Simmons v. Commissioner

Estate of Helene Simmons, Deceased, First National Bank in Houston, Temporary Administrator, Petitioner, v. Commissioner of Internal Revenue, Respondent

Simmons v. Commissioner

Docket No. 42726

United States Tax Court

26 T.C. 409; 1956 U.S. Tax Ct. LEXIS 180;

May 31, 1956, Filed

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Decision will be entered under Rule 50.

Helene (petitioner's decedent) and Frank Simmons were husband and wife whose legal residence was in Texas. Helene owned, as her separate property, all of the stock in the Crosby Companies. She was president and a director of those companies but neither participated nor took active interest in the companies' affairs. She gave Frank her power of attorney, made him a director and vice president and general manager of the companies, and left the complete control of the companies' affairs in his hands. During 1946 and 1947, the years in issue, Frank (a) caused the companies to expend sums to or for the benefit of Helene alone, himself alone, or himself and Helene jointly, charging off such expenditures as corporate expenses, (b) received and retained money from sales of the companies' assets, and (c) received "kickbacks" from suppliers of the companies. Held:

1. The aforementioned sums constitute community income to Helene and Frank, one-half of which is taxable to Helene. The doctrine of Commissioner v. Wilcox, 327 U.S. 404">327 U.S. 404, does not apply to this factual situation so as to cause those sums to be nontaxable as embezzlement income.

2. Withdrawals, totaling $ 109,264.43, made by Helene and Frank from the Crosby Companies in 1947 and charged on the companies' books as accounts receivable due from them were bona fide loans and not community income to them in 1947. These loans were subsequently repaid in full.

3. Certain overriding oil royalties were received by Frank in 1947 as compensation for his services in connection with some leases. The Commissioner has determined that these properties were community income and has determined their fair market value. Held, the Commissioner is sustained in his determination that the properties were community income but their fair market value was less than the Commissioner determined. Fair market value of such properties determined.

4. Certain "unidentified" bank deposits made to the accounts of Frank and Helene in 1946 represented unreported community income to them for that year.

5. No part of Helene's deficiencies for either 1946 or 1947 was due to fraud with intent to evade taxes.

Charles W. Bell, Esq., Clarence E. Kendall, Esq., and Clyde L. Wilson, Jr., Esq., for the petitioner.

Richard W. Janes, Esq., and Godfrey L. Munter, Jr., Esq., for the respondent.

Black, Judge.

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BLACK

The Commissioner determined that petitioner was liable for deficiencies in its decedent's income taxes, and for additions thereto for fraud as follows:

		Addition
Year	Deficiency	for fraud
1946	$ 38,762.87	$ 19,381.43
1947	54,859.10	27,429.55

In the statement attached to the deficiency notice, the adjustments resulting in the deficiency determinations, and the explanations of those adjustments, are set forth as follows:

Taxable Year Ended December 31, 1946
ADJUSTMENTS TO NET INCOME
Net community income as disclosed by returns		$ 33,973.26
Additional income:
(a) Dividends	$ 72,926.19
(b) Capital gain	1,705.58
(c) Oil properties acquired	8,194.28
(d) Commissions omitted	1,147.25
(e) Unidentified deposits	30,798.56	114,771.86
Net community income adjusted		$ 148,745.12
(f) Less: Community interest of decedent's husband		72,724.51
Net income adjusted		$ 76,020.61

EXPLANATION OF ADJUSTMENTS

(a) Dividends reported to have been increased by amounts paid to you or for your benefit by the corporations listed below and by cash used by you from corporation receipts.

Wynn Crosby Drilling Company	$ 44,493.21
Crosby Drilling Corporation	8,707.80
A. W. Crosby, Incorporated	3,872.58
Cash received by the above corporations and applied to personal
use	15,852.60
Total	$ 72,926.19

(b) Sale of DeSoto Parish land with retention of mineral rights resulted in the adjustment * * *

(c) Oil properties acquired from W. C. Schmitz without consideration are included in income at their fair market value.

(d) Cash commissions of $ 1,147.25 from Pan American Petroleum Company were omitted from the return and are, therefore, included here.

(e) Deposits which were unidentified as to source or purpose totalled $ 30,798.56 and this amount is included in taxable income.

(f) All items are community income and expense except royalties and capital gain and small deductions which belong on decedent's return.

Taxable Year Ended December 31, 1947
ADJUSTMENTS TO NET INCOME
Net community income as disclosed by returns		$ 46,357.56
Unallowable deductions and additional income:
(a) Dividends	$ 45,165.36
(b) Withdrawals	109,304.43
Total	$ 154,469.79
Additional deduction:
(c) Profit reported from sale of stock	44.51
Net addition		154,425.28
Net community income adjusted		$ 200,782.84
(d) Less: Community interest of decedent's husband		98,638.53
Net income adjusted		$ 102,144.31

EXPLANATION OF ADJUSTMENTS

(a) Dividends reported have been increased by amounts paid to you or for your benefit by the following corporations and increased, also, by cash used by you from corporation receipts:

Wynn Crosby Drilling Company	$ 31,767.65
Crosby Drilling Corporation	250.00
A. W. Crosby, Incorporated (paid)	4,047.71
A. W. Crosby, Incorporated (cash used)	9,100.00
Total	$ 45,165.36

(b) Withdrawals, shown by your accounts payable on the books of the corporations mentioned in (a) above, are added to income as taxable distributions. * * *

(c) Profit reported from sale of stock of Commonwealth and Southern, $ 44.51, is eliminated since it was a 1946 sale.

(d) Income is community income except royalties which are shown as allocated on the returns.

By appropriate assignments of error petitioner contested all of the above adjustments. However, petitioner introduced no evidence relative to adjustments (b) and (d) for 1946, nor does its brief contain any argument thereon. Consequently, it is deemed to have conceded those two adjustments and they will be appropriately reflected in the Rule 50 computation.

FINDINGS OF FACT.

Petitioner is the acting temporary administrator of the estate of Helene Simmons (hereinafter called Helene) and has its principal office in Houston, Texas. Helene and Frank A. Simmons (hereinafter called Frank) were husband and wife and were domiciliaries of Texas at all times material to this proceeding. For the calendar years 1946 and 1947, Helene filed separate income tax returns on the community property basis with the then collector of internal revenue for the first district of Texas. She died May 4, 1950. Appropriate consents extending the period of limitations applicable to Helene's 1946 and 1947 returns were filed and no statute of limitations issue is presented. Frank Simmons died sometime prior to the hearing in this case.

Helene was married to A. W. (Wynn) Crosby for many years prior to the latter's death in 1938. They had an adopted son, Donald W. Crosby (hereinafter called Donald), who died in November 1949. A. W. Crosby had been a successful oil operator and was the founder and principal stockholder of three oil drilling and exploration corporations: Wynn Crosby Drilling Company, Crosby Drilling Corporation, and A. W. Crosby, Inc. (hereinafter sometimes collectively called the companies). Wynn Crosby Drilling Company owned all the stock of Crosby Drilling Corporation.

On A. W. Crosby's death Helene acquired all but 1,200 of the 5,000 shares of stock in Wynn Crosby Drilling Company, which 1,200 shares were owned by Donald, and all the stock in A. W. Crosby, Inc. The actual management of the three companies was taken over by an employee and later by Donald. Helene had no activity in business affairs. This was due in part to the fact that she had developed cancer, for which she was operated on in 1942 and for which she received extensive treatments thereafter and until the time of her death.

Helene first met Frank about 1941. In that year Frank assisted her in the sale of some securities she had inherited from A. W. Crosby, earning a large commission for himself on the deal. As a result of this and other transactions Helene acquired confidence in Frank's business ability and integrity and gave him her power of attorney in 1943. On September 30, 1944, Frank obtained a divorce in Reno, Nevada, from his then wife and, on that same day, married Helene.

Frank was a man of questionable principles and judging from his relations with Helene, appears to have been a money-seeking adventurer. As a result of his efforts, friction was created between Helene and Donald, and Helene, in December 1944, purchased Donald's 1,200 shares in Wynn Crosby Drilling Company for $ 210,000. Thereafter, on about January 1, 1945, the management of the Crosby Companies was taken over from Donald by Frank, who was made a director and vice president and general manager thereof. The other two directors of the companies were Helene, who was also their president, and an employee whom Frank had hired.

The complete control of the Crosby Companies rested in Frank's hands during the period here material and he exercised that control to the fullest extent, delegating no appreciable executive authority to anyone else. Frank spent most of his time in Houston, Texas, where the offices of the three companies were located. On the other hand Helene, although she was a director and president of the companies and received a salary from them, had nothing whatever to do either with their direct operation or the formulation of business policy during the years in issue. She spent most of her time in California, where she was concerned with caring for her health and with decorating and enjoying an expensive residence built by her in 1941 in a suburb of Los Angeles.

No dividends were declared by the companies after Frank took over their management in 1945, although dividends had been declared and paid prior thereto.

Frank was a businessman of considerable ability and the Crosby Companies continued to prosper under his direction. However, he engaged in a course of taking funds of the companies for his own use and for the use of Helene, the sole stockholder. For example, he caused personal items to be paid with funds of the companies and charged to expenses on the companies' books. Frank gave detailed instructions to the companies' auditor regarding the way in which various items of the aforementioned type (and of related types mentioned later) were to be handled on the companies' books. In giving those instructions he was greatly concerned with minimizing the effect of Federal income taxes. Helene was not a party to these transactions and knew nothing about them.

The auditor questioned the legitimacy of those items and called them to the attention of the independent auditing firm retained by the companies, but the latter refused to thoroughly investigate them. In addition the auditor attempted to bring these matters to the attention of internal revenue agents, but the agents expressed no interest in them and apparently viewed the matter as an internal corporate problem.

Late in 1948, Helene, whose health had been getting progressively worse, went with Frank to Johns Hopkins Hospital in Baltimore, Maryland. While there Frank had her sign a document giving him authority to withdraw funds from her personal bank accounts. The source of income in one of those bank accounts was from some property Helene owned. After leaving the hospital Helene returned to her home in California. Although she was occasionally able to leave that home Frank and his brother attempted to cut her off from her friends and relatives, prevented them from seeing her, and intercepted her mail and telephone calls. In addition Frank, who was then the principal beneficiary under Helene's will, harassed and threatened her with dire consequences should she attempt to change that will. All this caused Helene to fear for her life.

With the aid of her son, Donald, Helene left her California home in February 1949, and, by various stages, fearing all the while that she would be found by Frank, traveled to Houston, Texas. She and her nurse resided in a hotel there until her death on May 4, 1950. During this final period of her life Helene retained a Texas lawyer and first had him prepare a will for her revoking the previous one which named Frank the principal beneficiary. At the same time she filed suit for divorce against Frank in Texas and an action to recover money taken by him from her personal bank accounts. She also obtained a restraining order preventing Frank from harassing her. Moreover, as sole stockholder of the Crosby Companies, Helene caused Frank's removal as an officer and director thereof. Further, the power of attorney she had given Frank in 1943 was revoked by her in 1949.

Helene's lawyer also decided to inquire into Frank's handling of the affairs of the Crosby Companies. This inquiry uncovered numerous instances of Frank's charging to companies' expenses personal expenditures benefiiting both himself and Helene and of Frank's using corporate opoprtunities for his personal benefit. With the exception of one type of item (i. e., salary checks issued by the companies to a personal chauffeur charged as companies' expense), Helene had no idea how Frank had been handling the companies' affairs and dealing with personal expenses, etc. After learning the above Helene caused the Crosby Companies to file various suits against Frank in Texas and Louisiana to recover certain properties acquired by him and, in addition, amended her suit for divorce to cover misappropriation of corporate property.

Frank entered various defenses and cross-claims in the above suits and instituted a divorce action against Helene in California. He also misappropriated Helene's stock in the Crosby Companies (which had been kept in the companies' safe in Houston), depositing it with a California court where he sought a declaratory judgment to the effect that he was the owner of the stock.

Helene died before her divorce action came to trial. However, judgments in the suits which she caused the companies to file against Frank were rendered in 1952. For the most part, those judgments, based on agreement of the parties, were favorable to the companies and Frank made cash repayments to the companies and transferred certain royalty and oil lease interests to them.

At the same time that Helene and her attorney were investigating Frank's activities and taking legal action against him in 1949, respondent's agents were also investigating the companies' affairs. Helene and her attorney, as well as the auditor they caused to be hired for the companies, cooperated with those agents to the fullest extent.

As more fully set forth and explained in the preliminary statement Helene and Frank, in separate returns, reported net community income of $ 33,973.26 for 1946. Respondent determined increases in that figure totaling $ 114,771.86, resulting in adjusted net community income of $ 148,745.12. Helene's portion of that adjusted net community income was determined by respondent to be $ 76,020.61. ^{*193 of the community. The $ 72,926.19 was composed of the following items:}

(a) $ 16,009.23 paid directly to Frank by the Crosby Companies as reimbursements of expenditures, and charged as corporate expenses on their books, but which in fact represented either personal expenditures by Frank or were expenditures which Frank never actually made.

(b) $ 7,500 paid by one of the companies on a gambling debt owed by Frank and charged as corporate expense on its books.

(c) $ 14,222 personally received and retained by Frank from sales of corporate assets.

(d) $ 1,630 received by Frank in "kickbacks" from suppliers of the companies.

(e) $ 33,564.96 paid by the companies for personal expenses of Helene alone or of her and Frank jointly and charged as corporate expense on the companies' books. Part of this sum represents companies' checks drawn to payees who had performed personal services for Helene and Frank and had already been paid. The endorsements of those payees were forged, apparently by Frank, and the checks were either cashed by Helene or Frank or deposited in one of their bank accounts. There is no evidence to show that Helene had any knowledge that endorsements by the payees of the checks were forged.

A second element in respondent's adjustments of net community income for 1946 is an increase of $ 8,194.28 for "Oil properties acquired." In 1946, on the urging of William C. Schmitz, a consulting petroleum geologist, Frank had one of the Crosby Companies exercise an option Schmitz held to purchase an oil and gas lease covering 286 acres from the Clifton Land Corporation. The company, intending to drill for oil on that leasehold, paid the option price therefor, which was $ 30,000 plus a 5/16 royalty, and gave Schmitz a 1/16 overriding royalty interest therein. Schmitz then gave Frank personally a 1/48 royalty (i. e., one-third of Schmitz's interest) and respondent included that 1/48 interest in community income at a value of $ 7,174.50. The lease was of a highly speculative nature in an area noted for lack of success in oil operations; in fact the land had previously been leased to another oil company but that company dropped its lease. The lease was drilled in 1946 by one of the Crosby Companies and, in fact, became a valuable producing property in that year. The fair market value of Frank's 1/48 interest in the lease at the time it was assigned to him by Schmitz was $ 3,500.

Frank also helped Schmitz sublease to a third party (which party intended to conduct drilling operations) for $ 2,294.50, an oil and gas lease Schmitz held in the Pine Prairie tract. For this service Schmitz assigned Frank a 1/72 overriding royalty interest in the Pine Prairie lease and respondent included that 1/72 interest in community income at a value of $ 1,019.78. This lease was also of a highly speculative nature in an area noted for lack of success in oil operations. The lease was drilled in 1946 and, in fact, became a valuable producer. The fair market value of Frank's 1/72 interest in the lease at the time it was assigned to him by Schmitz was $ 500.

A third element in respondent's adjustments to 1946 net community income is $ 30,798.56 in unidentified bank deposits. This is composed of $ 10,822.27 in deposits to Helene's individual bank accounts and $ 19,976.29 in deposits to Frank's individual bank accounts.

Of the unidentified deposits to Frank's bank account, $ 15,000 is accounted for by a check received by Frank in settlement of a suit arising out of matters in which Frank was interested before his marriage to Helene. It is Frank's separate property. The balance of the unidentified deposits to Frank's and Helene's accounts represents unreported community income for 1946 arising, at least in part, from properties and transactions other than those connected with the Crosby Companies.

As more fully set forth and explained in the preliminary statement Helene and Frank reported, in separate returns, net community income of $ 46,357.56 for 1947. Respondent determined increases in that figure totaling $ 154,469.79, resulting in adjusted net community income of $ 200,782.84. Helene's portion of that adjusted net community income was determined by respondent to be $ 102,144.31. *197 The $ 45,165.36 was composed of the following items:

(a) $ 5,827 paid directly to Frank by the companies as reimbursements of expenditures, and charged as corporate expenses on their books, but which in fact represented either personal expenditures by Frank or were expenditures which Frank never actually made.

(b) $ 9,100 personally received and retained by Frank from sales of corporate assets.

(c) $ 30,238.36 paid by the companies for personal expenses of Helene alone or of her and Frank jointly and charged as corporate expense on the companies' books. Part of this sum represents company checks drawn to payees who had performed personal services for Helene and Frank and had already been paid. The endorsements of those payees were forged, apparently by Frank, and the checks were either cashed by Helene or Frank or deposited in one of Frank's bank accounts. There is no evidence that Helene had any knowledge that the endorsements of the payees of the checks were forged.

The second element in respondent's adjustments of net community income for 1947 is an increase of $ 109,304.43 for "Withdrawals." This is composed of personal expenses paid by the Crosby Companies for Helene and Frank, or money advanced to them, and charged against them as accounts receivable on the companies' books and carried by the companies as assets on their books. The net charges actually made for 1947 totaled $ 109,264.43 and not the $ 109,304.43 determined by respondent. Of that $ 109,264.43 total, $ 42,013.92 was charged against accounts receivable in Helene's name and $ 67,250.51 was charged against the accounts receivable in Frank's name.

A. W. Crosby, Helene's first husband, had advanced large sums of money to the Crosby Companies. When he died in 1938, the companies owed him about $ 285,000, which was credited to him on their books and which credit balances Helene inherited. Helene then began the practice of having the companies pay some of her personal expenses and advance funds to her from time to time, charging those company expenditures against the credit balances in her favor. From 1938 through 1944, the balances were in Helene's favor; at the end of 1945, she owed the companies about $ 880; but, at the close of 1946, neither she nor the companies owed each other anything. During 1947, the companies advanced to her or for her benefit $ 42,013.92, which she did not repay in that year and which showed up as accounts receivable due from her at the close of 1947.

In 1948, certain additional advances were made to Helene, or for her benefit, by the Crosby Companies and debited to the accounts receivable due from her. Also certain charges to Frank's accounts receivable were transferred to Helene's accounts by adjusting entries in January 1948. In that year, however, Helene gave the companies a demand note for over $ 56,000, bearing interest at 2 per cent, to cover part of the debit balance in her account receivable. In 1949, when the attorney Helene had retained to press proceedings against Frank advised her of the status of her accounts Helene transferred to the companies a diamond ring worth $ 45,000 in part payment for that note. (In a later settlement, after Helene's death, of one of the legal actions between Frank and the Crosby Companies the diamond ring was awarded to Frank.) She also, in 1949, sold to one of the companies (Wynn Crosby Drilling Company) all of her stock in another of the companies (A. W. Crosby, Inc.) for $ 275,000, applying $ 50,000 thereof to reduce part of the debit balance in her account receivable with the purchasing company and using the rest of the money to live on and to finance the actions initiated against Frank. Although she was a wealthy woman it was necessary for her to sell that stock in order to obtain immediate cash because Frank (through use of the document Helene had given him in 1948 while she was in Johns Hopkins Hospital) had withdrawn a large amount of money from her bank accounts.

The sums totaling $ 42,013.92 charged to Helene's accounts receivable with the Crosby Companies in 1947 were intended by Helene to be loans from the companies which she would repay. They were in fact bona fide loans from the Crosby Companies to Helene.

During 1947, net charges of $ 67,250.51 were made against accounts receivable in Frank's name on the Crosby Companies' books, resulting from money paid by the companies to Frank or for the benefit of Frank and/or Helene. In January 1948, $ 16,650.28 of the $ 67,250.51 was transferred to Helene's accounts receivable by adjusting entries and treated by her as her debt, she subsequently paying part of it in 1948 and its being settled in full upon liquidation of the companies. The $ 50,600.23 balance represents money paid to Frank or for his benefit. Part of that balance was transferred in 1948 to a note given by Frank bearing 2 per cent interest. However, the entire $ 50,600.23 balance, including the part covered by the note, was charged off as a bad debt later in 1948. The judgments subsequently rendered in 1952 in the actions between the Crosby Companies and Frank included the $ 50,600.23 and that sum was repaid by Frank as part of the judgments. At the time the sums totaling $ 67,250.51 were charged to Frank's accounts receivable with the Crosby Companies in 1947, he intended them to be loans which would be repaid. They were in fact bona fide loans from the Crosby Companies to Frank.

The Crosby Companies, in 1946 and 1947, had earnings and profits in excess of the amounts respondent contends constituted informal dividends from those companies.

Helene's individual income tax return for 1947 was prepared by an independent auditing firm retained to conduct an annual audit of the companies. Although the evidence is not clear, that firm probably also prepared Helene's 1946 return. At the least, her 1946 return was prepared on the basis of figures from the Crosby Companies which were first audited by that firm. No part of the deficiencies in Helene's income taxes for 1946 or 1947 was due to fraud with intent to evade tax.

OPINION.

For both 1946 and 1947, respondent determined that informal dividends, totaling $ 72,926.19 and $ 45,165.36, respectively, were received by the community of Frank and Helene from the Crosby Companies and that Helene did not report her community half thereof. We have set out the components of the above sums in our findings. Analysis of those components indicates that they can be segregated into three groups:

1. Moneys which Frank withdrew from the companies, retained from sales of their assets, or caused them to expend, primarily for his benefit (Frank causing the companies to charge off his withdrawals and their expenditures as corporate expenses).

2. Moneys which Frank caused the companies to expend for the benefit of Helene alone, or of both Helene and Frank, and to charge off as corporate expenses.

3. "Kickbacks" received by Frank from suppliers of the companies. This is a small item, being $ 1,630 for 1946 and none for 1947.

Petitioner argues that the above sums were embezzled by Frank from the companies, do not constitute income to him under section 22 (a) of the 1939 Code, , and , certiorari denied , and therefore cannot be community income taxable one-half to Helene. Petitioner also argues that even if those sums do constitute income to Frank under section 22 (a), they were wrongfully acquired from the companies, thereby becoming impressed with a constructive trust, and that property so impressed does not become community property under Texas law. We are unable to sustain petitioner's position.

We note first that although Helene was the sole stockholder of the companies and that stock was her separate property, any dividend income therefrom in 1946 and 1947 would be community income of Helene and Frank. , affd. (C. A. 5) ; , and cases cited therein. "The applicable Texas statutes vest title to the community property in the husband and wife in equal parts, but, during coverture, the husband has the exclusive power of control over the property as long as he discharges his obligation as the head of the family." , certiorari denied . Frank was the head of the family in the taxable years before us. There seems to be no doubt of that fact and petitioner does not dispute it. He, therefore, had complete control over any dividend income that might be realized from the Crosby Companies in 1946 and 1947 and could expend such income for any purpose he saw fit, even purposes redounding solely to his benefit such, for example, as paying his gambling debts.

Moreover, Frank was a director and the vice president and general manager of the companies and was in complete control of their operations. He also held a power of attorney from Helene who, although president and a director of the companies, performed no functions as president and took no active part in the businesses. The third director of the companies was an employee whom Frank had hired.

Finally, it is noted that the companies had sufficient earnings and profits to constitute as dividends all of the sums here in issue, had formal declarations of dividends been made.

Considering all of the above factors, we find the reality of the situation to be that Frank, as a practical matter, could have had the companies make formal dividend declarations and payments of the sums in issue and then, since such dividends would be community property subject to his exclusive control, expend them for any purposes he wished, nefarious though such purposes may have been. In such case there would be no doubt that those dividends constituted community income under Texas law, one-half of which was taxable to Helene. We do not believe that a different tax result should proceed simply from a change in the form of the transaction wherein Frank exercised dominion over the companies' earnings and profits without there first being a formal dividend declaration.

We think the situation here is somewhat akin to that in , affirming , certiorari denied , wherein the Court of Appeals made the following observation:

It is thus readily apparent that but for the alleged embezzlements 90% of the money in question (less corporate taxes) would in the normal course of events have been returned to the family in the form of dividends or capital. Unlike the situation in Wilcox, where the taxpayer would not have received the proceeds except for his conversion, the Kanns were to a large extent taking their own money. Indeed, under the Pennsylvania and Ohio codes, * * * and bearing in mind the principles of corporate entity, it would seem to be possible for the proprietor of a one-man corporation to be guilty of embezzlement if he diverted corporate monies to his own pocket without the formality of declaring dividends. Such local law concept of embezzlement, while it may be useful to deter those in control of a corporation from defrauding creditors and minority stockholders, should not, in our opinion, be used as a vehicle for tax avoidance, absent a clear mandate to the contrary.

See also . Here, too, but for the alleged embezzlements, the money in question (less corporate taxes) would in the normal course of events have been returned to Helene in the form of dividends or capital, as the court said in the Kann case, supra. If returned as dividends they would have been community income that Frank, as manager of the community, could have expended as he wished. Indeed it appears that one of the major reasons Frank used the methods he did to get the benefit of the companies' funds for himself and Helene was to minimize taxes.

Certainly the moneys which Frank caused the companies to expend for the benefit of Helene alone, or of both Helene and Frank, must, under our previous decisions, be regarded as income attributable at least in part to Helene even though there were no formal dividend declarations. And, in view of the community nature of any income derived from the companies' and Frank's rights of disposition in regard thereto, we are unable to make any distinction for tax purposes in regard to the earnings and profits which Frank appropriated solely for his own benefit and without formal dividend declarations. Such sums must also be held community income.

Petitioner relies on , and , for its contention that the informal dividends here in issue were embezzled by Frank and therefore do not constitute income either to him or to the community. In any event those cases would not be applicable to the "kickbacks" received by Frank from the companies' suppliers, since it was held in , certiorari denied , that "kickbacks" are taxable to the recipient and do not fall within the Wilcox doctrine of nontaxability of embezzled income.

Further, the Wilcox doctrine is a narrow one ;;, certiorari denied . It does not, we think, apply to the companies' funds expended for the benefit of Helene alone or of Helene and Frank jointly in view of the fact that Helene was sole stockholder of the companies. And, as regards the companies' funds appropriated solely for Frank's benefit, here again, when we consider Frank's complete control over the companies' affairs, the fact that the form actually employed by him to get the funds from the companies might "have technically amounted to embezzlement" under the local law is not determinative for Federal tax purposes. Indeed, we note that even though Helene caused the companies to bring suits against Frank in 1949 for misappropriation of property, no action was taken to criminally prosecute him for embezzlement. See

Petitioner's alternative argument, that in any event, the funds appropriated by Frank from the companies were impressed with a constructive trust and therefore do not constitute community income, must also, we think, fail. It seems to be well established that a constructive trust is a legal fiction, remedial in nature, developed to prevent unjust enrichment. Trusts, sec. 139, 89 C. J. S. 1015. We note that the Crosby Companies were solvent at all times here material. It would therefore appear that none of the sums in issue could be said to be impressed with a constructive trust in favor of the creditors of the companies and, in fact, petitioner does not contend such to be the case. Petitioner does argue though that the appropriated sums were impressed with a constructive trust in favor of the companies and their stockholders. In view, however, of the fact that Frank was the directing head of all three of the companies and was in complete charge of their affairs and was placed in that position by the will of the stockholders, we do not believe that the doctrine of constructive trust is applicable. Frank's misappropriation was in essence a misappropriation of the community funds and petitioner has referred us to no case in which a husband, during coverture and while head of the family, has been declared constructive trustee of community funds.

We sustain respondent in his determination that unreported informal dividends of $ 72,926.19 in 1946 and $ 45,165.36 in 1947 were received by the community of Helene and Frank and that one-half thereof constitutes income taxable to Helene.

The next issue we have to decide is respondent's adjustment increasing 1947 net community income by $ 109,304.43 for "Withdrawals." This was composed of personal expenses paid by the companies for Helene and Frank, or money advanced to them, and charged against them as accounts receivable on the companies' books. We have found that the net charges actually made for 1947 totaled $ 109,264.43, of which $ 42,013.92 was charged against accounts receivable in Helene's name and $ 67,250.51 was charged against accounts receivable in Frank's name.

Whether or not the withdrawals represented community income to Helene and Frank in 1947 "depends upon * * * [the recipient's] intent and whether he [or she] took the company's money for permanent use in lieu of dividends or whether he [or she] was then only borrowing." (Emphasis supplied.) . It is the intent at the time the withdrawals were made which is determinative. If, at that time, the recipient intended the withdrawal to be a loan which he would repay but, in a later year, changed his mind, the withdrawal still qualifies as a loan in the year made and does not become income until such later year. , certiorari denied .

The question of Helene's and Frank's intent at the time of their withdrawals in 1947 is one of fact which we must decide upon consideration of all the circumstances present in this particular case. ; . We have carefully reviewed the entire record and have concluded that at the time of their respective withdrawals in 1947, and during all of that year, both Helene and Frank intended them to be loans from the companies which they would repay.

For many years Helene followed the practice of withdrawing sums from the companies and, in effect, repaying the companies by charging those withdrawals against her credit balances with them which she had inherited from her first husband. The companies, in fact, owed her money in every year, save one, from 1938 through 1945, and at the end of 1946 she and the companies were even. The sums totaling $ 42,013.92 which she withdrew from the companies during 1947 were charged to her on their books. She further recognized those withdrawals as loans by executing, in 1948, a 2 per cent demand note covering them, and she subsequently made every effort to repay them. Moreover, at the time Helene made the withdrawals in 1947 she was a wealthy woman capable of repaying them at any time.

Her efforts to repay the companies in 1949 by transfer of a ring to them, and sale to one of the companies of stock in another, has been challenged by respondent as a paper transaction. Ordinarily such circumstances might raise serious doubts in our mind regarding Helene's bona fide intent at the time the withdrawals were made, but here those circumstances are explained to our satisfaction by the fact that Helene's cash position was poor because Frank had taken much money from her bank accounts. All things considered, therefore, we are of the opinion that Helene at all times intended her 1947 withdrawals from the companies to be loans which she would repay.

As regards the $ 67,250.51 in withdrawals by Frank during 1947, it is first noted that $ 16,650.28 thereof was obviously for Helene's benefit because such amount was, by adjusting entries, transferred to Helene's account in January 1948, treated by her as a debt, and subsequently repaid. We think it clear, therefore, that this sum was not income to Frank.

The question of Frank's intent regarding the $ 50,600.23 balance of his 1947 withdrawals is a closer one. Those withdrawals were charged to Frank on the books of the companies at the time made and were, in part, further recognized by Frank in 1948 by his execution of a 2 per cent demand note covering most of that balance. Later in 1948, the companies charged off the $ 50,600.23 balance, including that part covered by the note, as a bad debt. Subsequently, in the stipulated judgments arrived at between Frank and the companies in 1952, the $ 50,600.23 was recognized by him as a debt owed to the companies and was paid by him. After careful study of the above facts, we conclude that at the time Frank withdrew the $ 50,600.23 in 1947 and during the remainder of that year, he intended those withdrawals to be loans which he would repay. They were in fact subsequently repaid. We hold these withdrawals were loans, and not dividends.

In 1946, Frank caused one of the companies to exercise an option held by William C. Schmitz, a geologist, to purchase an oil and gas lease covering 286 acres from the Clifton Land Corporation for $ 30,000 plus a 5/16 royalty. The company gave Schmitz a 1/16 overriding royalty interest in the lease and Schmitz then gave Frank personally a 1/48 interest therein. Respondent determined that the fair market value of Frank's interest at the time he received it was $ 7,174.50 and included it in the community income of Frank and Helene at that value. The 1/48 interest Frank received from Schmitz must be included in community income at its fair market value. Regs. 111, sec. 29.22 (a)-3. Respondent's determination of fair market value is prima facie correct and petitioner bears the burden of proving the incorrectness of that determination. .Petitioner, in its brief, contends that this 1/48 interest which Frank received from Schmitz had a fair market value not in excess of $ 500. Respondent argues that his determination of $ 7,174.50 value should be sustained. There is testimony in the record concerning the fair market value of this 1/48 overriding royalty interest. After giving consideration to this testimony we have found that Frank's 1/48 overriding royalty interest in the Clifton Land property lease had a fair market value of $ 3,500 at the time Frank received it.

Also, another item which respondent included in the community income was a 1/72 overriding royalty interest in the Pine Prairie lease which Frank received from Schmitz for his help in securing a sublease to a third party who intended to conduct a drilling operation on the land. Petitioner contends that at the time Frank received this interest from Schmitz, the value of the lease was so highly speculative that it was practically worthless and had no fair market value. We are not convinced that this is true. Respondent, in his determination of the deficiency for 1946, has determined this 1/72 overriding royalty interest in the Pine Prairie lease to have had a fair market value at the time it was received of $ 1,019.78. We think from the evidence this value is too high. In our Findings of Fact we have fixed the value of this 1/72 overriding royalty interest at $ 500 at the time Frank received it from Schmitz.

The result of our holding as to the two oil royalty properties is to hold that item (c) in the Commissioner's adjustment for the year 1946 "Oil properties acquired $ 8,194.28," should be $ 4,000, instead of $ 8,194.28 as the Commissioner has determined. That figure will be used in a Rule 50 computation.

Respondent determined that $ 30,798.56 in unidentified bank deposits represented unreported community income to Helene and Frank in 1946. This was composed of $ 10,822.27 in deposits to Helene's individual bank accounts, and $ 19,976.29 in deposits to Frank's individual bank accounts. We have found, however, that $ 15,000 of the deposits to Frank's bank accounts was received by Frank in settlement of a lawsuit arising out of matters in which he was interested before his marriage to Helene. That $ 15,000 was Frank's separate property and not income to the community. Tex. Civ. Stat. (Vernon) art. 4613; (Tex. Civ. App.); (Tex. Civ. App.); (Tex. Civ. App.).

The balance of the unidentified bank deposits, totaling $ 15,798.56, represented unreported community income of Frank and Helene. Respondent's agent made a thorough study of Helene's and Frank's bank accounts. As stated in respondent's brief, his agent "went to the banks and made transcripts of the bank accounts of both individuals. * * * He examined all the deposit slips and made copies of them. He examined all of the [Crosby] Corporations' checks, the bank cancellation dates, and identified such corporate items on the individual bank accounts. He traced all other known income items into the known bank accounts and traced all transfers between known bank accounts." The results of the agent's investigation were introduced in evidence. Moreover, the record reveals that at least two probable sources of those unexplained deposits were property owned by Helene (our findings indicate she maintained a separate bank account for some such property) and Frank's gambling activities.

Petitioner, on the other hand, has completely failed to give any explanation for the $ 15,798.56 in unidentified deposits. It has, therefore, not sustained its burden of proving respondent's determination to be incorrect as regards this amount. Consequently, we hold that the $ 15,798.56 constituted unreported community income of Frank and Helene for 1946.

Fraud Issue.

It is well settled that respondent has the burden of proving fraud by clear and convincing evidence. In our opinion, he has here failed to sustain that burden.

It should be remembered that we do not have Frank's case before us. The fact that he may have been guilty of fraud in many of his transactions with the companies and in his income tax returns does not mean that fraud penalties should be sustained against Helene. No joint returns were filed in 1946 and 1947 by the two. Helene filed her own separate returns for those years, and so did Frank. Unless the respondent has shown that Frank and Helene were acting in concert in Frank's defalcations, he has failed to prove his case against Helene insofar as the fraud penalties are concerned. Petitioner's evidence, it seems to us, clearly shows Helene's disassociation from the acts in question, her ignorance of these acts at the time committed, and her zealous repudiation of those acts at the time she learned of them. Helene was in ill health before, during, and after the years involved. Her paramount interest was in the recovery of her health. To this end she turned over all her business affairs to her husband for management. The evidence convinces us that she was not a party to his fraudulent transactions. The evidence convinces us that during the 2 taxable years here involved she had implicit confidence in Frank. Later on and prior to her death she was to find that confidence had been greatly misplaced.

After a careful examination and weighing of all the evidence, we have made a finding that "No part of the deficiencies in Helene's income taxes for 1946 and 1947 was due to fraud with intent to evade tax." That finding disposes of the fraud issue in favor of petitioner. The imposition of fraud penalties by the Commissioner is not sustained.

Decision will be entered under Rule 50.

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Footnotes

• 1. Helene's portion exceeds half of the adjusted net community income because some items which in fact constitute separate income to her are included in that total.↩

• 2. Helene's portion exceeds half of the adjusted net community income because some items which in fact constitute separate income to her are included in that total.↩

• 3. "* * * no single, conclusive criterion has yet been found to determine in all situations what is a sufficient gain to support the imposition of an income tax. No more can be said in general than that all relevant facts and circumstances must be considered. * * *" .↩