Before DUFFY, Chief Judge, and MAJOR, Circuit Judge (Retired), and PLATT, District Judge.
We have here for review two decisions of the Tax Court dated September 23, 1957. The cases were consolidated for trial by the Tax Court.
Robert L. Bender and Esther C. Bender, his wife, are residents of Madison, Wisconsin. They each filed individual income tax returns for the years 1942-1947, and they filed a joint return for 1948. Checker Taxi Company, hereinafter called "Checker," filed original and amended returns for the years 1942-1948.
The Tax Court held that false and fraudulent returns were filed for the years 1942 to 1945, inclusive, and for the year 1947 by Checker and by Robert Bender; that Robert Bender and Esther C. Bender each received taxable income from Checker for each of the years from 1942 to 1948, inclusive; and that deficiencies for each of the years 1942 to 1947, inclusive, of Checker and of Robert L. Bender were due to fraud with intent to avoid tax. Taxpayers claimed in the Tax Court that deficiencies were barred by the Statute of Limitations. Waivers had been executed for the years 1946 and 1948.
Robert and Esther Bender were the original incorporators of Checker. Of the one hundred shares of capital stock, Bender owned ninety, Esther owned nine and a qualifying share was held by one Hackert. In November, 1947, the capital stock was increased to six hundred shares. Bender owned four hundred ninety five shares, Esther one hundred four shares and Hackert one. Although Esther was the president of the corporation, she had very little to do with the operation of Checker from 1942 through 1948. Robert managed, controlled and directed the operations of Checker during the years here in question, and, as secretary-treasurer of the corporation, was the sole active officer.
Checker was engaged in the business of operating taxicabs, school buses, airline limousines, and other vehicles in and about Madison, Wisconsin. During the years here in question, the business of Checker increased rapidly. In 1942, Checker had three taxicabs, three school buses, three pickup trucks and one moving van. By the end of 1948 it owned twenty-four taxicabs, seven school buses, three airline limousines, three pickup trucks and one moving van. Checker's Equipment Account increased from a net of $9,334.80 on January 1, 1942, to $92,224.45 as of December 31, 1948.
Checker maintained several business bank accounts in the American Exchange Bank in Madison. These accounts were intended for the deposit of receipts from the operation of Checker. In the same bank there was also an account in the name of Esther C. Bender.This account existed prior to 1942. It was opened originally when the business was small and the Benders' credit standing precarious, in order that some funds might be available if creditors should attach Bender's funds. All of the deposit slips for funds deposited in this account were made out by Robert Bender and he personally made the deposits. However, only Esther was authorized to draw checks on this account. She often signed several checks in blank and gave them to Bender to fill in.
During the years 1942-1948, inclusive, Robert Bender followed the practice of depositing a considerable portion of the receipts from the operations of Checker into the Esther C. Bender checking account. Many of such deposits were not recorded in the cash receipts journal or in any other books kept by Checker. Such deposits were not included in the gross income in Checker's tax returns.
Prior to 1938, Bender personally maintained the bookkeeping records of Checker, although he had no formal training in accounting and knew very little about bookkeeping. In 1938, Bender hired Wilbur S. Grant, a local certified public accountant, to perform bookkeeping services for Checker, and to prepare Checker's tax returns. No audits ever were made, although in a letter written February 12, 1947, Grant referred to Checker's books being kept "on a continuous audit basis." Grant died prior to the time of the Tax Court hearing.
When Grant was hired in 1938, he set up a double entry bookkeeping system to replace the old single entry system. A cash receipts daybook was maintained which book constituted the original record of entry of receipts of the business. All income from the business was supposed to be entered in this book. In 1941, Frieda Poster, a sister of Robert Bender, was employed to maintain the cash receipts daybook, and to record therein all amounts received by Checker from its various operations. This book was kept in Checker's office. One of Grant's employees instructed Frieda with reference to the method of keeping such records. The book was inspected about once a month by a staff member of Grant's office, and periodically, it was turned over to Grant for the purpose of recording the receipts shown therein in the permanent records of Checker.
In the years 1942 to 1947 Bender deposited in Esther's bank account funds of Checker totaling over $160,000.00. The largest amount in any one year was in 1945, when over $35,000.00 was thus diverted. Although the amounts differed from year to year, Bender followed a consistent practice of diverting income of Checker into his wife's bank account without disclosing the practice to his accountants or to his bookkeeper. It is clear from the record that Frieda did not know Robert Bender was diverting Checker's funds into his wife's account.
The principal question before us is whether Robert Bender and Checker filed fraudulent income tax returns with the intent to avoid tax. It is urged by Robert Bender for himself and Checker, that when a taxpayer selects a competent tax expert and requests him to prepare income tax returns, the taxpayer has done all that ordinary business care and prudence can reasonably demand. Taxpayers insist that Bender had the right to assume that Grant, as a certified public accountant, would make a proper record of corporate income and would properly prepare the income tax returns. Taxpayers say that Sackett, who was employed by Grant, knew of the Esther Bender account from the very beginning. Taxpayers point out that Grant never furnished them any copies of their income tax returns, and that when they signed same, they did not examine them.
Taxpayers' position is that Bender knew Grant had access to all of the records of Checker and also the cancelled checks and bank statements of the Esther Bender account; that it was Grant's job to see that all of the receipts of Checker were properly entered and accounted for. Bender testified he put all of Checker's money in the bank and figured Grant "would get it." Claiming there was no fraud with intent to evade tax, taxpayers rely upon such cases as Davis v. Commissioner, 10 Cir., 184 F.2d 86, 22 ...