Eagle v. Commissioner of Internal Revenue, 16079.

• Decision Date: 02 April 1957
• Docket Number: No. 16079.,16079.
• Citation: 242 F.2d 635
• Parties: Marvin D. EAGLE, Jr. and Geraldine Eagle, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

242 F.2d 635 (1957)

Marvin D. EAGLE, Jr. and Geraldine Eagle, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 16079.

United States Court of Appeals Fifth Circuit.

April 2, 1957.

R. B. Cannon, Fort Worth, Tex., for petitioner.

C. Guy Tadlock, Walter Akerman, Jr., Robert N. Anderson, Lee A. Jackson, Dept. of Justice, Washington, D. C., Charles K. Rice, Asst. Atty. Gen., John Potts Barnes, Chief Counsel, Int. Rev. Service, Rollin H. Transue, Sp. Atty., Internal Revenue Service, Washington, D. C., for respondent.

Before HUTCHESON, Chief Judge, and CAMERON and JONES, Circuit Judges.

JONES, Circuit Judge.

Marvin and Geraldine Eagle, husband and wife, petition for a review of a decision of the Tax Court¹ sustaining the Commissioner's findings that, for the years 1944 through 1948, petitioners had failed to report substantial income, derived principally from the sale of cattle. The aggregate income tax deficiency assessed amounted to $50,546.73, in addition to total civil fraud penalties of $19,479.53 assessed under 26 U.S.C.A. § 293 (b), Code 1939, upon the determination that the deficiencies were due to fraud with intent to evade tax for each of the years in question.² The questions necessary for consideration are whether the petitioners, hereafter referred to as Eagle or petitioner, have sustained their burden of overcoming the presumed correctness of the Commissioner's deficiency assessments and whether sufficient relevant evidence, under the peculiar circumstances here, sustains the findings of fraud.

During the years in question Eagle, a resident of Panhandle, Texas, was engaged principally in the cattle business, buying and selling some stock and raising a little stock for sale from cattle he already owned January 1, 1944. All financial arrangements for the purchase of cattle were transacted by Eagle through loan accounts at two banks. Eagle applied a substantial part of his receipts directly to the payment of these loans, resulting in these receipts never going through his checking account. He maintained no books or records for the years in question from which his income could adequately be determined or from which income tax returns could be properly prepared.

Eagle and a co-adventurer, Grandbush, entered into a sheep-raising venture in June, 1948, in which Grandbush was to furnish the pasture and Eagle the sheep. Eagle invested a total of $35,000 in this venture. For the years 1948 and 1949, the latter year winding up the venture, the Commissioner included a total of $3,498.78 in Eagle's income as his share of the profit from the venture.

Eagle engaged a local attorney, now deceased, who held himself out as competent and qualified and who had been the attorney for Marvin Eagle, Sr. and prepared his tax returns for many years, to prepare his returns for all the years in question. For the preparation of the returns Eagle furnished the attorney with his bank statements, cancelled checks and deposit slips and all other data or records that were requested of him. Depending upon his attorney, Eagle never questioned the accuracy of the returns prepared for him and his wife, and signed the returns and checks for payment of the tax as prepared by the attorney.

The Commissioner, in determining the deficiencies, computed Eagle's income from bank deposit slips and statements pertaining to Eagle's checking account, the bank's customer liability ledgers which showed Eagle's various loans and payments thereon, and by verifying Eagle's sales and purchases with the persons with whom he dealt.

The stipulations of the parties show that Eagle received large amounts of unreported income. The tax deficiencies, together with the fraud penalties as found by the Commissioner, were sustained by the Tax Court against Eagle's contentions that the amount of the deficiencies for the years 1945, 1947 and 1948 were excessive as some of the cattle sales during these years were of breeding cattle held for a period greater than six months, thus the resulting gains were long-term capital gains of which only one-half is includable in computing taxable income under 26 U.S.C.A. § 117 (j) (1), Code 1939; and that the Commissioner erred in including in income for 1948 and 1949³ any amount representing income from the sheep venture with Grandbush as he did not get any of the "paper profits" that Grandbush's books showed, and lacked $3,500 in recouping his investment, both debts becoming worthless and uncollectible in 1949.

Substantially the same argument is urged here regarding the contention that income from the sale of some cattle during 1945, 1947 and 1948 resulted in a long-term capital gain. The Tax Court determined that Eagle had failed to establish, in some instances, how long the cattle sold were held and, in others, that they were held for breeding purposes. Furthermore, it stated that the testimony of an accountant with no personal knowledge of the facts underlying his computations could not be relied upon and was of no help in supporting Eagle's contentions.

The burden is on the taxpayer to overcome the findings of the Commissioner, which are presumed to be correct. Marshall v. Commissioner of Internal Revenue, 5 Cir., 1957, 240 F.2d 185, and cases there cited. Alluding only to the uncorroborated testimony of Eagle, relied on below, and the accountant's computations, but without pointing out wherein the Tax Court was in error, Eagle asks us to reach an opposite decision from that of the Tax Court. A careful survey of the evidence on this point leads us to the conclusion that the Tax Court was right and that Eagle has not established the elements necessary to entitle him to a long-term capital gain from the sale of cattle.

Relying on the testimony of Grandbush that Eagle did not get his part of the "paper profits" in 1948 and lacked about $3,500 of getting back his investment in the sheep venture, both of which, according to testimony, Eagle was unable to collect from Grandbush in 1949, Eagle asks us to hold here that he sustained a bad debt deduction for 1949 substantially equivalent to the sum of these items.⁴ The Tax Court held that the evidence failed to establish any part of this contention. We agree. The question of the worthlessness of the debt in 1949 is essentially one of fact. The burden rests on the petitioner to establish this fact by a preponderance of the evidence. Lunsford v. Commissioner of Internal Revenue, 5 Cir., 1954, 212 F.2d 878. The Tax Court was of the opinion that the evidence consisting of testimony of Grandbush that he did not know whether he was bankrupt or insolvent, but that Eagle was unable to collect the debt in 1949 or since then, which Eagle also testified to, is insufficient to establish the worthlessness of this obligation. We cannot say that this decision is clearly erroneous, Rule 52(a), Fed.Rules Civ. Proc., 28 U.S.C.A., for the mere statement that one was unable to collect a debt, in the absence of further evidentiary facts establishing this conclusion, is an inadequate basis to substantiate the claim of worthlessness. Lunsford v. Commissioner of Internal Revenue, supra.

The issue of fraud is an issue of fact to be determined from the entire evidence and circumstances surrounding and entering into the taxpayer's business and all the facts incident to the preparation of...