Commissioner of Internal Revenue v. Licavoli
| Decision Date | 14 February 1958 |
| Docket Number | No. 13135.,13135. |
| Citation | 252 F.2d 268 |
| Parties | COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. Peter LICAVOLI, Respondent. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Meyer Rothwacks, Washington, D. C. (Charles K. Rice, Hilbert P. Zarky, Washington, D. C., on the brief), for petitioner.
John F. Noonan, Detroit, Mich. (Joseph W. Louisell, Detroit, Mich., on the brief; Ivan E. Barris, Detroit, Mich., of counsel), for respondent.
Before MARTIN, McALLISTER and MILLER, Circuit Judges.
The Commissioner seeks review of the Decision of the Tax Court resulting from a ruling in a proceeding by the respondent taxpayer to review a deficiency assessment, which in practical effect struck from the record the Commissioner's answer, because of his failure or refusal to comply with the Court's order to file an amended answer making a more complete statement of his defense. Following the ruling, the Tax Court rendered its Decision of no deficiency. The nature of the issue requires a somewhat detailed review of the pleadings.
The taxpayer filed this action in the Tax Court on May 27, 1955, contesting an income tax deficiency for 1947 in the amount of $42,733.86, together with a fraud penalty of $21,366.93. In addition to alleging that the Commissioner erroneously increased his net income for the taxable year, the petition stated that the deficiency assessment, notice of which was dated March 1, 1955, was barred by the Statute of Limitations.
The Commissioner filed an Answer on July 15, 1955, in which it was stated that the deficiency was due to fraud with intent to evade, and that accordingly, it could be assessed at any time in accordance with Section 276(a) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 276(a). The Answer further alleged that for the taxable year in question the taxpayer reported net income of $27,066.68 and a tax of $8,839.12, when in truth and in fact, his correct net income and tax liability were $88,342.08 and $51,572.98, respectively, that taxpayer's books and records made available to the Commissioner were inadequate to correctly reflect his correct taxable income, and that an analysis of the taxpayer's net worth for the taxable years ending December 31, 1946, and December 31, 1947, showed a net increase in net worth and taxable income for 1947 as follows:
12-31-46 12-31-47
Total Assets ................. $168,015.68 $236,147.31
Total Liabilities ............ 59,793.24 60,059.48
___________ ___________
Net Worth .................... $108,222.44 $176,087.83
Increase in net worth ........ $ 67,865.39
Add: Personal Expenditures
Income Taxes Paid and
Living Expenses ............ 47,918.61
Total Income (Corrected Taxable ___________
Income) .................... $115,784.00
The Answer further stated that the assets so listed consisted of bank balances, bonds, stocks, automobiles, personal and real property, business investments, loans and mortgages receivable.
On September 23, 1955, the taxpayer filed a motion that, because the allegations were so general in nature, the Commissioner be ordered to make the answer more definite and certain by supplying the following information: the names and locations of the banks and amount on deposit in each bank; that the stocks and bonds be identified by name and amount together with the purchase price or market value, whichever method of computation was being used; the make, purchase price or value of the automobiles; what the personal property consisted of and its value or market price; the location, purchase price and value of the real estate; that he identify the business investments and the amounts invested in each; the nature, date and amount of loans receivable; and the amount and the date of the mortgages and the persons to whom the money was loaned.
On September 28, 1955, the Tax Court ordered the Commissioner to file an Amended Answer setting forth the items making up the net worth alleged in the original Answer or show cause why the proceeding insofar as it related to the fraud issue, should not be dismissed for failure properly to prosecute.
On November 4, 1955, the Commissioner filed an amendment to the Answer to which was attached a schedule which, among other things, gave a breakdown of assets at cost as of December 31, 1946, and December 31, 1947. This gave total amounts for each of the separate items of bank balances, United States Government bonds, stocks, automobiles, personal property, real estate, mortgages and receivables, and business investments. It did not give the requested information about the names of the banks, a description of the bonds or stocks, or any information about the particular items comprising the automobiles, personal property and real estate.
On December 19, 1955, the taxpayer moved to dismiss the issue of fraud for the alleged failure of the Commissioner to comply with the order of September 28, 1955. Following a hearing, the motion was granted on January 18, 1956. On February 24, 1956, the Commissioner filed a motion for reconsideration. On March 2, 1956, the Tax Court vacated its order of January 18, 1956, and ordered the Commissioner to file an Amended Answer in which he would identify the banks and the balances in each, the United States Government bonds and stocks, the automobiles, the personal property and the real estate and the amounts which he related to each, or show cause on or before March 28, 1956, why the allegations relating to fraud should not be stricken.
After having obtained an extension of time within which to file the Amended Answer, the Commissioner on May 23, 1956, filed an Amended Answer, to which was attached the same exhibit which was attached to the first Amended Answer of November 4, 1955, and which did not give the detailed information which was required by the Tax Court's order.
On June 14, 1956, the Tax Court entered its order striking from the Answer, as amended, the allegations of fraud. In the absence of fraud the deficiency assessment was barred by the Statute of Limitations. In order to put the case in position for appellate review, the Commissioner moved for a decision in the proceeding on the basis of the pleadings, and on August 21, 1956, the Tax Court entered its Decision of no deficiency, now being reviewed.
In making the ruling the Judge of the Tax Court filed a Memorandum to Accompany Order in which he recognized that the net worth method upon which the Commissioner proposed to rely in his effort to prove fraud was one frequently used for that purpose. He stated, however, that one of the purposes of the rules of the Tax Court was to bring about an orderly, fair and time-conserving disposition of the issues, that the taxpayer was entitled to know what the facts were upon which the Commissioner relied to prove fraud so that he could prepare his defense and not be taken by surprise, and that it was essential that the facts be pleaded in sufficient detail that each allegation might be admitted or denied and the area of disagreement as to the facts reduced in that fashion to a minimum, thus conserving the time, effort and expense of all concerned, including the Court. He pointed out that this was particularly true in Tax Court pleadings, since no discovery or pre-trial procedure was expressly provided under which the taxpayer might gain the same information which is sought through the pleading. He stated that proper pleading and the factual details necessary would vary with circumstances and excessive detail should be avoided, but in the present case the Commissioner refused to break down any category shown in the net worth statement, that the Court was impressed with the taxpayer's argument that he should have further information in regard to net worth facts upon which the Commissioner was relying in support of the fraud issues, and that, in the exercise of his discretion, he had ordered the Commissioner to plead the items going to make up the net worth statement in greater detail.
The Commissioner contends that the Tax Court erred in requiring him to plead basic evidentiary details in an Answer in which he affirmatively alleged fraud, both for the purpose of imposing the 50% addition to tax and to preclude the bar to Statute of Limitations. The taxpayer contends that the Tax Court was authorized under its rules to order the Commissioner to file a further and better statement of his defense to the action and that it was not an abuse of discretion on its part to require that an Amended Answer be filed giving the detailed...
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