Estate of Briden v. Commissioner

Estate of Louis L. Briden, Deceased, Francis P. Kirk, Administrator d. b. n., Petitioner, v. Commissioner of Internal Revenue, Respondent

Estate of Briden v. Commissioner

Docket No. 15802

United States Tax Court

11 T.C. 1095; 1948 U.S. Tax Ct. LEXIS 2;

December 31, 1948, Promulgated

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Decision will be entered under Rule 50.

1. Held, the businesses operated under the name of L. L. Briden & Co. and Clinton Dye Works, respectively, were wholly owned by decedent and were not partnerships in the years involved.

2. Amounts credited as of December 31, 1941 and 1942, to the capital accounts of three persons other than decedent on the books of Clinton Dye Works and to the capital account of one other than the decedent on the books of L. L. Briden & Co., held, upon the evidence, includible in the taxable income of decedent. There being no evidence showing the amounts were intended as compensation for services rendered, held, such amounts are not deductible as business expenses under section 23 (a) (1) (A), I. R. C.

3. Disallowance of deductions claimed by Clinton Dye Works in 1940 to 1942, inclusive, as traveling expenses of Francis J. Coleman approved, the evidence showing that the amounts were not received or expended by Francis J. Coleman or anyone else in traveling in connection with the business of Clinton Dye Works.

4. Inclusion in income of decedent of proceeds of sales actually made by L. L. Briden & Co. in 1936 to 1942, inclusive, and proceeds of sales of waste actually made by Clinton Dye Works in 1940 to 1942, inclusive, not entered on the books of either company, approved, there being no evidence that amounts received were sales made without his knowledge or proceeds were misappropriated by employees of decedent.

5. Inclusion in decedent's income of amounts paid out of funds of Clinton Dye Works and L. L. Briden & Co. for personal expenses of certain employees of decedent and treated as business expenses of such companies for 1939 to 1942, inclusive, approved.

6. Held, that decedent filed false and fraudulent income tax returns with intent to evade taxes for 1936 to 1942, inclusive.

7. Held, that decedent's estate is liable for the 50 per cent addition to the tax imposed by section 293(b) of the Revenue Acts of 1936 and 1938 and the Internal Revenue Code.

Chester C. Steadman, Esq., and John F. Carr, Esq., for the petitioner.

Paul P. Lipton, Esq., for the respondent.

Van Fossan, Judge.

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VAN FOSSAN

The Commissioner determined deficiencies in income tax and 50 per cent penalties for the years 1936 to 1942, inclusive, and thereafter made claim for an increase in the deficiencies and penalties for the years 1938 to 1942, inclusive, as follows:

	Original determination		Increase claimed
Year
	Deficiency	Penalty	Deficiency	Penalty
1936	$ 4,860.83	$ 2,430.42
1937	8,495.70	4,371.68
1938	11,604.16	5,896.72	$ 577.30	$ 288.65
1939	7,066.32	3,533.16	680.48	340.24
1940	6,015.09	3,099.95	1,099.71	549.85
1941	10,091.35	5,045.68	14,477.78	7,238.89
1942	65,323.12	32,661.56	53,088.75	26,544.38

Respondent abandoned his claim for increased deficiencies for the years 1938 and 1939.

The questions to be determined are whether certain items are includible in the taxable income of decedent, as follows:

(1) Amounts credited as of December 31, 1941 and 1942, to the capital accounts of Francis J. Coleman, Gladys M. Coleman, and Xavier Briden on the books of Clinton Dye Works and to the capital account of Gladys M. Coleman on the books of L. L. Briden & Co.;

(2) Deductions claimed by Clinton Dye Works in 1940 to 1942, inclusive, as traveling expenses of Francis J. Coleman, and disallowed;

(3) Proceeds of sales of L. L. Briden & Co. in 1936 to 1942, inclusive, not entered on the books of such company;

(4) Proceeds of the sale of waste by Clinton Dye Works in 1940 to 1942, inclusive, not entered in the books of such company, and

(5) Amounts paid by Clinton Dye Works and L. L. Briden & Co. for personal expenses of Francis J. Coleman and Gladys M. Coleman and treated as business expenses of such companies, respectively, for 1939 to 1942, inclusive.

The following additional questions are presented:

(6) Whether the decedent filed false and fraudulent income tax returns with intent to evade income tax for the years 1936 to 1942, inclusive, and

(7) Whether the estate of decedent is liable for the 50 per cent addition to the tax under section 293 (b) of the Revenue Acts of 1936 and 1938 and the Internal Revenue Code.

Other issues raised by the pleadings have been stipulated, to which effect will be given upon recomputation under Rule 50.

The facts were established by the pleadings, by stipulation of the parties, by oral testimony, and by documentary evidence. Those facts hereinafter appearing which are not from the stipulation are otherwise found from the record.

FINDINGS OF FACT.

Louis L. Briden, hereinafter referred to as decedent, died intestate in Miami, Florida, on April 5, 1943. He had gone there shortly before his death. His income tax returns for the years 1936 to 1942, inclusive, were filed with the collector of internal revenue for the district of Massachusetts. Decedent was born in Alsace, France, on January 27, 1890, and came to the United States in 1907.

The decedent's returns for 1936, 1937, and 1938 were filed on February 6, 1937, February 11, 1938, and February 24, 1939, respectively. The notice of deficiency covering such years was mailed to petitioner June 18, 1947.

Francis P. Kirk, hereinafter referred to as the petitioner, was appointed administrator de bonis non of the estate of decedent on June 23, 1942. He succeeded Xavier L. Briden, brother of decedent, who had been appointed administrator de bonis non following the death of decedent.

At the time of his death and during the years involved herein decedent operated two businesses in Clinton, Massachusetts; one under the name of L. L. Briden & Co., hereinafter referred to as Briden & Co., and the other under the name of Clinton Dye Works. Briden & Co. was engaged in the business of manufacturing and selling dyestuffs and a chemical product known as "Permacyl," on which the decedent had a patent. Clinton Dye Works engaged in the business of commission dyeing. It dyed both yarn and tops, the latter being raw wool made in a ball so it can be dyed and spun into yarn. Prior to 1924 and until June 1932, decedent conducted the business of Briden & Co. in Boston, Massachusetts. In June 1932 he moved the business to Clinton, where he had acquired a plant located on Stone Street. He conducted the two businesses at the same location.

On July 8, 1932, decedent filed a "Certificate of Name" with the town clerk at Clinton, stating that he was conducting business on Stone Street in Clinton under the name of "Clinton Dye Works" and "that no other person has any part ownership or interest in said business." No other certificate of name was filed by decedent or any other individual or group of individuals at any time during the years 1932 to 1942, inclusive, for Clinton Dye Works.

The real estate in Clinton on which the businesses of Briden & Co. and Clinton Dye Works were conducted stood in the name of decedent only throughout 1936 to 1942, inclusive, and at all material times prior thereto.

The office building located on Stone Street consisted of a basement floor, main floor, and second floor. On the basement floor was an office and a conference room. On the main floor were two offices. One was used by the bookkeeper. The other office on the main floor had three desks in it and was occupied by Gladys and Robert Coleman. The decedent used the office in the basement and also the office on the main floor. On the second floor was a four-room apartment, which was occupied by decedent after about July 1, 1939.

The mill was in a separate building in the immediate rear of the office building. The office of Francis Coleman was located in the mill. Francis Coleman at first was overseer or superintendent of the dyers, and later, superintendent of the mill. In the mill office the invoices for the dyeing of yarns and tops were prepared by an employee of Clinton Dye Works, hereinafter referred to as the clerk. She had been employed in about 1933 to do general office work. The invoices were prepared in duplicate, the original having the letterhead of Clinton Dye Works on it and the duplicate being plain white paper. The invoices were numbered in rotation by typewriter. The original invoice was mailed to the customer and the duplicate invoice was taken by the clerk to the bookkeeper in the main office. In the mill office was kept a large book called the "yarn book," in which were entered the yarn and tops received from each customer, the dye specified, and the yarn shipped. The decedent examined this record daily.

Prior to and throughout the years 1936 to 1942, inclusive, decedent had a checking account at the First National Bank of Boston. He had a safe deposit box in that bank.

During the years 1936 to 1942, inclusive, Briden & Co. also had a checking account at the First National Bank of Boston. Deposits in that account were made by mail.

All checks of Briden & Co. issued in 1937 were signed by decedent. Otherwise, such checks were in the handwriting of Gladys Coleman, except 18 of them, which were written by decedent.

All checks issued from January through November 1938 were signed by decedent. Most of those checks were made out by Gladys Coleman. The checks issued in December 1938 were signed by decedent and Gladys Coleman. Most of those checks were made out by Gladys Coleman.

All checks issued in March, April, and May of 1939 were signed by decedent. The body of all such checks is in the handwriting of Robert Coleman. Checks issued from June 1 to June 6, inclusive, were signed by decedent, but the body thereof is mostly in the handwriting of Robert Coleman or Gladys Coleman. After June 6 to the end of that month the checks were signed by Gladys Coleman and made out by her and Robert Coleman. During the remainder of 1939 most of the checks were signed by Gladys Coleman, there being a few checks in each month signed by decedent.

All checks issued during February 1940 were signed by decedent and were made out by Robert Coleman. Checks issued during March and June 1940 were signed by decedent, most of them being in the handwriting of Robert Coleman. Checks for the balance of the year, except during the month of November, were signed by both decedent and Gladys Coleman. In November Gladys Coleman signed all checks.

During the taxable years involved Clinton Dye Works had a checking account at the Clinton Trust Co. in Clinton. Deposits of Clinton Dye Works were generally taken to Clinton Trust Co. by Robert Coleman and he called at the bank every week to get the pay roll. Decedent was at this bank at the time the account of Clinton Dye Works was opened, but thereafter he seldom visited the bank.

Clinton Trust Co. required that an endorsement of a check by a firm include the name and title of the officer making the endorsement and also an endorsement by the person presenting the check to be cashed. On several occasions decedent telephoned the head teller of Clinton Trust Co. directing him to cash checks brought in by his chauffeur or Gladys Coleman without requiring personal endorsement by them. The head teller was also instructed by an executive officer of Clinton Trust Co. to cash checks endorsed "L. L. Briden & Co." without question.

A safe deposit box was rented at Clinton Trust Co. on October 14, 1938, in the names of Francis Coleman and decedent as joint lessees, with right of survivorship. On a joint box, two keys are issued and each party has the right of access to the box at any time. Access to the box was had on 8 occasions in 1938, 27 in 1939, 18 in 1940, 36 in 1941, and 40 in 1942. On each such occasion the access card was signed by Francis Coleman.

Another box was rented at Clinton Trust Co. on July 3, 1942, and held jointly by Francis Coleman and his wife.

Incoming mail of Briden & Co. and Clinton Dye Works was called for at the Clinton post office by Robert Coleman prior to his death and thereafter generally by Francis Coleman. The mail of both companies was brought to the main office. It was opened by decedent personally. Usually Robert Coleman was in the office with decedent when the mail for Briden & Co. was opened and Francis Coleman when the mail for Clinton Dye Works was opened, for the purpose of discussion.

Separate books of account were kept for Clinton Dye Works and for Briden & Co. Such books were kept on the accrual basis.

In October 1939 decedent employed a high school graduate, who in June 1938 had completed a four-year commercial course, including three years of bookkeeping, to keep the books of Clinton Dye Works. This bookkeeper continued in decedent's employ until decedent's death, except for a two-month lay-off in the early part of 1940. At the time she commenced to work for the company, Robert Coleman showed her its books of account. She thereafter made most of the daily entries and the monthly closing entries. Gladys Coleman, however, made the semiannual and annual closing and adjusting entries, except the closing entries for the year 1942, which were made by the bookkeeper upon instructions from decedent. Robert Coleman kept the books during the time the bookkeeper was on vacation.

At the time the bookkeeper was employed by decedent, either Robert Coleman or Gladys Coleman kept the books for Briden & Co. They continued to do so, except that the bookkeeper made daily entries and monthly closing entries until the death of Robert Coleman on November 28, 1942, when the bookkeeper also kept the books of Briden & Co. The closing and adjusting entries for the year 1942 were made by the bookkeeper in January 1943, upon instructions from decedent.

The bookkeeper took instructions from Robert Coleman, Francis Coleman, and Gladys Coleman when the decedent was not present.

The bookkeeper commenced billing the invoices for Briden & Co. after the death of Robert Coleman.

The books of each company consisted of a columnar cash book, columnar purchase book, accounts receivable ledger, general ledger, sales journal and binder containing duplicate invoices and a general journal.

Decedent became acquainted with the late Gladys M. Coleman prior to 1928. At that time she was living in Stafford Springs, Connecticut, and was married and known as Mrs. Clifton D. Sheppard.

On November 6, 1930, decedent created a revocable insurance trust, with the Granite Trust Co. of Quincy, Massachusetts, as trustee for the benefit of Gladys Marie Sheppard. The trust agreement provided that from and after the death of decedent the trustee should hold the trust property and pay to Gladys Marie Sheppard $ 500 per month from income and so much of the principal as was necessary to make the monthly distribution $ 500. On April 29, 1943, the trustee received $ 51,723.63 upon a Metropolitan Life Insurance Co. policy on decedent's life and thereafter made monthly payments to Gladys Coleman until her death, the last payment to her having been made on December 5, 1947.

The following cash entries debited to decedent's capital account on the books of Briden & Co. represent premium payments to the Metropolitan Life Insurance Co: November 10, 1934, $ 2,163; and November 7, 1935, $ 2,163.

Gladys Coleman entered the employ of Briden & Co. in about 1932 and continued to be employed by that company until decedent's death and thereafter. She usually arrived at the office at about 10 o'clock in the morning and left at about 3 o'clock in the afternoon. She was absent from the office on many occasions, the absence varying from a day to several weeks or months.

An account entitled "G. M. Coleman, Personal" was established in the General Ledger of Briden & Co. as of November 1, 1932. The totals of the debits to the account, all of which were posted from the cash book, were as follows:

1932	$ 900
1933	3,900
1934	3,900
1935	3,600
1936	3,600
1937	4,000
1938	4,800
1939	4,800
1940	5,000
1941	6,000
1942	4,200

The totals of yearly debits were charged to profit and loss in determining the book profit of Briden & Co. for each of the years 1932 to 1942, inclusive.

An account entitled "G. M. Coleman, Capital" was established in the general ledger of Briden & Co. as of October 10, 1932. The debits and credits entered in the account are as follows:

Debits
June 9, 1941 (Cash item)	$ 390
Credits
Oct. 10, 1932 (Cash item)	$ 1,000.00
Apr. 23, 1934 (Cash item)	2,390.00
Dec. 31, 1941 (Book profit 1941)	533.02
Dec. 31, 1942 (Book profit 1942)	4,051.01

An account entitled "Louis L. Briden, Capital" was established in the general ledger of Briden & Co. prior to 1932. The credit balance in that account on January 1, 1932, was $ 49,126.17. During the taxable years, the debits to that capital account were as follows:

Oct. 7, 1936 (Cash item)	$ 843.03
Dec. 31, 1936 (Loss for 1936)	2,564.90
Jan. 1, 1937	2,102.27
Mar. 15, 1937 (Cash item)	1,731.50
Apr. 22, 1938 (Cash item)	636.50
Dec. 31, 1938 (Loss for 1938)	2,005.05
Dec. 31, 1939 (Loss for 1939)	1,474.87
Nov. 8, 1940 (Cash item)	2,200.00
Apr. 8, 1941 (Cash item)	1,000.00
June 13, 1941 (Cash item)	292.65
Sept. 11, 1941 (Cash item)	262.95
Dec. 11, 1941 (Cash item)	266.72

An account entitled "L. L. Briden, Personal" was established in the general ledger of Briden & Co., prior to January 1, 1932. The totals of the debits or withdrawals, all cash items, during 1932 to 1942, inclusive, were as follows:

1932	$ 13,324.81
1933	1934	300.00
1935	None
1936	None
1937	300.00
1938	300.00
1939	None
1940	1,200.00
1941	4,800.00
1942	4,800.00

The yearly totals of the debits in the above account were charged to profit and loss in determining book profit of L. L. Briden & Co. for the calendar years 1932 to 1942, inclusive.

Book profit (or loss) of Briden & Co. for the years 1932 to 1942, inclusive was as follows:

Year	Profit	(Loss)
1932		$ 5,971.10
1933		5,497.05
1934		3,482.89
1935		1,851.67
1936		2,564.90
1937	$ 1,835.63
1938		2,005.05
1939		1,474.87
1940	5,216.68
1941	2,266.04
1942	8,102.02

In each year in which a loss was shown the entire amount of the loss was debited to decedent's capital account. The entire profit for 1937 and 1940 was credited to decedent's capital account. The profit for 1941 and 1942 was credited to decedent's and Gladys Coleman's capital accounts as follows:

Year	Decedent	Gladys Coleman
1941	$ 1,733.02	$ 533.02
1942	4,051.01	4,051.01

Robert J. Coleman, brother of Gladys Coleman, was in the employ of decedent for some years prior to and up to the time of his death on November 28, 1942. An account entitled "Robert J. Coleman, Personal" was established in the general ledger of Briden & Co. as of May 1, 1941. There are monthly debits in such account of $ 400 each. The totals of the debits in 1941 and 1942 of $ 3,200 and $ 4,400, respectively, were charged to profit and loss in determining book profit of Briden & Co. for 1941 and 1942, respectively.

An account entitled "Robert J. Coleman, Capital" was established in the general ledger of Briden & Co. as of April 9, 1941. This account contains only two entries: A credit entry of $ 1,000 as of April 9, 1941, and a debit entry in the same amount as of December 29, 1942, both posted from the cash book.

A check dated April 8, 1941, of Briden & Co., signed by "G. M. Coleman," in the amount of $ 1,000 payable to decedent and endorsed by him, was cashed at the Clinton Trust Co. on the same date. This check was debited on April 8, 1941, to the decedent's capital account on the general ledger of Briden & Co. A treasurer's check payable to Robert J. Coleman in the amount of $ 1,000 was purchased at the Clinton Trust Co. on April 9, 1941, endorsed by him, and deposited in the First National Bank of Boston to the credit of Briden & Co. This is the item credited to the capital account of Robert J. Coleman on April 9, 1941.

Upon the death of Robert J. Coleman, his brother, Francis J. Coleman, was appointed administrator of his estate. As such administrator he received from decedent a check at Briden & Co. in the amount of $ 1,000 dated December 29, 1942, signed "G. M. Coleman" and bearing the notation "In full payment of interest in L. L. Briden & Co." Prior to the receipt of such check, Francis had not known that his brother Robert "was a partner" in Briden & Co. He did not examine the records of Briden & Co. in connection with such payment to him.

Partnership returns (Form 1065) for the years 1936 to 1942, inclusive, were filed for Briden & Co. All such returns, except the 1938 return, were in the handwriting of Gladys Coleman and signed by her. The 1938 return was typewritten, but signed by Gladys Coleman. The net income and distributive shares of partners as shown in the returns were as follows:

		Distributive shares
Year	Net income
			Gladys M.
		Decedent	Coleman
1936	$ 1,035.10		$ 1,035.10
1937	6,137.83	$ 2,135.63	4,000.00
1938	3,399.88		3,399.88	or all profit to $ 5,000 as per
				agreement
1939	3,715.29	(Loss)	3,715.29	as per agreement
1940	11,420.68	1,200.00	5,000.00	as per agreement
				Robert J. Coleman
1941	16,269.83	6,533.02	6,533.02	$ 3,200.00
1942	21,502.02	8,851.01	8,251.01	4,400.00

In her returns for 1936 to 1942, inclusive, Gladys Coleman reported as income received as partner from Briden & Co. and Clinton Dye Works the following amounts:

		Clinton Dye
Year	Briden & Co.	Works
1936	$ 1,035.10
1937	1938	1 4,800.00
1939	1 4,800.00
1940	1 5,000.00
1941	1942	8,251.01	$ 9,093.20

The amounts reported in 1937 to 1941, inclusive, are the amounts withdrawn by Gladys Coleman and debited to her personal account on the books of Briden & Co.

Although the book loss of $ 2,564.90 was charged to decedent's capital account, he reported no profit or loss with respect to Briden & Co. for 1936. The amount of $ 1,035.10 reported by Gladys Coleman is the difference between her withdrawals in 1936 of $ 3,600 and the 1936 book loss of $ 2,564.90 of Briden & Co.

The book profit (or loss) for the years 1936 to 1942, inclusive, of Clinton Dye Works was as follows:

1936	($ 45.11)
1937	(678.10)
1938	4,697.88
1939	2,559.22
1940	5,243.71
1941	8,260.93
1942	49,327.36

The entire loss for 1936 and 1937 was debited to the capital account of decedent and the entire profit for each year 1938 to 1940, inclusive, was credited to the capital account of decedent. Book profits for the years 1941 and 1942 were divided and credited to the respective capital accounts on the books of Clinton Dye Works as follows:

		Francis	Gladys	Xavier
Year	Decedent	Coleman	Coleman	Briden
1941	$ 7,510.93	$ 500.00	$ 150.00	$ 100.00
1942	23,056.76	8,317.20	7,493.20	10,451.20

An account entitled "L. L. Briden, Capital" was established in the general ledger of Clinton Dye Works prior to January 1, 1936. The credit balance in the account as of December 31, 1935, was $ 25,411.79. The debits and credits to the account during the years involved were as follows:

Debits
1936
	Dec. 31 (Loss for year)	$ 45.11
1937
	Dec. 31 (Loss for year)	678.10
1939
	May 26 (Cash item)	21,000.00
1941
	Oct. 28 (Cash item)	750.00
1942
	Nov. 11 (Cash item)	3,834.70
Credits
1935
	Dec. 31 Credit balance	$ 25,411.79
1936
	Apr. 14	2,161.21
1938
	Dec. 31 (Profit for year)	4,697.88
1939
	Dec. 31	14,223.17
	Dec. 31 (Profit for year)	2,559.22
1940
	Jan. 17 (Cash item)	2,000.00
	Dec. 31 (Profit for year)	5,243.71
1941
	Feb. 4 (Reduction of note)	3,071.12
	May 9 (Reduction of note)	928.88
	July 10 (Reduction of note)	1,000.00
	Aug. 28 (Reduction of note)	500.00
	Nov. 24 (Reduction of note)	500.00
	Dec. 31 (Share of profits)	7,510.93
1942
	Dec. 23 (Reduction of note)	500.00
	Dec. 31 (Share of profits)	23,065.76

The two debits in the above account as of December 31, 1936, and December 31, 1937, represent the book losses of Clinton Dye Works for the respective years.

An account entitled "L. L. Briden, Personal" was established in the general ledger of Clinton Dye Works prior to January 1, 1936. There were no withdrawals by decedent from Clinton Dye Works during 1936 to 1942, inclusive, shown as such on the books, except those shown in decedent's above capital account and those shown in his personal account, all cash items, as follows:

Sept. 2, 1942	$ 600
Oct. 1, 1942	600
Oct. 30, 1942	600
Dec. 7, 1942	600

Francis J. Coleman, a brother of Gladys Coleman, entered the employ of decedent when Briden & Co. was located in Boston. He remained there for about a year to obtain laboratory experience and then left to return to the mill at Stafford Springs, Connecticut, where he had been previously employed. In 1933 or 1934 he was again employed by decedent in the business of Clniton Dye Works at $ 50 a week. He continued in that employment until the death of decedent and thereafter until January or February of 1948.

An account entitled "Francis J. Coleman" was established in the general ledger of Clinton Dye Works as of November 1, 1937. The totals of the debit entries in the account for each year, all of which were posted from the cash book, were as follows:

1937	$ 650
1938	3,900
1939	3,900
1940	3,900
1941	3,900
1942	5,825

The monthly debit of $ 325 was increased to $ 600 in June 1942.

The debits to the above account during the calendar years 1940 to 1942, inclusive, represent monthly payments made to Francis J. Coleman which were charged to the profit and loss account in determining the book profit of Clinton Dye Works for the years 1940 to 1942, inclusive.

An account entitled "Francis J. Coleman, Capital" was established in the general ledger of Clinton Dye Works as of May 1, 1940. The debits and credits in the account were as follows:

Debits
1943
	Mar. 8 (Cash item)	$ 2,817.20
Credits
1940
	May 1 (Cash item)	$ 5,000.00
1941
	Dec. 31 (Share of profit)	500.00
1942
	Dec. 23 (Reduction of note)	2,000.20
	31 (Share of profit)	8,317.00
	Total	15,817.20

The cash book (receipts) of Clinton Dye Works, page 218, contains the following entry as of May 1, 1940: "Francis J. Coleman, Capital -- $ 5,000." This amount of $ 5,000 was obtained by Francis Coleman through a loan from the Clinton Trust Co. on a note endorsed by decedent and William Reisner. The note was repaid by Francis Coleman with currency given to him by decedent.

An account entitled "Gladys M. Coleman, Personal" was established in the general ledger of Clinton Dye Works as of September 2, 1942. Monthly debits of $ 400 in the account, in the total amount of $ 1,600, represented monthly payments made to Gladys M. Coleman which were charged to profit and loss account in determining the book profit of Clinton Dye Works for the year 1942.

An account entitled "Gladys M. Coleman, Capital" was established in the general ledger of Clinton Dye Works as of September 9, 1941. The debits and credits in the account were as follows:

Debits
1943
	Mar. 8 (Cash item)	$ 493.20
Credits
1941
	Sept. 9 (Reduction of note)	$ 500.00
	Nov. 24 (Reduction of note)	500.00
	Dec. 1 (Reduction of note)	500.00
	Dec. 31 (Share of profit 1941)	150.00
1942
	Dec. 23 (Reduction of note)	1,350.00
	Dec. 31 (Share of profit 1942)	7,493.20
	Total	10,493.20

Xavier Briden, brother of decedent, was born on January 8, 1898, and came to the United States in 1924. About three weeks after his arrival he commenced to work for decedent in connection with the business of Briden & Co., then in Boston. He worked in the laboratory, mixing dyes, having been trained in the dyestuff business in France. After he had acquired a sufficient knowledge of the English language to work elsewhere, he left decedent to work as overseer of dyeing with a firm at Stafford Springs, Connecticut. After that firm closed down in 1929 or 1930, he worked elsewhere, and he came to Clinton to work for decedent after decedent purchased the mill in Clinton. Subsequently, he left Clinton and was employed as overseer of dyeing by Walther Manufacturing Co., Philadelphia, Pennsylvania, where he remained until May 1941, when he returned to Clinton at decedent's request to work for Clinton Dye Works, as a dyer at $ 65 a week. At the time he left Philadelphia he was receiving a salary of $ 75 a week. He lived with decedent in his apartment at Stone Street for two months. He purchased a home in Clinton, where he and his family thereafter resided.

An account entitled "Xavier L. Briden, Personal" was established in the general ledger of Clinton Dye Works as of November 4, 1941, with a debit entry as of that date in the amount of $ 65. Two further debits of $ 282 each were made in 1941 as of November 13 and December 1, respectively. Monthly debits of $ 282 each were made in the account during the first six months of 1942. As of July 1, 1942, the monthly debit was increased to $ 325. As of May 27, 1943, the monthly credit was increased to $ 600. The debits to the account during 1941 and 1942, in the total amounts of $ 629 and $ 3,642, respectively, represent monthly payments made to Xavier L. Briden which were charged to profit and loss account in determining the book profit of Clinton Dye Works for 1941 and 1942.

An account entitled "Xavier Briden, Capital" was established in the general ledger of Clinton Dye Works as of September 9, 1941. The debits and credits to the account were as follows:

Debits
1943
	March 8 (Cash item)	$ 2,951.20
	June 14 (Cash item)	748.28
Credits
1941
	Sept. 9 (Reduction of note)	$ 500.00
	Nov. 24 (Reduction of note)	500.00
	Dec. 31 (Share of profit)	100.00
1942
	Dec. 23 (Reduction of note)	1,400.00
	Dec. 31 (Share of profits)	10,451.20
	Total	12,951.20

None of the amounts credited to the above account were paid by Xavier Briden.

The $ 100 credit was a Christmas present from decedent.

On May 26, 1939, the Clinton Trust Co. made a loan of $ 10,000 to Clinton Dye Works on a note signed by decedent. On May 27, 1939, it made another loan to decedent in the same amount on a note signed by decedent. Both loans were credited to the "Notes Payable" account on the books of Clinton Dye Works, under date of May 26 and May 31, respectively. Payments on those notes, all of which were credited to capital accounts on the books of Clinton Dye Works, were made as follows:

			Gladys	Xavier	Francis
Date	Total	Decedent	Coleman	Briden	Coleman
Feb. 4, 1941	$ 3,071.12	$ 3,071.12
May 9, 1941	928.88	928.88
July 10, 1941	1,000.00	1,000.00
Aug. 28, 1941	500.00	500.00
Sept. 9, 1941	1,000.00		$ 500	$ 500
Nov. 24, 1941	1,500.00	500.00	500	500
Dec. 1, 1941	500.00		500
Dec. 23, 1942	500.00	500.00
Dec. 23, 1942	4,750.00		1,350	1,400	$ 2,000

The records of the Clinton Trust Co. disclose that on December 23, 1942, loans were made to Gladys Coleman and Francis Coleman in the amounts of $ 1,350 and $ 2,000, respectively, both of which loans were paid in cash on December 28, 1942. The loan to Gladys Coleman was secured by certain shares of stock in the name of decedent, with his permission to pledge them as security on the loan. Certain securities were pledged by decedent as security on the loan to Francis Coleman.

Partnership returns (Form 1065) were filed for Clinton Dye Works for 1940, 1941, and 1942. The returns are in the handwriting of Gladys Coleman and are signed by her, except the return for 1940, which is signed by decedent. The net income and distributive shares as shown therein were as follows:

		Distributive shares
	Net
Year	income
			Francis J.	Gladys M.	Xavier
		Decedent	Coleman	Coleman	Briden
1940	$ 9,143.71	$ 5,243.71	$ 3,900.00
1941	12,789.93	7,510.93	4,400	$ 150.00	$ 729.00
1942	62,794.36	25,465.76	14,142.20	9,093.20	14,093.20

The decedent filed individual income tax returns for the years 1936 to 1942, inclusive, all of which were signed by him. The returns for 1936, 1937, 1939, amended return for 1940, 1941, and 1942 are in the handwriting of Gladys Coleman. The 1938 return is typewritten. The original return for 1940 is partly typewritten and partly in the handwriting of Gladys Coleman and the affidavit of preparation is signed by her. In the 1941 return it is reported that the decedent was married, but not living with his wife.

The profit (or loss) derived from or sustained by Clinton Dye Works and Briden & Co. was reported in his returns as follows:

	Clinton	Briden &
Year	Dye Works	Co.
1936	($ 45.11)
1937	(678.10)	*28 $ 2,135.63
1938	4,697.88	(1939	2,559.22	(1,474.87)
1940	5,243.71	1941	7,510.93	6,533.02
1942	25,465.76	8,851.01

Other income reported by decedent in his returns for 1936 to 1942, inclusive, was as follows:

			Capital	Other
Year	Interest	Dividends	gain (or	income
			loss)
1936	$ 235.31	$ 850.70	$ 131.61
1937	607.42	1,147.23	97.92	$ 2.350
1938	341.26	693.75
1939	313.76	755.43	140.00
1940	344.30	951.70
1941	327.87	934.78	(1,784.36)
1942	155.66	784.96

In his income tax returns for 1940 to 1942, inclusive, Francis Coleman reported the following income items:

			Income from
			partnership --
Year	Salaries	Interest	Clinton
			Dye Works
1940	$ 3,900	$ 42.85
1941	3,900		$ 500.00
1942			14,142.20

In each return his occupation was stated as that of "partner."

In his income tax return for 1941 Xavier Briden reported income in the total amount of $ 3,352, consisting of salaries received from his occupation as dyer in the total amount of $ 3,318 and dividends of $ 34. The only income reported in his 1942 return was the amount of $ 14,093.20 stated to have been received as partner of Clinton Dye Works.

The 1942 returns of Francis Coleman and Xavier Briden were filed on March 11, 1943. Entries in each return were in the handwriting of Gladys Coleman. At about the time of the filing of those returns, decedent gave Francis Coleman and Xavier Briden checks of Clinton Dye Works in the amount of $ 2,817.20 and $ 2,941.20, respectively, with the request that each cash the check received and return to him the amount by which the check exceeded the first income tax installment, which he would hold for payment of further installments. Both Francis Coleman and Xavier Briden complied with this request, the first installment on their respective returns being $ 776.95 and $ 748.28. The amount of $ 2,817.20 was charged to the capital account of Francis Coleman and the amount of $ 2,941.20 was charged to the capital account of Xavier Briden under date of March 8, 1943. An additional amount of $ 748.28 was charged under date of June 14, 1943, to the capital account of Xavier Briden.

The checks referred to above were signed under the printed name "Clinton Dye Works" by Francis J. Coleman. The checks were cashed at the Clinton Trust Co.

Under date of January 24, 1941, decedent, in writing, authorized Francis J. Coleman to sign and endorse checks of Clinton Dye Works.

Entries closing out profit and loss accounts for each year of Briden & Co. and Clinton Dye Works were made in January following. Such entries for 1941 were made by Gladys Coleman. The closing entries for 1942 for both companies were made by the bookkeeper. Prior to January 1943, when the closing entries for 1942 were made, the bookkeeper had no knowledge as to the amount of profit of Briden & Co. to be credited to Gladys Coleman, and she had no such information with respect to the profit of Clinton Dye Works to be credited to the decedent, Francis Coleman, Gladys Coleman, or Xavier Briden. At some time in January 1943 the decedent came to the office where the bookkeeper was employed and gave her the amounts to be credited to each of the capital accounts.

Decedent and Francis Coleman never had any understanding or agreement with respect to sharing of profits of Clinton Dye Works. Francis Coleman did not know until after the close of the years 1941 and 1942 what amount of the profits of Clinton Dye Works would be credited to his capital account. He never invested any of his own money in the business. He never claimed to be a partner until after the death of decedent.

In 1941, when decedent requested Xavier Briden to return to Clinton to work for him, he stated that he would give him an interest in the business. There were no subsequent conversations between them relating to a partnership. They had no understanding and entered into no agreement with respect to sharing of profits or losses of Clinton Dye Works. Xavier Briden never invested any of his own money in the business. Prior to some time in the early part of 1943, he did not know what amount, if any, he would receive in addition to his salary. He never claimed to be a partner.

The decedent was the administrative head of the two businesses. He had a general knowledge of everything that was going on in the mill and offices at all times. He spent all of his time, except when calling on customers or away on infrequent vacations, in the mill and offices. He was an expert in dyestuffs and could make them himself. He was familiar with the bookkeeping system employed by both of the companies and frequently made entries in the purchase and cash books, particularly in the earlier years.

During all the years involved, final authority regarding the policy and the conduct of the business of Clinton Dye Works rested in decedent. Both Francis Coleman and Xavier Briden always consulted him and worked under his direction. No one other than decedent exercised any authority as proprietor of his businesses. Neither Francis Coleman nor Xavier Briden ever questioned decedent's decisions except that Xavier Briden, on or about March 8, 1943, when decedent handed a check to him and one to Francis Coleman, with the request that the checks be cashed, the first installment of their 1942 income tax be paid, and the remainder thereof returned to decedent, objected to such procedure on the ground that if anything happened to decedent they would have to pay the remainder of the taxes, to which decedent replied, "That is the way we do business here."

Decedent made two trips to Florida, the last one in 1943 just prior to his death, and a cruise to the West Indies. Gladys Coleman accompanied him on such trips. He was always immaculately dressed. He was very fond of the theater, wrestling matches, and hockey games. He attended practically all theatrical performances in Boston and attended shows in Philadelphia and in New York when there. He and Gladys Coleman, sometimes with guests, including Robert Coleman, attended night clubs frequently. At such times decedent paid the bills, which were substantial in amount. Gladys Coleman was always well dressed. She had three fur coats. Decedent gave her very large amounts of jewelry.

In determining the deficiencies for 1941 and 1942, the Commissioner included in taxable income of decedent the amount of profits of Clinton Dye Works and Briden & Co. credited to capital accounts, as follows:

		Clinton Dye
Year	Capital account	Works	Briden & Co.
1941	Francis Coleman	$ 500.00
	Gladys Coleman	150.00
	Xavier Briden	100.00
	Gladys Coleman		$ 533.02
	Total	750.00	533.02
1942	Xavier Briden	10,451.20
	Francis Coleman	8,317.20
	Gladys Coleman	7,493.20
	Gladys Coleman		4,051.01
	Total	26,261.60	4,051.01

During the years 1940, 1941, and 1942 there were charged on the books of Clinton Dye Works, as traveling expenses of Francis J. Coleman, items totaling $ 1,441.95, $ 2,966.98, and $ 4,690.95, respectively, which were claimed as deductions in computing the net income of that company. The Commissioner disallowed the deductions. These entries were made upon the issuance of checks of Clinton Dye Works on the Clinton Trust Co., all signed by decedent, as follows:

1940
Aug. 26	$ 416.70
Oct. 4	379.00
Nov. 18	383.75
Dec. 20	262.50
Total	1,441.95
1941
Feb. 4	$ 553.66
May 26	363.40
June 30	545.56
July 28	439.34
Sept. 15	517.39
Nov. 14	547.63
Total	2,966.98
1942
Feb. 2	$ 513.23
Mar. 18	531.28
Apr. 1	612.17
May 8	482.25
July 2	561.73
Aug. 5	607.23
Sept. 2	521.14
Nov. 12	438.55
Dec. 11	423.37
Total	4,690.95

All the above checks, except the one dated September 2, 1942, were made out by the bookkeeper of Clinton Dye Works on instructions from decedent. He also instructed her to charge the amounts of the checks to the travel account. All of the checks, except the one dated November 18, 1940, were made payable to Francis J. Coleman. The check dated November 18, 1940, was made payable to "Cash" and was cashed on the same date at the Clinton Trust Co. without endorsement. This check never came into the possession of Francis J. Coleman. All the checks, except the one made out to cash, were, at the request of decedent, endorsed by Francis J. Coleman and returned to decedent. Francis J. Coleman did not receive the proceeds from any of such checks. Two of the checks, dated June 30, 1941, and September 15, 1941, were also endorsed by decedent and deposited in decedent's account with the National Bank of Boston. All the other checks endorsed by Francis J. Coleman were cashed without further endorsement at the Clinton Trust Co.

The following schedule shows the amounts of sales reported in the partnership information income tax returns of Briden & Co. for the years 1936 to 1942, inclusive, and the number of sales and the aggregate amount thereof not entered on the books of Briden & Co., and not reported in the partnership returns of Briden & Co. or the returns of the decedent:

		Sales not entered on books or reported
	Amount of sales	in partnership returns
	reported in	of Briden & Co. or in decedent's
Year	partnership return	returns
	of Briden & Co.
		Number	Amount
1936	$ 124,865.02	35	$ 18,443.19
1937	135,916.98	56	27,086.65
1938	120,666.26	67	30,198.36
1939	147,825.23	52	26,639.51
1940	111,340.57	15	6,281.76
1941	146,092.10	16	4,889.04
1942	108,221.32	10	6,621.37

The last sale not entered on the books in 1942 was a sale covered by invoice dated October 1, 1942, in the amount of $ 335.20.

Salesmen employed by Briden & Co. called on customers, took orders, and transmitted the orders to the office by mail or telephone. In some instances, customers sent in orders directly to the office. The decedent held monthly meetings of salesmen at the office of the company. He also held conferences with individual salesmen, some of which took place as frequently as twice a month. Decedent was familiar with the territory covered by the salesmen and their customers, and sometimes called on customers with the salesmen. Certain customers' accounts were handled by decedent exclusively. These companies included the Paragon Worsted Co., Verdun Manufacturing Co., Warrenton Woolen Co., and Walther Manufacturing Co. of Philadelphia.

The following schedule shows the yearly number and amount of omitted sales to customers which were handled exclusively by the decedent:

	Walther		Warrenton		Verdun		Paragon
	Mfg. Co.		Woolen Co.		Mfg. Co.		Worsted Co.
Year
	Sales	Amount	Sales	Amount	Sales	Amount	Sales	Amount
1936	9	$ 5,936.03			20	$ 10,501.14
1937	10	5,506.86	2	$ 727.65	12	7,449.55	9	$ 4,140.73
1938	20	10,867.44	1	442.53	10	6,489.12	10	3,865.99
1939	11	9,057.85	1	142.19	6	3,587.29	9	4,890.73
1940			1	235.12	5	2,836.16	3	1,729.91
1941			4	1,386.50	1	485.10	5	1,263.06
1942			2	1,132.63	1	1,212.75

Occasionally checks received by Briden & Co. from customers were payment of both sale or sales not entered on the books of account and a sale or sales entered on the books of account. When this occurred, a treasurer's check was purchased at the Clinton Trust Co. payable to the order of Briden & Co. in the amount of the sale or sales entered on the books. The amount of such treasurer's check was then credited to the account of the customer making payment and deposited in the bank account of Briden & Co. In 1936, 8 treasurer's checks were so purchased; in 1937, 6; in 1938, 14; in 1939, 4; in 1940, 1; in 1941, 3; and in 1942, 4. An endorsement reading "For deposit to the credit of L. L. Briden & Co." was stamped on each of such checks.

The deposit slips for 1937 to 1942, inclusive, on which treasurer's checks were listed for deposit are in the handwriting of either Robert Coleman or Gladys Coleman, except one dated September 3, 1937, on which a treasurer's check dated September 3, 1937, in the amount of $ 892.84 is listed. The listing and amounts of four checks, including the check of $ 892.84, on that deposit slip are in the handwriting of decedent. The $ 892.84 represented payment of four sales of Shetucket Worsted Mills. The entry in the cash book crediting that customer with payment is in the handwriting of decedent.

The Verdun Manufacturing Co. sent a check dated March 15, 1940, payable to Briden & Co., in the amount of $ 2,553.82, in payment of purchases made by it. This check was in payment of two sales aggregating $ 1,193.35, which were entered on the books of Briden & Co., and two sales aggregating $ 1,360.47 which were not entered on the books. The check was endorsed "L. L. Briden & Co." in the handwriting of Robert Coleman. It cleared through the Clinton Trust Co. on March 20, 1940. On the same day, two treasurer's checks were purchased at the Clinton Trust Co. payable to Briden & Co., one in the amount of $ 1,193.35 and the other in the amount of $ 1,360.47. The check in the amount of $ 1,193.35 was deposited on the same date to the account of Briden & Co. in the First National Bank of Boston. The check in the amount of $ 1,360.47 was endorsed "L. L. Briden & Co." in the handwriting of decedent and was cashed on August 16, 1940, at the Clinton Trust Co.

With respect to the 251 sales not entered on the books during the years 1936 to 1942, inclusive, checks in payment of 221 of such sales were produced in evidence. Of the available checks received in 1936, 5 were endorsed "L. L. Briden & Co. per L. L. Briden" and one "L. L. Briden & Co.," all in the handwriting of decedent. One of such checks, in the amount of $ 3,889.52 from Verdun Manufacturing Co., dated December 26, 1936, was in payment of 2 sales of $ 540 and $ 109.52, which had been entered on the books, and a sale of $ 3,240 which had not been entered on the books. This check was cashed at the First National Bank of Boston on January 4, 1937. Two of the checks from Walther Manufacturing Co., in the amounts of $ 645.97 and $ 465.30, respectively, and one of Verdun Manufacturing Co., in the amount of $ 647.93, were also cashed at the First National Bank of Boston. The 2 remaining checks received from Verdun Manufacturing Co., in the amounts of $ 655.56 and $ 540, respectively, were cashed at the Clinton Trust Co. The remaining checks were endorsed "L. L. Briden & Co. per G. Coleman," in the handwriting of Gladys Coleman. Three of the checks received in 1937 were endorsed by decedent. Of these, 2 from Verdun Manufacturing Co. in the amounts of $ 1,080 and $ 163.03, representing payment of 2 sales omitted from the books, were cashed at the Clinton Trust Co., and the third, from another company in the amount of $ 282.98, was deposited in the First National Bank of Boston. Another check, dated September 1, 1937, in the amount of $ 1,512.03, covered 2 sales in the aggregate net amount of $ 619.19 not recorded on the books of account and 4 sales in the aggregate net amount of $ 892.84 recorded on the books. This check was endorsed "L. L. Briden & Co." in the handwriting of decedent. It was also endorsed by Robert Coleman, and it was cashed at the Clinton Trust Co. on September 3, 1937. As heretofore pointed out, a treasurer's check in the amount of $ 892.84 was purchased on September 3, 1937, from the Clinton Trust Co. and deposited in the First National Bank of Boston for the account of Briden & Co. and listed on a deposit slip in the handwriting of decedent. On the same date an entry was made in the cash book of Briden & Co. crediting the customer with $ 892.84. This entry is in the handwriting of decedent.

All of the available 59 checks received in 1938 covering 62 sales were endorsed "L. L. Briden & Co." in the handwriting of Gladys Coleman. All of the available 40 checks received in 1939 covering 45 sales were endorsed "L. L. Briden & Co." in the handwriting of Gladys Coleman, except 11, which were similarly endorsed in the handwriting of Robert Coleman. The 13 checks received in 1940 covering the 15 sales omitted from the books were endorsed "L. L. Briden & Co." in the handwriting of Gladys Coleman, except 3, which were similarly endorsed in the handwriting of Robert Coleman. The 15 checks received in 1941 covering all omitted 1941 sales were endorsed "L. L. Briden & Co." in the handwriting of Gladys Coleman, except 7, similarly endorsed in the handwriting of Robert Coleman, 3 of which also have his name endorsed thereon. The endorsement of "L. L. Briden & Co." on 9 of the 10 checks received in 1942 is in the handwriting of Robert Coleman. Four of such checks, in addition, have his personal endorsement. The remaining check is endorsed "L. L. Briden & Co. per G. M. Coleman" in the handwriting of Gladys Coleman.

The customary procedure with respect to orders received by Briden & Co. and the billing thereof was as follows: Upon the receipt of an order, a so-called "formula sheet" was prepared in the main office. It contained a number, name of the dyestuff ordered, contents and quantity thereof, and the name of the customer. A formula sheet was made out for each color ordered. The formula sheets were called for by an employee in the mixing room or sent down to the mixing room from the main office. After the dyestuff had been mixed and packed for shipping, the formula sheet, initialed and containing the weight of the dyestuff, was returned to the main office. A bill of lading was prepared. The formula number and weights noted thereon were transferred to the order, from which an original and duplicate invoice were prepared. The original invoice was mailed to the customer. From the duplicate invoice an entry was made in the sales journal chronologically including the date, name of customer, and amount of invoice. The duplicate invoices were placed in a binder. The amount of the first invoice in a month was written at the bottom of such invoice and then written at the top of the next invoice. The amount of the latter was added to the figure at the top and written at the bottom of the second invoice. The cumulative totals were carried forward until the end of the month, when the total on the last invoice was compared with the total in the sales journal. The monthly total of sales was posted to the general ledger by a credit thereof to the accounts receivable account and a debit to the sales account. Entries to the customer's accounts in the accounts receivable ledger were made daily.

A record of sales was also kept on white cards approximately 7" x 10" in size. These were divided on each side into 3 parts, each part having four columns, headed "Date," "Quantity," "Mdse.," and "Price," respectively. At the top of each card was a space for the name and address of the customer. In the above columns was entered the date of each invoice, the weight in pounds, the name of the product, and the price per pound. Such entries were posted from the duplicate invoices in chronological order. The cards were used as a price reference or price list. All of the 251 unrecorded sales were entered on the white cards, except 27 sales to various customers, and 7 sales in 1937 to H. T. Haywood & Co., the white card for which was missing.

The white cards were used and referred to by decedent. He knew their purpose and occasionally made notations thereon in pencil.

In determining the deficiencies, the Commissioner included in the taxable income of decedent amounts designated as "Understatement of sales" of Briden & Co. as follows:

1936	$ 18,443.19
1937	27,101.65
1938	30,235.86
1939	26,996.63
1940	6,281.76
1941	5,138.88
1942	6,648.10

In the dyeing process some waste of the materials dyed resulted. the woolen waste was packed in bags, which were sewed up, weighed, and placed in the waste shed, formerly a two-car garage with a small shed attached, until enough accumulated to be sold. The top, or slub, waste was packed in cartons and usually stored in the cellar of Clinton Dye Works.

Decedent frequently visited the waste shed and inquired of the shipping clerk whether waste was going out. He was in the main office and in the mill office daily.

Before waste which had been sold was loaded on trucks for delivery, the shipping clerk of Clinton Dye Works weighed it and wrote the weight, number of bales or cartons, etc., on a 3" x 5" slip of plain white paper, which he usually handed to the clerk in the mill office. From such slips invoices were prepared by the clerk in the mill office, in duplicate, both on plain white paper ordinarily used for duplicate invoices covering dyeing charges. The name of the seller, Clinton Dye Works, was not printed or typewritten on such invoices. These invoices were handed by the clerk to Francis Coleman, who in turn gave them to decedent. The invoices were not numbered. However, invoices were not prepared for all sales, the white slip written by the shipping clerk serving as an invoice on a number of sales.

Waste was sold by Clinton Dye Works during 1936 to 1942, inclusive. The only sales of waste entered in the account entitled "Waste" in the general ledger of Clinton Dye Works during such period were one on June 30, 1936, in the amount of $ 90, and one on December 31, 1939, in the amount of $ 113.58.

Most of the waste was sold to William Reisner & Co., of Clinton, and Heller & Michaelson Co., of Providence, Rhode Island. The net amounts of sales of waste by Clinton Dye Works during 1940, 1941, and 1942, as shown by white slips and invoices prepared by employees of Clinton Dye Works and other records of William Reisner & Co. and Heller & Michaelson Co., introduced in evidence, were as follows:

	Sales to --
Year			Total
	William	Heller &
	Reisner	Michaelson
	& Co.	Co.
1940		$ 2,696.60	$ 2,696.60
1941	$ 548.32	23,929.66	24,477.98
1942	9,791.10	50,412.01	60,203.11

The above sales of waste were not entered on the books of Clinton Dye Works. No portion of the proceeds of such sales was reported in the partnership income tax returns filed for Clinton Dye Works for 1940 to 1942, inclusive, and no portion of such proceeds was included by the decedent in his personal income tax returns for the years 1940 to 1942, inclusive.

The invoice for the sale of waste to Heller & Michaelson Co. of $ 2,696.60 on November 21, 1940, was prepared and typed by the clerk in the mill office from a white adding machine tape having on it figures representing the weight of bags of colored and of white waste and the total of each. The words "colored" and "white" on such tape are in the handwriting of decedent. Payment for the waste was made with a certified check of Heller & Michaelson Co., dated November 20, 1940, in the amount of $ 1,000, payable to Clinton Dye Works and a check of the same firm in the amount of $ 1,696.60, dated November 21, 1940, payable to cash. The endorsement on the $ 1,000 check of "Clinton Dye Works L. L. Briden" is in the handwriting of decedent. The cash check bears the endorsement of Francis Coleman and was deposited in his account in the Clinton Trust Co. on November 22, 1940. The check was given to him by the decedent.

A purchase of waste by Heller & Michaelson Co. on April 18, 1941, in the net amount of $ 630.34 was paid by cash of $ 350 and check of Heller & Michaelson Co. in the amount of $ 280.34. The check bears the endorsement of Francis Coleman.

All the above sales to Heller & Michaelson Co. were covered by invoices prepared by the clerk in the mill office except a sale in the net amount of $ 638.40 on June 19, 1941. A sheet from a 1940 calendar pad containing weights and computations in the handwriting of decedent served as an invoice for that sale.

On February 20, 1942, Heller & Michaelson Co. made two purchases of waste in the total net amount of $ 1,887.64. A certified check in that amount, dated February 16, 1942, was offered as payment for such purchases, but was refused, and cash payment was insisted upon. Heller & Michaelson Co. deposited the check in its own bank account and the purchases were paid for in cash. Payment of all other purchases of waste from Clinton Dye Works in 1941 and 1942 were made in cash by Heller & Michaelson Co.

William Reisner & Co. was owned by William Reisner, who prior to his death on December 2, 1942, made all purchases of waste from Clinton Dye Works. His son David was in his employ up to the time of his father's death as general laborer and truck driver. He called for the waste purchased at Clinton Dye Works at his father's direction. William Reisner at times came to the main office of Clinton Dye Works, but usually drove into the mill yard with his son and went into the mill to the downstairs office. Sometimes he talked with decedent in the lower office or in the mill yard. David knew decedent and saw him when he called for waste, and the decedent saw David. Bills of William Reisner & Co. were usually paid by check, but all purchases of waste from Clinton Dye Works were paid for in cash. After his father's death, David purchased waste from Clinton Dye Works on December 5, 12, and 26, 1942, in the total net amount of $ 569.39. He paid for such waste in cash because he was told by Francis Coleman that it was "the policy of the dyers, they wanted cash for the waste." In making such purchases, David Reisner dealt with Francis Coleman and made the cash payments for them to him.

Sales of waste were made by decedent, or Francis Coleman, or both. Whenever money in payment therefor was received by Francis Coleman, he turned it over to decedent. Whatever funds he may have received from that source during the years 1940 to 1942, inclusive, were given to him by decedent.

The firm of Heller & Michaelson Co. consisted of Abraham Heller and Samuel Michaelson. Most of the business between Clinton Dye Works and Heller & Michaelson Co. was conducted by Heller. During 1940, 1941, and 1942, however, Heller was not well and Michaelson frequently accompanied him to Clinton to call at the Clinton Dye Works. Heller died in November 1942. Heller or Michaelson, alone or together, always called at the main office. Heller asked the bookkeeper or other person present for decedent. If decedent was on the main floor he would go with Heller to the mill. If he was not there, someone in the office would telephone to the downstairs office or mill to inform decedent that Heller was in the office. The decedent came to the main office and he and Heller would go to the mill. Sometimes both of them returned to the main office. Michaelson asked for "Mr. Briden" or "Mr. Coleman." He generally saw both the decedent and Francis Coleman together. Business with them was transacted in the office on the basement floor. Cash payments by him were usually made to decedent, but on occasion to Francis Coleman in the presence of decedent.

During the years 1936 to 1942, inclusive, personal expenditures were charged to purchase account in the purchase book of Briden & Co. as follows:

	1936	1937	1938	1939
Furniture	$ 314.70		$ 987.15
Linens	189.90	$ 58.25	53.50	$ 554.35
Clothing	147.25	172.50		20.00
Doctor bills		40.00
Flowers		92.97	34.50	39.00
Groceries		94.71	257.01	1,007.05
Cleaning		188.52	154.82	271.89
Theater tickets		19.25	58.56
Miscellaneous		34.00		1,678.84
Total	651.85	700.20	1,545.54	3,571.13

	1940	1941	1942
Furniture
Linens		$ 235.25
Clothing	$ 361.67
Doctor bills
Flowers	26.50	12.00	$ 44.00
Groceries	436.60	686.34	260.72
Cleaning		84.44	48.49
Theater tickets
Miscellaneous	202.93
Total	1,027.70	1,018.03	353.21

All of the above items were charges for personal items or expenditures, but were included in cost of goods sold in determining profit and loss and were included in cost of goods sold in the partnership information income tax return filed by Briden & Co. for each of the years 1936 to 1942, inclusive.

Personal expenditures were entered in the purchase book of Briden & Co. and charged to sundry expense account as follows:

	1936	1937	1938	1939	1940	1942
Flowers	$ 32.50	$ 25.75	$ 16.50	$ 58.00	$ 55.00	$ 16.75
Clothing	24.00	57.50	38.50	39.50	16.50	85.00
Doctor bills	73.00	14.00	13.00	110.00
Cleaning	45.69			47.57		103.90
Theater tickets		66.00	11.00	7.16	61.96
Miscellaneous						11.42
Total	175.19	163.25	79.00	262.23	133.46	217.07

All of the above items were for personal items or expenditures, but were treated as business expenses in determining profit and loss and were claimed as deductions in the partnership information income tax return filed by Briden & Co. for each of the years stated.

During the years 1937, 1938, and 1939, personal expenditures were entered in the purchase book of Briden & Co. and charged to travel account, as follows:

	1937	1938	1939
Clothing	$ 15.00	$ 14.00	$ 74.00
Cleaning	36.31
Doctor bills		75.00
Flowers			35.00
Total	51.31	89.00	109.00

All of the above items were for personal items or expenditures, but were treated as business expenses in determining profit and loss and were claimed as deductions in the partnership information income tax return filed by Briden & Co. for the years stated.

During the years 1936, 1937, and 1938 and from January 1 until on or about July 1, 1939, the decedent and Gladys M. Coleman resided in separate apartments at 6 Washington Avenue, Cambridge, Massachusetts. The monthly rental for each apartment was $ 50, which was paid to the Improved Realty Co., Cambridge, Massachusetts. After July 1, 1939, Gladys M. Coleman lived in a residence at 49 Metcalf Street, Worcester, Massachusetts, and the decedent resided in a four-room apartment on the second floor of the office building used by Clinton Dye Works and Briden & Co. The residence occupied by Gladys M. Coleman was purchased by the decedent at a cost of about $ 21,000 and furnished by him at a cost of approximately $ 16,000. On May 26, 1939, the capital account of decedent on the books of Clinton Dye Works was debited with $ 21,000 representing a check drawn to the order of decedent.

During 1936, 13 items totaling $ 1,200; during 1937, 12 items totaling $ 1,200; and during 1938, 12 items totaling $ 1,200, all representing rent due the Improved Realty Co. for the apartments occupied by decedent and Gladys M. Coleman, were entered in the purchase book of Briden & Co. and charged to purchase account. All of these items were included in cost of goods sold in determining profit and loss and were included in cost of goods sold in the partnership information income tax return filed by Briden & Co. for the years 1936, 1937, and 1938.

Charges for telephone service and electricity used in the apartments occupied by decedent and Gladys M. Coleman were entered in the purchase book of Briden & Co. and charged to telephone and telegraph account and light account, respectively, as follows:

	Telephone
Year	service	Electricity
1936	$ 232.58	$ 43.94
1937	272.59	35.86
1938	321.59	35.97
1939	315.87	10.16

These items were treated as business expenses in determining profit and loss and were claimed as deductions in the partnership information income tax returns filed by Briden & Co.

Charges for telephone service and electricity used in the personal residence of Gladys M. Coleman on Metcalf Street were entered in the purchase book of Briden & Co. and charged to telephone and telegraph account and light account, respectively, as follows:

	Telephone
Year	service	Electricity
1939		$ 64.12
1940	$ 159.95	53.41
1941	359.78	58.29
1942	223.16	73.53

All of these items were treated as business expenses in determining profit and loss and were claimed as deductions in the partnership information income tax returns filed by Briden & Co.

Charges for the care of the lawn at the personal residence of Gladys M. Coleman on Metcalf Street, amounting to $ 92.25 and $ 312.63 for 1940 and 1941, respectively, were entered in the purchase book of Briden & Co. and charged to repair account. These items were treated as business expenses in determining profit and loss and were claimed as deductions in the partnership information income tax return filed by Briden & Co. for 1940 and 1941.

Amounts were charged on the books of Briden & Co. to purchases for which checks on the First National Bank of Boston were issued as follows:

		Checks of Briden & Co.
Date	Amount
		Payable to --	Signed by --
1937
Feb. 17	$ 222.80	Xavier Briden	Decedent.
June 2	473.28	Cash	Decedent.
Aug. 17	311.10	Xavier Briden	Decedent
Nov. 10	516.60
	1,523.78
1940
Sept. 10	446.00	Xavier Briden	Decedent.
Dec. 9	309.08	Xavier Briden	Gladys M. Coleman.
Dec. 27	178.46	Cash	Gladys M. Coleman.
	933.54
1941
Feb. 3	163.45	Xavier Briden	Gladys M. Coleman.
Apr. 7	462.30	Cash	Gladys M. Coleman.
	625.75

The item of $ 516.60 of November 10, 1937, was charged to purchases with the explanation "Dyes bought by Xavier Briden." The cash book of the company discloses no payment on that date to Xavier Briden, but does show issuance of a check in the amount of $ 784.92 with the explanation "invoice of November 10." The check for $ 784.92 was signed by decedent and cashed without endorsement at the Clinton Trust Co. The items entered in 1940 and 1941 were designated as purchases from Xavier Briden. The "cash" checks of June 2, 1937, December 27, 1940, and April 7, 1941, were cashed without endorsement at the Clinton Trust Co. on the respective dates of the checks. All the checks made payable to Xavier Briden were endorsed by him and bear the stamp of a Philadelphia bank.

At the time the above checks were issued, Xavier Briden was working and living in Philadelphia. During the period the checks were issued, he did not buy for, or sell to, the decedent, Briden & Co., or Clinton Dye Works any dyestuffs, chemicals, or other products. Occasionally, decedent gave Xavier Briden money to buy presents for his four children and to pay for expenses incurred due to illness or accident. Sometimes decedent, when in Philadelphia, requested Xavier Briden to cash a check for him, or to advance some money to him, which he later repaid by check.

During 1937 Clinton Dye Works incurred expenditures in connection with replacing an old boiler and installing a new boiler and new boiler room. Payments to contractors for installation of the new boiler room, fittings for the new boiler, and cost incurred in drilling for water were charged to the repair account on the purchase book of Clinton Dye Works. Such items totaled $ 3,654.56 and were treated as business expenses in determining profit and loss of Clinton Dye Works for 1937 and were claimed as deductions in determining business income from Clinton Dye Works in the income tax return filed by decedent for 1937.

During 1938 expenditures incurred by the Clinton Dye Works in connection with the acquisition and installation of stainless steel drums used in the dyeing process were charged to the repair account in the aggregate amount of $ 3,982.32 and to dyes, chemicals and supplies account in the aggregate amount of $ 7,115.36 on the books of Clinton Dye Works. The amounts charged to repair account were treated as business expenses in determining profit and loss of Clinton Dye Works for 1938 and were claimed as deductions in determining business income from Clinton Dye Works in the income tax return filed by decedent for 1938. The amounts charged to dyes, chemicals and supplies account were included in cost of goods sold in determining profit and loss of Clinton Dye Works for 1938 and were included in cost of goods sold in determining business income from Clinton Dye Works in the income tax return filed by decedent for 1938. The above drums were capable of being used permanently.

An item of $ 693.50, representing a charge for rent of a summer cottage occupied by decedent, was entered in the purchase book of Clinton Dye Works on May 20, 1938, and charged to the dyes, chemicals and supplies account. The item was included in cost of goods sold in determining profit and loss of Clinton Dye Works for 1938 and was included in the cost of goods sold in determining business income from Clinton Dye Works in the income tax return filed by decedent for 1938.

During 1939, 13 items in the aggregate amount of $ 605.40, representing personal expenditures for meats, groceries, linens, and a doctor bill, and an amount of $ 654.85 expended for hedges for the personal residence of Gladys M. Coleman on Metcalf Street, were entered in the purchase books of Clinton Dye Works and charged to the dyes, chemicals and supplies account. Such items were included in cost of goods sold in determining profit and loss of Clinton Dye Works for 1939 and were included in cost of goods sold in determining business income from Clinton Dye Works in the income tax return filed by decedent for 1939.

Thirty-one items, representing personal expenditures for meats, groceries, portraits, fuel oil for the residence on Metcalf Street, and clothing, in the aggregate amount of $ 672.65, were entered during 1940 in the purchase book of Clinton Dye Works and charged to the dyes, chemicals and supplies account. The items were included in cost of goods sold in determining profit and loss of Clinton Dye Works for 1940 and were included in cost of goods sold in the partnership information income tax return filed by Clinton Dye Works for 1940.

Thirty-eight items, aggregating $ 645.18, and 40 items, aggregating $ 1,200.54, representing personal expenditures for meats, groceries, fuel oil at the Metcalf Street residence, clothing, and cleaning were entered during 1941 and 1942, respectively, in the purchase book of Clinton Dye Works and charged to the dyes, chemicals and supplies account. Such personal items were included in cost of goods sold in determining profit and loss of Clinton Dye Works for 1941 and 1942 and were included in cost of goods sold in the partnership information income tax return filed by Clinton Dye Works for 1941 and 1942.

Eight items totaling $ 297.91 and two items totaling $ 64.58 were entered during 1942 in the purchase book of Clinton Dye Works and charged to repair account and telephone and telegraph account, respectively. Such items represented charges for care of the lawn and telephone service, respectively, at the personal residence of Gladys M. Coleman on Metcalf Street. They were treated as business expenses in determining profit and loss of Clinton Dye Works for 1942 and were claimed as deductions in the partnership information income tax return filed by Clinton Dye Works for 1942.

On August 10, 1942, an item of $ 386.67, representing cost of painting the personal residence of Francis J. Coleman, was entered in the purchase book of Clinton Dye Works and charged to dyes, chemicals and supplies account. The item was included in cost of goods sold in determining profit and loss of Clinton Dye Works for 1942. It was also included in cost of goods sold in the partnership information income tax return filed by Clinton Dye Works for 1942. The bill for the painting was turned in to the office for payment upon the direction of decedent.

Expenditures incurred by Clinton Dye Works during 1942 in connection with the erection of a building addition of cement and steel construction, diversion of the stream flowing through the premises, and construction of concrete retaining walls and a bridge, in the total amount of $ 30,340.10, were entered in the purchase book of Clinton Dye Works and charged to purchase and expense accounts as follows:

Account	Amount
Dyes, chemicals and supplies	$ 13,181.16
Repairs	6,756.67
Labor	7,990.85
Freight	2,411.50

The amounts charged to dyes, chemicals and supplies account were included in cost of goods sold in determining profit and loss of Clinton Dye Works for 1942 and were included in cost of goods sold in the partnership information income tax return filed by Clinton Dye Works for 1942. The amounts charged to expense accounts were treated as business expenses in determining profit and loss of Clinton Dye Works for 1942 and were claimed as deductions in the partnership information income tax return filed by Clinton Dye Works for 1942. The men engaged in the construction of the building addition were put on the pay roll of Clinton Dye Works. The man in charge of the construction was also put on the pay roll, as he did not have enough capital to take on so large a construction job. None of the men had been employed previously by the company and they were not employed after the building and construction work was finished. Materials for use in the construction were purchased from various concerns. The work was done under the general direction of decedent. Expenditures in connection with the construction of the building addition were charged to the dyes, chemicals and supplies account at the direction of decedent.

All the items hereinbefore referred to which were entered in the purchase books of Briden & Co. and Clinton Dye Works were paid by checks of Briden & Co. and Clinton Dye works, respectively. Five of such checks of Clinton Dye Works issued in 1941 and nine issued in 1942 were signed by decedent. Other writing on such checks was that of the bookkeeper.

In the notices of deficiency the following statement was made:

During the years 1936 to 1942, inclusive, Louis L. Briden owned two businesses known, respectively, as L. L. Briden & Co. and Clinton Dye Works. The income received by him from those businesses was understated in his Federal income tax returns filed for each respective year because of (a) fraudulent omission from gross income, (b) utter disregard of the income tax laws and regulations by claiming purely personal items as business expense deductions, (c) fraudulent representations that the L. L. Briden & Co. business was owned by a partnership during the years 1936 to 1942, inclusive, and that the Clinton Dye Works business was owned by a partnership in the years 1940 to 1942, inclusive, and (d) unallowable deductions claimed as business expenses, etc.

The decedent filed false and fraudulent returns for the years 1936 to 1942, inclusive, with intent to evade tax. Part of the deficiency for each year 1936 to 1942, inclusive, is due to fraud with intent to evade tax.

OPINION.

In determining the deficiencies herein, the Commissioner included in the taxable income of decedent certain deductions claimed as business expenses by Briden & Co. and Clinton Dye Works and also sales not entered upon the books of such companies and amounts credited to certain so-called capital accounts in 1940 and 1941 and treated as distributions of net profits to partners. Whether such items are includible in their entirety in the taxable income of decedent depends upon whether or not Francis Coleman, Gladys Coleman, and Xavier Briden were partners with decedent in the business conducted under the name of Clinton Dye Works, and whether Gladys Coleman was a partner with decedent in the business conducted under the name of Briden & Co.

The Commissioner determined that decedent was, during all the years in question, 1936 to 1942, inclusive, the sole owner of the two businesses.

Petitioner does not contend that either company was a partnership for income tax purposes. In his brief he states, in part, as follows:

It must be borne in mind that Francis Coleman, Gladys Coleman, and Xavier Briden have maintained and still maintain that they are partners in the Clinton Dye Works. Their interests and claims are adverse to that of the Estate of Louis L. Briden and necessarily antagonistic. * * *

His arguments are the same with respect to Briden & Co. He contends that the payments were deductible as compensation paid.

It appears from the record that in February 1944 the petitioner, as administrator of the estate of decedent, commenced proceedings in the Superior Court of Suffolk County, Massachusetts, for the determination of whether Gladys Coleman, Francis Coleman, and Xavier Briden were the surviving partners of Clinton Dye Works and Gladys Coleman a surviving partner of Briden & Co.; that a decree was entered restricting all payments to the three named individuals to no more than $ 600 a month each; and that in January 1948, by proceedings instituted by Xavier Briden, a receiver was appointed to take charge of the business of both companies. We have no record of a determination of the question of the validity of the partnership as prayed for.

Neither Francis Coleman, Gladys Coleman, nor Xavier Briden contributed any capital out of his own funds to either company. Decedent was sole owner of the two businesses and the relationship between him and such persons, in so far as the businesses are concerned, was that of employer and employees. Whatever the latter received, other than the amounts charged to their personal accounts, were gifts from decedent to them, the giving, or the amounts of which, were wholly in the discretion of decedent. There is no evidence that any of them exercised any authority as a partner or participated in the management of either business, or that decedent intended to create a real partnership relationship by establishing the capital accounts. Although a capital account was established for Robert Coleman on the books of Briden & Co., as of April 9, 1941, no part of the profits for 1941 was credited to that account, and upon his death in November 1942 his administrator received no part of the profits earned by Briden & Co. to the date of his death. All he received was a check for $ 1,000, the amount credited to the capital account when it was established. Francis Coleman, the administrator, made no claim for any profits earned after April 9, 1941.

Upon the record made, the determination of the Commissioner that decedent, during all the years involved, was the sole owner of Clinton Dye Works and Briden & Co. is approved.

With respect to the amounts credited as of December 31, 1941 and 1942, to the capital accounts of Francis Coleman, Gladys Coleman, and Xavier Briden on the books of Clinton Dye Works and to the capital account of Gladys Coleman on the books of Briden & Co., it is alleged in the petition that the Commissioner erred in determining that "there was no arrangement with respect to distribution of profits" of the two companies, and that the "amounts are not proper inclusions in the taxable income of decedent." Petitioner argues on brief that the amounts in question are deductible as compensation for personal services actually rendered under section 23 (a) (1) (A) of the Internal Revenue Code.

It is contended by the respondent that there is no basis in the pleadings for petitioner's contention and, furthermore, that there is no evidence in the record that the amounts credited to the capital accounts were intended as additional compensation or that reasonable compensation for personal services rendered by either Francis Coleman, Gladys Coleman, or Xavier Briden was in excess of the amounts paid to them as salary and allowed as deductions by him.

In his reply brief the petitioner states that the partnership returns for the two businesses for the years in question "show a tremendous growth in business, no doubt due to war conditions," and that "this fact, together with the further fact that these three individuals together with Louis L. Briden were the vital factors in running said businesses" during such years establish that the additional amounts were intended as compensation.

There is no evidence showing that the three individuals were vital factors in running the two businesses. Nor is there any evidence showing that the efforts or duties of the three individuals increased with the growth of the businesses or that such growth was due to their efforts, thus entitling them to additional compensation. On the contrary, there is evidence indicating that there was no change in their duties in the year the capital accounts were set up or thereafter. Xavier Briden was not employed by decedent until May 1941. He was employed as a dyer. His salary was increased from $ 65 a week to $ 325, beginning July 1, 1942. Francis Coleman started as a dyer at $ 50 a week in 1933 or 1934. In 1937 he was receiving $ 325 a month, which was increased to $ 600 a month in June 1942. Gladys Coleman did some of the bookkeeping and other office work and exercised some supervision in the office. She received $ 6,000 in 1941 and $ 5,800 in 1942. The bookkeeper to whom was assigned the bookkeeping for both companies after November 1942 thereafter received only $ 35 a week.

The testimony of Xavier Briden and Francis Coleman indicates that they regarded the credits as gifts and not compensation.

Furthermore, the evidence shows that the monthly payments were charged to profit and loss in determining the book profit of the two companies. Thus such monthly payments were treated as an operating expense, i. e., compensation for services rendered. The additional amounts were not so treated.

In our opinion, the evidence fails to show error in the determination of the respondent. The inclusion of the amounts credited to the three individuals on the books of Briden & Co. and/or Clinton Dye Works as of December 31, 1941 and 1942, in the taxable income of decedent is approved.

In determining the taxable income of decedent for 1940, 1941, and 1942, the Commissioner included therein the amounts of $ 1,441.95, $ 2,966.98, and $ 4,690.95, respectively, which had been charged on the books of Clinton Dye Works as traveling expenses of Francis Coleman and claimed as a deduction in computing the taxable income of the company. The petitioner, in his brief, "waived argument" on this issue.

Although the respondent affirmatively alleged that the deductions for such traveling expenses were fraudulent with intent to evade taxes, the burden of proof to show error in the disallowance of the claimed deductions rests upon the petitioner. It is stated in L. Shepp Co., 25 B. T. A. 419, that the substantive issue (in that case a loss deduction) and the issue of fraud are:

* * * clearly separate, for, although the determination of fraud necessarily implies falsity in the claim of loss, yet the respondent can and may determine the deduction to be based on a false or incorrect claim and still find no justification for imposing the fraud penalty. In either event his determination disallowing the loss deduction is by law presumed to be correct, while his determination of fraud carries no such presumption * * *.

* * * As to the issue raised by his determination of fraud, the burden is upon him; and he may fail to sustain such burden, notwithstanding the determined and presumed error in the return. In other words, both parties may fail through inadequate proof on their several issues, and thus the deficiency would be sustained and the penalty set aside.

The above amounts are the aggregate amounts of checks charged on the books as traveling expense of Francis Coleman. The checks were not used by the latter to pay traveling expenses incurred by him on behalf of Clinton Dye Works and did not represent reimbursement to him for such expenses. While he endorsed all of the checks except one, Francis Coleman testified that he endorsed the checks at the request of decedent, returned the checks to him, and did not receive the proceeds thereof. Two of the checks were deposited in decedent's personal bank account.

In cross-examination of counsel for petitioner, the bookkeeper testified that Francis Coleman called on customers prior to the death of decedent and that thereafter he made more business calls. However, the expenses, if any, incurred on such business calls by Francis Coleman were not connected in any way with the above deductions.

Since the disallowance of the deductions is presumptively correct and the petitioner has failed to show that the amounts disallowed were paid or incurred for traveling expenses, the action of the respondent must be approved.

With respect to the proceeds of sales by Briden & Co. not entered on the books of account or reported for income tax purposes, the petitioner alleged that he believed that decedent did not receive the proceeds from such sales; that the proceeds were collected by others and should be excluded from the income of decedent. It is contended by petitioner on brief that the proceeds from the understated sales during 1936 to 1942, inclusive, were not received by decedent; that he was not cognizant that they were unrecorded; that they were misappropriated by Gladys and Robert Coleman; and that his estate is entitled to a deductible loss in the amount thereof under the provisions of section 23 (e) of the Internal Revenue Code.

The petitioner concedes that the sales of Briden & Co. were understated and not recorded on the books of account or reported for income tax purposes. There is no evidence supporting his contention that Gladys and Robert Coleman appropriated the proceeds of such unrecorded sales.

Gladys and Robert Coleman were employed by decedent. They kept the books of Briden & Co. until the death of Robert, in November 1942. Their authority to endorse and cash checks came from the decedent. It is not contended by petitioner that decedent did not know anything about the conduct of his business. It is conceded that the decedent was the administrative head of the business, that he must have had some comprehension of the use of the white cards and did use the same for price reference. The evidence shows that decedent, except when calling on customers or away on infrequent vacations, spent all of his time in the offices and the mill. In fact, after about July 1, 1939, he lived on the premises. He employed salesmen and kept in close touch with them. He himself handled some customer accounts, exclusively. He opened the mail each day. He was familiar with the books of account and at times made entries in some of them. Of the unrecorded sales for 1936 to 1942, inclusive, a substantial portion thereof were sales to customers whose accounts decedent handled exclusively, as shown by the following schedule:

		Total net sales
	Unrecorded	to accounts
Year	net sales	handled by
		decedent
1936	$ 18,443.19	$ 16,437.17
1937	27,086.65	17,924.79
1938	30,108.36	21,665.08
1939	26,639.51	17,678.06
1940	6,281.76	4,801.19
1941	4,889.04	3,134.66
1942	6,621.37	2,345.38

A check of Shetucket Worsted Mills, Inc., dated September 1, 1937, in the amount of $ 1,512.03, payable to L. L. Briden & Co., shows on its face that it was in payment of six sales. Four of them, in the total net amount of $ 892.84, were recorded on the books, and two of them, in the total net amount of $ 619.19, were not recorded on the books. The check of Shetucket Worsted Mills, Inc., is endorsed "L. L. Briden & Co." in the handwriting of decedent. That this check also bears the endorsement of Robert Coleman is not important. At that time, the endorsement of the person cashing the check was apparently required by the bank. This check was cashed on September 3, 1937, at the Clinton Trust Co., and on the same day a treasurer's check in the amount of $ 892.84 was purchased from the same bank. The decedent not only listed the treasurer's check on a deposit slip of the First National Bank of Boston for deposit to the account of Briden & Co., but he also made the entry in the cash book giving credit to Shetucket Worsted Mills, Inc., for the payment of the four sales recorded on the books of account. Obviously, decedent was familiar with the entire transaction and the method employed in handling checks received in payment of both unrecorded and recorded sales. He endorsed six checks, one being in the amount of $ 3,889.52, received in 1936 in payment of unrecorded sales. Five of these checks were cashed. He also endorsed four of the 1937 checks. There is other evidence indicating that he had knowledge of the unrecorded sales.

It is our conclusion that the unrecorded sales of Briden & Co. for the years 1936 to 1942, inclusive, are includible in the taxable income of decedent.

The respondent made claim for increased deficiencies for 1938 to 1942, inclusive, based on the omission from gross income of Clinton Dye Works of the proceeds of the sale of waste by that company. He abandoned his claim for increased deficiencies for 1938 and 1939.

The petitioner alleged that if any waste was sold by Clinton Dye Works it was sold without the knowledge of decedent by a person or persons claiming interest adverse to him and that such person or persons misappropriated the proceeds from such sales. On brief he contends that the proceeds from the sales of waste were misappropriated by Francis Coleman and that the petitioner is entitled to a deductible loss in the amount of such sales. He further contends that the respondent has failed to prove, as alleged by him, that the proceeds from the sale of waste were appropriated by the decedent to his own use and benefit, and that any amounts received by others initially were received with decedent's knowledge and consent and were either paid to decedent or retained with decedent's knowledge and consent.

The petitioner concedes that for each of the years 1938 to 1942, inclusive, the respondent introduced evidence of the sale of waste by Clinton Dye Works to Heller & Michaelson Co. and for the years 1941 and 1942 to William Reisner & Co., and that such sales were neither recorded in the books of Clinton Dye Works, nor reported in the income tax returns of decedent or partnership returns of Clinton Dye Works.

That the decedent had knowledge or should have had knowledge of all such sales is shown by the evidence. The first and only sale in 1940 as disclosed by the evidence was a sale to Heller & Michaelson Co. in the net amount of $ 2,696.60. That the decedent participated in this sale is shown by an adding machine tape containing two separate additions of the poundage of bags or cartons of waste sold and also the description of such waste, i. e., "Colored" and "White," which description is in the handwriting of decedent. An invoice was prepared from such tape. Furthermore, this sale was paid in part by a certified check in the amount of $ 1,000 payable to Clinton Dye Works which was endorsed "Clinton Dye Works L. L. Briden," in the handwriting of decedent. Again, in 1941, a sheet from a calendar pad with weights and computations as to sale price on it, in the handwriting of decedent, served as an invoice for a sale to Heller & Michaelson Co., in the net amount of $ 638.40. There is also testimony by the bookkeeper who worked in the main office, the clerk who typed the invoices for waste and who worked in the mill office, and the shipping clerk who prepared the waste for shipment and weighed it, which indicates clearly that the decedent not only had knowledge that sales were made, but also that he saw and conferred with William Reisner, Heller, and Michaelson.

The fact that Francis Coleman handled most of the sales is not important. He was superintendent of the mill and, as such, it was his duty to instruct the shipping clerk and the clerk in his office whenever sales were made with respect to preparing the waste for delivery and preparing invoices. His admission that after the death of decedent he sold waste and that "the cash was split three ways between Xavier Briden, Gladys Coleman and myself" is not proof that he appropriated all or any of the proceeds of sales of waste prior to the death of decedent, particularly since he testified that he delivered all the cash received by him to decedent, and petitioner has not shown that Francis Coleman actually received and retained, without the knowledge of decedent, any of the proceeds on the sale of waste received by him prior to the death of decedent. The testimony of Francis Coleman that decedent was usually present when sales of waste were made is corrobrated by the testimony of Michaelson, who testified that whenever he called at the office of Clinton Dye Works he asked for decedent, and that usually decedent and Francis Coleman were together when sales were made and paid for. This testimony is also corroborated by that of the bookkeeper, whose credibility has not been impugned.

The petitioner relies upon the frequent visits of Francis Coleman to a safety deposit box at Clinton Trust Co. as absolute proof that Francis Coleman received the cash proceeds from the sale of waste and appropriated the same to his own use. This box was held jointly by Francis Coleman and decedent. Had he embezzled or appropriated the proceeds from sales of waste, it is reasonable to assume that he would not have placed them in a box to which decedent had access at any time. Francis Coleman testified that his visits to the box were, in part, due to the fact that decedent gave him sealed envelopes to put into the box, which within a day to a week he would return to decedent at the latter's request. He admitted that he received and retained some of the proceeds, but only with the knowledge and consent of decedent and as gifts.

The sales of waste were made by Clinton Dye Works. Since the decedent was the owner thereof, the proceeds from the sales of waste as set forth in our findings are includible in the taxable income of decedent for 1940, 1941, and 1942, respectively.

The petitioner alleged that respondent erred in including in income of decedent personal items of Gladys M. Coleman and Francis Coleman properly taxable to the recipients thereof, as follows:

	Francis	Gladys M. Coleman from --
	Coleman
Year	from Clinton
	Dye Works	Clinton Dye	Briden & Co.
		Works
1939		$ 1,414.18	$ 2,810.50
1940		143.18	1,425.95
1941		312.41	1,876.94
1942	$ 386.67	1,633.81	555.39

The items are set forth in detail in the petition showing the payees and amount paid to each. It is contended in the petition that items enumerated "represent income taxable" to Francis Coleman or Gladys Coleman and are not proper inclusions in the taxable income of decedent.

It is not contended, and there is no evidence showing, that such amounts were paid as additional compensation. On the contrary, the evidence indicates that the amounts were intended as gifts. The amount of $ 386.67 was paid for the painting of the personal residence of Francis Coleman. The amounts paid out for Gladys Coleman were paid for expenses in connection with her personal residence, groceries, linens, jewelry, and other personal items. It is conceded that all the items represented personal expenditures. All the items were paid with checks of either Clinton Dye Works or Briden & Co. The funds upon which such checks were drawn represented income derived from the business as conducted by such companies, of which decedent was the owner. The amounts are therefore includible in his income.

The next question to be considered is whether decedent filed fraudulent returns with intent to evade income taxes for 1936 to 1942, inclusive.

It is conceded by respondent that, if this issue is determined in the negative, deficiencies for 1936 to 1938, inclusive, are barred by the statute of limitations.

As argued by petitioner, the fact that the respondent determined a greater tax liability than reported and that his determination is sustained does not of itself establish fraud. James Nicholson, 32 B. T. A. 977; affd., 90 Fed. (2d) 978; Harold B. Franklin, 34 B. T. A. 927. It is also true, as argued by petitioner, that mere negligence is not proof of fraud, nor is ignorance or error of law. An intent or purpose to evade tax is essential.

However, in Charles E. Mitchell, 32 B. T. A. 1093, it is stated as follows:

Under the revenue laws every taxpayer is, in the first instance, his own assessor. He determines the amount of tax due. This privilege carries with it a concurrent responsibility to deal frankly and honestly with the Government -- to make a full revelation and fair return of all income received and to claim no deductions not legally due. This responsibility is not properly discharged by resolving all doubts against the Government, or by giving effect to studied efforts to wipe out taxable income by secret and questionable practices. It is a maxim of our law that, in dealing with the Government, taxpayers must turn square corners.

* * * *

* * * It [fraudulent intent] is to be gleaned from all the facts and the normal and reasonable inference therefrom. Though intent is a state of mind, its character is to be established, as other facts are established, by weighing all the evidence and applying the proper measure of proof.

* * * *

The decedent was the owner of two businesses operating under the names of Clinton Dye Works and Briden & Co. Proceeds received from sales of waste by the former and sales of dyestuffs by the latter were not entered on the books of either company and were not reported in the individual return of decedent or partnership returns in the total amounts as follows:

	Sales of waste	Sales of dyestuffs
Year	by Clinton	by	Total
	Dye Works	Briden & Co.
1936		$ 18,443.19	$ 18,443.10
1937		27,101.65	27,101.65
1938		30,235.86	30,235.86
1939		26,996.63	26,996.63
1940	$ 2,696.60	6,281.76	8,978.35
1941	24,477.98	5,138.88	29,616.86
1942	60,203.11	6,648.10	66,851.21

In addition, numerous personal expenses, including expenditures for groceries, furniture, linens, clothing, telephone, electricity, doctor bills, cleaning, flowers, rent, and theater tickets, in substantial amounts, were charged on the books of both Clinton Dye Works and Briden & Co. to purchases or expense accounts and included in cost of goods sold or treated as business expenses. In 1940, 1941, and 1942, substantial amounts were charged on the books of Clinton Dye Works as travel expenses of Francis Coleman, which amounts were not received or expended by him for such purpose. In 1937, 1940, and 1941 the amounts of $ 1,523.78, $ 933.54, and $ 625.75, respectively, were charged to purchases of Clinton Dye Works or bought from Xavier Briden, who never sold any dyestuffs, chemicals, or other products to that company. In 1937 capital expenditures for the installation of a new boiler in the aggregate amount of $ 3,654.56 were treated as business expenses. During 1942 capital expenditures for the construction of a building addition in the total amount of $ 30,340.10 were charged in large part to purchases and the remainder in part to the repairs, labor, and freight accounts.

Partnership returns were filed for both Briden & Co. and Clinton Dye Works, although no real partnerships existed.

The reduction of taxable income by the above means was not due to mere negligence, careless bookkeeping, or ignorance or error of law. The items were numerous and in the aggregate very substantial in amount. The reduction in income had become a practice and was carried on continuously for a period of seven years. No mistake in judgment or law has been shown. It is well known by all business men that proceeds of sales are includible in gross income and that personal expenses are not allowable deductions or a part of cost of goods sold. In M. Rea Gano, 19 B. T. A. 518, 533, it is stated as follows:

* * * Though fraud is not proven merely by establishing that petitioner claimed unallowable deductions * * *, where a taxpayer has attempted to obtain unallowable deductions by falsely representing the character of the same, the good faith of the taxpayer is impugned and it is but reasonable to look to the recurring presence of such improper deductions as corroborative of the intent of the taxpayer to evade taxes.

A failure to report for taxation income unquestionably received, such action being predicated on a patently lame and untenable excuse, would seem to permit of no difference of opinion. It evidences a fraudulent purpose.

The record fails to show whether or not the decedent took part in the preparation of his returns or the partnership returns. Most of them were in the handwriting of Gladys Coleman. She signed the affidavit of preparation for decedent's 1940 and 1941 returns. His signature appears on his personal returns. However, he can not escape his responsibility for a correct return by committing its preparation to others. Irving Fisher, 30 B. T. A. 433, and cases cited. Furthermore, the decedent, knowing that sales were not recorded and personal expenses charged to cost and as business expenses, must also have known that his returns, as well as the partnership returns, which reflected book income and expenses, were incorrect and false. For the same reason he must have known that the partnership returns were incorrect and false.

Petitioner argues that the burden is not upon him to show the innocence of the decedent, but that the burden rests upon the respondent to prove fraud by clear and convincing evidence. In our opinion, the respondent has met his burden of proof, which proof the petitioner has failed to explain, refute, or rebut. He concedes that the returns were incorrect. His argument that decedent did not receive the income from the unrecorded sales and that such income was embezzled by Gladys Coleman, Robert Coleman, and Francis Coleman has been discussed heretofore.

A careful consideration of all the evidence compels the conclusion that the falsity in the returns was known and deliberate and we have so found.

The petitioner contends that the 50 per cent addition to the tax provided for by section 293 (b) if any part of any deficiency is due to fraud with intent to evade tax can not be assessed after the taxpayer's death. The notices of deficiency were mailed on June 18, 1947, after the death of decedent on April 5, 1943.

The petitioner argues that a cause of action which is given by a Federal statute, if no specific provision is made by act of Congress for its survival, survives or not according to the principles of the common law ( Sullivan v. Associated Billposters & Distributors, 6 Fed. (2d) 1000), that there is no specific provision providing that the penalty imposed by section 293 (b) of the Internal Revenue Code shall survive the death of the person against whom the penalty is assessed, and that under the rules of the common law actions for damages caused by fraud, being actions ex delicto, do not survive the death of the wrongdoer. Hensaw v. Miller, 17 How. 212">17 How. 212, 219, 222. He argues that, regardless of whether the assessment is called an addition to the tax or other term indicative of compensation to the Government rather than a penalty, it is assessed because of the wrongful act (or tort) of the taxpayer, against the taxpayer himself for the purpose of punishing him for his wrongful act, and that such a cause of action must by its own nature be in substance ex delicto.

A similar contention was made and considered in Helvering v. Mitchell, 303 U.S. 391">303 U.S. 391. In that case the taxpayer had been indicted under section 146 (b) of the Revenue Act of 1928 for willfully attempting to defeat and evade income tax upon his net income for 1929. He was tried and acquitted. Thereupon a notice of deficiency was mailed to the taxpayer in which the Commissioner proposed to assess the 50 per cent addition to tax provided by section 293 (b) of the Revenue Act of 1928. The taxpayer appealed to the Board of Tax Appeals. He argued that the imposition of the penalties prescribed in section 293 (b) would constitute a second punishment for the same offense for which he was indicted and of which he was acquitted under the provisions of section 146 (b). In its opinion (32 B. T. A. 1093, 1136) the Board stated as follows:

A careful study of the two sections convinces us that they are basically different in character and were enacted for wholly different purposes. The language of the two sections differs widely and contemplates situations which may require entirely dissimilar proof.

Section 146 (b) is a statute defining a felony and establishing punishment and penalties for the commission of a crime. It is a punitive statute and prosecution thereunder is strictly a criminal proceeding initiated by the United States. Section 293 (b) imposes an additional 50 per cent of the deficiency if any part of the deficiency is due to fraud with intent to evade the tax. Proceedings thereunder are civil in character and are initiated by the taxpayer. The penalties contained therein are likewise civil and were inserted in the taxing statutes to aid in collecting revenue. [Citations omitted.] They become a part of the deficiency in tax and are collected in the same manner as the deficiencies. * * *

Upon petition for review, the Circuit Court of Appeals for the Second Circuit affirmed the Board's decision with respect to the deficiency in tax, but reversed the Board's approval of the 50 per cent additional assessment under section 293 (b). Mitchell v. Commissioner, 89 Fed. (2d) 873. The Supreme Court reversed the Circuit Court of Appeals as to this point and in its opinion, affirming the Board, it stated, in part, as follows:

In assessing income taxes the Government relies primarily upon the disclosure by the taxpayer of the relevant facts. This disclosure it requires him to make in his annual return. To ensure full and honest disclosure, to discourage fraudulent attempts to evade the tax, Congress imposes sanctions. Such sanctions may confessedly be either criminal or civil. * * *

Congress may impose both a criminal and a civil sanction in respect to the same act or omission; for the double jeopardy clause prohibits merely punishing twice, or attempting a second time to punish criminally, for the same offense. The question for decision is thus whether section 293 (b) imposes a criminal sanction. That question is one of statutory construction. * * *

* * * *

The remedial character of sanctions imposing additions to a tax has been made clear by this Court in passing upon similar legislation. They are provided primarily as a safeguard for the protection of the revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from the taxpayer's fraud. * * *

The fact that the Revenue Act of 1928 contains two separate and distinct provisions imposing sanctions, and that these appear in different parts of the statute, helps to make clear the character of that here invoked. The sanction of fine and imprisonment prescribed by section 146 (b) for willful attempts "in any manner to evade or defeat any [income] tax," introduced into the act under the heading "Penalties," is obviously a criminal one. The sanction of 50 per centum addition "if any part of any deficiency is due to fraud with intent to evade tax," prescribed by section 293 (b), introduced into the act under the heading "Additions to the tax," was clearly intended as a civil one. This sanction, and other additions to the tax are set forth in Supplement M, entitled "Interest and Additions to the Tax." * * * Obviously all of these "Additions to the Tax" were intended by Congress as civil incidents of the assessment and collection of the income tax.

The Supreme Court concluded that Congress, in providing for the additional assessment under section 293 (b), intended a remedial or civil sanction and not a criminal or punitive sanction, and that in the civil enforcement of a remedial sanction there can be no double jeopardy.

The above case is dispositive of petitioner's contention that the 50 per cent addition is assessed to punish the taxpayer for his wrongful act. See also United States v. Glidden Co., 119 Fed. (2d) 235; certiorari denied, 314 U.S. 678">314 U.S. 678; Harvey v. Early, 66 Fed. Supp. 761; affd., 160 Fed. (2d) 836; G. C. M. 22326, C. B. 1940-2, p. 159; Myrna S. Howell, 10 T. C. 859 (on appeal CCA-6, Aug. 16, 1948).

As part of the deficiency for each of the taxable years 1936 to 1942, inclusive, is due to fraud with intent to evade tax, the imposition of the addition under section 293 (b) is mandatory.

Decision will be entered under Rule 50.

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Footnotes

• *. Included a premium payment to the Metropolitan Life Insurance Co. of $ 2,176.50 on Nov. 10, 1933.↩

• 1. Reported as salary.↩

• 2. Reported $ 6,000 as salary and $ 683.02 as income from partnerships.↩

• 1. 1937 book profit $ 1,835.63 plus withdrawal of $ 300.

• 2. 1938 book loss $ 2,005.05, minus withdrawal of $ 300.↩

• 3. Also reported $ 1,200 as salary from Briden & Co.↩