Carter v. Campbell

• Decision Date: 10 March 1959
• Docket Number: No. 17443.,17443.
• Citation: 264 F.2d 930
• Parties: B. B. CARTER and Mrs. Tommie V. Carter, Appellants, v. Ellis CAMPBELL, Jr., Director of Internal Revenue, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

264 F.2d 930 (1959)

B. B. CARTER and Mrs. Tommie V. Carter, Appellants, v. Ellis CAMPBELL, Jr., Director of Internal Revenue, Appellee.

No. 17443.

United States Court of Appeals Fifth Circuit.

March 10, 1959.

COPYRIGHT MATERIAL OMITTED

Wentworth T. Durant, Robert J. Hobby, Dallas, Tex., for appellants.

Davis W. Morton, Jr., I. Henry Kutz, Lee A. Jackson, Joseph F. Goetten, Dept. of Justice, Washington, D. C., Andrew F. Oehmann, Acting Asst. Atty. Gen., Charles K. Rice, Asst. Atty. Gen., John C. Ford, Asst. Atty. Gen., William B. West, III, U. S. Atty., Fort Worth, Tex., on the brief, for appellee.

Before HUTCHESON, Chief Judge, and BROWN and WISDOM, Circuit Judges.

JOHN R. BROWN, Circuit Judge.

This appeal turns on the burden of proof in a taxpayer's suit to recover civil fraud income tax penalties. Intertwined are those naturally related to that question — was the burden properly interpreted and applied by the District Court, and, if so, did the evidence justify the finding and judgment adverse to the taxpayer. In the disposition we make of the case at this stage, the situation can be briefly summarized.

Carter, the appellant-Taxpayer, in his brief correctly describes this as a civil sequel¹ to his last visit here. Carter v. United States, 5 Cir., 1955, 224 F.2d 563. So far as appears no action since that time has been taken on the criminal case. But pending at that time was the Taxpayer's claim for refund of income tax deficiencies and civil fraud penalties paid in April 1954 and for which this suit was filed in January 1958.

The suit² against the District Director to recover overpayments concerned only the tax year 1946. Taxpayer and his wife by separate but identical returns had reported a tax of $2,858.59 each, or a combined tax of $5,717.18. Deficiency assessments fixed the husband's³ tax at $54,199.76, including fraud penalties, and that of the wife,⁴ with no penalties, at $32,601.39. A detailed breakdown was not made, but testimony, not here challenged by the Government, from Taxpayer's accountant indicates that after excluding the 50% civil fraud penalty of $11,924.60 and interest on the deficiency against both husband and wife, the combined tax was in the neighborhood of $53,415.60 or roughly ten times that originally returned and paid.

After timely claims for refunds filed with the Commissioner, the suits were each for the recovery of $23,849.21 in taxes plus interest. The husband's suit also sought recovery of the civil fraud penalties of $11,924.60. The District Court denied all relief and entered judgment for the District Director. The husband alone appeals and only as to the civil fraud penalty. Thus, as to the husband, the case is one of a taxpayer who has judicially acknowledged the existence of a substantial deficiency.⁵

Taxpayer was a stockman-farmer of Stratford, Texas. He had a large ranch on which he raised cattle which he bought and sold. He also had a large farm producing feed for his cattle and wheat which he sold. His operations were extensive. The original return for 1946 showed cattle sales of $410,737.11. Gross income from cattle sales was $99,555.83. To this was added miscellaneous income plus grain sales in the amount of $23,820.95 for a total gross income of $131,480.26. These operations, particularly the sale of cattle, required considerable financing, and during the year 1946 Taxpayer borrowed over $120,000 from the First State Bank of Stratford. Interest charges, taken as a deduction, exceeded $10,000. Expenses, none of which are shown on this record to have been improperly taken, total $77,739.95 leaving a net income of $22,188.91. With some small capital gains, this produced a community income of $25,607.31 which, on division between husband and wife, fixed the tax at $2,858.59 for each.

Taxpayer had little formal education. Prior to 1940, he had not had to file any income tax returns. With a marked increase in his income, the president of the local bank, upon inquiry, recommended that his returns be prepared by Russell, a local lawyer and accountant. As a farmer, Taxpayer was not required to keep books. Treas.Reg. 111, § 39.54-1. He did not. Returns were prepared primarily on the basis of Taxpayer's records of bank deposit slips, bank statements and cancelled checks, and, as Russell put it, "such other information as he could give us."

The Government did not undertake to show the composition of the deficiency which we now treat as judicially confessed, see note 3, supra. To show that a part of that deficiency was attributable to fraud,⁶ the Government relied on two specific grain sale items which were not run through the bank account. One⁷ was used in the purchase of property, the other⁸ as a payment on Taxpayer's indebtedness to the First State Bank of Stratford. They aggregated $20,752.69, and it must now be conceded that this was additional and unreported income. Taxpayer never denied the fact of the receipt or use of these checks. He denied vigorously, however, that he had intentionally concealed them from Russell or his staff. On the trial he swore that he told Russell's office of them. However, on cross examination he was confronted with prior inconsistent statements made to the Special Agent in 1948 implying that he had not done so or must have forgotten to do so.

In addition to these prior inconsistent investigative statements, the Government sought to prove by Russell that Taxpayer had not in fact informed his office about these checks. Russell's testimony was inconclusive as he could not recall any particular discussion with Taxpayer which he personally had. He was strong in the implied opinion that Taxpayer had not told any of his staff because had he done so, a memoranda would have been made and no such memorandum was in the file. Those who might have had something to do with preparation of Taxpayer's return or discussion with him were Boomer, Underwood and Mrs. Hancock. Neither Boomer nor Underwood were called as witnesses. Mrs. Hancock was certain that Taxpayer had not mentioned these checks to her or any one else as there was no file memorandum to indicate it. But she had to acknowledge, of course, that she did not know what, if anything, Taxpayer might have told Boomer or Underwood. At least on the face of things, this approach — which sought to prove that Taxpayer did not give Russell's staff information because no memorandum was found in the file of work papers — was certainly weakened by one incident. The work paper file showed a deposit slip⁹ dated December 14, 1946, for over $7,000 from cattle sales. However, only $442.93 of this had been included by Russell's staff in determining gross income and in computing tax. No explanation was made or offered as to how Russell's office, whose records were championed as well-nigh infallible, happened to make this error. That it was an error is conceded, for while this added another $6,735.57 in unreported income which went into the total on which the deficiency was computed, it was never, nor is it now, claimed that this omission¹⁰ was fraudulent.

So far as this record now reflects, apart from the two specific checks, notes 7 and 8, supra, there was no evidence from which to infer that the wide disparity between the combined taxes paid ($5,717.18) and that finally assessed ($53,415.60 exclusive of penalties) was due to concealment or any improper or fraudulent action. On the contrary, on the record so far developed, a routine income tax adjustment¹¹ which required Taxpayer to show an opening grain inventory in 1946 (although he had not done so for 1945, 1946, or 1947, and no fraud was imputed because of this controversy over proper tax and accounting practice) precipitated the remainder¹² of the deficiency.

In other words, in the present posture of the case, the two grain check items aggregating $20,752.69, see notes 7 and 8 supra, stand on their own and do not take on character as fraudulent or non-fraudulent by reason of the remainder of the deficiency.

This means that the case on the present record narrowed down to the ultimate question: did Taxpayer purposefully conceal these grain items so that they would not be reported as income upon which a tax would be payable, or was the omission by Russell due to mere neglect or error, either because Taxpayer failed to inform his attorney-accountant of the facts or because of error in the receipt, consideration and use of the Taxpayer's information by Russell's office?

Were the case pending in the Tax Court, and before us on a petition of review, we would determine it against very exacting standards. There is first the matter of what is and what is not fraud. We have recently given our approval, Olinger v. Commissioner, 5 Cir., 1956, 234 F.2d 823, 824, to the strong language of Davis v. Commissioner, 10 Cir., 1950, 184 F.2d 86, 87, 22 A.L.R.2d 967. "Fraud implies bad faith, intentional wrongdoing and a sinister motive. It is never imputed or presumed and the courts should not sustain findings of fraud upon circumstances which at most create only suspicion." Equally emphatic is that stated for us by Judge Sibley in Mitchell v. Commissioner, 5 Cir., 1941, 118 F.2d 308, 310. "Negligence, whether slight or great, is not equivalent to the fraud with intent to evade tax named in the statute. The fraud meant is actual, intentional wrongdoing, and the intent required is the specific purpose to evade a tax believed to be owing. Mere negligence does not establish either." These principles have been restated frequently and recently with no recession either from emphatic language or like application. Goldberg v. Commissioner, 5 Cir., 1956, 239 F.2d 316, 321; Fairchild v. United States, 5 Cir., 1957, 240 F.2d 944, 947; Eagle v. Commissioner, 5 Cir., 1957, 242 F.2d 635, 638; Jones v. Commissioner, 5 Cir., 1958, 259 F.2d 300. See also 10 Mertens, Federal Income Taxation § 55.10.

Added to this is the burden placed upon the Commissioner. The Code¹³ places it...