Gatling v. CIR, 8146.

Decision Date06 January 1961
Docket NumberNo. 8146.,8146.
Citation286 F.2d 139
PartiesJohn GATLING, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
CourtU.S. Court of Appeals — Fourth Circuit

Herman Wolff, Jr., Raleigh, N. C. (T. Lacy Williams, and Poyner, Geraghty, Hartsfield & Townsend, Raleigh, N. C., on the brief), for petitioner.

William A. Friedlander, Atty., Dept. of Justice, Washington, D. C., (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson and I. Henry Kutz, Attys., Dept. of Justice, Washington, D. C., on the brief), for respondent.

Before SOBELOFF, Chief Judge, and HAYNSWORTH and BOREMAN, Circuit Judges.

BOREMAN, Circuit Judge.

John Gatling, petitioner taxpayer, seeks review of a decision of the Tax Court determining deficiencies in his income taxes for the years 1946 through 1949, penalties for fraudulently understating his income for the years 1947, 1948 and 1949 and for failure to file a tax return for 1946.1

In the absence of adequate books and records, the Commissioner of Internal Revenue used the "net worth" method of determining income during the taxable years, determined that taxpayer had no cash on hand at the beginning of the net worth period and that increases in his net worth during each of those years were attributable to currently taxable income. At the trial before the Tax Court taxpayer presented testimony as to possession, at the beginning of the period, of a large sum of cash, approximately $35,000 and claimed that certain additions to his net worth were attributable to expenditures from this cash fund during those years. The Tax Court held that the Commissioner was in error in refusing to allow any cash on hand at the beginning of the net worth period; that the taxpayer had cash on hand at the beginning of the period in the amount of $7,000 and the same amount at the end of each year in question. With some other modifications and adjustments, the determinations by the Commissioner of deficiencies and fraud were affirmed by the Tax Court.

The statutes here involved are found in the Internal Revenue Code of 1939 (26 U.S.C. 1952 Ed.).2

Taxpayer challenges the sufficiency of the evidence to support the Tax Court

(1) in finding deficiencies in taxpayer's individual income taxes for the years 1947, 1948 and 1949;

(2) in finding that some part of the deficiency for each of those years was due to fraud with intent to evade tax; and

(3) in finding that the taxpayer did not file an income tax return for the year 1946.

It is well established that where issues of fact are raised, it is for the Tax Court, as the trier of such issues, to find the true facts from the record evidence, exercising its judgment as to the credibility of the witnesses.3 The findings of fact are peculiarly the province of the trial court and not subject to reversal unless clearly erroneous.4

Throughout the investigation of taxpayer's financial affairs and in the litigation involving the deficiencies charged to him, he has consistently offered one explanation of his expenditures in excess of reported income — the claimed cash hoard of $35,000 at January 1, 1947, and $23,000 at December 31, 1950. Thus, he himself has chosen the ground upon which to challenge the Commissioner's computation.

The Tax Court's findings and discussion thereof cover more than twenty printed pages. We shall limit ourselves to a condensed statement of the testimony upon which the Tax Court found against the taxpayer.

From the outset of his career, taxpayer, who was unmarried, enjoyed a modest earnings record. When he was discharged from the army in 1919, he had approximately $1,000 in cash. From 1921 to 1942 he was employed by the North Carolina State Highway and Public Works Commission with an annual average salary of less than $2,000. During that period his total earnings amounted to approximately $41,000, the portion earned before 1939 being tax exempt. He claimed to have received, from part time engineering work, $700 on one occasion and $250 on another, and some small income from raising and selling bird dogs. Further, he claimed that before 1941 he sometimes earned from $2,000 to $3,000 annually on the stock market and that his credit balance in his brokerage account at one time reached about $12,000 and at another time about $16,000, his largest withdrawals having been in 1936 or 1937. However, all brokerage records before 1941 were destroyed and the 1941 closing of his account shows a payment to taxpayer of only $1,655.65. The Tax Court found that his testimony as to stock market operations was vague, that it consisted principally of generalities and was unsupported by any books or records.

In 1939 he began to buy cheap rental houses, on one occasion paying $6,000 for nine houses, $1,500 in cash and the balance with borrowed money. By 1942 he had received $15,000 in rents but had expended up to $22,000 in construction, repairs and improvements. During the years 1942-1946, taxpayer was again in the military service serving in the Pentagon and his cousin, Bart Moore, managed the properties. The 1946 rental account balance was only $1,868. In 1947 Moore settled the account in full with taxpayer by paying him $1,600.

During his 1942-1946 military service, taxpayer received a total salary and allowances of $14,800 and at least $4,000 thereof was taxable. He claimed that he customarily deposited his $1,500 yearly allowance in a certain bank though by 1946 his balance there was less than $100. Prior to this military service, in the years 1923 to 1942, taxpayer lived with his parents paying them only $20 a month and he claims to have saved seventy-five cents out of every dollar he made. During his war service, he occupied a $54 a month apartment and asserts that he recovered much of the rent through reimbursement from guests who periodically occupied the apartment. It was during the war he first bought a car. Taxpayer claimed his expenses for living amounted to only $1,200 a year though the Tax Court increased this figure to $2,000 by adding to the reported amounts other expenses such as automobile and medical care.

Taxpayer's failure to file any tax returns during the years up to 1942, except when he paid a tax of less than $25 for the year 1940, tended strongly to indicate absence of income, other than salary, in any substantial amount.

In 1941 and 1942 taxpayer borrowed from banks, submitting financial statements in connection with each application. His first statement showed assets of $42,140 and cash in banks of $490, with no notation in the space provided for reporting cash on hand. The second statement shows assets of $40,025 and bank deposits of $450, noting cash on hand "small am't personal". In 1941 he borrowed $1,500 from his father, $700 of which remained unpaid in 1950 and on which he was paying interest. Taxpayer did not file State of North Carolina intangible property tax returns until 1953, notably after the start of the Internal Revenue investigation, when he filed back returns for four years showing cash as follows: 1947-$32,000; 1948-$24,000; 1949-$14,000; and 1950-$23,000. However, in a sworn statement to the agents during the investigation, taxpayer had claimed cash on hand as of the end of the year 1950 in the amount of $10,000 or less, subject to possible adjustment. In the same statement he described his net worth, as of December 31, 1942, as $65,000 in houses, less loans, with no mention of a hoard of cash.

Taxpayer testified that his accumulated cash was kept in his trunk at his father's home but during his army service he carried approximately $35,000 around with him in a suitcase. He admitted that he had not taken the trouble to count the money or keep any record of it. He attempted to explain by stating that he wished to have cash on hand in order to take advantage of any dips in the stock market but the evidence indicated that he had abandoned his dealings in the market about 1941 and prior to his re-entry into service in 1942. As the Tax Court pointed out, stock purchases could be made as readily through payments by check as by cash. Moreover, taxpayer, himself, recounted an experience when his brokers refused his tender of cash in a stock transaction, required him to walk to the bank, deposit the cash and pay them by check. One of his close personal friends, a hunting companion, testified that on one occasion in 1947 he went to the taxpayer's room where he found taxpayer counting bills from a pile of at least $30,000 spread out on his bunk. Taxpayer explained that, at intervals, he took his savings to a local bank, procured $100 bills which he then wrapped and placed in envelopes in the suitcase. At the trial he produced some empty brown envelopes on which he had made penciled notations which he interpreted as totaling $35,000.

However, in further testimony purporting to explain the manner in which he arrived at his estimate of a pre-1947 cash hoard of $35,000, he stated that he had about $23,000 at the end of 1950 and that he could calculate back from that figure to the beginning of 1947 and thus establish his cash holding on January 1, 1947, at $35,000. But his statements were characterized by vagueness and he apparently had no more reliable knowledge of his cash holdings at the end of 1950 than at the beginning of 1947. He stated that, at 1950, he was able to make a computation from his records. How, he does not reveal. The Tax Court found the story of the cash hoard of $35,000 to be incredible.

This, in substance, was taxpayer's attempt to show that the additional funds necessary to account for obvious excess of expenditures over reported income in the net worth years came from accumulated funds held before the start of that period and not from additional and unreported taxable income received during the period. From the best evidence available, the Tax Court carefully analyzed taxpayer's assets and investments back to the year 1939 and concluded that his investments...

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