Drieborg v. Commissioner of Internal Revenue

• Decision Date: 29 August 1955
• Docket Number: No. 12276,12277.,12276
• Citation: 225 F.2d 216
• Parties: William J. DRIEBORG and Laura D. Drieborg, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. William J. DRIEBORG, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Sixth Circuit

225 F.2d 216 (1955)

William J. DRIEBORG and Laura D. Drieborg, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

William J. DRIEBORG, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 12276, 12277.

United States Court of Appeals Sixth Circuit.

August 29, 1955.

Donald G. Tripp, Detroit, Mich., argued (Robert W. Tripp, Detroit, Mich., on the brief), for petitioners.

S. Dee Hanson, Washington, D. C., argued (H. Brian Holland, Ellis N. Slack, Assts. Atty. Gen., Washington, D. C., on the brief), for respondent.

Before ALLEN, McALLISTER and STEWART, Circuit Judges.

STEWART, Circuit Judge.

The petitioners, husband and wife, are residents of Grand Rapids, Michigan, where, during the years 1941 through 1950, they operated a successful bar and restaurant business. The husband filed individual income tax returns for the years 1941 through 1947, and the petitioners filed joint returns for the years 1948 through 1950.

Finding that the petitioners' books and records did not correctly reflect their income, the respondent Commissioner reconstructed their income for those ten years by use of the increase in net worth method, determined that the petitioners had substantially understated their income for each of the ten years involved and redetermined their taxes accordingly. In addition to the deficiencies in taxes the Commissioner determined that the petitioners were liable for fifty per cent fraud penalties for each year under § 293(b) of the Internal Revenue Code of 1939.¹ The deficiencies and penalties were assessed against the husband alone for the years 1941 through 1947 and against both petitioners for the years 1948 through 1950.

The Tax Court sustained the action of the Commissioner, redetermining the deficiencies in tax and the additions for fraud in an amount slightly higher each year than had been determined by the Commissioner, as a result of amendments to the pleadings in that court.

On this review the petitioners do not take issue with the Tax Court's findings as to the amounts of understated income nor with its consequent determinations of deficiencies in their income taxes, conceding in effect that they failed to sustain their burden of overcoming the presumption of correctness attaching to the Commissioner's determinations. They insist, however, that upon the question of fraud the Commissioner failed to sustain the burden of proof imposed upon him by § 1112 of the Internal Revenue Code of 1939.² If the petitioners are correct in this contention, the Tax Court's decisions were erroneous in imposing the fifty per cent fraud penalties and in imposing any deficiencies at all for the years 1941 through 1945, barred, in the absence of fraud, by the five-year statute of limitations contained in § 275(c) of the Internal Revenue Code of 1939.³

At the outset it should be emphasized that the failure of the taxpayers to overcome the presumptive correctness of the deficiencies, even though those deficiencies cover a consecutive ten year period, cannot be regarded, in and of itself, as sufficient proof that the deficiencies or any part thereof were due to fraud on the part of the taxpayers. To hold otherwise would be to ignore the statute which imposes on the Commissioner the burden of proving fraud, and the often repeated admonition that such proof must be by clear and convincing evidence. Wiseley v. Commissioner, 6 Cir., 1950, 185 F.2d 263; Rogers v. Commissioner, 6 Cir., 1940, 111 F.2d 987, 989; Mitchell v. Commissioner, 5 Cir., 1941, 118 F.2d 308. There must be additional independent evidence from which fraudulent intent on the part of the taxpayer can be properly inferred. See Rogers v. Commissioner, supra.

That the difference in the burden of proving ordinary tax deficiencies and civil fraud can have important practical results has long been recognized. "As to the issue raised by the Commissioner's determination of fraud the burden is upon him; and he may fail to sustain such burden, notwithstanding the determined and presumed error in the return. In other words, both parties may fail through inadequate proof on their several issues, and thus the deficiency would be sustained and the penalty set aside." L. Schepp Co., 1932, 25 B.T.A. 419, 437. "The failure of the taxpayer to overcome the presumptive correctness of the deficiency, as is true in the case at bar, does not create a presumption of fraud. Both parties in a proceeding of this nature may fail through inadequate proof on the several issues." Sol Gross, Para. 49, 254 P-H TC Memo., Docket No. 15004, 10-11-49. See Gus S. Pancol, Para. 53,072 P-H TC Memo., Docket No. 32383, 3-5-53; Max Cohen, 1947, 9 T.C. 1156, 1163; Snell Isle, Inc., v. Commissioner, 5 Cir., 1937, 90 F.2d 481, 482; Bryan v. Commissioner, 5 Cir., 1954, 209 F.2d 822, 825.

The Commissioner in the present case points out, however, that the taxpayers have virtually conceded both in the Tax Court and upon this review that their evidence was insufficient to overcome the presumed correctness of the Commissioner's determinations. We fail to perceive how this rather forthright concession by counsel for the taxpayers relieves the Commissioner of any part of his statutory burden of proof of their fraud. "That the petitioner is not contesting certain adjustments is not an admission of fraud." Estate of Fred Arbogast, Para. 48,047 P-H TC Memo., Docket No. 11950, 4-6-48. "Failure to contest an adjustment made in determining the deficiency is not proof of fraud. The Commissioner can not sustain his burden of proof on a fraud issue by statements made in his notice of deficiency." Oscar G. Joseph, 1935, 32 B.T.A. 1192, 1204.

What has been said should not be construed to mean that a taxpayer's consistent and substantial understatement of income over several consecutive years is not evidence of his fraud. Together with other circumstances in any particular case, such consistent and consecutive understatements of income can be and often are clear and convincing evidence of fraud. Rogers v. Commissioner, supra.

For the years 1945 through 1950 we think that the Tax Court was correct in finding that the Commissioner had clearly sustained the burden of proving the petitioners' fraudulent intent. The petitioners' returns for those years, which were in evidence, consistently understated their true income for each year, and the surrounding circumstances clearly lead to the conclusion that these understatements were deliberate and willful. Petitioners' returns were actually prepared by a Mr. McGuire, who had died before the time of the proceedings in the Tax Court. However, the petitioner husband testified that he himself kept such books and records as were kept. These books and records were inaccurate and untruthful, and in some instances had been altered. Yet in some instances the tax returns did not reflect the books and records, either before or after alteration. In view of this evidence, the Tax Court was correct in finding that the...