Millikin v. CIR, 8445.

• Decision Date: 31 January 1962
• Docket Number: No. 8445.,8445.
• Citation: 298 F.2d 830
• Parties: M. S. MILLIKIN, and M. S. Millikin and Dorothy P. Millikin, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fourth Circuit

298 F.2d 830 (1962)

M. S. MILLIKIN, and M. S. Millikin and Dorothy P. Millikin, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 8445.

United States Court of Appeals Fourth Circuit.

Argued January 5, 1962.

Decided January 31, 1962.

B. Gerard Hartzog, Columbia, S. C., for petitioners.

Arthur E. Strout, Atty. Dept. of Justice, Washington, D. C. (Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, and Meyer Rothwacks, Attys., Dept. of Justice, Washington, D. C., on brief), for respondent.

Before SOBELOFF, Chief Judge, and HAYNSWORTH and BOREMAN, Circuit Judges.

HAYNSWORTH, Circuit Judge.

The petitioners seek a review of a decision of the Tax Court determining deficiencies of income tax for the years 1945 through 1950, and approving the Commissioner's imposition of fraud penalties. Its determination was based upon net worth computations. The principal contention here revolves around the husband's claim to have had a cash hoard of $40,000 at the opening of the net worth period. We think the evidence justified the finding of the Tax Court that he had no more than $6,000 in cash at that time, and that it supports the other findings and conclusions of that court.

The husband filed an individual return for each of the years 1945-1949, inclusive, and the husband and wife filed a joint return for 1950. These returns disclosed, using approximate figures, net income of $1600 in 1945, $13,000 in 1946, $3700 in 1947, a loss of $7300 in 1948, net income of $3,000 in 1949, and of $5200 in 1950. By computing the increased net worth on an annual basis, to which was added nondeductible expenses in each year, the Tax Court determined that there was net income in each of these years of $18,600, $41,000, $23,400, $16,400, ($1400), and $13,700, respectively.

In making these computations, the Commissioner and the Tax Court had information of the exact amount of the cash in bank at the opening and close of each annual period. The Commissioner gave no credit for any undeposited cash hoard as of January 1, 1945, but the Tax Court gave Milliken credit for $6,000 as of that date. The Tax Court did not give Milliken credit for the value of his equity in certain record playing machines he owned in January 1945. The failure to give him credit for a larger amount of undeposited cash and for the value of his equity in the record playing machines is the principal basis of his attack upon the decision of the Tax Court.

Milliken testified that on January 1, 1945, he had $40,000 in currency. He explained the accumulation of this cash hoard by consistent savings through frugal living during the 20-year period following his marriage to Dorothy P. Milliken in 1925. In the summer of 1944, he testified, this hoard was in small bills, which he took to the Federal Reserve Bank in Charlotte, North Carolina, where he exchanged the small bills for others of larger denomination. This testimony was supported by a teller of the Federal Reserve Bank, who testified that he recalled that Milliken did come to the bank with a bag of small bills which were exchanged for bills in denominations of $50 and $100. He testified that to count the bills and make the exchange required some thirty minutes, from which he estimated that the total amount involved exceeded $30,000, but he had no other recollection of the amount of the money. He was unable to recall just when this transaction occurred, though he testified it was after January 19, 1942 and prior to 1948.

Another official of the Federal Reserve Bank testified that, beginning on May 21, 1945, records were made of all such transactions when the amount involved was as much as $1,000. He had searched the records of the bank and found no record of any such exchange by Milliken. From this testimony, Milliken reasons that the exchange recalled by the teller must have occurred prior to May 21, 1945, and that this testimony strongly corroborates his testimony that he had a cash hoard of at least $40,000 on January 1, 1945.

Milliken's financial history weighs heavily against the claim, however.

Petitioner finished only the ninth grade in school. At the age of twenty, in 1925, he married Dorothy. Thereafter, he went into the dry cleaning business in Hamlet, North Carolina, and for some years worked as a part time brakeman on a railroad. His earnings as a brakeman never exceeded $600 in any of these early years, and in 1931 amounted to only $69.96. In 1932, the dry cleaning business was declining, so he sold it out, and the petitioner moved to Hickory, North Carolina, where Milliken became employed as assistant manager of a retail store at a salary of $12 to $15 per week. This employment terminated when his employer went into receivership.

In 1933, Milliken, operating as Milliken Music Company, went in the business of supplying coin-operated phonographs and pinball machines to locations controlled by others. The usual agreement, under which these machines were operated, divided the gross receipts of each machine on the basis of fifty per cent to Milliken and fifty per cent to the operator of the premises.

This coin-operated machine business, referred to as the "music business," petitioner sold in September 1941 for $2500 in cash and the assumption by the purchaser of the balance of $8,317.77 due on equipment purchase contracts. The equipment at that time consisted of some forty-seven coin-operated machines, some related equipment, a pickup truck, and a typewriter.

Millikin then moved to Georgia where he purchased a coin-operated machine business, for which he paid $5,000 in cash and agreed to pay $700 per week until the balance of the purchase price, undisclosed on this record, was paid. The volume of the business decreased, and Millikin had difficulty in maintaining his payments. In 1942, he turned back this business to the person from whom he had bought it, receiving for himself about $2500.

Millikin then returned to Hickory, North Carolina, and reacquired his old music business from its earlier purchaser, who had been unable to make any money from it. To reacquire his old music business, Millikin paid $3600 in cash on March 25, 1942, and assumed the payment of a balance of $4,389.51, due upon purchase contracts for twenty-three phonographs.

Under date of February 9, 1942, an instrument was executed by the petitioner in which it was recited that the conditions of the equipment purchase contracts of his reacquired Hickory business had not been performed, that the petitioner desired to consolidate the indebtedness on those contracts and to arrange for an extension of the term of payment. There is then described in the instrument some twenty-three Wurlitzer phonographs, the equipment on which the balance of $4,389.51 was still due on the purchase price. That balance, petitioner agreed to pay in sixteen monthly instalments of $274.34, (the last instalment was to be $274.41), the first instalment being due on February 11, 1942. This instrument was recorded on March 25, 1942, the date on which he paid the cash consideration to reacquire his old business.

In 1943, petitioner placed some of his coin-operated phonographs and pinball machines in officers' and enlisted men's clubs at Camp McCall, North Carolina. At about that time, or shortly thereafter, he also began to purchase slot machines and furniture for clubs at Camp McCall, under arrangements by which he received a percentage of the receipts of the machines as their purchase price. There were also agreements that he would keep the machines in operating condition, for which he was to receive a percentage of their receipts or a flat fee.

Meanwhile, sometime prior to World War II, Millikin had a half interest in a flying school at Beacon Field, Hickory, North Carolina. At different times, Millikin and his partner owned four airplanes. This operation ceased when the partner went into military service, and the record indicates the business was not a financial success.

In October 1942, Millikin began to work again as a brakeman on a railroad. He continued in that employment through April 1943. His average earnings from the railroad during this seven-month period amounted approximately to $265 per month.

Mrs. Millikin had begun the operation of a beauty salon in Hickory in 1933 or 1934. This shop was a going business on January 1, 1945, the opening date of the net worth period. She sold it on March 14, 1946 for $3750.

Millikin had filed no federal income tax return prior to 1940. He filed returns for 1940 and 1941, but showed no tax due. He filed no return for 1942. He filed returns for 1943 and 1944, showing taxes due, respectively, of $1362.91 and $858.53. Mrs. Millikin filed an income tax return for 1945, in which she showed a profit from the operation of her beauty salon of $594.73.

Intangible property tax returns filed in North Carolina by Millikin for the years 1947 and 1948 disclosed no cash on hand as of the end of either of those years.

It is clear on this record that sometime after Millikin began to place his coin-operated machines in clubs at Camp McCall, and later at other military posts, his cash receipts and his earnings greatly increased. It is...