Howell v. Commissioner

Myrna S. Howell, Petitioner, v. Commissioner of Internal Revenue, Respondent

Howell v. Commissioner

Docket No. 12147

United States Tax Court

10 T.C. 859; 1948 U.S. Tax Ct. LEXIS 190;

May 17, 1948, Promulgated

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">*190 Decision will be entered for the respondent.

1. Held, returns in question were joint returns of husband and wife.

2. Where joint returns are filed by husband and wife the liability for taxes and penalty is both joint and several.

M. Alfred Roemisch, Esq., for the petitioner.

Howard M. Kohn, Esq., for the respondent.

Van Fossan, Judge.

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VAN FOSSAN

">*859 The Commissioner determined deficiencies in income">*191 tax for the years 1940, 1941, and 1942, and asserted penalties for filing false and fraudulent returns, against "Dr. Charles J. Howell and Mrs. Myrna S. Howell, husband and wife," as follows:

Year	Deficiency	50% penalty
1940	$ 3,529.19	$ 1,764.60
1941	4,694.64	2,368.57
1942	8,228.44	4,114.22

The proceeding was filed in the name of Myrna S. Howell only.

Petitioner alleged that the Commissioner erred in determining (1) that she was liable for any income tax for the years 1940, 1941, and 1942, and (2) that she was liable for any penalties under section 293 (b) of the Internal Revenue Code. It is alleged, in the alternative, that section 51 (b) of the code is unconstitutional, and that if such section is constitutional the assessment and collection of any deficiency as to petitioner for the taxable years are barred.

FINDINGS OF FACT.

Petitioner and Charles J. Howell were married on August 10, 1939, and lived together as wife and husband continuously from that date to and including the taxable years here involved.

Howell had been married previously and was divorced from his first wife on April 11, 1939.

Since 1917 Howell has been a doctor of dental surgery and for many">*192 years, including the taxable years, maintained his offices in the Keith Building, Cleveland, Ohio. The petitioner worked as a receptionist for Howell and three other doctors who occupied the same offices, from August 1928 to March 1936. She left the employ of Howell in 1936. During that period she was married to one Bailey. After her marriage to Howell, petitioner was not gainfully employed until 1943, when she was employed as a clerk by the O. P. A. Ration Board at an annual salary of $ 1,880.

">*860 Income tax returns for the years 1940, 1941, and 1942 were filed in due time with the collector of internal revenue for the eighteenth district of Ohio. The caption on page 1 of the 1940 return, so far as pertinent, reads as follows:

PRINT NAME AND ADDRESS PLAINLY. (See Instruction C)

Dr. Charles J. Howell -- Myrna S. Howell

(Name) (Use given names of both husband and wife, if this is a joint return)

The captions of the 1941 and 1942 returns are the same except that the word "and" was used in place of the two dashes, as follows: "Dr. Charles J. Howell and Myrna S. Howell."

To the question on the 1940 return: "Are items of income or deductions of both husband and">*193 wife included in this return?," the answer given is "Yes." The 1940 return was verified by petitioner's husband alone and signed by petitioner and her husband, as follows:

(Signature) (See Instruction E)

[Signed] Charles J. Howell

[Signed] Myrna S. Howell (Signature)

(If this is a joint return (not made by agent), it must be signed by both husband and wife. It must be sworn to before a proper officer by the spouse preparing the return. If neither or both prepare the return it must be sworn to by both spouses).

The 1941 return was signed and verified by petitioner's husband only.

The 1942 return was signed by petitioner and her husband, as follows:

[Signed] Charles J. Howell

(Signature of taxpayer)

[Signed] Myrna S. Howell

(If this is a joint return (not made by agent), it must be signed by both husband and wife) A return made by an agent must be accompanied by a power of attorney. (See Instruction F)

The petitioner took no part in the preparation of the returns for the taxable years. At the request of her husband she signed blank return forms for 1940 and 1942. The returns were prepared in the office of her husband and she did not see the completed returns">*194 prior to the mailing thereof to the collector's office.

The items of income and deductions reported on such returns are as follows: ">*861

	1940	1941	1942
INCOME
Dividends		$ 275.00	$ 180.00
Net long term loss from sale of capital
assets	($ 2,285.02)	(400.00)
Net long term loss from sale of other than
capital assets		(587.50)
Net profit from business or profession	10,428.98	10,095.50	8,157.05
Total	8,143.96	9,383.00	8,337.05
DEDUCTIONS
Contributions	350.00	350.00	300.00
Interest	112.92	771.65
Taxes		411.53	483.71
Other deductions (alimony)		255.98	2,100.00
Total	462.92	1,789.16	2,883.71
Net income	7,681.04	7,593.84	5,453.34

In the 1940 return the following short term capital losses were reported:

	Gain	Loss
Goodbody & Co. (commodities)	$ 2,143.75	$ 6,599.25
Goodbody & Co. (commodities)	1,973.50	29,532.50
Fuller Rodney & Co. (commodities)	970.35	2,934.15
Mrs. Myrna Howell (Goodbody & Co., commodity accounts)	1,750.00	3,886.75
	4,693.85	42,952.65
		4,693.85
Net loss on commodity transactions		36,115.05
Loss on sale of 100 shares Wheeling Steel		802.55
Loss on sale of 100 shares S. P. Sugar		239.06
Total short term capital losses		37,156.66

">*195 In schedule H of the 1940 return there were shown "Real Estate Taxes" in the amount of $ 263.78, but they were not deducted in computing net income.

In the 1941 return the interest deduction of $ 711.65 was shown in schedule C of the return to consist of "Mtg and Bank Loans" interest of $ 688 and "Wifes interest" of $ 83.65. Under the short term capital losses there were reported a loss of $ 369.77 on the sale on November 17, 1941, of 50 shares of Republic Steel acquired November 13, 1940, at a cost of $ 1,202.50 and a loss on commodity trading of $ 479, or a total short term capital loss of $ 848.77. There was also reported a long term capital loss of $ 800 on the sale on April 4, 1941, of land acquired July 6, 1934, and also an ordinary loss of $ 587.50 on the sale of a building acquired July 6, 1934. Such land and building were the so-called Painesville property hereinafter referred to. The deduction for taxes included real estate taxes of $ 311.53.

In the 1942 return the deduction for taxes included real estate taxes in the amount of $ 368.31.

">*862 Except as to the professional income and deductions of petitioner's husband in each return, the commodity transactions in">*196 the name of petitioner reported in the 1940 return, and the interest paid item in the 1941 return, the returns do not specify any particular item of income or deduction as attributable to either petitioner or her husband.

No separate returns for the taxable years were filed by petitioner. Separate returns were filed by petitioner for 1939 and 1943. In the separate 1943 return, in addition to salary of $ 1,880, dividend income of $ 50 was reported.

On or about March 1, 1946, Charles J. Howell was indicted on five counts for filing false and fraudulent income tax returns for the years 1939 to 1943, inclusive. Upon arraignment, Howell pleaded guilty and on April 23, 1946, was sentenced to imprisonment for a period of fifteen months and assessed costs in the amount of $ 27. The returns for 1940, 1941, and 1942 involved in the criminal proceedings against Howell are the same returns involved herein.

The notice of deficiency herein is addressed to "Dr. Charles J. Howell and Mrs. Myrna S. Howell, Husband and Wife, 1436 Keith Building, Cleveland, Ohio." The Commissioner determined that the taxable net income of the parties for 1940, 1941, and 1942 was $ 25,920.99, $ 22,785.88, and $ 25,528.36, ">*197 respectively.

Prior to and during the taxable years, Howell dealt in commodities and securities on margin.

Commodity accounts, both regulated and unregulated, and security accounts were opened by him in the name of Mrs. Myrna Howell, as follows:

Date	Broker	Account
Oct. 25, 1939	Goodbody & Co	Regulated Commodity
May 10, 1940	Goodbody & Co	Unregulated
		Commodity.
Sept. 30, 1941	Jackson & Curtis	Regulated
		Commodity.
May 31, 1941	Jackson & Curtis	Unregulated
		Commodity.
Nov. 4, 1940	Loeb, Rhoades & Co., New York, through	Securities.
	Prescott & Co., of Cleveland, Ohio.
Oct. 27, 1942	Paine, Webber, Jackson & Curtis	Securities.

The moneys deposited in such accounts were paid by petitioner's husband out of his own funds.

The commodity accounts reflect numerous transactions, some resulting in profits and others in losses. The annual net profit or net loss in each commodity account and the net profit or net loss reflected in all such accounts for each year are as follows: ">*863

	Net gain	Net loss	Net gain or
			net (loss)
1940
Goodbody & Co., regulated account		$ 556.25
Goodbody & Co., unregulated account		443.00
Jackson & Curtis, regulated account	$ 325.00
Total	325.00	999.25	($ 674.25)
1941
Goodbody & Co., regulated account	282.75
Goodbody & Co., unregulated account	53.00
Jackson & Curtis, regulated account		220.00
Jackson & Curtis, unregulated account		184.00
	335.75	404.00	(68.25)
1942
Jackson & Curtis, regulated account		741.25	(741.25)

">*198 The security account with Carl M. Loeb, Rhoades & Co. was opened with a deposit of a check of $ 1,000 on November 4, 1940. The account shows purchases of stock as follows: Nov. 7, 1940, 100 shares Republic Steel, cost $ 2,202.50; Nov. 12, 1940, 50 shares Republic Steel, cost $ 1,204.25. The 50 shares were sold on November 17, 1941, at $ 832.73. A short term loss of $ 369.77 resulting from such sale was reported in the 1941 income tax return. The account shows additional deposits of checks of $ 240 and $ 300 on November 16, 1940, and February 19, 1941. On March 31, 1942, the balance due in the account of $ 1,106.96 was paid and the remaining 100 shares of Republic Steel were delivered to petitioner. Dividends on the Republic Steel shares were credited to the account as follows:

Dec. 27, 1940	$ 60
Apr. 2, 1941	75
July 2, 1941	75
Oct. 2, 1941	75
Dec. 22, 1941	50
Total for 1941	275
Apr. 2, 1942	50

Checks of Prescott & Co., payable to the order of petitioner, covering each of the dividend credits, except the dividend of $ 50 credited December 22, 1941, were mailed to petitioner at her home address. The $ 50 dividend credited December 22, 1941, was credited against">*199 the balance due on the account.

The $ 60 dividend received in 1940 was inadvertently omitted from the 1940 return. The dividends for 1941 aggregating $ 275 were reported as dividend income in the 1941 return. The $ 50 dividend received ">*864 in 1942 was included in the dividend income reported in the 1942 return.

Interest was charged in the above account as follows:

1940	$ 13.72
1941	95.43
1942	13.55

The security account with Paine, Webber, Jackson & Curtis was opened with a deposit of a check of $ 1,500. On the same date a purchase of 100 shares of Ohio Oil Co. stock at $ 1,001.50 was recorded. On December 15, 1942, a dividend of $ 25 on such shares was credited to the account. Such dividend was paid on December 21, 1942, by the brokers' check in the amount of $ 25 payable to Myrna Howell. On December 29, 1942, 100 shares of stock of Eagle Picher Lead Co. were purchased at $ 724.50.

In the same account a purchase on January 8, 1943, of 100 shares of stock of Youngstown Steel Door was made at $ 939. On January 21, 1943, 100 shares of stock of White Motors were purchased and charged to the account at $ 1,466.13. In February 1943 the 100 shares each of Youngstown">*200 Steel Door, White Motors, and Eagle Picher Lead were sold at $ 1,026.84, $ 783.48, and $ 1,730.03, respectively, and the amounts credited to the account. On February 18, 1943, the account was charged with $ 2,120.16, the description of the entry being "To Dr. Chas J Howell A/C." Interest charges totaling $ 2.89 were made in the account, leaving a credit balance in the account as of February 28, 1943, of 5 cents. The account also shows a purchase on June 22, 1943, of 100 shares of stock of Edw. G. Budd Mfg. Co. at $ 838.30, which were paid for in full by check on June 26 and delivered. On the same date a transfer tax of $ 2 was charged to the account. On July 24 of the same year 100 shares of the same stock were sold at $ 1,039.01 and on July 27, 1943, a check of $ 1,037.01 covering the credit balance was charged to the account. This check was made payable to Myrna Howell and was endorsed by her.

On May 17, 1934, the petitioner, then Myrna S. Bailey, acquired title from her mother, Alice J. Sherburn, to real estate located in Mentor Township, Lake County, Ohio, referred to as the Painesville property, subject to a mortgage of $ 5,900. On or about February 20, 1939, by agreement">*201 with Howell and on payment by him of certain expenses, foreclosure proceedings against the property were dismissed by the mortgagee. In all, Howell expended approximately $ 1,500 in connection with the property. Upon the insistence of Howell the property was sold. The property was conveyed by petitioner and her husband to the purchaser on March 22, 1941, subject to a mortgage of $ 5,090. The sale of the property at a price of $ 5,840 was reported in the 1941 return. In computing the reported loss an estimated value of $ 8,300 was used as cost basis, less depreciation of $ 1,072.50 on the building.

">*865 Since March 1941 petitioner and her husband have resided in their home on Berkshire Road, Gates Mills, Ohio. The purchase price of the property was $ 15,500, which was paid by the assumption of a mortgage of $ 10,500, Howell's check for $ 3,000, and his note for $ 2,000. Title to the property was taken in the name of petitioner, pursuant to the understanding of petitioner and her husband that the property was a gift from him to her.

During the taxable years no title to real estate was held in the name of Howell.

The petitioner had little knowledge of, or experience in, trading">*202 in securities or commodities.

After her marriage to Howell, petitioner received a substantial allowance for household expenses.

The returns filed for 1940, 1941, and 1942 were the joint returns of petitioner and her husband. Each return was fraudulent with intent to evade tax. Part of the deficiencies for each of the years 1940, 1941, and 1942 was due to fraud with intent to evade tax.

OPINION.

The notice of deficiency upon which this proceeding is based is addressed to "Dr. Charles J. Howell and Mrs. Myrna S. Howell, Husband and Wife." The wife, Myrna S. Howell, alone appealed. She disclaims liability for the deficiencies in income tax and penalties asserted by the Commissioner for the years 1940, 1941, and 1942 on the grounds that she had no income or deductions in such years within the meaning of the Internal Revenue Code; that she neither made nor filed a return for any of such years which would render her liable for any tax or penalty under section 51 (b) of the Internal Revenue Code, and that she is not chargeable with fraud with intent to evade any tax for the years involved.

Both the petitioner and her husband testified. Their testimony was contradictory, vague, and evasive, ">*203 except as to certain ultimate conclusions of fact. Thus, the husband, in answer to the question whether any of the understatements in income for 1940, 1941, and 1942 were the income of his wife, stated that his wife had no income whatever. He further testified that the income reported and deductions claimed in the returns involved were not the income or deductions of his wife. The wife testified that she had no income of any kind in 1940, 1941, and 1942 and that she made no return for any of such years.

Moreover, it is the position of petitioner that, since the respondent has asserted fraud penalties, the burden of proof rested upon him to prove by "clear and preponderating evidence that petitioner had specific items of income or deductions or both in each of the years involved." In this contention petitioner is in error.

The burden of proof of fraud was upon the respondent. Sec. 1112, I. R. C. Not so the proof as to the deficiencies. It is admitted by ">*866 petitioner that her husband was indicted and convicted on five counts for filing false and fraudulent income tax returns for the years 1939 to 1943, inclusive. The Commissioner determined that the net income for 1940, ">*204 1941, and 1942 as reported in the returns filed was understated in the amounts of $ 18,239.95, $ 15,192.04, and $ 20,075.02, respectively, and that the deficiencies were due to fraud with intent to evade tax. The petitioner does not question the correctness of the determination of deficiencies, or that her husband was guilty of fraud.

As to whether the returns were joint returns of petitioner and her husband and whether petitioner had income or deductions, the determination of the Commissioner is prima facie correct and the burden of proof to show error on his part in that respect rested upon the petitioner. L. Schepp Co., 25 B. T. A. 419, 436-437; Anderson v. United States, 48 Fed. (2d) 201; and Burnet v. Houston, 283 U.S. 223">283 U.S. 223.

On its face each return states that it is the joint return of Howell and his wife. The 1940 and 1942 returns bear petitioner's signature. It is not important that petitioner signed the returns in blank. Presumably, she knew what she was signing and that her husband would prepare the returns. Petitioner was uncertain as to whether the signatures on the">*205 returns were her own and reluctantly admitted that they looked like her signature. However, at the time of the investigation of the returns by the office of the Intelligence Unit of the Bureau of Internal Revenue, the returns were shown to her on November 17, 1944, and she then, without hesitation, recognized the signatures as her own. The 1941 return is not signed by petitioner. Her failure to sign that return is not alone determinative. It was held in Joseph Carroro, 29 B. T. A. 646, 650, that where a husband filed a joint return, without objection of the wife, who failed to file a separate return, it will be presumed the joint return was filed with the tacit consent of the wife. The petitioner filed no separate return for 1940, 1941, or 1942. Separate returns for petitioner were filed for 1939 and 1943.

The petitioner testified that she had no knowledge of the commodity and security accounts in her name. Yet all checks covering dividends on stock held in the security accounts were mailed to petitioner at her home address. These checks bear her endorsement. There is no evidence that these checks were not received and used by petitioner as ">*206 her own and for her own purposes. Moreover, contrary to petitioner's testimony, the customer's man at Prescott & Co., who had known petitioner for about ten years, testified that, when the account was opened with Loeb, Rhoades & Co. in November 1940, the petitioner personally came to the office of Prescott & Co. and deposited the $ 1,000 check upon the opening of the account. Again when questioned in the office of the Intelligence Unit as to the accounts, petitioner stated: "Well, it was no secret because the statements were always sent to my home and I knew by these monthly statements what was going on."

">*867 The petitioner's husband testified before us that the accounts in the name of his wife were his own accounts and that he also operated other accounts in the name of his son and his mother. There is no corroborating evidence to that effect. Nor is his testimony in accord with statements made by him at the time of the investigations of his returns, when he stated that all security and commodity transactions had been carried in his name "except for money which I have given as a present to Mrs. Howell to operate a small account."

In each return deductions for real estate">*207 taxes were claimed. In the 1940 and 1941 returns deductions for interest paid were claimed. In the 1941 return $ 83.65 of the $ 771.65 interest paid deduction was designated as "Wife's interest." Other than this, there is no explanation of such items. In fact, no attempt was made to explain any item of income or deduction in the returns.

So far as the record discloses, petitioner alone owned real property, i. e., the Painesville property and the home of petitioner and her husband at Gates Mills. Each property was mortgaged. There is no evidence that any of the interest deducted was paid upon the obligations of the husband. A husband may not deduct in his separate return taxes paid by him on real estate occupied by himself and wife as a home and held in her name and owned by her even if such property was given by the husband to the wife. William Ainslie Colston, 21 B. T. A. 396; affd., 59 Fed. (2d) 867; certiorari denied, 287 U.S. 640">287 U.S. 640.

Petitioner acquired title to the Painesville property in 1934, long prior to her marriage to Howell. In 1941 the property was sold and in the 1941 return a loss">*208 resulting from such sale was claimed. Even though Howell expended about $ 1,500 on such property, the property remained that of petitioner. Furthermore, the money was expended by him to assist petitioner and not in any transaction entered into for profit. Sec. 23 (e), I. R. C.

Upon all the evidence, we have concluded as ultimate facts that petitioner had income and deductions; that the returns for 1940, 1941, and 1942 were the joint returns of petitioner and her husband; and that each of the returns was fraudulently filed with intent to evade tax.

It is true, as argued by petitioner, that this court and other courts have held that the liability of spouses filing a joint return was not joint and several and that liability for the tax should be determined in accordance with the net income attributable to each. Frank W. Darling, 34 B. T. A. 1062; Ella R. Flaherty, Executrix, 35 B. T. A. 1131; Arthur B. Hyman, 36 B. T. A. 202; Celia Sedar, Executrix, 38 B. T. A. 874; Richard Downing, 43 B. T. A. 1147; Uniacke v. Commissioner (C. C. A., 2d Cir.), 132 Fed. (2d) 781,">*209 affirming Estate of Mary Lewis Hague, 45 B. T. A. 104. The decisions in these cases were based upon the decision in Commissioner v. Rabenold (C. C. A., 2d Cir.), 108 Fed. (2d) 639, reversing B. T. A. memorandum opinion (Mar. 21, 1939); and Cole v. Commissioner (C. C. A., 9th Cir.), 81 Fed. (2d) 485, ">*868 reversing 29 B. T. A. 602. In Frida Hellman Cole, 29 B. T. A. 602, this Court, then the Board of Tax Appeals, had stated in its opinion, as follows:

* * * the joint return contains no data upon which the separate taxable income of the two spouses can be computed. There is no segregation of the amounts of gross income severally received or any designation of the deductions to which each would be entitled. Since the joint return, though made by the husband, reports the income as a unit, we think it is perfectly clear that liability for the tax is joint and several and may be asserted against the collected from either spouse.

See also Joseph Buchhalter, 29 B. T. A. 600; Joseph Carroro, supra;">*210 and Frank A. Weinstein, 33 B. T. A. 105, in which fraud penalties were asserted.

Cole v. Commissioner, supra, was decided by the Circuit Court of Appeals December 12, 1936, and thereafter that decision was followed by the Board until the question was presented in George W. Schoenhut, 45 B. T. A. 812. Taxpayers relied upon Cole v. Commissioner, supra.The Board, however, upon authority of Moore v. United States, 37 Fed. Supp. 136; certiorari denied, 314 U.S. 619">314 U.S. 619; rehearing denied, 314 U.S. 706">314 U.S. 706; Helvering v. Janney, 311 U.S. 189">311 U.S. 189; and Taft v. Helvering, 311 U.S. 195">311 U.S. 195, reverted to its position taken in Frida Hellman Cole, Executrix, supra, despite the reversal as above noted, and held that the liability of spouses filing joint returns under section 51 (b) of the Revenue Act of 1936 was joint and several. It was further stated by the Board that decisions to the contrary">*211 made by the Board in the Darling, Flaherty, and Sedar cases would not be followed in the future. See Miguel Jose Ossorio, 1 T.C. 410, 415-416.

Prior to the Revenue Act of 1938, section 51 (b) did not specifically impose joint and several liability upon spouses as a condition upon the exercise of the privilege of filing joint returns. However, section 51 (b) was amended by the Revenue Act of 1938 to read as follows:

SEC. 51. INDIVIDUAL RETURNS.

* * * *

(b) Husband and Wife. -- In the case of a husband and wife living together the income of each (even though one has no gross income) may be included in a single return made by them jointly, in which case the tax shall be computed on the aggregate income, and the liability with respect to the tax shall be joint and several. * * *

The section was thus amended so "that any doubt as to the existence of such liability should be set at rest." Committee on Ways and Means Report No. 1860, 75th Cong., 3d sess., pp. 29-31. ¹

">*212 Petitioner and her husband were living together in the taxable years. ">*869 Since she elected to file a joint return with her husband, her liability with respect to the tax for 1940, 1941, and 1942 is clearly joint and several under section 51 (b) as amended and applicable here.

Section 293 (b) of the Internal Revenue Code requires, if any part of a deficiency is due to fraud with intent to evade tax, the addition to such deficiency of 50 per centum of the total amount of the deficiency. This is a civil penalty. Helvering v. Mitchell, 303 U.S. 391">303 U.S. 391. It is admitted that the deficiencies for 1940, 1941, and 1942 were due to fraud with intent to evade tax. Whether the fraud is that of the husband or wife, or both, is immaterial under the statute. The liability is joint and several. The 50 per centum addition to the tax is mandatory.

Section 276 provides that, in the case of a false or fraudulent return with intent to evade tax, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time. As stated in Frank A. Weinstein, supra:

* * * The provision">*213 for an unlimited period for assessment is, by the terms of the statute, an impersonal provision applying to the situation arising from a fraudulent return. As to Frank, who signed a waiver, and Sarah, who did not, the assessment upon a fraudulent return may be made at any time.

The contention of petitioner that section 51 (b) is unconstitutional is without merit. She concedes that Congress may impose joint and several liability upon spouses who elect to make joint returns. The burden of proof to show that she did not make a joint return with her husband rested upon her. She has failed to meet this burden. Hence, her liability for the deficiencies and penalties for 1940, 1941, and 1942 is joint and several.

Decision will be entered for the respondent.

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Footnotes

• 1. "Section 51 (b)↩ of the bill expressly provides that the spouses, who exercise the privilege of filing a joint return, are jointly and severally liable for the tax computed upon their aggregate income. It is necessary for administrative reasons, that any doubt as to the existence of such liability should be set at rest, if the privilege of filing such joint returns is continued."