Marcella v. Commissioner of Internal Revenue, 15167.

• Citation: 222 F.2d 878
• Decision Date: 01 June 1955
• Docket Number: No. 15167.,15167.
• Parties: Anthony MARCELLA and Bessie Marcella, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

222 F.2d 878 (1955)

Anthony MARCELLA and Bessie Marcella, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 15167.

United States Court of Appeals Eighth Circuit.

June 1, 1955.

R. E. McGannon and Joseph A. Hoskins, Kansas City, Mo. (Harlow B. King, Kansas City, Mo., was with them on the brief), for petitioners.

Dudley J. Godfrey, Jr., Sp. Asst. to the Atty. Gen. (H. Brian Holland, Asst. Atty. Gen., and Ellis N. Slack, Hilbert P. Zarky, and Karl Schmeidler, Sp. Assts. to the Atty. Gen., were on the brief), for respondent.

Before SANBORN, COLLET and VAN OOSTERHOUT, Circuit Judges.

VAN OOSTERHOUT, Circuit Judge.

Petitioners, Anthony and Bessie Marcella, are here asking for a review of the judgment of the Tax Court of the United States determining a deficiency in their 1947 income tax in the amount of $8,039.08 and a 50 per cent fraud penalty of $4,019.54. The deficiency determined by the Tax Court is slightly less than the amount determined by the Commissioner. Jurisdiction of this court is invoked under section 7482 of the Internal Revenue Code of 1954, 26 U.S.C.A.

The petitioners, who are husband and wife, filed a joint income tax return for 1947, claiming a loss of $4,800.97. Mrs. Marcella had no independent income, but is party to this case because she signed the joint return. Mr. Marcella, who will hereinafter be referred to as the taxpayer, was engaged in the retail liquor business in Kansas City, Missouri, in the capacity of sole proprietor of such business. He owned and operated three retail stores in which he sold liquor by the drink, bottle, and case. He also sold liquor by the case at his farm.

The Commissioner and the Tax Court found that taxpayer's books for 1947 were incomplete, lacked means of verification, and did not correctly reflect his income, and consequently determined taxpayer's income by a method which they described as "excess cash expenditures method." The facts will be developed hereinafter.

The taxpayer asserts that the Tax Court in reaching its decision committed error in the following respects:

1. In finding that taxpayer's books and records were inadequate and that reasonable grounds existed for disregarding them.

2. In holding the Commissioner's peculiar and novel personal cash expenditures method of constructing taxable income was valid and accurate, and that, in any event, such method, if available, was improperly applied in that proven sources of cash available were not recognized and considered.

3. In disregarding a portion of proven capital additions to taxpayer's residence which would increase the adjusted basis of his property to an amount in excess of the sales price.

4. In holding that the evidence justified a finding that at least part of taxpayer's deficiency in income tax was due to fraud with intent to evade tax.

We now proceed with the consideration of the alleged errors.

1. Taxpayer during 1947 employed Mr. H. A. Brockhouse, a Federal Reserve Bank examiner, on a part-time basis to keep his books for him. Mr. Brockhouse's integrity is not challenged. Proper records subject to verification were kept as to the sale of liquor by the drink and bottle at the three retail stores and as to expenses and salaries, the original entries being by adding machine tapes and records maintained by the employees. Such records are not challenged. The controversy arises in connection with liquor sales by the case at the three stores and the farm. The case sales represent over 60 per cent of taxpayer's sales volume of over half a million dollars. No sales slips or original records of any kind were made as to the case sales at the retail stores or at the farm. It is obvious that the failure to make any record of the case sales at the taverns was at the taxpayer's direction. Apparently all the sales at the farm were by the taxpayer himself. Brockhouse had no means of verifying the case sales, and was also apparently unaware of the fact that case lots were being sold at the farm. Brockhouse testified that at infrequent intervals, sometimes over a month apart, the taxpayer would orally report case sales to him. The taxpayer would specify the brand and number of cases sold and the amount received above invoice cost. Brockhouse would usually be able to find the purchase invoices and make his computation on the basis of the oral information supplied and the invoices, and would make entries in taxpayer's books accordingly. The record discloses that the method of bookkeeping was rather unusual. As to this Brockhouse testified, "* * * and in this instance I grant you that these books are rather unorthodox, but that doesn't say they are false."

Section 54 of the Internal Revenue Code of 1939, 26 U.S.C. § 54, requires the taxpayer to keep such records as the Commissioner with the approval of the Secretary may prescribe. Section 29.541, as amended, of Treasury Regulations 111 states:

"Every person subject to tax * * * shall, for the purpose of enabling the Commissioner to determine the correct amount of income subject to the tax, keep such permanent books of account or records, including inventories, as are sufficient to establish the amount of the gross income and the deductions, credits, and other matters required to be shown in any return under chapter 1."

The taxpayer has made some inconsistent statements. He has several felony convictions and has used a number of aliases. He has made no explanation of his lack of adequate records as to case sales. The determination of the Commissioner and the Tax Court that the books of the taxpayer are incomplete, lack means of verification, and do not correctly reflect the taxpayer's income is fully justified by the record in this case.

2. The Commissioner's determination of the amount of taxpayer's income and the existence of a deficiency is prima facie correct. The burden is on the taxpayer to disprove the Commissioner's determination. Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 78 L.Ed. 212; Helvering v. Gowran, 302 U.S. 238, 245, 58 S.Ct. 154, 82 L.Ed. 224. The decisions of the Tax Court are to be reviewed in the same manner as decisions of the district court in civil actions tried without a jury. § 7482, Internal Revenue Code of 1954; Rule 52(a), Federal Rules of Civil Procedure, 28 U.S. C. Findings of fact by the Tax Court are not binding upon this court if there is no substantial evidence to sustain them, if they are against the clear weight of the evidence, or if they are induced by an erroneous view of the law. United States v. U. S. Gypsum Co., 333 U.S. 364, 68 S.Ct. 525, 92 L.Ed. 746; Aetna Life Ins. Co. v. Kepler, 8 Cir., 116 F.2d 1, 4; Pendergrass v. New York Life Ins. Co., 8 Cir., 181 F.2d 136.

In the U. S. Gypsum Co., case, supra, 333 U.S. at page 395, 68 S.Ct. at page 542, the court states:

"The findings were never conclusive, however. A finding is `clearly erroneous\' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed."

In the Pendergrass case, supra, 181 F.2d at page 138, this court said:

"* * * The findings of fact of a trial court should be accepted by this Court as being correct unless it can be clearly demonstrated that they are without adequate evidentiary support or were induced by an erroneous view of the law. * * *"

Governed by the foregoing rules we proceed to determine whether the findings upon which the deficiency tax is based are clearly erroneous. The Commissioner, after properly finding that taxpayer's records do not clearly reflect his net income, is authorized to compute the taxpayer's net income "in accordance with such method as in the opinion of the Commissioner does clearly reflect the income." 26 U.S.C. § 41. No specific alternate methods of computing net income are prescribed by statute. Undoubtedly, the Commissioner is required to use a method which clearly and fairly reflects the taxpayer's income. The burden is upon the taxpayer to show that the method used or its application is improper or arbitrary. The method employed by the Commissioner in determining the taxpayer's income is described in the Tax Court's opinion and in the Commissioner's brief as "excess cash expenditures." The basis of the deficiency determination made by the Commissioner is shown by the following statement:

                              "Sources of Cash
                  Bank accounts                     $10,956.71
                  Sale of one of taverns              4,500.00(a)
                  Increase mortgage on
                    home                              2,500.00
                  Sale of house at 405 Gladstone     17,500.00
                                                    __________
                        Total                       $35,456.71(b)
                           "Personal Expenditures
                  Federal income tax including
                    interest of
                    $291.17                         $12,682.39(b)
                  Personal expenses by
                    checks                           11,670.36(b)
                  Furniture                           4,051.84(c)
                  Payment on farm at 13203
                    Wornall Road, including
                    expenses of $5,826.71             9,826.71
                  Paid on home, 804 W
                    64th Terrace                     15,000.00
                  Mortgage payments, 804
                    W. 64th Terrace                   6,093.32
                  Checks out of proceeds of
                    sale of 405 Gladstone
                    endorsed to Hamm-Singer
                    Co.                               2,000.00(d)
                       McKesson-Robbins                 500.00(d)
                  Medical expense                       455.15
                                                    __________
                       Total                        $62,279.77(e)
                

"(a) The sale was not reported by the petitioner in his return for 1947.

"(b) The parties entered into oral stipulations at the hearing that these figures are correct except for the right reserved by petitioner to establish additional sources of cash.

"(c) Respondent concedes that the figure should be $3,876.98 on account of a duplication of $174.86.

"(d) These amounts were used by petitioner in the purchase of liquor for sale in

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