Harp v. CIR, 13442.
| Decision Date | 11 February 1959 |
| Docket Number | No. 13442.,13442. |
| Citation | 263 F.2d 139 |
| Parties | Vernon F. HARP and Vera Harp, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Robert J. Hobby, Dallas, Tex., Durant & Hobby, Dallas, Tex., on the brief, for petitioners.
James P. Turner, Washington, D. C., Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson and Robert N. Anderson, Attys., Dept. of Justice, Washington, D. C., on the brief, for respondent.
Before MILLER, Circuit Judge, and JONES and THORNTON, District Judges.
This matter arises on a petition for review of a decision of the Tax Court upholding the determination of deficiencies by the Commissioner of Internal Revenue.
Vernon F. Harp (hereinafter called taxpayer, since his wife is a party only because joint returns were filed) was originally a plasterer by trade, but since 1938 he has been engaged in building homes and in various real estate developments. His wife has always kept the records pertaining to the construction business, using a single entry system on the cash basis; after 1948 an accountant maintained a ledger of income, purchases and expenses, rendering quarterly financial statements, computing payroll taxes, and preparing income tax returns including the returns for 1948-1951 which are here involved.
For the years 1943-1947 the taxpayer failed to file timely returns. In 1948 he contacted an old friend, Deputy Collector Albert L. Wentz, now deceased, to help straighten out his tax situation. Wentz adopted the net worth method and prepared the returns, arriving at $75,000.00 closing net worth as of December 31, 1947. No details of the make up of the $75,000.00 net worth are in the record, of which more later.
The taxpayer's tax records for 1948-1950 were examined in early 1952 by Revenue Agent Edward S. Harrington. The testimony of Vera Harp is that Harrington did not examine all their business records, since some of them were at the accountant's office in another town a few miles away. She further testified that the agent told her not to bother filing the 1951 return because he would pick that year up in his audit.
Presumably as a result of Agent Harrington's inspection, the Commissioner first determined that taxpayer's records did not correctly reflect income and adopted the net worth method, determining deficiencies based upon an understatement of net income in the following amounts:
Commissioner's
Return Determination
1948 ............... $ 7,339.50 $35,199.25
1949 ............... 7,735.55 37,524.02
1950 ............... 9,069.92 30,817.08
1951 ............... 10,939.42 28,678.34
The taxpayer first asserted that the Commissioner was not entitled to use the net worth method, but offered the Tax Court no proof indicating that his records did in fact fairly reflect income. The Commissioner's determination is presumed to be correct. See 26 U.S.C. § 1141; Thomas v. Commissioner, 6 Cir., 1955, 223 F.2d 83. Since there was no evidence to overthrow this presumption, the Tax Court properly refused to set aside the net worth determination on that ground.
In addition to the determination by the Commissioner of deficiencies because of understatement of income in the years involved, penalties were assessed for failure timely to file the 1951 return § 291 (a); for failure to file an estimate in 1948, 1950 and 1951 § 294(d) (1) (A); and for substantially underestimating income for 1948, 1949, 1950 and 1951 § 294(d) (2). The Tax Court approved the determination in full.
The real problem in this case is the effect of the presumption that the Commissioner's determination is correct. In Thomas v. Commissioner, supra, 223 F. 2d 88, it is stated that:
In short, the Commissioner's determination is presumed correct, but if error is shown, the presumption disappears and the Commissioner then has the burden of proving the correctness of his determination, or at least the correct amount actually due. A presumption is but a heavier burden of proof, but once overcome the burden of going forward shifts with the introduction of the proofs.
The petitioner does not actually contest the findings of the Tax Court on the fact issues but strenuously contests the conclusions drawn from the facts.
The Tax Court specifically found six errors in the computation:1
A. Omissions from opening and closing net worth (these affect the computation but not the determination):
1. $10,000.00 — Punch Bowl Land
2. 1,603.11 — Well drilling and
pumps
3. 1,500.00 — Fritz Fair Land
B. Omissions from opening net worth only (these affect the determination as well as the computation since they reduce the increase from year to year):
1. $7,000.00 — 3 apartment dwelling on Punch Bowl, treated as addition to net worth — 1948 2. No amount found — houses in process, treated as additions to net worth — 1948.
C. Items not subtracted from net worth (these also affect both determination and computation):
1. $10,000.00 — 29 Harpcrest Heights lots, of which 27 were sold during the period involved, but not removed from net worth.
The omissions from opening and closing net worth in Group A, since they show no error in the final determination, are, as the Tax Court concludes, not sufficient to overcome the presumption of validity. However, they should have been included in the computation. See Holland v. United States, 1954, 348 U.S. 121, 75 S.Ct. 127, 99 L.Ed. 150.
With regard to the omissions from opening net worth only in Group B, the question arises whether the presumption is destroyed, for these items do affect the final result, and therefore should have been included. In both cases the Tax Court states:
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