Kilborn v. Commissioner ( 1957 )

Charles M. Kilborn and Angeline W. Kilborn, Petitioners, v. Commissioner of Internal Revenue, Respondent

Kilborn v. Commissioner

Docket No. 56499

United States Tax Court

29 T.C. 102; 1957 U.S. Tax Ct. LEXIS 56;

October 24, 1957, Filed

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Decision will be entered under Rule 50.

1. A partnership, of which petitioner was a member, sold and assigned to a bank conditional sales contracts, which it acquired in the course of its business of selling used cars. Part of the purchase price was credited to the partnership for its unrestricted use, while another part was placed in a special reserve account for the partnership over which the bank retained control as security for the performance by the partnership of its obligation under its contract with the bank, including the obligation to repurchase any conditional sales contracts which might thereafter be in default by two payments. The bank was empowered to charge against this special reserve account the unpaid amount of any such contracts which the partnership did not repurchase. Held, that the increments to the special reserve account constituted income to the partnership.

2. The amount of the expenses incurred in operating a boat and entertaining its passengers and the portion of the amount expended for liability insurance for the said boat which represented ordinary and necessary business expenses of the partnership determined.

3. Respondent's determination of an addition to tax for 1948 for negligence or intentional disregard of rules and regulations rejected.

4. Respondent's determination of additions to tax for failure to file declarations of estimated tax and for substantial underestimates of tax sustained.

Vincent F. Kilborn, Esq., for the petitioners.

Lester R. Uretz, Esq., for the respondent.

Turner, Judge.

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TURNER

The respondent determined deficiencies in income tax and additions to tax against the petitioners as follows:

		Additions to tax
Year	Deficiency
		Sec. 293(a)	Sec. 294(d)	Sec. 294(d)
			(1) (A)	(2)
1947	$ 737.79		$ 189.60	$ 113.75
1948	3,409.58	$ 170.43	370.20	222.12
1949	1,347.60		213.27	127.96

The questions for decision are (1) whether that part of the price at which a bank bought automobile notes from a partnership, of which petitioner Charles M. Kilborn was a member, which was credited to a "collateral security" reserve account standing in the name ¹ of the partnership on the bank's books, was to be accounted for in reporting partnership income; (2) whether certain expenses incurred in 1949 in connection with the ownership and use of a boat were ordinary and necessary expenses of the partnership; (3) whether any part of the deficiency, if any, for 1948 was due to negligence or intentional disregard of rules and regulations; (4) whether the failure of petitioner to make and file a declaration of estimated tax for the years herein was due to reasonable cause; and (5) whether there was a substantial underestimate of tax for the said years within the meaning of section 294 (d) (2) of the Internal Revenue Code of 1939.

FINDINGS OF FACT.

Some of the facts have been stipulated and are found as stipulated.

The petitioners are husband and wife, and reside in Mobile, Alabama. They filed their joint income tax returns for the taxable years 1947, 1948, and 1949 with the collector of internal revenue for the district of Alabama.

Charles M. Kilborn, hereafter referred to as petitioner, was, during the years in question, a partner in a retail used automobile merchandising business, known as the Y Auto Sales, hereafter referred to as the partnership. The partnership was formed on May 1, 1947, as a successor to a partnership known as the Little Car Company, which was dissolved on April 30, 1947. Petitioner was an equal partner with Sherman Barnes in both partnerships.

On July 1, 1947, the partnership became a party, together with Sherman Barnes, in his individual capacity, to an agreement with the First National Bank of Mobile, sometimes referred to as the bank, which constituted the basis of the financing arrangement between the partnership and the bank during the years herein. The agreement was in part as follows:

1. Dealer represents and warrants unto bank that he is and will remain, during the term hereof, the sole owner of Loop Auto Exchange and Motor Mart; and that he, together with Charles Kilborn, constitute and will continue to constitute, during the term hereof, the members of the firm of Y Auto Sales, a co-partnership. Dealer further represents and warrants that he has full and complete power and authority to bind said Y Auto Sales hereby and that, during the term hereof, he shall have full and complete power and authority to transact any and all business, of every kind and description, with said bank, on behalf of said Y Auto Sales.

2. Bank will finance, subject to the terms and conditions hereof, paper acquired by said Loop Auto Exchange, Motor Mart and Y Auto Sales in the retail sale of motor vehicles (hereinafter, for convenience, referred to as "automobiles" or "cars"). Such paper is to be recorded, is to be in such form and have such content as may be satisfactory to bank, and is to provide for the retention of title until payment of the balance of the purchase price or for a lien securing the payment of such balance. The aggregate amount of such paper to be financed hereunder shall be such amount as from time to time may be agreed upon between bank and dealer.

3. Dealer represents and warrants that all sales made by any such business shall be made in conformity with all governmental regulations and laws, including regulations and laws as to price, terms of payment, etc.

4. There shall be charged the buyers of such automobiles, for financing deferred payments under this agreement, not more than the amount which would be charged under Chart No. 6540 of Universal C. I. T. Plan, copy of which chart is attached hereto and made a part hereof.

5. Dealer will cause the buyer's total indebtedness on each such sale to be payable in equal monthly installments, and the paper evidencing each such sale shall be discounted by bank at the rate of one-half (1/2) of one percent (1%) per month; that is to say, if there are six (6) monthly payments, the paper will be discounted at three percent (3%) flat, and if there are twelve (12) monthly payments, the paper will be discounted at six percent (6%) flat. Such discount shall be computed on the unpaid balance of the price for which the vehicle was sold (without inclusion of any financing charges or other charges imposed on buyer) plus the gross premiums on the insurance which the bank is to take out as herein provided (which premiums shall not necessarily be the cost to bank of such insurance), plus any other amounts actually paid or incurred by the bank in or because of handling such paper. Bank will take title to such paper, in its name, or at its option, in a nominee's name.

6. Purchase of any such paper by the bank shall be effected as follows: From the amount due by the buyer on the contract or mortgage, the bank shall deduct its discount, the amount necessary to record the paper, and the gross premiums on the insurance which bank is to take out as hereinafter provided (which premiums shall not necessarily be the cost to bank of such insurance); the balance remaining, not to exceed the unpaid balance of the price for which the car was sold (without inclusion of any financing charges or other charges imposed on buyer) or the N. A. D. A. average loan value, whichever is lower, shall then be paid or credited by bank to an account standing in the name of the particular business which acquired such paper from the buyer. Any balance then remaining shall be credited to a special account standing in the name of dealer, and such balance so credited thereto and said special account shall be deemed forthwith pledged by dealer to the bank, as collateral security, for the payment by dealer of such sums as he may then or thereafter owe, from time to time, hereunder, and shall remain so pledged so long as any paper is being financed hereunder.

6 [sic]. Bank shall insure the car covered by paper which it purchases against such hazards as it deems advisable, provided that collison coverage shall not be obtained where the unpaid balance of the purchase price at the time of the sale is One Hundred and Fifty Dollars ($ 150.00) or less, unless dealer expressly agrees to such collision coverage.

7. Bank shall, at its expense, make reasonable efforts to collect, by notices, letters, and field services, the amounts becoming due on the paper purchased by it hereunder; but bank shall not be required to file any suit on any such paper or to repossess any automobile covered by any such paper. Any and all repossessions shall be made by dealer, for dealer's account, and dealer agrees to indemnify bank and hold it harmless and free from any loss or liability arising out of any repossession or attempt to repossess.

8. Should two (2) payments become delinquent at any one time on any one contract or note financed hereunder, dealer shall forthwith repurchase such paper from bank for a sum equal to the total amount then payable by buyer thereon, minus a credit for "unearned discount", computed as hereinafter provided. To effect such repurchase by dealer, there shall be credited against the repurchase price any unexpended sum which may have been credited, and remains credited, to said special account by virtue of the particular paper which has become delinquent, and said special account shall be charged with the sum so credited. There shall also be credited against such repurchase price the "unearned discount", which shall be computed by deducting from the sum at which such paper was originally discounted by the bank a sum ascertained by treating the transaction as though dealer's repurchase was being effected on the next following quarter-annual date (running from the date of the bank's original purchase); provided that such "unearned discount" shall not be credited against such repurchase price if, by giving such credit, the bank's earned discount would be less than Ten Dollars ($ 10.00); and further provided that if, in any case, the computation of such "unearned discount" would leave the bank with an earned discount of less than Ten Dollars ($ 10.00), the difference between such earned discount and the sum of Ten Dollars ($ 10.00) shall be added to the amount the dealer is required to pay in order to repurchase such paper. Dealer shall immediately pay to bank, on demand, the sums required to be paid hereunder in order to repurchase such paper, and bank shall then endorse such paper, without recourse, to the dealer or his nominee.

9. Should dealer refuse or fail to repurchase any paper in accordance herewith, bank may, at its option, (a) proceed to enforce any and all rights given bank, as the holder of such paper, under the terms of such paper, against buyer. dealer and/or the seller named in such paper, and/or (b) proceed forthwith, without notice to dealer or any other person, to charge against said special account (and against any particular transaction or transactions which has or have resulted in said special account being credited) all sums which dealer is obligated to pay hereunder on such delinquent paper, and/or (c) proceed forthwith, without notice to dealer or any other person, to charge against any other account which dealer may have in the bank all sums which dealer is obligated to pay hereunder on said delinquent paper.

10. If dealer becomes the owner of, or a partner in, any business other than Loop Auto Exchange, Motor Mart, and Y Auto Sales, and if such other business is engaged in selling automobiles, and if dealer desires bank to finance hereunder the paper acquired by such other business, then dealer shall notify bank to such effect. With respect to said three (3) named businesses and with respect to any such other business named in a notice from dealer to bank, dealer expressly agrees as follows:

Bank is authorized and directed by dealer to handle in accordance with this instrument all paper delivered to bank which purports to have been executed in the name of any such business or in the name of dealer, and dealer represents and warrants that the person or persons executing such paper on behalf of any such business or on behalf of dealer has or have, and shall have, authority to do so. Dealer agrees that he and said business shall be deemed an assignor, with recourse, and guarantor of all such paper as fully and completely and with the same effect as though he had personally executed the "Dealer's Representation and Assignment" on the papers transferred to bank in his own name and in the name of said business, a copy of such "Dealer's Representation and Assignment" being attached hereto and made a part hereof. Dealer expressly authorizes H. S. Aldridge, Danner Fraser, and Wythe L. Whiting, or any one of them to execute on any such paper said "Dealer's Representation and Assignment" in his name and in the name of said business. All businesses selling automobiles, the paper on which is to be purchased by the bank hereunder, shall be bound by the terms and provisions hereof, and dealer expressly represents and guarantees unto bank that he is and shall remain fully authorized to so bind such businesses hereto, and that he is and shall remain fully authorized, on their behalf, to modify, amend, or cancel this instrument for and on behalf of such businesses and to take any and all action which he may at any time attempt to take in connection with the financing of such paper.

11. Dealer agrees to pay all costs, expenses and attorneys' fees which may be incurred by bank at any time in enforcing or attempting to enforce this agreement.

* * * *

14. This contract may be cancelled by either party on notice in writing to the other, but in the event of cancellation, all of the terms hereof shall continue to apply to such paper as the bank then holds and to such merchandise as is then being handled under a Floor Plan arrangement, and the special account hereinabove referred to shall be retained by bank, in accordance with the pledges thereof herein provided for, until all such paper has been paid out or handled in accordance herewith and all Floor Plan arrangements have been concluded; provided, however, that dealer may repurchase all paper then held by the bank hereunder, in accordance with the provisions hereof relating to the repurchase by dealer of paper which has become delinquent, and dealer may also consummate all Floor Plan arrangements, and if dealer does both, this contract shall be deemed terminated.

The "Dealer's Representation and Assignment" incorporated in the above agreement by the reference made in paragraph 8 thereof, was as follows:

The contract on the reverse side hereof having been accepted by Dealer, we hereby represent and warrant to The First National Bank of Mobile, in order to induce its purchase of said contract, that the same is genuine; the cash payment and/or the trade-in allowance was received; the Buyer is competent and more than twenty-one (21) years old; we had good title to the car, free from all liens and encumbrances, at the time of the execution of said contract; all laws and regulations applicable to the transaction have been complied with; all statements of fact in said contract are true; and "Buyer's Statement" is true to the best of our knowledge, information and belief. For value received, we hereby sell and assign said contract, together with all rights and privileges thereunder, and all interest in the car to The First National Bank of Mobile, its successors and assigns, with full power to the bank in its or our name to take such legal or other proceedings as we might take, except for this assignment. This assignment is made with     recourse on us, and we, jointly and severally, guarantee payment of principal, and interest after maturity at the highest legal contract rate, collecting expense, costs and attorney's fees and all other sums due under said contract, as and when the same shall become due, accepting all the provisions of said contract, and authorizing said bank, without notice to us, to grant Buyer extensions of time and to compound or release any rights against Buyer or any other obligor, and waiving all demands and notices of default and all other things necessary to hold us; also waiving all rights of exemption and agreeing that in the event of non-payment at maturity of any installment due under said contract, suit may be brought by said bank against any one or more or all of us, at the option of said bank, whether or not any suit has been commenced against the Buyer.

The price at which the bank would purchase automobile sales paper from the partnership was arrived at pursuant to paragraphs 5 and 6 of the above agreement. Of that price, it would then pay or credit to the partnership an amount not to exceed the unpaid balance of the price for which the car was sold, without inclusion of any financing charges or other charges imposed on the buyer, or the National Automobile Dealers Association's average loan value, whichever was lower. Any balance remaining of the purchase price of the paper, the bank would credit to a special reserve account standing in the name of the partnership, which, according to the agreement, was pledged by the partnership to the bank as collateral security for the payment by it of any sums it might then or thereafter owe, from time to time, under the agreement. See the above paragraphs 8, 9, 10, and 11 of the said agreement. The amounts so credited to such special reserve account standing in the name of the partnership as of December 31, 1947, 1948, and 1949, were $ 3,837.29, $ 18,657.17, and $ 20,348.60.

No amounts were charged by the bank against the special reserve account during the years herein for conditional sales contracts in default which were not repurchased by the partnership. ²

On December 31, 1949, the bank paid $ 5,000 to the partnership from the special reserve account. This $ 5,000 was reported as income on the 1949 partnership return of income. This was the first and only time during the years in question that the bank released funds from the special reserve account to the partnership.

The partnership, at its place of business, kept a cashbook for recording all receipts. Its expenditures, other than petty cash expenditures, were recorded on stubs in its checkbook. Expenditures from the petty cash fund were evidenced by petty cash vouchers. A car record sheet was maintained for each car purchased, on which the costs relating to such vehicles were recorded. These records would be taken periodically by an accountant who kept a set of books, of an undisclosed nature, for the partnership. Partnership sales in the amount of $ 2,900 for the months of May, June, and July, 1948, were not recorded in the books so kept by the accountant and were omitted from the partnership's 1948 return. The partnership reported sales of $ 234,796.29 on its return for the said year.

Neither the partnership nor the petitioner reported as income, during the taxable years, any part of the amounts credited to the special reserve account for the partnership. The partnership returns show no deductions for bad debts, or as losses by repurchase of any automobile purchase contract. Although each partnership return stated it was made on the cash basis, the returns themselves disclosed that income had been determined and reported by use of inventories.

The respondent determined that the annual increments to the special reserve account in 1947, 1948, and 1949 in the respective amounts of $ 3,837.29, $ 14,819.88, and $ 1,691.43, which were attributable to partnership sales, were income to the partnership in those years.

The partnership owned and maintained a 42-foot cabin cruiser which was used partly for business purposes and partly for personal recreation. The partnership in 1949 deducted as ordinary and necessary business expenses $ 755.65 expended in the operation of the boat and the entertainment of its passengers and $ 236.25 expended for liability insurance on the boat. The petitioner's use of the boat was partly for personal purposes and partly for business purposes and the expenses of operation were in part paid by him personally and in part by the partnership. Barnes also used the boat at times, but not as often as petitioner. Payments by the partnership were made from the petty cash fund and charged to the partnership, which deducted them as business expenses. In the operation of its business in 1949, the partnership incurred as much as $ 250 in the operation of the boat and entertainment of its passengers, and $ 60 for liability insurance on the boat.

The amounts reported by the petitioners in their joint returns as gross income and gross income from sources other than wages, for the years 1947, 1948, and 1949, were as follows:

		Gross income
Year	Gross income	from sources
		other than
		wages
1947	$ 7,078.53	$ 6,659.99
1948	5,200.39	2,707.59
1949	8,286.40	5,503.30

No part of the deficiency for 1948 is due to negligence or intentional disregard of rules and regulations.

The petitioners failed to file declarations of estimated tax for 1947, 1948, and 1949. Their failure to file such declarations was not due to reasonable cause.

OPINION.

The petitioner, during the taxable years 1947, 1948, and 1949, was a member of a partnership engaged in the sale of used automobiles. This partnership entered into an agreement with the First National Bank of Mobile, wherein the latter agreed to purchase paper acquired by the partnership in the retail sale of used cars on an installment basis. Such paper was required to be satisfactory to the bank in form and content and to provide for the retention of title until full payment thereunder was made, or for a lien to secure such payment. The total indebtedness was to be payable in equal monthly installments. The bank purchased the paper from the partnership at the face amount thereof, less the bank's discount, the amount required for recording the paper, and the gross premiums on the insurance the bank was to take out, but which would not necessarily be the cost of the insurance to the bank. Of this purchase price, an amount equal to the unpaid balance of the price for which the car was sold, without inclusion of any financing or other charges imposed on the buyer, or the National Automobile Dealers Association's average loan value, whichever was lower, was credited to the partnership for its unrestricted use, and any balance of the purchase price was credited to a special reserve account for the partnership as collateral security for the performance by the partnership of its obligations under the contract, among others, the obligation to repurchase delinquent paper. In the event of a failure by the partnership to repurchase such paper, the bank was entitled to enforce its rights under the paper against the delinquent debtor or the partnership, or to charge the special reserve account, or any other account maintained by the partnership at the bank, with the amount due under the agreement.

During 1947, 1948, and 1949 the bank made credits of $ 3,837.29, $ 14,819.88, and $ 1,691.43, respectively, to the special reserve account pursuant to the above contract purchase arrangement, and in none of the years were any charges made against the account. The record does not show whether or how the said amounts were accounted for on the partnership books, but we do know that they were not taken into account in computing the income reported on the partnership returns. The respondent, in making his determinations herein, has increased income for each of the years by the amount of the credits during the year, and the question is whether he erred in so doing.

In support of his claim of error, the petitioner contends, first, that the partnership was on a cash basis of accounting and reporting income and that the amounts in question, credited as they were to the special reserve account, could not represent income to a cash basis taxpayer; and, second, that due to contingencies and uncertainties, they did not constitute income for the said years on an accrual method of accounting.

It is our opinion that the claim is not tenable on either ground. The evidence shows that partnership income was computed and reported by the use of inventories. By section 29.41-2 of Regulations 111, a regulation of long standing, it is provided that where inventories are used by a taxpayer in computing its income, no method other than accrual will properly reflect income. Diamond A Cattle Co. v. Commissioner, 233 F.2d 739">233 F. 2d 739, reversing on another point 21 T. C. 1; Caldwell v. Commissioner, 202 F. 2d 112; Herberger v. Commissioner, 195 F. 2d 293; and Harry Hartley, 23 T. C. 353. For a contrary view, the petitioner cites and relies on Glenn v. Kentucky Color & Chemical Co., 168 F. 2d 975. In respect of that argument, see Diamond A Cattle Co.v. Commissioner, supra at 471. It is thus apparent that the respondent was justified in making his determination on the accrual basis, and it is accordingly unnecessary to consider and decide whether the amounts credited to a collateral reserve account, in circumstances such as we have here, would or would not constitute realized income to a cash basis taxpayer. See, however, Luther Bonham, 33 B. T. A. 1100, affd. 89 F.2d 725">89 F. 2d 725.

Beginning with Shoemaker-Nash, Inc., 41 B. T. A. 417, decided February 16, 1940, this Court has consistently held in cases where the facts in material and controlling respects were substantially the same as those in the instant case that amounts credited to such dealer's reserve accounts were income to the dealer as credited. Blaine Johnson, 25 T. C. 123; Albert M. Brodsky, 216">27 T. C. 216; Texas Trailercoach, Inc., 27 T. C. 575; and West Pontiac, Inc., 27 T. C. 749. It is true that Blaine Johnson, supra, was reversed by the Court of Appeals for the Fourth Circuit, in Johnson v. Commissioner, 233 F. 2d 952. We have carefully examined and considered the reversal in that case and the basis therefor as stated in the court's opinion, and feeling that our original position was sound and should therefore be adhered to, we have followed the rule laid down in Shoemaker-Nash, Inc., in each of the cases decided since the said reversal of the Blaine Johnson case, and with full and due respect to the Court of Appeals in the Johnson case, we do so here. See Arthur L. Lawrence, 27 T.C. 713">27 T. C. 713.

In the alternative, the petitioner has alleged, and now contends, that even on an accrual basis the partnership would be entitled to a corresponding reserve for the repurchase or repossession of contracts, which would offset the accruals to the special reserve collateral security account maintained by the bank. Under the statute, losses are deductible in the year sustained and bad debts are deductible in the year the debts become worthless, whether a taxpayer is on a cash basis or an accrual method of accounting. There are situations, however, where, under sound accounting practices, the setting up and maintaining of reserves to cover anticipated losses are permitted; and where such reserves are set up and maintained, the deduction allowable is in the amount of the addition to the reserve which at the end of an accounting period is reasonably required to bring the reserve to the proper level to absorb the losses which on experience and facts existing at the time may, within reason, be expected to occur during the next accounting period. Insofar as appears from the partnership returns themselves and other evidence of record, the partnership during the years herein sustained no losses by reason of the repurchase or repossession of automobile purchase contracts. And assuming that the establishment and maintenance of a reserve would, under sound accounting practices, be permissible for the purposes stated, the record is wholly devoid of any facts which would support any additions to such a reserve for any of the years herein.

During 1949 the partnership maintained a 42-foot cabin cruiser, which was used partly for business purposes and partly for personal recreation. The partnership claimed as business expenses $ 755.65 expended in the operation of the boat and in the entertainment of its passengers, and $ 236.25 in the purchase of liability insurance on the boat. An expense of this nature, where reasonably related to the operation of the business, may be deducted as an ordinary and necessary expense. The extent to which the expenses in the instant case were related to the operation of the business is, in the main, supported only by the petitioner's stated conclusions that the expenses claimed were of a business rather than a personal nature. Except for generalities, the criteria upon which the petitioner's basis for determining whether they were business or personal expenses were not disclosed in his testimony. The record further shows that the boat was used not only by petitioner, but by the other partner, Sherman Barnes, and while it was petitioner's testimony that Barnes did not use the boat often, and would usually run it aground when he did use it, there is no evidence to show whether Barnes was using the boat for purposes of the partnership business, or for personal reasons. Neither is there any evidence to show whether a part, all, or none of Barnes's expenses were included in the deduction claimed. The evidence similarly fails to reveal whether the amount claimed for liability insurance was the full amount expended therefor, or only a portion thereof. We are convinced that some of the expenses were sufficiently related to the business to constitute business expenses. But since the evidence is indefinite as to the amount which did properly represent such expenses, we are forced to rely on the rule enunciated in Cohan v. Commissioner, 39 F. 2d 540, and determine as best we can, on the record before us, the amount thereof. Considering the evidence of record and applying the rule laid down in the Cohan case, we are unable to find that more than $ 250 of the amounts expended for the operation of the boat and the entertainment of its passengers and $ 60 of the amount expended for liability insurance represented partnership business expense. The deductions are accordingly limited to those amounts.

As a part of his determination, the respondent determined that a part of the deficiency for the taxable year 1948 was due to negligence or intentional disregard of rules and regulations, and determined an addition to tax therefor under section 293 (a) of the Code. While the determination of the said addition to tax is, by the pleadings, made an issue herein, we are still not advised with any certainty as to what the negligence or disregard of regulations on which the respondent based his determination consisted of. The respondent's counsel, in his opening statement, made no mention of the matter whatever and at no place in the record did he give any indication of or state any basis therefor. Similarly, his briefs offer no discussion and contain only the general stated conclusion of the determination.

Counsel for the petitioner apparently has proceeded with his presentation of evidence and with his discussion on brief on the theory that the negligence charged under the said section was the omission from the partnership books of $ 2,900 of the automobile sales made during the months of April, May, and June, 1948. The total sales for 1948 were shown to have been $ 234,796.29, or an average of $ 19,566.34 per month. The omission from sales for the 3 months was an average of $ 966.66 2/3. It was shown that the established practice at the partnership's place of business was to maintain a separate record card for each automobile purchased and sold and that these cards were periodically taken by an accountant to his office, where he maintained a regular set of books for the business, and while the evidence presented with respect to the qualifications of the accountant and in justification of reliance on him consisted to a substantial degree of generalities and responses to leading questions, we are persuaded, on the record as a whole, that the omission of slightly less than $ 1,000 for each of the months April, May, and June, 1948, from average sales of almost $ 20,000 does not alone supply a proper basis for the addition to tax determined, particularly in light of complete failure on the part of the respondent and his counsel to make any representations in rebuttal of petitioner's evidence and argument as to just what the acts of negligence supplying the basis for the respondent's determination were. As to the addition to tax for negligence for the year 1948, the petitioner is sustained.

Admitting that he never filed a declaration of estimated tax for any of the years herein, it is petitioner's contention that such failure to file was due to reasonable cause, and not to willful neglect, and that the respondent accordingly erred in his determination of additions to tax under section 294 (d)(1)(A). In establishing reasonable cause, the petitioner's argument, in substance, is that he relied on one Crowley, the accountant, "who kept the books and prepared the returns"; that on the basis of the information at the time, he was justified in believing that Crowley was competent; that if Crowley said to make declarations of estimated tax, he made them, but if Crowley did not say to make them, the declarations were not made, although he personally did not have any recollection as to whether declarations of estimated tax were or were not made. We are satisfied from the overall record that the petitioner, in his generalized answers, was prompted by his current feeling of resistance to the respondent's determination, and not to any understanding with or dependency on Crowley or anyone else with respect to the filing of declarations of estimated tax. While there is some indication of record that Crowley did keep a regular set of books of some undisclosed character for the partnership, and may have prepared returns, the record as to petitioner's books and returns fails to bear out the general assertions and stated conclusions by petitioner in his own testimony. And in passing, it might be noted that none of the partnership returns shows the signature of Crowley as the preparer thereof. The return of the petitioners for 1947 indicates from a signature thereon that it was prepared by John C. Hanson, not Crowley, although at one point in his testimony the petitioner testified that Hanson was employed after Crowley was dismissed, which was after 1949. From the petitioners' 1948 return, there is nothing to indicate that it was prepared by anyone other than petitioners themselves. The 1949 return does show that it was prepared by Crowley. We are satisfied, from listening to and observing the petitioner and from an examination of the transcript of his testimony, that the failure to file declarations of estimated tax was the result either of ignorance of the law or indifference, or both, and whether or not he did in fact depend upon Hanson, Crowley, or someone else to make the joint income tax returns which were filed, the failure to file declarations of estimated tax has not been shown to have been due to reasonable cause. The respondent's determination of additions to tax therefor is sustained.

The respondent likewise determined additions to tax, under section 294(d)(2), for the said years, for substantial underestimation of tax. Failure to file a declaration of estimated tax has been held to be equivalent to an estimate of zero, for the purposes of that provision of the statute. The respondent's determination of additions to tax for substantial underestimates of tax is also sustained. Harry Hartley, supra;G. E. Fuller, 20 T.C. 308">20 T. C. 308.

Decision will be entered under Rule 50.

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Footnotes

• 1. It is possible that the account on the bank's books was in the name of Sherman Barnes, one of the partners.↩

• 2. If any of the contracts sold to the bank were in default during the years herein, that fact is not shown of record. Similarly, the record is silent as to the repurchase of contracts, if any, from the bank during the said years.↩