Harris v. Commissioner of Internal Revenue, 5841.

• Decision Date: 08 April 1949
• Docket Number: No. 5841.,5841.
• Parties: HARRIS et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fourth Circuit

174 F.2d 70 (1949)

HARRIS et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 5841.

United States Court of Appeals Fourth Circuit.

April 8, 1949.

Stonley Worth, of Washington, D. C. (Blair, Korner, Doyle & Appel, of Washington, D. C., on the brief), for petitioner.

Sumner M. Redstone Sp. Asst. to Atty. Gen. (Theron Lamar Caudle, Asst. Atty. Gen., Ellis N. Slack and L. W. Post, Sp. Asst. to Atty. Gen., on the brief), for respondent.

Before PARKER, Chief Judge, and SOPER and DOBIE, Circuit Judges.

PER CURIAM.

The main question in this proceeding to review the decision of the Tax Court is whether the Commissioner of Internal Revenue has met the burden resting upon him to prove that the taxpayers, Frank Harris and Victoria Harris, his wife, fraudulently reported less net income than they actually received in certain years between 1934 and 1942.¹ The Tax Court held in favor of the Commissioner for deficiencies and penalties for the years 1934, 1936-37, 1939, and 1941-2, amounting in the aggregate to $7690.84. The taxpayers pleaded the statute of limitations as to all years before 1941, and showed that in the absence of fraud, Section 6 of the Current Tax Payment Act of 1943, 57 Stat. 126, 145, 26 U.S.C.A. § 1622 note, prevented the assessment of any deficiency for 1942. The Commissioner took the position that neither defense could properly be made, since the taxpayers filed false and fraudulent returns for the years in question.

Section 1112 of the Internal Revenue Code, 26 U.S.C.A. § 1112, provides that "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." In order to meet this burden, the revenue agents endeavored to show the taxpayer's net income for each of the years in question by comparing his net worth at the beginning and end of the year. They adopted this method because the taxpayer refused to cooperate with them in their investigation and because he denied that he had any books and records from which his gross income for each year and the allowable deductions therefrom could be ascertained.

The taxpayer owns about 400 acres of farm land in North Carolina, some 250 of which are under cultivation. At the time of the trial below in October, 1947, he was 72 years of age, and after 1940, because of ill health, he rented his farms to sharecroppers. Besides feed and products for home consumption, he raised tobacco, his principal crop, and some cotton for sale. His only other source of income consisted of interest on United States Government bonds and on mortgage loans, all of which were recorded. He and his family live with extreme simplicity in a small farmhouse with no telephone, heating plant, or other conveniences except lights; they rarely go to town and have never seen a motion picture, or gone on a vacation. They raise practically all their food, and their living expenses are relatively negligible.

The taxpayer reads and writes with great difficulty, and has never kept any record of his business transactions. Besides the recording of his mortgages, the only record with respect to them is the notation on the mortgage notes themselves of payments of interest and principal. At the close of each year, the taxpayer collected his tobacco and cotton bills (statements issued by a warehouse as selling agent, concerning the particulars of the sales), and his receipts evidencing disbursements, and with the help of his daughter-in-law, prepared a summary which was generally the result of three to five hours' work. Some expenses had to be estimated and the taxpayer conceded that it was impossible to be certain that he reported all the income he should have. He testified, however, that he conscientiously tried to report his income accurately, and intended to pay all the tax that was due. The summary thus prepared was turned over to taxpayer's accountant, who prepared the returns. Neither taxpayer's daughter-in-law nor his accountant had any independent knowledge of the accuracy of the items in the summary.

The number and variety of the activities and investments from which the taxpayer derived his income, and his failure to keep records of his transactions, made it impossible for the government to state his annual income with complete accuracy. Yet there are certain outstanding facts, supported by the proof, which strongly indicate that he was wilfully and deliberately, that is, fraudulently misstating his taxable income during the period under investigation. It is true that he was deficient in those capacities that make for accurate accounting, but he was prudent and canny enough to amass a considerable fortune in the business world so that at the end of the period his net worth was substantially greater than it was at the beginning. This fact cannot be denied, even though the estimate of the Tax Court that he was worth some $80,000 more in 1942 than in 1934 may be disputed.

Definite proof of deliberate understatement of income is found in the tax returns in respect to the item of interest which the taxpayer received from his investments in government securities and farm mortgages, and which is not open to dispute. The evidence indicates that during the period the taxpayer owned $30,000 in Government bonds on which the income approximated $975 annually; and also 6 per cent. mortgage notes which, according to evidence produced by the taxpayer, varied in amount during the tax years from $20,000 to $30,000. To these amounts should be added interest on bank accounts (at a rate not disclosed) which ranged from $10,000 in 1934 to $55,000 in 1941. Yet he reported his income from interest to be only $208.73 in 1934, $500 in 1938, $600 in 1941, $941.67 in 1942 and nothing in other years. The following statement from the court's opinion is well substantiated by the proof:

"Whatever doubts may surround the amount of entire net income, the evidence adduced is conclusive that petitioner has owned United States Government bonds of a face value of $30,000 since prior to 1934, and the annual interest on these bonds was about $975 — slightly more before exchanges for new issues in 1934 and 1935. The record is convincing that during all of the taxable years petitioner held 6 percent mortgage notes...