Hanby v. Commissioner of Internal Revenue

• Decision Date: 03 October 1933
• Docket Number: No. 3491.,3491.
• Citation: 67 F.2d 125
• Parties: HANBY v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fourth Circuit

67 F.2d 125 (1933)

HANBY v. COMMISSIONER OF INTERNAL REVENUE.

No. 3491.

Circuit Court of Appeals, Fourth Circuit.

October 3, 1933.

Robert Ruark, of Raleigh, N. C. (Ruark & Ruark, of Raleigh, N. C., on the brief), for petitioner.

J. P. Jackson, Sp. Asst. to Atty. Gen. (Sewall Key and Earl C. Crouter, Sp. Assts. to Atty. Gen., and E. Barrett Prettyman, Gen. Counsel, Bureau of Internal Revenue, and Mason B. Leming, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., on the brief), for respondent.

Before PARKER, NORTHCOTT, and SOPER, Circuit Judges.

SOPER, Circuit Judge.

A petition was filed by the taxpayer to review a decision of the Board of Tax Appeals affirming the Commissioner's determination of additional income and excess profits taxes for the years 1917, 1918, 1919, 1920, and 1921. The sum of the deficiencies of the taxes in these years, as so approved, is $22,829.64, to which penalties in the amount of $20,556.35 have been added. For the year 1917 there was imposed under R. S. § 3176, as amended by section 16 of the Revenue Act of 1916 (39 Stat. 756, 775), a penalty of 50 per cent. of the excess profits tax, for failure to make and file the excess profits return, and also a penalty of 100 per cent. of the income tax, for willfully making a false and fraudulent income tax return; while for each of the other years there was imposed, under section 250 (b) of the Revenue Acts of 1918 and 1921 (40 Stat. 1057; 42 Stat. 227), a penalty of 50 per cent. of the amount of the deficiency, for false and fraudulent understatement, with intent to evade the tax or the amount which should have been paid. Petitioner does not question the amount of the deficiencies assessed, but advances divers reasons why the assessment may not now be imposed upon the following facts as found by the Board.

Petitioner was engaged during the years in question at Wilmington, N. C., in the manufacture and wholesale distribution of candies and soft drinks, under the trade-name of Crescent Candy Company. A false record book was kept, under petitioner's direction, the accounts of the business were deliberately manipulated in order that his taxable gain might be understated, and false returns, based upon these accounts, were filed in due time for each of the years 1917 to 1921. On June 9, 1923, after an examination of petitioner's books, a deficiency letter, with attached statement showing an additional tax and penalty of $63,892.37 for the years 1917, 1918, and 1919, was mailed to petitioner, and as a result petitioner filed amended returns for those years, admitting part of the liability asserted. Conferences were then had in Washington between a representative of the petitioner and representatives of the Bureau of Internal Revenue, and as a consequence of these discussions an additional assessment of taxes and penalties was made by the Commissioner, and additional payments were made by the taxpayer under circumstances to be later more fully described. In the year 1924, a further examination of petitioner's books was had, and a second deficiency letter, showing additional taxes and penalties in the sum of $43,385.99, was mailed to petitioner on October 11, 1924. A jeopardy assessment for this sum followed in November, 1924; and the present proceeding grows out of the respondent's rejection on June 3, 1927, of petitioner's claim for abatement of the full amount of the additional assessment. In the meantime, petitioner was indicted in the United States District Court for the Eastern District of North Carolina for willful attempt to defeat and evade the taxes imposed by law, by filing false and fraudulent amended returns for the years 1917, 1918, and 1919, and also for filing a false and fraudulent original return for 1921. He was tried under this indictment and acquitted of the charges with reference to the amended returns for 1917, 1918, and 1919, but convicted of the charge in relation to his original return for 1921.

Upon these facts, petitioner contends: (1) That the assessment in November, 1924, of taxes and penalties for 1917, 1918, and 1919 was barred by the statute of limitations; (2) that there was a binding settlement and compromise of tax liability for the years 1917, 1918, and 1919; (3) that the acquittal of petitioner on criminal charges in connection with the amended returns for 1917, 1918, and 1919 is res judicata, as to his liability for fraud penalties for those years; and (4) that the indictment and conviction of petitioner on the charge of filing a false and fraudulent original return for 1921 operates as a bar, under the doctrine of double jeopardy, to the further imposition of the fraud penalty for that year.

There is also a preliminary procedural question, petitioner earnestly contends, as to the penalties imposed, that the question of fraud was not properly raised by the pleadings before the Board, and hence that certain objections made by him at the hearing to evidence of fraud offered by the respondent should have been sustained, leaving no evidence in the record to support the imposition of the penalties. It is true that respondent did not affirmatively allege fraud in his answer, but simply denied that he had erred in making the assessment and denied generally the material allegations of fact in the petition. Nor did the petitioner expressly allege the absence of fraud. In his specifications he referred to certain of the defenses above mentioned, and declared that the computation of tax and penalties was erroneous, being based upon improper data and records, and not in accord with the facts. But it does not follow that the question of fraud was not in issue. It is obvious that the petitioner was well aware that fraudulent conduct on his part formed the basis of the Commissioner's determination, for the petition itself contained the allegation on his part that the amounts assessed against him as penalties were assessed upon the ground that he had unlawfully and willfully attempted to evade payment of the taxes imposed upon him for the respective years. Moreover, as the Board pointed out in its opinion, the question of fraud was inherent in the Commissioner's determination. The jeopardy assessment of November 29, 1924, of $43,385.99, consisted of additional taxes and of penalties incurred from his willful attempt to evade the payment of taxes. He filed a claim in abatement of this assessment which was rejected on June 3, 1927, and the pending petition was filed by him to secure a review of this rejection by the Board.

Since the Commissioner's determination and assessment of penalties was based on a finding of fraud, the only way in which the taxpayer could get relief was to put the question of fraud in issue; for the Board has merely a revisory capacity and its jurisdiction is limited to the issues raised by the pleadings before it. Popular Price Tailoring Co. v. Commissioner (C. C. A.) 33 F.(2d) 464; Blair v. Mathews (C. C. A.) 29 F.(2d) 892; Boggs & Buhl, Inc., v. Commissioner (C. C. A.) 34 F.(2d) 859, 861. Therefore, unless it appears from the petition of the taxpayer that he contested the validity of the Commissioner's finding on the ground that fraud was not proved, the Commissioner's determination of fraud must necessarily stand. Compare Board of Tax Appeals v. United States, 59 App. D. C. 161, 37 F.(2d) 442. It would avail the taxpayer nothing in this case to interpret the general assignment of error above referred to in the manner which he now suggests as questioning only the correctness of the mathematical calculation involved in the assessment, for no error has been shown in this respect, and this interpretation would leave the finding of fraud by the Commissioner undisturbed. It may be added in passing that the point under discussion is purely formal and technical, because the Commissioner offered evidence which fully established fraudulent conduct on the part of the petitioner in connection with his tax return, and the petitioner offered no evidence on his behalf to the contrary. Under these circumstances, we think that the Board was correct in holding that the Commissioner's answer, filed on August 22, 1927, was in accord with rule 14 of the Board, which then provided, in substance, that the answer should fully advise the petitioner and the Board of the nature of the defense, and should contain a specific admission or denial of each material allegation of fact contained in the petition, and should set forth any new matters upon which the petitioner relies for defense or for affirmative relief. The issue of fraud was not new matter within the meaning of this rule because it was inherent in the Commissioner's prior determination; and it cannot be said that the petitioner was in need of advice that fraud was involved, since his petition disclosed that he was in possession of this information. Subsequent to the filing of the answer, section 601 of the Revenue Act of 1928, 45 Stat. 791 (26 USCA § 1219 (a) amending section 907 (a) of the Revenue Act of 1924, 43 Stat. 253, was passed providing for the first time that the burden of proving fraud should be upon the Commissioner; and, pursuant to this statute, the Board amended rule 14 to provide that the answer shall contain amongst other things a statement of any facts upon which the petitioner relies to sustain any issue raised in the petition in respect to which the burden of proof is placed upon the Commissioner; but this rule was not in effect in 1927 when the answer was filed, and such a statement was not then necessary.

This result disposes also of the first contention made by petitioner upon the facts as found by the Board, that the assessment of taxes and penalties for the years 1917, 1918, and 1919 was barred by the statute of limitations. Section 277 (a) (3) of the Revenue Act of 1926, 44 Stat. 9, 26 USCA § 1057 (a) (3), provides: "The amount of income, excess-profits, and war-profits taxes imposed by * * * the Revenue Act of 1...