Banks v. CIR

• Decision Date: 12 September 1963
• Docket Number: No. 17150.,17150.
• Parties: Thomas W. BANKS, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Eighth Circuit

322 F.2d 530 (1963)

Thomas W. BANKS, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 17150.

United States Court of Appeals Eighth Circuit.

September 12, 1963.

COPYRIGHT MATERIAL OMITTED

Joseph A. Maun, of Maun, Hazel, Green, Hayes, Simon & Aretz, St. Paul, Minn., for petitioner.

Burton Berkley, Atty., Dept. of Justice, Washington, D. C., for respondent and Louis F. Oberdorfer, Asst. Atty. Gen., Washington, D. C., and Lee A. Jackson and Joseph M. Howard, Attys., Dept. of Justice, Washington, D. C., on the brief.

Before VOGEL, BLACKMUN and RIDGE, Circuit Judges.

BLACKMUN, Circuit Judge.

The Tax Court, by its decision entered March 15, 1962, has held, among other things, that there were deficiencies aggregating $194,522.34 in Thomas W. Banks' income and victory taxes for the calendar years 1942-1947, inclusive, and that 50% fraud additions, under § 293 (b) of the Internal Revenue Code of 1939, and an under-estimation addition for 1947, under § 294(d) (2), were properly imposed. Banks has petitioned for review.

The case was developed on the net worth theory. The taxpayer's position here is (a) that the Commissioner's opening net worth statement was wholly inaccurate and unreliable; (b) that determination of tax based thereon was arbitrary and invalid; (c) that the Tax Court erred as to the burden of proof; (d) that certain findings were clearly erroneous; and (e) that the court erred with respect to treatment of farm inventory and breeding animals.

Judge Fisher's opinion, T.C. Memo 1961-237 and not officially reported, covers 145 pages. It was not reviewed by the full court. It sets forth the facts, some of which were stipulated, in meticulous detail. No useful purpose would be served by a similar survey in this opinion. We endeavor to confine ourselves to those facts which have some pertinence here.

Background to 1934. Banks filed no federal income tax returns at all for the years 1920-33, inclusive. He did file returns for 1934-47 in the Collector's office for the District of Minnesota. His wife Reta filed separate returns for 1942-47. The Director's records show that the taxpayer's 1940 return was treated as a joint return. Banks and Reta were married in 1915. She was a milliner at that time but after her marriage ceased to work and has not since been employed.

Banks, who was 64 at the time of the trial, ran away from home at 13 and went to Omaha where he worked as a hotel page boy. He was in military service in 1918. Upon his release he worked as a bell boy in Kansas City. He came to Minneapolis in 1919 as head bellman at the Dyckman Hotel. Although the Eighteenth Amendment was then in effect, he sold whiskey until July 1920 to people in the hotel and received income which he estimated at between $100 and $200 a day. From 1920 to 1924 he hauled whiskey by car from Canada and made, he testified, about $1,000 net each weekly trip. During this period he kept no records of income and expenses. From 1924 to 1929 he hauled alcohol by car from Chicago two or three times a week, making an estimated $400 or $500 a trip. His only records from 1927 through 1929 consisted of a small vest pocket notebook in which he recorded his daily sales. He kept no record of what he paid for alcohol.

In 1929 Banks pleaded guilty to a liquor conspiracy charge in federal court in Minnesota. A fine of $2,500 was imposed. He paid it.

In 1930 or 1931 for a short time the taxpayer with others (as to whose identity "I don't know") ordered alcohol shipped into the Twin Cities in box cars. He maintained offices for this business in the West Hotel in Minneapolis but "never" kept records. He had "no idea" as to the amount of money he was making in this activity. He ceased the alcohol business in 1931. He had heard of the federal income tax laws and knew he should keep records.

Banks testified that "I can't just recall" what his principal financial activity was between 1930 and 1934 but that he was not involved in any way in selling alcohol or liquor illegally.

In 1934 a charge of conspiracy under § 37 of the Criminal Code to violate §§ 3258, 3296, and 3450 of the Revised Statutes was brought in federal court in Minnesota against Banks and others. The court accepted Banks' plea of guilty. He was fined $2,000. He paid this fine.

The 1934 offer in compromise. In 1934 an assessment was made against Banks and others for alcohol tax liability in an amount exceeding $33,000. In July 1937 an offer in compromise was submitted with respect to this liability. It called for payment of $1,875 immediately and $150 monthly thereafter, until a total of $5,000 had been paid. The offer was accepted. In support of that offer Banks submitted an affidavit dated July 2, 1937, pertaining to his financial condition. That affidavit is important here and is set forth in full in the margin.^*

Each item on the affidavit was reviewed separately and investigated by a revenue agent. The agent checked the six securities stated to be of no value and found that they were worthless. He interviewed Banks personally.

At the tax court trial in 1959 Banks testified that he was not telling the truth in the affidavit; that it did not truly represent his then financial condition; that he "offered the affidavit in order to get the government to do something"; and that "they could have extended themselves a bit and they would have found out that it was absolutely not true." He also testified that, although he signed the affidavit, he did not read it. He conceded that O'Gordon, his lawyer who prepared the affidavit, explained to him that he wanted to be told about "all of your assets, all of your receivables, all of the things that you owned". Banks' statement in the affidavit that he was then insolvent originated with him and not with the lawyer. At the time the affidavit was being prepared Banks did not tell his attorney anything about cash at home or debts owed to him.

Investigation after 1934. From 1934 to 1940 Banks worked as a commission salesman for Old Peoria Company, a liquor distributor. In March 1936 special agent Masica, with the cooperation of revenue agent Hanson, was assigned to investigate Banks. He reviewed previous investigations and the alcohol tax files. He checked on accounts and receivables in Minneapolis banks and talked to persons "who we thought might know something about Mr. Banks' financial affairs". He interviewed Robert Kinsey, taxpayer's bookkeeper. Masica testified that Kinsey told him that he had known Banks for many years; that he had been his bookkeeper; that he "had never seen any indication that Banks had a large income at any time"; and that "he had been engaged to prepare returns for all years for which Mr. Banks might owe a tax and to work with us in getting facts straight". Masica also testified that information in connection with the returns was not forthcoming; that it was very difficult to get information; and that Banks had no records.

As a result of this investigation and by the use of the net worth method, deficiencies in tax, delinquency penalties and fraud additions were determined for 1920 through 1933. In September 1937 Banks and his wife signed Form 870 consenting to the assessment of these items. The amounts plus interest were paid by Banks in cash.

In April 1946 special agent McKusick began an investigation of the taxpayer for the years 1937 through 1947. McKusick was later joined by revenue agent Kleven. He completed his investigation and submitted his report in 1951. He started his work by obtaining the returns from the agents to whom they had been routinely assigned. The Masica report was reviewed. Special agents were instructed to go to banks and examine every cashier's check, money order, and certified check. McKusick and others looked for both assets and liabilities for each year and the persons involved. He examined books and records of numerous business places and of individuals. He called on approximately 150 different establishments to determine whether the taxpayer had an investment or interest in them. He inquired as to gifts or inheritances the taxpayer may have received during the period.

Leonard Weinstock, an accountant, prepared the federal income tax returns for taxpayer and his wife from 1942 to the time of trial. Weinstock also maintained records or did accounting work for enterprises in which Banks had a financial interest and for Harry Shepard, a partner. After the investigation of Banks, Weinstock made a voluntary disclosure for Shepard up to 1950 and prepared and submitted a net worth statement for Shepard which included an addition to tax for fraud.

The investigation disclosed that many of Banks' dealings were consummated in currency and in large amounts. McKusick never saw any personal books and records of Banks although he inquired about them. The 90-day letter was issued in April 1952 prior to the beginning of the trial on the criminal charges.

The third criminal charge. In January 1952 Banks was indicted in the District of Minnesota for income tax evasion, in violation of § 145(b) of the 1939 Code, for the years 1945, 1946, and 1947. He entered a plea of not guilty. The government prosecuted the case upon the net worth approach, starting with December 31, 1936, and Banks' 1937 affidavit. The jury returned a verdict of guilty on all three counts. Banks received a general sentence of three years and a fine of $10,000. United States v. Banks, 45 A.F.T.R. 1154 (D.Minn.1952). The judgment of conviction was appealed but was affirmed by this court. Banks v. United States, 204 F.2d 666 (8 Cir., 1953). The Supreme Court first denied certiorari, 346 U.S. 857, 74 S.Ct. 73, 98 L.Ed. 370, but then vacated that denial, 347 U.S. 1007, 74 S.Ct. 861, 98 L.Ed. 1132 Later certiorari was granted, 348 U.S. 905, 75 S.Ct. 311, 99 L.Ed. 710, and the case remanded, with others, for consideration in the light of Holland v. United States, 348 U.S. 121, 75 S.Ct. 127, 99 L.Ed. 150 (1954), and...