Bryan v. Commissioner of Internal Revenue

• Decision Date: 05 March 1954
• Docket Number: No. 14385.,14385.
• Citation: 209 F.2d 822
• Parties: BRYAN et ux. v. COMMISSIONER OF INTERNAL REVENUE. BRYAN v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fifth Circuit

209 F.2d 822 (1954)

BRYAN et ux. v. COMMISSIONER OF INTERNAL REVENUE.

BRYAN v. COMMISSIONER OF INTERNAL REVENUE.

No. 14385.

United States Court of Appeals, Fifth Circuit.

January 29, 1954.

Rehearing Denied March 5, 1954.

COPYRIGHT MATERIAL OMITTED

C. J. Batter, Washington, D. C., for petitioner.

Fred E. Youngman, Ellis N. Slack, Special Assts. to Atty. Gen., H. Brian Holland, Charles S. Lyon, Asst. Attys. Gen., Charles W. Davis, Chief Counsel, Bureau of Internal Revenue, Rollin H. Transue, Sp. Atty., Bureau of Internal Revenue, Washington, D. C., for respondent.

Before HUTCHESON, Chief Judge, and BORAH and RUSSELL, Circuit Judges.

RUSSELL, Circuit Judge.

For each of the years 1935-1944, inclusive, J. Baker Bryan filed his individual¹ income tax returns with the Collector of Internal Revenue for the District of Florida, and reported his income on the cash receipts and disbursements basis. With the exception of the return for 1943, which was not filed until April, 1945, each of the returns was filed timely and all of the reported tax was paid. In October, 1945, a deputy collector of Internal Revenue, Marquis, was assigned to investigate taxpayer's returns. As a result of a joint investigation conducted by Marquis and another agent, jeopardy assessments of taxes, penalties and interest covering each of the years 1935-1944 were made on July 15, 1948, by the Commissioner against the taxpayer.² The Tax Court, upon petition for redetermination filed by the taxpayer, sustained the Commissioner in all material respects, but held that there were no deficiencies or penalties for the years 1935, 1936 and 1940, as conceded by the Commissioner at the trial. The deficiencies and civil fraud penalties asserted for each of the other seven years, as redetermined, were sustained, as was the delinquency penalty of 25% for the year 1943. On this petition for review, taxpayer, while not admitting the correctness of the decision of the Tax Court with regard to the years 1937, 1938 and 1939, seeks a review of the decision only insofar as it relates to the taxable years subsequent to 1940.

As a general rule, the income taxes imposed by Chapter 1 of the Internal Revenue Code, 26 U.S.C.A. § 1 et seq., must be assessed within three years after the required return is filed,³ however, in case a fraudulent return is filed with intent to evade the tax, the tax may be assessed at any time.⁴ Where any part of a deficiency in tax is due to fraud with intent to evade tax, not only may the tax be assessed at any time, but the Commissioner has the authority and the duty to collect as an addition to the tax a civil fraud penalty in an amount equal to fifty per centum of the total deficiency.⁵ While ordinarily a determination of tax liability made by the Commissioner is presumptively correct and the burden rests upon the taxpayer to prove it erroneous, in any proceeding involving the issue of fraud with intent to evade tax, the burden of proof with respect to the issue of fraud is upon the Commissioner.⁶ Thus in any case where a deficiency in tax is determined by the Commissioner after the three year period of limitation has expired and the civil fraud penalty is asserted, the burden is upon the Commissioner, in an appropriate proceeding where the validity of an assessment based upon such determination is contested, to establish by clear and convincing proof the existence of fraud. This, however, does not shift the burden of overcoming the presumptive correctness of the Commissioner's determination of deficiency from the taxpayer.⁷ When the Commissioner establishes that the returns were fraudulent and were filed with intent to evade tax, he has discharged the burden of proof imposed upon him by Section 1112, supra, and thereby the bar of the three year period of limitation is avoided. Thereafter, if the taxpayer is to escape the deficiency and the imposition of the civil fraud penalty, he must go forward with the proof and show that the determination of deficiency is erroneous. Since we are of this view, we reject the contention of the taxpayer that the Tax Court erred in holding that "once fraud is established, the statute of limitations does not apply and the petitioner must disprove the deficiencies."

It was not disputed that a return for each of the four years here involved was filed and that the three year period of limitation had expired as to each return prior to the time the jeopardy assessments were made. Upon making this proof the taxpayer rested his case-in-chief. Counsel for the Commissioner then acknowledged that "the burden is on us to show fraud in order that the Commissioner's determination may stand." The primary question presented by this petition to review is whether the finding of the Tax Court that the Commissioner discharged that burden is clearly erroneous.

In determining the deficiencies and in asserting the fraud penalties the Commissioner relied upon an understatement of gross income for each of the years and not upon an overstatement of business expense.⁸ To sustain these deficiencies and the assertion of the fraud penalty, the Commissioner introduced evidence showing that the taxpayer had increases in net worth and made expenditures for personal expenses far in excess of the amount of income reported on the returns for each of the years under review. It is contended that the Commissioner was not warranted in resorting to the net worth method of proving taxable income because the evidence does not show that the method of accounting employed by the taxpayer did not clearly reflect his income. The record does not sustain this contention. Although the taxpayer did have cash receipts and disbursement journals and certain other records covering some of the sources from which his income was derived, he had no records whatsoever covering other sources of income which were shown on his returns and from which he reported substantial amounts of income. This fact alone is sufficient to demonstrate that his records did not clearly reflect his income and to sustain the finding of the Tax Court that his records were incomplete and that all of his financial interests were not reflected by his books.

Taxpayer also contends that the testimony of the two agents who testified on behalf of the Commissioner was inadmissible because they did not have personal knowledge of the facts testified to by them, in that their knowledge was acquired through the work and investigations of another, or others, who were not under their control and supervision. The evidence shows that Marquis worked jointly with another agent, who was not an employee of the Bureau at the time of the trial and who was not offered as a witness, in accumulating and compiling the data upon which the assessments were based. Both he and a third agent, Swain, testified as to certain items included on the net worth statements which were discovered as a result of their individual and the joint investigations. However, the findings of the Tax Court with regard to net worth were based upon a stipulation of the parties entered into before the trial, the testimony of Marquis concerning the taxpayer's expenditures for living expenses and the testimony of Swain as to certain items disclosed by his personal investigation. It is true that Swain attempted to corroborate Marquis' testimony as to the expenditures for living expenses and the Tax Court apparently accepted his testimony as to estimated personal expenditures for 1944, but since this figure was less than that estimated by Marquis, the taxpayer was benefited by his testimony in this respect and, therefore, has no cause to complain of it.

It is strenuously urged that the net worth method of computing income, as applied in this case, was recklessly resorted to; that it does not clearly reflect income; that it is unreliable, untrustworthy and lacking in probative value, and that the evidence is insufficient to show that all...