Carlos and Jacqueline Marcello v. Commissioner of Internal Revenue, Joseph, Jr. And Anastasia Marcello v. Commissioner of Internal Revenue, 380 F.2d 499

Carlos and Jacqueline Marcello v. Commissioner of Internal Revenue, Joseph, Jr. And Anastasia Marcello v. Commissioner of Internal Revenue

380 F.2d 499

5th Cir.

1967

Check Treatment

*3 RIVES, and GOD- Before COLEMAN Judges. BOLD, Circuit Judge: RIVES, Circuit aof seek a review holding them Court decision each in income tax and for deficiencies liable pur- penalties some of liable for them 6653(a) suant to Sections the 1954 Internal Revenue Code.1 issues are distinct and unrelated seven disposition our To facilitate involved. up case, matter of this take each separately. Recognition on the Sale

I. of Gain

Marcello’s Residence. purchased residence Carlos Marcello it in July $42,500 and sold 1946 for Act $101,963.85. An December reflects Sale, March dated mother, Marcello, Carlos’ that Louisa purchased a residence in her name $110,000. Metairie, Louisiana, deposed Louisa in a notarized affidavit placed property this title to Cir., J. and Peter and third two cases are second Penny v. Commissioner involving Marcello the Mar- cases of four related Cir., family. two, No. Internal decided The other also cello day, F.2d 509. Marcello and Sadie this are Vincent Revenue, No. Internal v. Commissioner only; paying in her name for means of convenience been rent to Louisa bought repayments property specu- and for the aof loan.3 We do not Marcello; late on account Carlos paid the reasons these Carlos made purchase agreed mortgage price; payments. agree, she doWe how- herself, ever, heirs, to bind her executors with the Tax Court that within convey meaning property administrators such of Section 1034 Carlos was assigns Carlos, purchaser heirs, executors and of the new residence. so; that, required whenever making to do The aim of 1034 is conveyance Carlos, no such ignore gain only the realization of but though paid consideration is to one recognition postpone thereof and might stipulated and conveyance. to be declared defer the tax.4 A is not en paid in the deed of postponement titled to the benefit unless the 1954 *4 purchases he a new residence the within Code, 1034(a), Revenue 26 U.S.C.A. § Congress period. subscribed time in provides year that if a within before tended to enable use the homeowners to residence, taxpayer’s after the sale of a proceeds sales from a of the old sale taxpayer purchases the and uses newa buying residence their home. own residence, gain the on the sale the old purpose Section 1034 was not pur residence to the extent of the cost of permit taxpayer pro a to re-invest the chasing recogn the new residence is not ceeds from the sale of his home the ized.2 recog person home of another without nizing The Tax purposes Court held that and Carlos federal income tax Jacqueline prove they pur- gain by failed to realized the sale.5 The clear Though statutory language chased the new requires residence. that a new purchased by Court found that made Carlos residence be and used periodic mortgage payments taxpayer. for the new That the residence must be residence, pay- taxpayer it did not find that these owned is made evident purchase exception (g) ments were for his of the new in subsection house. Neither permitting a there Section 1034 either hus Carlos and made an initial band or the wife hold the residence payment, down party as claimed or her the tax- his name.6 If a third owns payers. suggests residence, purchase requirements The Commissioner mortgage payments could either are not have met.7 Mertens, Summary 2. See 3 Law of Federal Income Staff of Provisions of the Rev- 1951, Cum.Bull.1951-2, pp. Taxation Act of §§ 20.182-20.191. enue Mertens, 309. See Law of Federal points 3. The Commissioner out that Carlos Income Taxation 20.185. § $35,000. owed his mother beneficiary The fact that Carlos was purporting up nonrecognized gain may under an affidavit to set a 4. The become tax- relationship trust purchaser does not him a make able when the new residence is sold or dis- property. may posed be of. 3 Law of Federal In- beneficiary situations where a of a trust come Taxation 20.182. § purchaser. example, For document is 55-37, 1955-1, 5. See Rev.Rul. Cum.Bull. taxpayer may title sub- have recorded pp. 347, 348. ject duly to a recorded deed of trust or mortgage. Though according to state 1034(f), I.R.C.1954, See law, title be denomi- effect, 1034(f), providing, in C.A. § “equitable” the title of the nated and cooperative housing stock in a holders’ mortgagee trustee or considered corporation eligible are for the benefits “legal”, that section we have doubt assuming occupan (a), of subsection applicable. The facts of 1034 would cy prerequisite is met. Louisa Carlos this case reveal that persuaded ignore affidavit, per- the unrecorded We would be to find for the could property purchased legal in her if he had title mit Louisa to sell the thereby pos- Reg. party, prescribed period. 1.- a third within the name to capital gain. sibly (3) (i); (e) We do Committee Carlos’ 1034-1 Joint avoid incurring penalty pursuant Expenses of Carlos II. Interest Revenue of the 1954 Internal Motel. and Salvador’s provides for a Code. That section 5% Mar- Marcello and Salvador Carlos penalty month for each of the tax owed oper- along persons, cello, other with two filed return is fraction thereof Country- partners Town ated as determined late. The Commissioner disallowed Motel. days three month and the return was one partner- by the certain deductions taken late, so that 19%. ship thereby distribu- increased the taxpayers the return was contend that tive share Salvador. late, month so less than one Court, applying so- agree with should be 5%. part rule, procrasti- called Cohan found nership to deductions was entitled a two-month nation cost $5,000 interest amount penalty. January ending year for each taxable granted properly As a of a result 31, 1956, 1957, Specif and 1959.9 extension, Jacqueline had until ically, found the Tax Court September 15, 1969, to file their support claim for did not their They joint more even return. desired the full amount deducted: prepare In a letter time to return. their of loans “While there are a number 23, 1960, September local dated *5 actually by partnership made the which request district director refused the business, relate to its is a failure there extension, the a further but did advise establishing proof in connection taxpayers con that the return would particular payment, interest between a by timely sidered if it received filed were being made, and the loan on which it is days of the date his office within ten whether or not that loan is connected not filed letter. The return was the with the business the motel. Even and one month until October as loans shown to those which were filing days September 15 three after the business, be related to the motel’s date. are the exact unable to ascertain ten-day that the The contend during paid the of interest amounts filing grace period their date extended years involved.” They district that the October 3. assume We find that Court made a of time extension director’s letter was an correct estimate of interest was meaning what filing return within borrowings.10 partnership attributable assumption Their wrong. expressly refused The director 6651(a) Penalty III. The Section beyond September grant an extension Against Assessed and Carlos Exercising he, discretion, 15. his Jacqueline Marcello. effect, not invoke said he would 6651(a) Jacqueline if the return was sanctions of Marcello filed days. taxpayers, late, thereby joint The filed within ten tax return appeal speculate attempt disallow- Salvador do not whether to avoid an travel and ance of deductions taken for if the tax would have occurred even expenses. unrecognized. gain actually go entertainment would merely af- hold that this unrecorded Salvador, taxpayers, The Carlos justify a fidavit does not claim no difference it makes pur- contend Carlos, beneficiary, is a affidavit’s partner- to the the loans were advantage whether can take of section chaser who partners, ship on the the- or to individual expenses ory partnership are deduc- of Internal Rev- 8. Cohan v. Commissioner long partners run. tions enue, 2 Cir. 39 F.2d 540. wrong. argument clearly in- The This partner expense $7,581.37 A be de- partnership cannot terest had deducted partnership $12,444.42 (1957); so to lessen $8,644.22 as (1956); ducted partner B. $5,055.18 (1959). (1958); taxable income of Carlos though adhering to conditions of businesses. There is no in the evidence offer, reap record, however, deportation still its benefits. wish logical permit. originated any ex This we do not action income-producing out of business argument taxpayers’ leads tension of transactions.13 When unacceptable to an result. Under their claims a Section de- filing theory, duction, became as of prove overdue he has the burden to They thereby expense question October 3. would obtain the has a business eighteen-day origin.14 Surely an expenses per- extension.11 If the of a are district con nature, director did not intend or sonal there be no deduction template pursuant such 162(a)15 a result. We find no such to Section extension to be facts. warranted There is a further contention short, have not shown deportation vigorously resisted that their failure to file was due to reasonable enjoyed not because Carlos the comforts caus e.12 sanctity States, of the United but so personally operate he could busi Attorney IV. Carlos Marcello’s Fees. income-producing nesses and conserve his certain deducted property. argument has attorney expenses fees as within no merit. In Commissioner of Inter meaning of Sections and 212 of Tellier, nal Revenue v. the 1954 Internal Revenue Act. The 687, 689, 16 L.Ed.2d Commissioner disallowed the deductions Supreme Court, quoting from grounds on expenditures States, 1962, Gilmore v. United were neither business in- nor 9 L.Ed.2d production curred in the or collection of “origin noted that and character of income. respect the claim with to which an ex- pense paid incurred, involved fees were its rather than Carlos in resisting 1957 and 1958 in potential de consequences upon the fortunes *6 portation. taxpayers claim that controlling is the basic directly these fees were related to test expense of whether the was ‘business’ Carlos’s numerous rather intricate ‘personal’ meaning within the of 162 business (a).” ventures Louisiana. In (Emphasis their added.) If the tax- brief, taxpayers insinuate payers that correct, expense were then even deportation proceedings were motivated resisting charge incurred in a murder by alleged illegal activities committed theory expense could abe business on the partner sundry Carlos as one his that incarceration would take the defend- September 15 to October 3. Heininger, 1943, Internal Revenue v. 320 467; 171; 249, U.S. 64 S.Ct. L.Ed. 88 Logan Lumber v. Co. Commissioner Lilly see also Commissioner of Internal Revenue, 1966, Internal 5 Cir. F.2d 365 Revenue, 497, 1951, 90, 343 72 S.Ct. 846; States, Breland v. United 5 Cir. 96 L.Ed. 769. 1963, 492, 323 F.2d 497. See 3 A.L.R.2d 617 for a discussion on what to amounts 14. Cf. Interstate Transit Lines v. Commis Revenue, “reasonable cause” for failure to file tax 1942, of Internal sioner 319 U. 590, returns. 593, 1279, S. 63 S.Ct. L.Ed. 87 1607; Peekham v. In Commissioner 13. See of Internal Commissioner Revenue 1964, ternal 4 Cir. 327 F.2d Tellier, 687, 383 U.S. 855; Finger States, v. United D.S.C. 185; 16 L.Ed.2d Gilmore v. United F.Supp. 257 States, 1962, 372 U.S. 9 570; Patrick, private L.Ed.2d States v. United 15. For a distinction between wrongdoing opposed public wrong- S.Ct. 9 L.Ed.2d as ato doing, Jr., Vanderbilt, United States v. Omaha Live Stock see Cornelius T.C. Exchange, 66-330, Traders Cir. Memo 1957-235. See Rev. Rule 749; Finger States, D.S.C.1966, p. 5; I.R.B.-45, v. United 4A Law F.Supp. 312. Cf. Commissioner of Federal Income Taxation § 25.50. and, therefore, be sus- must away location. We from his ant business a destination.16 tained. refuse to travel to such three- taxpayers advanced Jacqueline Marcello’s V. Carlos find- pronged Tax Court on the attack Expenses. Personal arguments form, ings. capsule as disallowed support Commissioner (a) do not the facts are that expenses incurred

deductions numerous to holding intended on the Marcello (b) regulations; disregard rules and ground they ex were business an to show has the burden penses. agree Court’s the Tax regulations; with disregard rules and intent nothing upon conclusion “There 6653(a) (c) is worded since Section can conclusion which we base a disjunctive, in the deficiency unreimbursed were statutory [Carlos’s] must on the indicate expenses.”17 business allegedly occurred. violation notice which parries with The Commissioner VI. Penalties Assessed Pursuant the burden bear claim negligence or intentional to show that Marcello Various members disregard regulations occur- of rules family were with a assessed 5% suggests red. The pursuant 6653(a) the 1954 by circum- either intent can be exhibited regard Revenue Code.18 With by presuming stantial evidence Marcello, Salvador the Tax Court found deter- the Commissioner’s correctness of prop- 1959 to that his failure 1958 and mination. erly report proportionate share overlapping negligence Sweeping partnership aside the various income was due taxpayers, arguments and, further, partly offered re- he was complaint sponsible their real partnership’s observe for the failure to deficiency keep adequate notice the Commissioner in the The Tax Court records. merely without Marcello, Joseph cited Section found Jr. failed denoting section keep of the adequate what elements records of his business argument, expenditures violated. and that were the overstatement it, proposes that a tax- corresponding we understand as deductions on his 1958 properly de- adequately negligence. payer cannot tax return Final- was due to against of a Section ly, that, the assessment fend the Tax Court held as to Vin- upon knows penalty unless he Marcello, presumption cent of cor- parts section part or rectness what attributed to the Commissioner’s *7 argument This relies. Commissioner determination had not been overcome 1348; 788, 435, deporta- L.Ed. 78 16. 54 S.Ct. U.S. Court found that the 507, Helvering Taylor, 1935, proceedings U.S. v. 293 tion with were connected 623; 287, Interstate L.Ed. 79 55 S.Ct. Carlos’s business. This second conten- fall, of therefore, Lines v. Commissioner Transit tion must addi- the 590, 1942, Revenue, S.Ct. finding 63 319 U.S. tional reason that the Court’s 1279, expenditure directly L.Ed. 1607. 87 the was not related the business was to Pay Tax. to 6653. Failure 18. Section clearly a of fact not shown to be Negligence “(a) disre- or intentional 7482; See 26 U.S.C.A. § erroneous. regulations gard re- with rules and v. Commissioner of Internal Revenue any gift spect taxes. —If income or to Heininger, 1943, 467, 475, 320 U.S. 64 (as underpayment any part defined 249, S.Ct. 88 L.Ed. 171. imposed any (1)) (c) tax subsection Chapter by Helvering, 1933, of sub- A 12 or 17. subtitle See Welch v. 290 U.S. 212; (relating taxes and 111, May income 8, to B L.Ed. rath title gift 54 S.Ct. 78 negligence Revenue, or inten- taxes) is due to v. of Internal 5 regulations disregard 1966, to rules tional F.2d 209. Cf. Korn Cir. 357 defraud), there 1928, (but to States, intent without hauser v. 276 U.S. United amount 505; tax an 219, to the 145, be added L.Ed. New shall 48 S.Ct. 72 underpayment.” per equal Helvering, 1934, cent of the to 5 Colonial Ice Co. v. 292 506 disregard regulations the has to inv the rule or

assumes penalty may possibly if he asserts violation olved.22 The burden taxpayer part, taxpayer has the avoided if of a mis latter while because only rights conception legal asserts taken failed if burden regulations.23 part. of the first to follow or a violation the rules Negligence failure is lack due care or dispute is no ordinarily to do what a reasonable taxpayer if he is accused has the burden prudent person would do under circ regard being negligent mak Thus, taxpayer umstances.24 ing tax return.19 out of his negligent intentionally but still disre taxpay indicate authorities gard regulations, thereby rules to show that has burden er also violating 6653(a). Section disregard intentionally rules he did not segment regulations.20 The latter We now reach crux disjunctive usual problem. taxpayer clause If has ly brought play tax regardless into when the burden ele of which payer who or should be aware is aware ment ba ignore regulation assessment, of a rule chooses sis of the need Com taxpayer requirements.21 merely can its missioner do more than cite notice; showing deficiency intent avoid the no section in his 1966, Tomlinson, Co., 841; George 19. 362 Gibbs v. Cir. 5 21. In Journal B.T.A. 46 394; 1958-108; Rudolph Ebner, F.2d of In Lusk v. Commissioner G. T.C.Memo 591, 1957, Zivnuska, (1959). ternal F.2d 7 Cir. 250 A. 33 T.C. 226 1376, den., 932, cert. S.Ct. 357 U.S. 1375; 78 Admittedly, extremely 22. this is difficult. Pedrick, Boynton 2 2 L.Ed.2d v. Recognizing problem faced 745; Courtney, 1955, Cir. 228 F.2d David taxpayer who has to show he the burden (1957). Balter, T.C. Tax Fraud 28 658 reg- disregard had intent rules and Tax Evasion 8.2-3. See Niles Be § ulations, Senate Finance Committee States, 1930, ment Pond v. Co. United proposed in 1954 an amendment to what L.Ed. 281 U.S. 50 S.Ct. 74 is now Section The amendment 901. provided would not be Boynton Pedrick, v. Cir. 1955. 228 intentionally imposed taxpayer where the den., 93S, cert. 351 U.S. S.Ct. disregarded regulations rules and because 1465, rehearing den., L.Ed. 100 990, invalidity. of a belief of their To avoid 1503; L.Ed. penalty, however, the amendment States, 1954, F.Supp. Jacobs United upon it made incumbent 154, 159, Ct.Cl. See 10 adequate attach to his return an state- Law of Federal Income Taxation 55.- setting regula- forth the ment rules and 25; Balter, Tax Fraud and Tax Eva disregarded grounds tions and the for be- 8.2-3, Helvering sion 10.4—4. §§ Cf. lieving Sen.Rep. invalid. them be Cong., See Mitchell, 1938, sess., p. No. 83rd 2nd 82 L.Ed. 917. Where the Commissioner Cong. Ad.News, Cong., & 83rd U.S.Code penalty pursuant asserts fraud pp. 4781, sess., 2nd 5240. This amend- 6653(b), he has the burden of H.Rep. in conference. ment was deleted proving that the facts warrant im Cong., p. 80; sess., 2nd No. 83rd position penalty. of that Section 7454 Cong. & Ad.News U.S.Code Cong., 83rd *8 (a). may The intent of Section sess., p. 2nd 5342. be discerned from the failure of taxpayer regula to do what the rule or 23. Bennett v. of In- See Commissioner requires. penalty may tion The be avoid Revenue, 1944, ternal Cir. F.2d 8 139 taxpayer showing ed that he had 961. disregard regula no intent to rules or by excusing tions or his actions with an 24. Southeastern Finance Co. v. Commis acceptable justified reason, Revenue, and 1946, such as sioner of Internal 5 Cir. accepted by have been in courts F.2d v. 153 205. Evans Commis Cf. past. Nessen, Revenue, See “The 1956, Line Between sioner of Internal 8 Cir. Fraud; Negligence Op 909, and Civil 586, den., 235 F.2d cert. 352 U.S. Penalty eration of 147, Two Provisions 77 S.Ct. .2d 1 L.Ed 118. Against Underpaying Taxpayers.” 20 on Fed.Tax. N.Y.U.Inst. 1117.

5Q7 on case, taxpayer.29 Commissioner relied ward to After the tax- this payer produces evidence, segments He need both of the section.25 the Com- produce quoted the section missioner to have verbatim. elect being Citing appropriate evidence, section number rebuttal content notify taxpayer was to the Commis- sufficient has shown to their taxes was addition sioner’s determination to be erroneous. 5% segments violating for of Section both The Tax free reach its Court is then to 6653(a).26 taxpayers had the bur- decision on of the en- the basis whether underpayment den was to show that their tire record Commis- indicates negligence to due nor intent neither sion’s determination in error.30 was regulations.27 disregard rules and in Tax Court factors will consider two making (1) its the Com- decision: specific Tax As for the Court’s begin- findings taxpayers negligently missioner’s at determination income, ning presumed find proceedings understated their taxable of the contrary, no error. record On the correct, (2) the burden and keep docu shows a failure to books and proof proceedings of at of the the close necessary ments to form a rational basis still remains with reported for and the income establish the Commissioner’s errors deducted.28 preponderance find We evidence. correctly ably the Tax and Commissioner’s deter Court going mination of performed shifts the burden for- its task.31 part Dairy 25. If has one of Internal Inc. v. Commissioner certainly should, mind, 42, Revenue, 1962, like- he most F.2d for 10 Cir. 302 ly would, expressly “negligence,” though indicate it. Most he of the use the term subject negligence penalty note that commentators on for assessed was rarely pen- disregard assesses a the Commissioner alty rules or regulations. intentional disregard rules intentional for sugges- regulations. is some penalty negligence 27. “The assessment of a therefore, citing tion, Section 6653 dependent purely act is a administrative notice, deficiency reality, (a) in the negli- upon finding the extent of neg- an assessment of means gence.” of In- Board v. Commissioner Neg- ligence. Balter, Between “The Line 73, Revenue, 1931, F.2d 51 ternal 6 Cir. Fraud,” ligence 12 N.Y.U.Inst. Bothwell v. Commissioner 76. See 15, Hoffman, “Interna- Fed.Tax. 39. 1935, Revenue, F.2d 10 Cir. 77 Internal Regula- Disregard of Bules tional 35, 38; of In- v. Commissioner Gouldman (1950). tions,” Taxes 111 28 1948, Revenue, ternal 686, Cir. Balter, Practice, 26. Fraud and Tax Evasion § Tax Rules of 690. See prior mindful also 10.2-3. We are Rule Court 26 U.S.C.A. of the 1954 Int.Rev. to the enactment Humphrey’s v. Estate deficiency Code, due 1947, 162 F.2d 5 Cir. disregard negligence or intentional den., cert. 332 U.S. regulations was denominated rules and 394; R., L.Ed. C. I. 7 Cir. Tehan v. “Negligence.” It is conceivable that 895; 1961, 295 F.2d Cf. William S. negligence pen- that a Court’s Blomely, Jr., T.C.Memo 1964-84. alty properly negli- assessed or gence Helvering, 1933, occurred was its shorthand method Welch v. saying parts 212; that both Section 6653 L.Ed. Wickwire (a) were violated. Such Reinecke, 1927, conciseness S.Ct. light would understandable in Smith, 5 Cir. 72 L.Ed. C.I.R. predecessors terminology employed seq. 91, 95, et 285 F.2d do not rest on presents If the rebuttal interpretation this of the Tax Court’s testimony, such takes tes- the Tax Court being proper finding, it more answer timony into consideration. *9 specific arguments taxpayers’ than cavalierly them. the burden of to avoid See Section 31. For a discussion on 293(a), proof, Balter, Tax see Tax Fraud and Rev.Act Int.Rev.Code, also, Evasion thru 10.4-7. See 26 U.S.C.A. 10.3-1 § §§ Code). (1939 Copelan, Problems on Bur- See Robinson’s “Practical contends Property The of Inherited VII. Sale ruling, tax despite that, new Reported Install- on the given no The relief. payers should be Basis. ment fiduciary suggests that the prop- taxpayers inherited The various separate taxpayer, filed for return was Marcello, The erty Joseph Sr. from Joseph Marcello, Sr., Estate to several property in 1958 sold was the means to cannot be make therefore reported gain was corporations, no but taxpayers. individual for the an election no elec- any personal return tax on express was no as to installment report on the income tion “fiduciary purpose effect or re Form 1962 a In made. was basis agent as turn.” If Carlos the return filed Fiduciary Tax Income (United States taxpayers, may for the it individual be Joseph Estate of Return) the name in they appears are bound all deceased, filed Carlos Marcello, hand, on fiduciary the return.35 On the other pro- of the sale some in which Marcello may return have served reported to use the an election ceeds significant may purpose bind made. installment method32 light ing taxpayers. on the individual 1962 return contend that this ruling, proper it the new we think them to use election enables effect of Court to determine the report own installment method to fiduciary return. gains shares from the sale. part Affirmed in in and remanded argue as acted part. agent taxpayers and for each of other fiduciary is, in on return election EN PETITION FOR REHEARING effect, an election for each of them. REHEAR- BANC PETITION FOR wishing bene ING reporting fit make an of installment must PER CURIAM: year election on for the his return either year Rehearing when the the sale33 or Petition is payment panel first This latter is received.34 denied and no member of this nor making ap regular Judge time for proved by the election was active service on the having requested tax Rev.Rul. 65-297. The Court Court be that the payers request 25a, polled rehearing banc, remanded that this case be on en Rule apply subpar. (b), Rehearing can the new so Court Petition for ruling. En Banc is denied. Trials,” 1965-2, 65-297, Proof in den of Civil N.Y.U. 34. Rev.Rul. Cum.Bull. Inst, (1951); on Fed.Tax. binding 35. If the return on tax- all the Federal Income Taxation 50.- Law of 61, § they payers, reap any would benefits seq.; Ness, Role et “The of Stat- bring. an installment election would Presumptions utory Determining Fed- suggests that if a tax- The Commissioner Liability,” 12 Tax.L.Rev. 321 eral Tax payer large and, had a loss there- in 1958 (1957). fore, report wanted to all of his share of fiduciary year, re- the sale (1954), 26 Int.Rev.Code 32. Section prevent him election turn’s could U.S.C.A. doing. sure, for from so We are not so fiduciary binding, (b). Regulation if it return 1.453-8 binding for for worse. better or