negligence.

SMITH, TRUSSELL, VAN FOSSAN, and SIEFKIN agree with this dissent.