Appeal from an order of the Tax Court, accompanied by an opinion of Judge Quealy, on the ground that there is no clear and convicing evidence to support that Court's findings of the correctness of the determinations by the Commissioner of Internal Revenue (1) that one of the two taxpayers who filed a joint return, by underreporting income, committed a fraud which suspended the three year statute of limitations (Sections 6501 (a) and (c)(1) and (2) of the Internal Revenue Code of 1954), (2) that the underreporting was in a specified amount, and (3) that there should be imposed upon the fraudulent taxpayer a penalty of 50 percent of the underpayment of the tax (Section 6653 (b) of the Internal Revenue Code of 1954). Order enforced.
Oakes, Circuit Judge, Holder, District Judge,*fn* and Wyzanski, Senior District Judge.*fn**
WYZANSKI, Senior District Judge:
Taxpayers, William and Doris Geller, who, as husband and wife, filed joint federal income tax returns, appeal from the August 18, 1976 order of the United States Tax Court deciding that there are deficiencies in income taxes due from both of them in specified amounts for the years 1965 and 1966 and that for the same years there are additions to the tax, pursuant to Section 6653 (b) of the Internal Revenue Code of 1954, due from William Geller.
The principal questions are (1) whether in either 1965 or 1966 or both years William Geller made "a false or fraudulent return with the intent to evade tax", or a "willful attempt to evade tax", so that, pursuant to Section 6501 (c)(1) or (2) of the Internal Revenue Code of 1954, assessments and proceedings with respect to such year or years are not governed by the 3 year period of limitation provided in Section 6501 (a) of the Code, and (2) whether in either 1965 or 1966 or both years, any part of any underpayment of the tax required to be shown on a return was due to the fraud of Dr. Geller so that "there shall be added to the tax [due from him] an amount equal to 50 percent of the underpayment", in accordance with Section 6653 (b) of the Code.
The facts found by the Tax Court are to the following effect.
In each of the years 1965 and 1966 Dr. and Mrs. Geller filed a joint federal income tax return reporting that they owed no tax. In the first of those years they reported that their sole taxable income was from his practice of medicine which was overbalanced by his business deductions. In the second of those years they reported that their sole taxable income was from his practice of medicine and that, after business deductions, their gross profit was only $3,092.15. In neither year did taxpayers show income from dividends, securities transactions, or any source other than from Dr. William Geller's medical practice.
Before either of the taxable years now under scrutiny, that is to say in 1953 and 1954, Dr. Geller had filed federal tax returns upon the basis of which he was convicted of the crime of willful evasion of tax, and which led to his making in 1964 a compromise settlement of the government's civil claims. In support of that settlement, Dr. Geller filed on Form 433 statements of financial condition asserting that he had assets of only $650 and liabilities, (not including federal income taxes,) of $30,000 and that from 1956 through 1963 he did not have sufficient income to require him to file federal income tax returns.
In the years 1965 and 1966 - the ones now in issue - Dr. and Mrs. Geller in their tax returns made no reference to the "2377 Creston Corporation" or to any receipts therefrom. That corporation had been incorporated in 1950 by Dr. Geller, his wife, and her sister, Regina Strasfeld. They had become the sole directors and shareholders of that corporation. It was located at the taxpayers' residence, 135 Ridge Street, New York City. The corporation engaged in the real estate business and securities trading.
In 1965 that corporation filed a federal corporate income tax return, signed by appellant William Geller as president, in which it reported $117,184.19 gross income from the installment sale of a building sold by it in a prior year, and $70,859.70 income from dividends before the dividends-received deduction.
In 1966 that corporation again filed a federal income tax return, again signed by William Geller. It reported no installment income, but a taxable loss of $10,224.09.
For both 1965 and 1966 the 2377 Creston Corporation corporate income tax returns were prepared by Mason S. Greenland, an accountant, from figures supplied by Dr. Geller. Dr. Geller did not give Greenland books of original entry, but merely total figures of alleged income and expenses. The corporate returns for 1965 and 1966 showed balance sheets of the corporation indicating that its assets in cash which had been $242,622.70 on December 31, 1964 had been reduced by the end of 1965 to $12,128.48 and by the end of 1966 to zero. Among the liabilities, however, long term mortgages and notes were also reduced from $210,072.86 at the end of 1964, to $52,282.86 in 1965, to zero in 1966. Without explanation, surplus reserves which stood at $143,592.24 on December 31, 1964 were stated as being "zero" as of December 31, 1965 and again as of December 31, 1966.
In its 1965 return the corporation showed that it paid compensation of $7,000 to Murray L. Geller, (the 24 year old son of taxpayers), as secretary, and of $5,200 to Irwin Geller, (the 21 year old son of taxpayers), who is referred to as "president" [despite other documents which indicate that his father, Dr. Geller, was president]. In its 1966 return the corporation showed no compensation of officers.
On June 17, 1965 Dr. Geller personally opened with the firm of Merrill Lynch, Pierce, Fenner & Smith a brokerage account in the name of "Wolf Geller". (Appellants' brief in this Court virtually concedes that this was a name used by Dr. Geller as though it were his own; and that he intended to have the account benefit him and not any other person known to him.) Dr. Geller gave as Wolf Geller's address 318 East 149th Street, Bronx, New York, which was the ...