Bernstein v. CIR

• Decision Date: 29 May 1959
• Docket Number: No. 17407.,17407.
• Citation: 267 F.2d 879
• Parties: Lillian BERNSTEIN, Executrix of the Estate of Kalman Bernstein, deceased, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

267 F.2d 879 (1959)

Lillian BERNSTEIN, Executrix of the Estate of Kalman Bernstein, deceased, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 17407.

United States Court of Appeals Fifth Circuit.

May 29, 1959.

Taylor, Dowling, Culverhouse & DeCarion, George H. DeCarion, Harry G. Taylor, Miami, Fla., for petitioner.

Davis W. Morton, Jr., Atty., Dept. of Justice, Washington, D. C., Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, A. F. Prescott, Attys., Arch M. Cantrall, Chief Counsel, John M. Morawski, Sp. Atty., Internal Revenue Service, Washington, D. C., for respondent.

Before RIVES, JONES and WISDOM, Circuit Judges.

JONES, Circuit Judge.

The Commissioner of Internal Revenue determined deficiencies in the income taxes of Kalman Bernstein for the years 1943, 1944 and 1945. He died on January 21, 1953. His executrix, who for convenience will be referred to as the taxpayer, sought a redetermination of the taxes by the Tax Court. On facts, mostly stipulated, the Tax Court made extended findings and conclusions and directed that a decision be entered under its Rule 50.¹ The Commissioner submitted a computation as did the taxpayer. The Commissioner tendered another computation for an amount which was larger than that which it first proposed. A hearing was had and both the Commissioner and the taxpayer submitted oral argument which was followed by briefs of both parties. A decision was entered determining a deficiency in accordance with the first of the Commissioner's computations. The taxpayer asks us to review and set aside the Tax Court's decision.

The decedent, Kalman Bernstein, was the directing head of a retail jewelry business which was conducted in the name of K. Burns & Son. During all of the years 1943, 1944 and 1945, there were two stores in the operation, one at 114 East Flagler Street, Miami, Florida, and the other at 201 Laura Street, Jacksonville, Florida. From the latter part of 1942 until June 30, 1944, a third store at 38 N. E. 1st Avenue, Miami, Florida, known as Simpsons, was under the same ownership and management. The decedent actively managed the Flagler Street store. He maintained strict control over the managers of the other stores, and for these he did the buying. Sales, with only occasional exceptions, were made for cash. The decedent's son, Maurice Bernstein, who had been active in the business, was a member of the Armed Services of the United States between September, 1942, and October, 1945. Federal income tax information returns were filed by K. Burns & Son reporting partnership income as reflected by its books as distributed or distributable to Kalman Bernstein and Maurice Bernstein in equal shares. The share of the partnership income allocated to the decedent in the partnership returns was reported by him in his returns. The Internal Revenue Service found that the books and records of K. Burns & Son did not reflect all of its sales from which it followed, of course, that the returns did not correctly show the decedent's income nor the tax payable upon it. The Commissioner made a computation of income by a percentage markup method. Such method is applied by adding to the cost of goods sold a predetermined percentage of profit. The percentages used were, 45% for 1943, and 48% for 1944 and 1945. By this method and using these percentages the Commissioner found omitted sales for 1943 of $65,003.34, for 1944 of $77,075.12, and for 1945 of $65,515.86. The Commissioner found that the amounts of the additional sales were diverted and retained by the decedent, added all of these sums to the decedent's reported income and, making other adjustments not here involved, determined deficiencies. Fifty per cent. penalties were proposed by the Commissioner.

The taxpayer petitioned the Tax Court for a redetermination of the tax deficiencies and penalties. In the taxpayer's petition it was asserted that the Commissioner erred in determining that the percentage markup method should be used in computing additional sales and in finding that the proceeds of these sales were diverted and retained by the decedent. The propriety of the imposition of the fraud penalties was also challenged. The Commissioner answered, admitting or denying the particular allegations of the petition and making affirmative allegations of fraud by way of sustaining the penalties. The taxpayer filed a reply denying any fraud by the decedent in the filing of the tax returns. The case was tried before the Tax Court on a stipulation of facts and the testimony of fourteen witnesses. The record before us incorporates the stipulation but does not include the testimony of any of the witnesses. The Tax Court reached the conclusion that the Commissioner had used too high a percentage in reconstructing profits on retail sales and fixed a proper rate as being 37½%. The Tax Court adopted the Commissioner's premise that there...