Gasper v. Commissioner of Internal Revenue

• Decision Date: 06 July 1955
• Docket Number: No. 12304.,12304.
• Citation: 225 F.2d 284
• Parties: Ray GASPER, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Sixth Circuit

225 F.2d 284 (1955)

Ray GASPER, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 12304.

United States Court of Appeals Sixth Circuit.

July 6, 1955.

Edgar W. Pugh, Detroit, Mich., for petitioner.

Dudley J. Godfrey, Washington, D. C., for respondent. H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack, Harry Baum, Washington, D. C., on the brief.

Before SIMONS, Chief Judge, and McALLISTER and MILLER, Circuit Judges.

McALLISTER, Circuit Judge.

This is a review of a decision of the Tax Court holding that a determination of the Commissioner of Internal Revenue of a deficiency against the petitioner raised a presumption of correctness. Petitioner contends that the evidence discloses that the method used by the Commissioner was wrong, and calculated to produce incorrect results, and that, accordingly, there was no presumption that the determination was correct.

The evidence discloses that the petitioner conducted a bar business and that the Commissioner determined a deficiency against him by the use of a mark-up method instead of basing such determination upon his receipts and costs. Petitioner contended before the Tax Court that the records maintained by him for his bar business correctly reflected his income, including total receipts from that source; that his returns were based upon those records; and that respondent Commissioner erred in not accepting as correct the gross receipts reported in his returns for the years in question, 1942 through 1946. He testified that he had made a daily record of his receipts; that the receipts reported in his returns for the years in question were based upon the records thus made; that, at the request of the Deputy Collector, he had submitted such records to him for examination, but that the latter declined to accept them, stating that petitioner's receipts would be determined by a mark-up method. However, the Deputy Collector and his supervisor testified that petitioner was repeatedly asked to furnish evidence as to his receipts for the years in question, but failed to do so. During the hearing, petitioner testified that he had with him his records for 1946 which showed his daily receipts and daily expenditures for that year, and that he kept records of the same type for each year. These records were not, however, introduced in evidence and the Tax Court held that, since it was not proved by the evidence that petitioner maintained records of his receipts, it could not find that the Commissioner erred in not accepting as correct the receipts reported by petitioner in his returns.

It, nevertheless, appeared on the hearing before the Tax Court, from the facts presented as to petitioner's liquor sales in 1945 — one of the taxable years — that the mark-up method used by the Commissioner resulted in an overstatement of actual receipts for the year from brands of liquor selling at one price, and understatements, from brands selling at another price.

The Tax Court pertinently observed that, since the number of bottles of each brand of liquor sold during each year was determined, as well as the brands contained in each group of selling prices per drink, and the number of one-ounce drinks obtained from each bottle, it was not apparent why the Commissioner used percentage mark-ups to arrive at petitioner's receipts from the sales of the liquor. It further found that the Commissioner's mark-up method had resulted in a wholly incorrect determination and, as an illustration of that fact, the Tax Court stated: "The respondent determined that 239 bottles of brands selling at 25 cents per drink were sold in 1945 and that there were 22 drinks obtained from each bottle. On that basis, there were 5,258 drinks sold during the year at 25 cents which would amount to receipts of $1,314.50 for the year from such brands." The Tax Court then went on to show the fallacy of the mark-up method which the Commissioner had adopted: "From the evidence submitted $1,314.50 would appear to be the greatest amount that the petitioner realized from the sale of 239 bottles of such brands. However, by use of a percentage mark-up the respondent has determined that the total sales of such brands amounted to $1,981.65, or an overstatement of more than 50 per cent of the amount the petitioner realized. The respondent determined that 22 bottles of brands selling at 65 cents per drink were sold during the year. This would give a total of 484 drinks which at 65 cents would amount to $314.60. The respondent has determined that the total sales of these brands was $208.50, or an understatement of more than 30 per cent of the amount realized by petitioner."

After the above recital of the facts, the Tax Court concluded: "Since the method used by respondent produces results at variance with the basic facts, it can not be sustained as one calculated to correctly establish the petitioner's receipts." The court found that, while the Commissioner's determination as to the petitioner's sales or receipts with regard to beer, wine, and other items should be sustained, the determination as to liquor should be recomputed, by multiplying the number of bottles in each selling price group by 22 drinks per bottle, and multiplying that product by the selling price per drink. The court added that the foregoing method was properly applicable to all the other years involved, and that it was to be applied in recomputing the liquor receipts for those years.

In brief, the Tax Court held that the mark-up method used by the Commissioner in determining the deficiencies as to petitioner's income from liquor for the year 1945 was wrong, and did not establish what his receipts actually were; that the same incorrect method had been used by the Commissioner for all of the other taxable years; that petitioner's receipts from the sale of liquor for 1945 should be recomputed by the method above outlined by the court; and that such method was properly applicable to all of the taxable years in question, and should be applied in recomputing liquor receipts during those years.

Petitioner thereafter recomputed his liquor receipts for 1945 in accordance with the Tax Court's direction, and further submitted that there was no testimony or evidence from which could be determined the number of bottles in each selling group for the taxable years of 1942, 1943, 1944, or 1946. He further set forth that he had requested from counsel for respondent any records he might have as to the number of bottles in each selling group for the years involved, but that such counsel did not claim to have the records or to have ever prepared them.

The Tax Court thereupon ordered the case reopened for further hearing, reciting in its order that it appeared from the transcript of record that full and complete information as to the total number of bottles comprising petitioner's purchases for the years 1942, 1943, 1944, and 1946, together with the cost price thereof, was available to both parties and that, in fact, respondent's agent, in his investigation prior to the date of notice of deficiency, had obtained such information from the files of the Michigan Liquor Control Commission. The court, in its order, limited the reception of proof to the actual number of bottles comprising ...