Goldberg v. Commissioner of Internal Revenue
| Decision Date | 19 December 1956 |
| Docket Number | No. 16024.,16024. |
| Parties | Sam GOLDBERG, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Sam GOLDBERG and Estate of Evelyn Goldberg, Sam Goldberg, Executor, Petitioners. v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Joseph B. Brennan, William R. Patterson, Atlanta, Sutherland, Asbill & Brennan, Atlanta, of counsel, for petitioners.
Sheldon I. Fink, Atty., Dept. of Justice, Washington, D. C., Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, Marvin W. Weinstein, Robert N. Anderson, I. Henry Kutz, John Potts Barnes, Ch. Cnsl., Int. Rev. Serv., Rollin H. Transue, Special Atty., Washington, D. C., for respondent.
Before CAMERON and JONES, Circuit Judges.
The Commissioner of Internal Revenue determined deficiencies of income taxes of Sam Goldberg and his wife Evelyn Goldberg (now deceased) for the years 1939 through 1942, for which joint returns were filed, and of Sam Goldberg for 1943, for which a separate return was filed. Fraud was found and fraud penalties were imposed. With some adjustments, the Tax Court sustained the Commissioner's findings. Sam Goldberg, in his own right, and as executor of Evelyn Goldberg, Deceased, has sought a review of the Tax Court's decisions. Sam Goldberg will be herein referred to as the petitioner and Evelyn Goldberg will be called the decedent. The findings of the Tax Court in its unreported opinion have been carefully summarized in the brief of the Commissioner. Borrowing heavily from it, we outline the sequence of events which bring this appeal before us.
The petitioner and the decedent were engaged in the business of operating coin amusement machines, mainly juke boxes, but with some slot machines. These were placed in stores, taverns, and clubs, and other establishments in southeastern Georgia and South Carolina. During the years in question the petitioner had machines in areas near military bases and shipyards. The petitioner employed collectors who visited the locations of the machines and, in the presence of the owner or operator of the establishments, unlocked the machines and turned over to the owner his agreed share of the proceeds. The petitioner also employed a number of maintenance and repair men who either serviced the machines in petitioner's shop or at the location. The collectors and repair men incurred travel expenses for which they were reimbursed. The petitioner and his son frequently made collections. The decedent took care of the books and records. She made all the entries except for a period of one month. She had taken a course in commercial bookkeeping at New York Evening High School for Women and had worked some as a bookkeeper. The Tax Court found that she had a good knowledge of the principles of bookkeeping. The books consisted of collections and disbursements books kept on the cash method of accounting on a calendar-year basis, utilizing a single-entry system of bookkeeping. The tax returns were prepared by an accountant from the information supplied by the decedent. He did not audit the books or verify the information. The collectors checked in periodically with decedent (or, on occasion, with the petitioner who in turn would report to decedent) and accounted for the amount collected, less expenses. Periodically, the decedent would enter such amounts in a collections book kept for that purpose. The amounts as shown by this record were reported in the tax returns. Travel expense, salaries and other expenses were entered in a disbursements book. Substantially all the expenses were business expenses some of which were held not deductible, but there were a few tax payments entered which were not related to the business. Deductions were disallowed in an amount exceeding $20,000. The petitioner contests the disallowance of about two-thirds of the total.
A checking account used for the business was maintained at the Citizens and Southern National Bank, Liberty Street Branch, Savannah, Georgia. The Tax Court found it was impossible to reconcile, from the books, cash with the bank account, so as to ascertain what portion of the receipts was deposited or what portion was expended or withheld without being deposited. The returns in question include a cost of goods sold computation involving the amusement machines and automotive equipment used by the petitioner in his business. None of the machines or equipment were held for purposes of resale except some phonograph equipment of which the petitioner made five sales for a total of $4,000 and gross profits of $653.58. The average useful life of the machines and equipment was three years. In the years 1940 to 1942, the petitioner and decedent received income which they failed to report from the estate of the petitioner's father, in the total amount of $336.42, and, in 1942, they failed to report a gain from the sale of timber of $1,500. In 1943, the petitioner failed to report income from the aforementioned estate of $140.75 and from the sale of auto equipment on which there was a gain of $109.67. Prior to and during the years in question, the petitioner operated a number of slot machines. In 1937 he pleaded guilty to the illegal operation of slot machines in Georgia, and in 1940 he pleaded guilty to two similar charges. In 1923 the petitioner was criminally indicted for failure and refusal to make income tax returns and pleaded guilty. In 1929, the United States obtained a judgment of $50,000 for civil income tax liabilities against the petitioner, based upon his offer to compromise such liabilities. In 1923, the petitioner was criminally indicted five times (one indictment included 40 counts) for violation of the National Prohibition Act, 27 U.S.C.A. § 1 et seq. He pleaded guilty to four of the five indictments and was found guilty on all five. During the years 1916 to 1937, inclusive, he was on several occasions charged with violation of the criminal laws of Savannah, on some of which he was found guilty and sentenced.
The net income as shown by the petitioner and the decedent, and as determined by the Commissioner, was as follows:
Returned Determined
1939 $ 2,845.64 $11,721.40
1940 3,282.17 17,688.89
1941 9,152.69 36,276.94
1942 16,469.04 30,608.24
1943 23,135.12 47.595.62
The figures shown for 1939 through 1942 are for the petitioner and the decedent jointly. The 1943 figures are for the petitioner only and show the victory tax figures. The income tax figures are slightly less both as returned and as determined. Most of the increase in taxable income as determined by the Commissioner resulted from computations made by the so-called "Cash expenditures method". This method of reconstructing income is an extension or outgrowth of the net worth method. It starts with a valuation at the beginning of the period of the taxpayer's assets. If that which has been spent exceeds that which has been reported as received the inference is justified that the difference is unreported income. It is not an accurate method and its results are at best approximations. Its use is permitted where the taxpayer's records are so inadequate as to require that resort be had to some other means of reaching a determination. See Mertens, Federal Income Taxation, § 12.12.
The Commissioner, by an amended answer, sought to increase the deficiency for 1943 as originally asserted by more than $12,500 on the basis of a larger amount of unreported business receipts. The Commissioner's use of the cash expenditures method of income determination was approved by the Tax Court as was his determination of deficiencies and penalties. The Tax Court approved the Commissioner's disallowance of certain deductions for travel, legal and miscellaneous expenses, as well as a part of the claimed deductions for taxes. It sanctioned petitioner's claim for increased depreciation allowances for amusement machines and automotive equipment, subject to adjustment for an estimated salvage value. The Tax Court found fraud as to each year and that Section 6 of the Current Tax Payment Act of 1943, 57 Stat. 126, 26 U.S.C.A. § 1622 note, did not apply. The Tax Court rejected the claims for refunds for the years 1940, 1941 and 1943, and determined deficiencies in income tax and 50 per cent fraud penalties against the petitioner and decedent. The petitioner and decedent's estate filed petitions for review in this Court and these were consolidated into one cause by an order of this Court. The petitioner makes two contentions in opposing the finding of the tax deficiencies. By one of these he asserts error in the reduction of depreciation on equipment so as to reflect a salvage value at the end of the depreciation period. The other objection to the determination is a criticism of the Commissioner's application of the cash expenditures method.
The Treasury Regulations applicable to the tax years with which we are here dealing contain this provision:
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