Hogg v. United States, 19716.

• Decision Date: 14 August 1970
• Docket Number: No. 19716.,19716.
• Parties: James Steven HOGG, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

428 F.2d 274 (1970)

James Steven HOGG, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 19716.

United States Court of Appeals, Sixth Circuit.

June 24, 1970.

As Amended August 14, 1970.

Stuart A. Smith, Atty., Dept. of Justice, Washington, D. C., for defendant-appellant; Johnnie M. Walters, Asst. Atty. Gen., Meyer Rothwacks, Joseph M. Howard, Harry Marselli, Attys., Dept. of Justice, Washington, D. C., on brief; George I. Cline, U. S. Atty., Lexington, Ky., of counsel.

S. Russell Smith, Louisville, Ky., for plaintiff-appellee; M. K. Gilbert, III, Louisville, Ky., on brief; Smith & Smith, Louisville, Ky., of counsel.

Before PHILLIPS, Chief Judge, EDWARDS, Circuit Judge, and O'SULLIVAN, Senior Circuit Judge.

PHILLIPS, Chief Judge.

This appeal by the Government is from a judgment in favor of the taxpayer for a refund of income taxes, penalties and interest for the years 1959 through 1963, in the total amount of $32,968.34 plus statutory interest.

The judgment is based upon the verdict of the jury, which answered affirmatively the following interrogatory:

"Did Mr. Hogg report on his returns for 1959, 1960, 1961 and 1962 as much taxable income as you believe from the evidence he had for each of those years, and did he sustain a loss of $9,016.00 from his law practice and his rental and farm properties for the year 1964?"

The opinion of this Court on an earlier appeal in this proceeding is reported at 411 F.2d 578.

On the present appeal we consider two issues: (1) The motion of the taxpayer to dismiss the appeal; and (2) whether reversible error occurred during the course of the trial. We overrule the motion to dismiss the appeal and find reversible error for the reasons stated in this opinion. We reverse and remand for a new trial.

The taxpayer is a lawyer in Jackson, Breathitt County, Kentucky. He testified that during the years in question his law practice consisted exclusively of representing plaintiffs in personal injury cases which he handled on a contingent fee basis. The taxpayer was admitted to the bar in 1942 but did not devote his full time to the practice of law until 1949. Between 1936 and 1949 he owned and operated the only drugstore in Breathitt County. He sold that drugstore in 1949 for $27,000 and thereafter practiced law.

During the four years involved in this action the taxpayer's sources of income were his law practice, a one-half interest in two farms which he and his sister inherited from their mother in 1958, and a building in Jackson known as the Hogg Building in which the taxpayer lived and maintained his law office. Some offices in the Hogg Building were rented as commercial space while other space was rented to transients as sleeping rooms. During 1959 and a part of 1960 the taxpayer and his sister each owned a one-half interest in the Hogg Building, which was inherited from their father in 1918, subject to the dower interest of their mother. On June 21, 1960, the taxpayer purchased his sister's half interest in the Hogg Building for $32,500 of which $10,833.34 was paid at the time of sale. The balance was paid in two installments of principal in the amount of $10,833.33 each in 1961 and 1962, plus interest.

The taxpayer kept no books and records of his income other than the tax returns filed by him. He said that he could not recall who his clients were in the tax years here involved. He did not have copies of leases of any of his tenants in the Hogg Building. There was no record of any income from his farms. He maintained no receipt book reflecting any income from any source. He produced cancelled checks and receipts in support of some of the deductions claimed on his tax returns. His method of recording his income, according to his testimony, was through the use of three cigar boxes kept in a safe in his law office.

Gross receipts from his law practice were placed in the first cigar box. After he acquired his sister's interest in the Hogg Building in 1960, all receipts from tenants in this building were placed in a second cigar box which was identified easily because it bore the insignia of a different brand of cigars. At the end of the year he would count the money in each cigar box, enter at the appropriate place on his tax return the total of the amounts in the two cigar boxes, and remove the money from each box so as to start anew at the beginning of the year. He treated his tax returns as his permanent record of gross receipts. If the tax return was not prepared immediately after the end of the year, the taxpayer would enter this money count on a slip of paper in each of these two cigar boxes. Later, when preparing his tax return, he would report as gross receipts the amounts shown on these slips, then discard the slips.

The money removed after the end of the year from the first two cigar boxes was placed in a third cigar box, described by the taxpayer as his "reserve fund." All expenses were paid out of this third cigar box, either in cash, for which receipts were obtained, or by checks on the taxpayer's bank account in the First National Bank of Jackson. From time to time cash was taken from the "reserve fund" cigar box and deposited in the bank account to cover checks written for expenses, such as stenographic help, telephone, non-reimbursed court costs and the like.

The taxpayer made the first two payments for his sister's interest in the Hogg Building out of the cash in his "reserve fund" cigar box. The funds for the third payment were obtained by a loan from the First National Bank of Jackson. This loan was not repaid before the end of 1962.

Expenses such as travel and entertainment were paid in cash. The taxpayer computed his travel expense deductions by using the figure of 20¢ per mile to include food, lodging and the cost of upkeep on his automobile. He determined his business mileage by reading the speedometer at the beginning and end of each year, claiming that he used his car for nothing except business purposes.

The taxpayer reported no profit from either the Hogg Building or the two farms because, in his view, there was no profit to report.

During the period when the taxpayer owned the Hogg Building and farm properties jointly with his sister, the income from these properties was deposited in a joint bank account known as the "special account." From these deposits the taxpayer and his sister would pay by check such bills as were chargeable against these properties. This special bank account was closed after the taxpayer purchased his sister's interest in the Hogg Building in June 1960. Thereafter the gross receipts from rentals derived from this building were placed in the second cigar box in the manner described above.

A divorce had terminated his only marriage. At the time of the trial his ex-wife had remarried. The two children of the taxpayer were in the custody of their mother. As of 1959 his son was in high school and his daughter in grade school. During the years at issue the taxpayer paid $100 per month in child support, totaling $600 per year for each child. He did not pay any other expenses incident to his children. During the years at issue both the taxpayer and his ex-wife claimed the two children as dependents on their separate income tax returns.

In May 1962 the taxpayer was contacted by a revenue agent. The agent requested certain records which the Government says were not furnished. During the course of the investigation by the agent the taxpayer signed a Form 870, agreeing to extend the statute of limitations for the taxable year 1959 until December 31, 1963. The taxpayer failed or refused to sign a second Form 870 further extending the statute of limitations. Relations between the agent and taxpayer began amicably but soon deteriorated. The agent testified that the lack of cooperation on the part of the taxpayer was a significant factor in the decision to assess the penalty for civil fraud.

Deficiency assessments were made for each of the years 1959 through 1962. In reconstructing taxable income from 1959, the bank deposits method of recomputing gross receipts was used, coupled with disallowance of specific deductions. The deficiency assessed for 1959 totaled $5,053.87. For the years 1960-62, the net worth expenditures method of reconstructing income was used. Deficiency assessments for these years were as follows: $7,157.84 for 1960, $5,973.71 for 1961 and $10,452.12 for 1962.

In its brief on the present appeal the Government concedes that the revenue agent made certain mistakes in his report and that the deficiency assessments are erroneous to the extent that they reflect these mistakes. These mistakes were: (1) the inclusion of a bank deposit of $1,012.50 arising from an inheritance as income for 1959; (2) the inclusion as the taxpayer's income of 100 per cent rather than 50 per cent of the deposits in the "special" joint bank account of the taxpayer and his sister, the Government now conceding that the taxpayer had only a one-half interest in this account; and (3) the omission of the amount of $13,500 as an outstanding liability as of the end of the year 1962. This liability figure is stated to represent two separate bank loans in the amounts of $10,000 and $3,500 which the taxpayer obtained from the First National Bank of Jackson on July 6, 1962. The Government says the latter mistake was due to the fact that the entries on the bank ledger sheet were in the wrong column.

After a trial extending over a period of eight days the jury returned its verdict in favor of the taxpayer and judgment was entered against the Government.

1) The motion to dismiss

Before reaching the issues presented by the appeal on its merits we dispose of the taxpayer's motion to dismiss the appeal. This motion is grounded on the contention that the Government's timely notice of appeal filed January 8, 1968, is fatally defective because it was filed by the United States Attorney at a time when the Solicitor General had...