Barnes v. CIR, 16968.

• Decision Date: 10 April 1969
• Docket Number: No. 16968.,16968.
• Citation: 408 F.2d 65
• Parties: Florence M. BARNES, and Barnes Theatre Ticket Service, Inc., an Illinois corporation, Petitioner-Appellant, v. The COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

408 F.2d 65 (1969)

Florence M. BARNES, and Barnes Theatre Ticket Service, Inc., an Illinois corporation, Petitioner-Appellant, v. The COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 16968.

United States Court of Appeals Seventh Circuit.

March 5, 1969.

Rehearing Denied April 10, 1969.

George D. Crowley, Chicago, Ill., for petitioner-appellant, Crowley, Goschi & Griffin, Chicago, Ill., of counsel.

Mitchell Rogovin, Asst. Atty. Gen., Stephen H. Hutzelman, J. Edward Shillingburg, Lee A. Jackson, Attys., Tax Div., U. S. Dept. of Justice, Washington, D. C., for respondent-appellee.

Before HASTINGS, Senior Circuit Judge, and SWYGERT and CUMMINGS, Circuit Judges.

HASTINGS, Senior Circuit Judge.

The cases of three taxpayers were consolidated for trial in the Tax Court of the United States, Honorable Charles R. Simpson, Judge presiding.

Barnes Theatre Ticket Service, Inc. (Barnes), Docket No. 1210-64.

Albert C. Eckardt and Cassandra Eckardt (Eckardts), Docket No. 1211-64.

Florence M. Barnes (Florence), Docket No. 1212-64.

The respondent Commissioner of Internal Revenue had asserted deficiencies against the taxpayers in each of the three cases.

Following a trial, the court found and held:¹

(1) The issues in Docket No. 1211-64 favorable to the Eckardts, and the Commissioner has not appealed from this ruling;

(2) That certain sales made by Barnes to other ticket brokers in the taxable years 1955 through 1958 were "wash sales" which did not result in income to Barnes during those years, and the Commissioner has not appealed from this ruling;

(3) That the withdrawal of funds by Florence from Barnes in 1958 constituted a repayment of funds previously loaned by her to it and was not taxable to her as a dividend, and the Commissioner has not appealed from this ruling;

(4) That the Commissioner was correct in finding Barnes had overstated its cost of operations for the taxable years 1955 through 1958 in the following amounts:

                                        COST OF OPERATIONS
                                                                 Overstatement
                          Year      Claimed        Allowed     Cost of Operation
                          1955    $569,785.75    $499,010.61      $70,775.14
                          1956     499,164.30     436,451.28       62,713.02
                          1957     391,912.95     370,077.06       21,835.89
                          1958     475,372.89     460,929.65       14,443.24
                

And, that Florence realized additional taxable income from Barnes in the years 1955 through 1958 in amounts corresponding to the overstated costs of operation disallowed to Barnes.

Barnes and Florence now file their joint petition for review.

The contested issues on review may be generally stated as (1) whether the Tax Court correctly held that Barnes failed to sustain its burden of showing that its costs of operations exceeded the amounts allowed by the Commissioner; and (2) whether the Tax Court correctly held that Florence, president and sole shareholder of Barnes, had taxable income (constructive dividends) to the extent that Barnes overstated its cost of operations.

Based on our examination of the record, we shall summarize the facts relevant to this review.

During the taxable years in question, Florence was the president of and sole shareholder in Barnes, an Illinois corporation, whose principal office was located in the Palmer House Hotel in downtown Chicago.

Barnes, engaging in the ticket brokerage business, purchased tickets of admission to sundry entertainment events and then resold them at charges in excess of established box office prices. The tickets were resold from a counter adjacent to the corporate offices in the Palmer House Hotel and from 14 other stands located in hotels and private clubs in the Chicago area.

Control over both the purchase and the resale of tickets was maintained by Barnes' central office in the Palmer House.

Barnes secured tickets for resale from many different sources. It purchased them from box offices of various theaters and sporting arenas and from persons or organizations engaged in the production of theatrical performances and sporting events; Barnes also bought tickets via mail orders and from people not regularly engaged in the ticket vending business.

Under a working arrangement with the box office personnel of various theatres and sporting arenas, choice tickets of admission for different Chicago attractions were forwarded to Barnes' office at the Palmer House. Included with the tickets from each box office was a slip of paper which set forth the cost per ticket, the number of tickets purchased, and the amount of premium, if any, over the box office price paid by Barnes. Barnes' bookkeeper, Anne Magner, recorded in the regular course of business some of the information found on these slips of paper; thereafter, Miss Magner destroyed the box office slips. Under this arrangement, Barnes was permitted to return, prior to a performance or event, unsold tickets to the appropriate box office for full refund of the purchase price.

Barnes maintained close daily control over the sale of tickets by requiring each of its vending stands to send the main office proceeds from each day's sales, together with a sheet indicating the date, the number of tickets sold by the stand, the number of tickets being returned, the amount of money received, the customer's name, the names of the theaters to which the tickets applied, and an inventory of tickets. The accompanying sheets contained neither a designation as to the cost of the tickets to Barnes nor a figure indicating the premium paid for the tickets, if any, over established box office prices. The daily proceeds were checked against these sheets and then entered into the cash receipts book. Currency proceeds from sales were either deposited in Barnes' bank account or placed in the office safe to serve as operating capital. Check proceeds were deposited in Barnes' bank account.

Miss Magner summarized monthly the daily stand reports and drew up quarterly summaries which were utilized in the preparation of Barnes' federal excise tax return. The quarterly sales recaps did not, however, reflect a complete record of all Barnes' ticket sales; the quarterly figures excluded sales made at box office prices and for charitable functions and included only those sales on which an excise tax was due. The type of tickets sold, the box office price of the tickets and Barnes' selling price can be determined from these quarterly sales recaps.

Although Barnes' cash receipts book and cash disbursements book (Exhibits 15 and 16) are not in the record before us, we assume that the Tax Court's conclusions with respect to these books are correct since neither party disputes those findings upon appeal.

In 1955, the cash receipts book reveals total cash purchases by Barnes on a per week per theater basis. For the later taxable years in question, the cash receipts book indicates cash purchases for periods varying from one to several weeks and is generally without entries showing the names of the theaters and persons from whom tickets were purchased, the dates of the purchases, and the amounts paid for particular tickets or bundles of tickets.

While the majority of the ticket purchases by Barnes were cash transactions, some were paid for by check. All purchases by check for the years 1955 through 1958 were recorded in the cash disbursements books.

Based essentially on these facts, the Tax Court upheld the Commissioner's determination that the cost of operation alleged by Barnes Theatre Service, Inc. was overstated during the years 1955 through 1958 and that the amount of such overstatement constituted additional income to Mrs. Barnes. These holdings were premised on the court's conclusion that the petitioners failed to overcome the presumption of correctness which normally attaches to Internal Revenue determinations of this nature.

To hurdle the presumption obstacle, the tax court suggested that the taxpayer show "* * * that the asserted deficiency was computed in an improper manner or * * * show that its books and records are adequate and accurately reflect its income, or * * * produce a combination of such evidence."

In this case, the Tax Court specifically found that Barnes' books and records failed to adequately and reliably reflect costs of operation; and that Barnes adduced no evidence with respect to the propriety of the computation of the asserted deficiency.

Taxpayers contend that the statutory notices of deficiency were so incomplete that the presumption of correctness should not attach to the determination. Further, that since the statutory notices neglected to state the basis for the deficiency determination the action of the Commissioner was arbitrary and therefore invalid. We disagree with taxpayers on both contentions.

We are of the opinion that the notice of deficiency complies with the statute, Section 6212(a) of the 1954 Code, which provides in general that "If the Secretary or his delegate determines that there is a deficiency in respect of any tax * * *. he is authorized to send notice of such deficiency to the taxpayer by certified mail or registered mail." Int. Rev. Code of 1954 § 6212. Commissioner of Internal Revenue v. Forest Glen C. Co., 7 Cir., 98 F.2d 968, 971 (1938), cert. denied, 306 U.S. 639, 59 S.Ct. 487, 83 L.Ed. 1039.

Further, it seems clear that the Commissioner's notice of deficiency is not invalidated because it contains no particulars or explanations concerning how the alleged deficiencies were determined. Commissioner of Internal Revenue v. Stewart, 6 Cir., 186 F.2d 239, 242, 24 A.L.R.2d 793 (1951).

It was cogently stated in Olsen v. Helvering, 2 Cir., 88 F.2d 650, 651 (1937) that "the notice is only to advise the person who is to pay the deficiency that the Commissioner means to assess him; anything that does this unequivocally is good enough."

As Judge Simpson noted in 26 TCM at 1293: "In so holding, we are not approving of the deficiency; we are...