266 F.2d 5 (9th Cir. 1959), 15982, Cohen v. C.I.R.

Docket Nº:15982.
Citation:266 F.2d 5
Party Name:Lesly COHEN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
Case Date:April 08, 1959
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

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266 F.2d 5 (9th Cir. 1959)

Lesly COHEN, Petitioner,



No. 15982.

United States Court of Appeals, Ninth Circuit.

April 8, 1959

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John V. Lewis, San Francisco, Cal., Clyde C. Sherwood, Mountain Ranch, Cal., for petitioner.

Charles K. Rice, Asst. Atty. Gen., Grant Wiprud, Lee A. Jackson, S. Dee Hanson, Attys., Dept. of Justice, Washington, D.C. for respondent.

Before BONE, BARNES, and HAMLEY, Circuit Judges.

HAMLEY, Circuit Judge.

This matter is before us on a taxpayer's petition to review a decision of the Tax Court redetermining income tax deficiencies and penalties for 1948, 1949, and 1950. The principal question we

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have to decide is this: Where the Tax Court has rejected the deficiency determination of the Commissioner of Internal Revenue, may it redetermine the deficiency by finding that 'it is not likely' that gross income exceeded a certain figure (substantially below that found by the Commissioner) and then utilize that figure as actual gross income because petitioner failed to establish a lesser amount? 1

During the years in question the petitioner, Lesly Cohen, operated the Kingston Club, a San Francisco card room. During the same period and using the same premises as his headquarters, Cohen operated as a so-called 'betting commissioner.' The latter activity was in violation of both state and local law. Either as a part of this latter activity (as appellant contends) or as a separate venture in which appellant engaged in personal betting (as the Tax Court found), Cohen also received income from a San Francisco establishment known as the Film Row Club.

As betting commissioner, Cohen would obtain opposite parties to wagers on horse races and other sporting events. Normally he did not accept a wager as 'placed' until he had found some other individual to 'lay off' the other side of the same event. When Cohen was able to 'lay off' the entire amount of the bet, his profit or loss would not depend upon the outcome of the event. Instead, it would be a fixed percentage or 'commission' of the total wager. When able to do so, Cohen would lay off the bet with his own local customers. When this could not be accomplished, he would lay off or cover the bet with other betting commissioners.

The commission to petitioner on bets handled for his own customers was five per cent on each bet, except that on horseracing bets only the loser paid a commission. On bets laid off with other betting commissioners, the commission was usually split. At times he found it necessary to waive his entire commission in order to get the bet laid off. Occasionally he was unable to lay off a bet and had to carry it himself, acting in such cases as a bookmaker.

This betting-commissioner enterprise was operated almost entirely on a credit basis. Ordinarily no money was posted with the petitioner in advance of the sporting event. Settlements with local bettors and other local commissioners were usually made in cash. Transactions with out-of-town commissioners were generally settled at periodic intervals by check. The latter settlements were in effect the balancing of accounts between Cohen and the out-of-town commissioners. They usually represented the net amount due from a number of bets rather than a single bet.

Petitioner maintained a 'revolving found' of about $3,000 is cash, which he used in making payments to local winners. The only cash deposits to petitioner's commercial bank account during the years in question were as follows: 1948-- $430; 1949-- $8,470; 1950-- $13,955. However, cash received from local bettors far exceeded these sums. Cohen's records of cash transactions as betting commissioner were kept only a few days until settlement was made. He never furnished to his accountant any records of his cash transactions or cash commissions received as betting commissioner. Accordingly, undeposited cash was not taken into consideration in preparing Cohen's income tax returns for those years.

The total deposits to Cohen's commercial bank account for the years in question were: 1948-- $508,384.23; 1949-- $404,118.69; 1950-- $283,129.80. These largely represented receipts from other betting commissioners in settlement of accounts. In addition to the checks so deposited Cohen received a large number of settlement checks which were endorsed by him but not deposited. The

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totals of these undeposited checks were: 1948-- $120,974.75; 1949-- $107,712; 1950-- $22,613.75.

Cohen made payments by check in settlement of accounts with out-of-town bettors totaling $292,283.46 in 1950. Payments in unspecified amounts were made under similar circumstances in 1948 and 1949.

During the three years in question Cohen did not maintain any permanent or detailed records or formal books of account pertaining to his betting-commissioner activities. He kept a daily 'master sheet' of transactions, but these were always destroyed a day or two later. It was therefore impossible to make an accurate determination of the amount of commissions received by Cohen.

An accountant employed by Cohen determined the latter's annual gross income as follows: The amount in the bank at the beginning of the year was subtracted from the amount at the end of the year. There was added to the resulting net increase or decrease in the bank balance all expenses of the cardroom business and all withdrawals made by or for Cohen. The result was considered petitioner's gross income. Undeposited cash receipts and cash payments not substantiated by a memorandum wer disregarded. This was done on the theory that the $3,000 revolving fund remained approximately the same throughout the year.

Cohen's income tax returns were prepared by a certified public accountant on the basis of annual summary sheets supplied by the regularly employed accountant. The income tax disclosed and paid in Cohen's returns for 1948 and 1949 as amended was $13,863.65 and $19,190.51, respectively. His 1950 return disclosed that no tax was due, and none was paid for that year. These returns described Cohen's business as 'brokerage.'

Late in 1950, R. Parenti, an examining officer for the Internal Revenue Service, audited Cohen's income tax returns for 1948 and 1949. Basing his examination entirely on information furnished by Cohen's accountant, Parenti arrived at deficiencies of $5,505.67 for 1948, and $4,689.23 for 1949. In 1952, Glenn Adrian, another Internal Revenue Service agent, audited Cohen's tax return for 1950, and re-examined his returns for 1948 and 1949. At this time there was in progress a nationwide investigation of betting...

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