Halle v. Commissioner of Internal Revenue

• Decision Date: 01 June 1949
• Docket Number: Docket 20529.,No. 29,29
• Citation: 175 F.2d 500
• Parties: HALLE v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

175 F.2d 500 (1949)

HALLE v. COMMISSIONER OF INTERNAL REVENUE.

No. 29, Docket 20529.

United States Court of Appeals Second Circuit.

Argued May 11, 1949.

Decided June 1, 1949.

Before CHASE, CLARK and DOBIE, Circuit Judges.

Louis Halle, New York City, Edward Halle, New York City, for petitioner.

Theron Lamar Caudle, Assistant Attorney General, Ellis N. Slack, Helen Goodner and S. Dee Hanson, Special Assistants to the Attorney General, for respondent.

DOBIE, Circuit Judge.

This is an appeal from a decision of the Tax Court of the United States which determined deficiencies in individual income taxes of Louis Halle, deceased, for the taxable years 1929-1938, inclusive, in the amount of $184,943.96 and imposed as additions thereto 50% penalties for fraud in the amount of $92,482.10, plus interest on both these sums.

The following table shows these deficiencies and penalties, as broken down by the Tax Court, for the ten years in question:

                Year Deficiency 50% Penalty
                  1929          $ 8,758.44        $ 4,379.22
                  1930           32,848.13         16,424.07
                  1931           39,526.86         19,763.43
                  1932           41,565.55         20,782.78
                  1933            9,969.82          4,984.91
                  1934           11,216.53          5,614.56
                  1935           15,287.97          7,647.79
                  1936           11,554.96          5,777.48
                  1937            7,220.91          3,610.46
                  1938            6,994.79          3,497.40
                

From this table it will be readily seen that the average yearly deficiency (as determined by the Tax Court) for the ten years exceeded $18,000; that the minimum deficiency for any one year (1938) was nearly $7,000, with a maximum (1932) in excess of $41,000; and that for three successive years (1930-1932 inclusive) the yearly deficiency in each instance exceeded the sum of $32,000. These figures are clearly significant.

This appeal presents to us two questions: (1) whether we can sustain the findings of the Tax Court as to the deficiencies in taxpayer's income and the Tax Court's imposition of 50% fraud penalties for the years in question; and (2) whether it was reversible error for one judge of the Tax Court to hear this case and for another judge of the Tax Court to write the opinion. We think the first question must be answered in the affirmative and the second question in the negative, so that we must affirm the Tax Court's decision.

Apposite federal statutes in this case are set out below:

Revenue Act of 1928, c. 852, 45 Stat. 791:

Sec. 22. Gross Income.

"(a) General Definition. `Gross income' includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever." 26 U.S.C.A. § 22.

Sec. 293. Additions to the Tax in Case of Deficiency.

"(b) Fraud. If any part of any deficiency is due to fraud with intent to evade tax, then 50 per centum of the total amount of the deficiency (in addition to such deficiency) shall be so assessed, collected, and paid, in lieu of the 50 per centum addition to the tax provided in section 3176 of the Revised Statutes, as amended." 26 U.S. C.A. § 293.

Internal Revenue Code:

Sec. 1112. Burden of Proof in Fraud Cases.

"In any proceeding involving the issue whether the petitioner has been guilty of fraud with intent to evade tax, the burden of proof in respect of such issue shall be upon the Commissioner." 26 U.S.C.A. § 1112.

Taxpayer, during the years in question, was a prosperous and successful lawyer in New York City. Particularly lucrative was his practice while the Volstead Act, 27 U.S. C.A. § 1 et seq., was in effect. He kept bank accounts in his own name and a brokerage account, while his wife maintained a bank account and a pretty active brokerage account in her name. Practically all the funds in the bank and brokerage accounts of the wife were provided by taxpayer, with the exception of small sums representing income on, or gain from, her investments. And, apparently the money given to the wife came from taxpayer's earnings. Taxpayer himself gave a number of orders to buy and sell securities for the wife's brokerage account. There was evidence tending to show that during the year 1934, when taxpayer returned an income of $6,500.38, his actual living expenses exceeded $20,000.

During the period beginning at some time in 1934, taxpayer kept a loose-leaf book, showing some of his receipts and disbursements, but this loose-leaf book neither clearly nor completely reflected taxpayer's income. He could produce no records showing receipts and disbursements prior to 1934.

Up to 1934, he personally prepared his own tax returns. After that, his returns were prepared by an accountant who relied upon information furnished by the taxpayer. It seems that the accountant, in preparing these returns, did not examine any of taxpayer's books or records.

Petitioner attacks the findings of the Tax Court as to deficiencies in taxpayer's income on the ground that these findings have no warrant in the record. We think this contention is without merit.

Certain principles are helpful in this connection. The Commissioner's determination bears a presumption of correctness. Old Mission Portland Cement Co. v. Helvering, 293 U.S. 289, 55 S.Ct. 158, 79 L.Ed. 367; Welch v. Helvering, 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212; Greenfeld v. Commissioner, 4 Cir., 165 F.2d 318. The federal income tax system is one of self-assessment by the taxpayer. Its efficiency must depend largely on the truth of facts set out by the taxpayer in his return. And, appropriately geared to the gravity of nondisclosure (or false disclosure), Congress has provided varied sanctions, both civil and criminal, to protect that system. Implicit in the working of the system is an obvious duty of keeping proper records imposed on the taxpayer. Nor must the fact be overlooked that the taxpayer here was no unlettered person, ignorant of the methods of business and the purlieus of the law, but, on the contrary, he was a successful lawyer, practicing under the keen competition that obtains in the largest city on this continent.

The Commissioner determined the taxpayer's income during the years here involved from the bankbooks and brokerage accounts of taxpayer and his wife, cancelled checks, check stubs and vouchers, and such other meager records and data as were available. In some instances, the Commissioner made adjustments in favor of the taxpayer (e. g., in the years 1931 and 1934) and these were taken into account by the Tax Court in its findings. No reasonable doubts were resolved against the taxpayer, while the audit and analysis made by the Commissioner seems to have been as accurate as the circumstances here permitted.

Against this background, taxpayer and his wife introduced little or no genuine evidence to explain the large sums of money deposited in the bank and brokerage accounts. The answers of taxpayer and his wife as to items involving large sums of money were halting, inconclusive and evasive. Again and again, the wife's answers to questions here were simply: "I do not remember," "I can't remember," "I can't tell you." One striking example of this was the deposit, in the wife's name, of some $70,000 with the brokerage firm of Kidder, Peabody & Company in the year 1930. Again, for 1936, taxpayer reported a loss of $2,451.44, yet there was evidence to show that during this year taxpayer deposited in two banks, to the account of his wife and himself, sums in excess of $80,000. Nor could taxpayer explain this (at least) apparent discrepancy. Often, when called on to explain important items involving substantial sums of money, taxpayer resorted merely to a general statement that his returns were true and correct.

The decided cases clearly show that we cannot here disturb the Tax Court's findings as to the deficiencies in the taxpayer's income tax. In Hague Estate v. Commissioner, 2 Cir., 132 F.2d 775, 776, certiorari denied 318 U.S. 787, 63 S.Ct. 983, 87 L.Ed. 1154, Circuit Judge Chase said:

"When, in this setting, everything identifiable was excluded by the Tax Court from the decedent's gross income for each year, the residue of the...