Furnish v. CIR

• Citation: 262 F.2d 727
• Decision Date: 22 December 1958
• Docket Number: No. 15942.,15942.
• Parties: Richard Douglas FURNISH and Emilie Furnish Funk, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

262 F.2d 727 (1958)

Richard Douglas FURNISH and Emilie Furnish Funk, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 15942.

United States Court of Appeals Ninth Circuit.

December 22, 1958.

Murray M. Chotiner, Beverly Hills, Cal., Dermot R. Long, Hollywood, Cal., for petitioners.

Charles K. Rice, Asst. Atty. Gen., Grant W. Wiprud, Lee A. Jackson, A. F. Prescott, Joseph Kovner, Attys., Department of Justice, Washington, D. C., for respondent.

Before BARNES, HAMLEY and JERTBERG, Circuit Judges.

BARNES, Circuit Judge.

Before us are separate appeals by Richard Douglas Furnish and Emilie Furnish Funk, his onetime wife. Richard Douglas Furnish appeals from determinations of deficiencies of income tax for the years 1939 to 1949; his former wife for the period 1939 to 1942. Mrs. Funk's responsibility rests on her alleged joint and several liability for the filing of joint returns found to have been fraudulent. Mrs. Funk had actually signed such income tax forms, while blank, at her husband's request.

I — Dr. Furnish's Appeal

Richard Douglas Furnish, a doctor of medicine practicing in California, filed income tax returns for the years 1939 to 1948 reporting net income of $101,407.88 for these years. In the court below, he admits that he received a net income of $529,854.84 during these years, computed by his accountant through use of the net worth method. The figures established originally by an audit of taxpayer's books, prepared by an auditor of taxpayer's choice — the so-called Hill Audit — and as revised and checked by the Commissioner, enabled him to find, and he did find, that the doctor's net income during this period was $649,512.73. The Tax Court found the Commissioner's method of determining the taxpayer's net income (i. e., from the doctor's professional books and receipts, dividends, interest, and gain from sale of properties) was more accurate than the net worth method.

Errors urged are (1) that the so-called Hill Audit (Petitioner's Ex. 1) was received in evidence in error; (2) that its figures were not as accurate as those derived by the net worth method, advocated and relied on by the petitioner; (3) that respondent had not sustained his burden of proof of establishing fraud; and (4) that because of the absence of fraud, the statute of limitations bars deficiencies prior to 1944.

The deficiencies in question cover eleven successive calendar years — from 1939 through 1949. No point is raised on this appeal with respect to the deficiency determination for 1949. A total gross understatement of the difference between $100,000 and $530,000 (in round figures) is admitted by the taxpayer. Some substantial portion of that difference is admitted as to each year. Thus the incorrectness of the returns is without dispute. Mere omission of reportable income is not of itself sufficient to warrant a finding of fraud in an income tax case. Bryan v. Commissioner, 5 Cir., 1954, 209 F.2d 822; Goldberg v. Commissioner, 5 Cir., 1956, 239 F.2d 316, 320. However, repeated understatements in successive years when coupled with other circumstances showing an intent to conceal or misstate taxable income present a basis on which the Tax Court may properly infer fraud. Anderson v. Commissioner, 5 Cir., 1957, 250 F.2d 242, 249-250. Some of the taxpayer's income was reported by individuals other than petitioner.¹ Title to real and personal property owned by the taxpayer was held in names other than the taxpayer.² Petitioner failed to include certain substantial amounts of income on his books. "There was evidence of a consistent pattern of under reporting large amounts of income, and of the failure on petitioner's part to include all of (his) income in (his) books and records. * * *" These acts alone are sufficient to support an inference of wilfulness, says the Supreme Court in Holland v. United States, 1954, 348 U.S. 121, 139, 75 S.Ct. 127, 99 L.Ed. 150; Spies v. United States, 1943, 317 U.S. 492, 499-500, 63 S.Ct. 364, 87 L.Ed. 418.

The taxpayer not only did not keep accurate records, but he refused to follow the advice of others suggesting that he keep them.

The taxpayer concealed his ownership of certain property. He explained this as being a matter of convenience due to law suits and difficulties with his wife. Yet such concealment by itself is indicative of a wilful intent to evade income taxes. Remmer v. United States, 9 Cir., 1953, 205 F.2d 277, 288. Further, neither by testimony, brief, nor in oral argument has petitioner explained why he sent checks received from patients which represented payment of his (the taxpayer's) bills for medical services rendered in Los Angeles County, California, to his sister in Kansas City. There they were cashed and stored in a safe deposit box. "Approximately $25,000" was returned to him from his sister in cash by express in 1946, and "approximately $25,000" additionally was sent to Dr. Furnish in cash in 1947. No record was kept by anyone as to these transactions.

Again, the suggestion of "convenience" is raised by taxpayer explaining why he had a friend cash a $65,000 check made out to someone else, in San Pedro, so that he (Dr. Furnish) might receive the money in $20 bills. Such a transaction, when viewed in the light of all other evidence in the case, leads more readily to a conclusion of intent to defraud the government than that it was a matter of mere convenience.

No explanation is offered as to why Dr. Furnish denied to government auditors that he had previously owned any real estate, or had had any transactions therein, when the opposite was true.

Dr. Furnish did not choose to take the stand in his own behalf in this case. He introduced evidence on his own behalf, however, that he had previously entered a plea of nolo contendere to two of three counts in a criminal indictment charging the fraudulent evasion of income tax. After such conviction, the third count against Dr. Furnish was dismissed. At the time of his sentence, leniency was urged on his behalf by his counsel because "the doctor still must face the matter of fraud penalties — a fifty per cent penalty payment of tax, and the payment of interest."

In view of the uncontradicted testimony of the petitioner's actions during this ten year period from 1939 to 1948, there can be no question but that the government sustained its burden of proof of establishing fraud by clear and convincing proof. The claim that no fraud was established is utterly unconvincing, and approaches the frivolous.

Petitioner Richard Douglas Furnish raises two other points that can be considered together — error in admitting the Hill Audit, and that the Hill Audit was not as good or as accurate a method of establishing income as was the net worth method, which in the manner presented by petitioner was more favorable to him.

It should be noted that the correct amount of taxpayer's income for each of the years in question from sources other than gross professional income is not in question. This covers interest, dividends and capital gains on real estate transactions. Further, the amount of petitioner's professional expenses is undisputed, since the Commission allowed all claimed by the taxpayer. Thus in reality the sole remaining issue is whether the determination made by the Tax Court of what constituted petitioner's gross professional receipts is supported by the evidence.

We first note that the audit upon which the Tax Court and the Commissioner below relied was prepared by Harry K. Hill, a Certified Public Accountant. He was acting at the direction of taxpayer who subsequently through his duly authorized attorney turned the audit over to the government. The audit was an extensive one based upon the accountant's complete examination of all the patient record cards in taxpayer's office, aided by consultation with taxpayer's two assistants who were familiar with the records and with taxpayer himself. Taxpayer is precluded from attacking the determination based on his own audit. Anderson v. Commissioner, supra, 250 F.2d at page 248. On ordinary rules of evidence, this admission alone is sufficient to support a finding by the trier of the facts that his income was as so stated. 4 Wigmore, Evidence § 1078 (3d ed. 1940). But, further, the government's representative checked the figures in the Hill Audit. Respondent points out that:

"Agent Ness carefully checked it, sampling 3,900 of the 20,000 cards. The special agent also consulted with the taxpayer\'s two office employees who were familiar with the records; and whenever they could not answer any question on a particular card, the special agent took it up with the taxpayer himself.

"As the special agent testified:

"`* * * we consulted freely with Rose Saunders and Irma Wheeler in the office, and with Dr. Furnish when he was available, and when these questions arose at that time, we consulted with whoever was available and we determined what that card reflected.\'

"The agent\'s ampling disclosed some discrepancies between the audit as made by taxpayer\'s accountant and the records, but these discrepancies were generally in favor of the taxpayer and were accepted unchanged by the Commissioner." Respondent\'s brief, pp. 24-25.

As the government brief well says:

"Only once source of income is in dispute, namely his gross professional receipts, but these have been established from his own records, by his own accountant, aided by the taxpayer himself and his own employees. In short, this case is one in which the Commissioner has determined the taxpayer\'s income to be what he said it was."

We know of no rule of law or evidence that requires the Tax Court to accept as the best evidence a reconstructed net worth system in which the starting figures of opening cash were supplied and based solely on the taxpayer's statement,³ in preference to an audit made entirely from the records as they were maintained by the taxpayer.

The opening cash position is the one most critical...