Harvey v. Early, 6205.

• Decision Date: 11 May 1951
• Docket Number: No. 6205.,6205.
• Citation: 189 F.2d 169
• Parties: HARVEY v. EARLY et al.
• Court: U.S. Court of Appeals — Fourth Circuit

189 F.2d 169 (1951)

HARVEY v. EARLY et al.

No. 6205.

United States Court of Appeals Fourth Circuit.

Argued March 14, 1951.

Decided May 11, 1951.

L. Grafton Tucker, Lovingston, Va., for appellant.

Richard D. Harrison, Sp. Asst. to Atty. Gen. (Theron Lamar Caudle, Asst. Atty. Gen., Ellis N. Slack and A. F. Prescott, Sp. Assts. to Atty. Gen., Howard C. Gilmer, Jr., U. S. Atty. and R. Roy Rush, Asst. U. S. Atty., Roanoke, Va., on brief), for appellees.

Before SOPER and DOBIE, Circuit Judges, and WATKINS, District Judge.

WATKINS, District Judge.

This is an action by a taxpayer against the personal representatives of the Collector of Internal Revenue for the State of Virginia to recover the sum of $8,169.22 assessed against him as a deficiency income tax, plus 50% fraud penalty and interest for the years 1941, 1942 and 1943. The amount was collected in part by distraint, and by payment under protest on August 21, 1946 of $1,342.39, the remainder thereof. After hearing the evidence the District Court dismissed the complaint, and this appeal followed. The taxpayer contends that the assessment was arbitrary in that there were no facts upon which to base the assessment.

At the trial the taxpayer admitted that such records which he originally had were inadequate and incomplete and did not reflect a true and complete account of his merchandise business. He testified that such records as he originally had were destroyed by fire. There was no attempt made by him to record either purchases, sales, receipts or disbursements in such a manner that the income of the business could be determined. It was, therefore, necessary for the Commissioner to reconstruct a set of books for the taxpayer, and to adopt the best procedure available to determine gross income.

The taxpayer operated a general merchandise store and filling station. The method used to determine gross income was to show a 30% sales mark-up over cost on everything except gasoline. The evidence showed that this adjustment was in line with general experience of similar business in that locality, and taxpayer does not complain of the amount, or method of arriving at his profit from the sale of merchandise. His appeal relates to the method of computing gross income from sale of gasoline.

The investigation showed that sales of gasoline by taxpayer had increased approximately 10,000 gallons in 1942 over 1941, and that sales in 1943 were more than double the volume sold in 1941. Other operators of filling stations had no increase in sales of gasoline for the years 1942 and 1943 because gasoline was then rationed. Taxpayer's permit for the sale of gasoline was suspended for a period of thirty days during the year 1943. He was indicted and convicted in the District Court upon three charges for violation of Ration Order No. 8 promulgated pursuant to the Second War Powers Act, 1942, 50 U.S.C.A.Appendix, § 631 et seq., two offenses being for possession of counterfeit sugar ration coupons in March, 1944, and the other offense being the possession in April, 1944, of gasoline ration coupons prior to the validity date thereof. He was also indicted for the sale of 2,809 gallons of molasses over a period from May 23, 1943 to March 27, 1945, in violation of Section 2811 of the Internal Revenue Code, 26 U.S.C.A. § 2811, and Treasury Regulations 17 issued by the Commissioner of Internal Revenue. He plead guilty to these violations and was sentenced. He also admitted that during the years in question he bought and sold a number of automobiles and that he never reported any profit from such sales. The District Court made the following significant finding of fact:

"An analysis of the taxpayer's tax returns showing the merchandise and gasoline purchases and the gross sales for the three years as compared with the merchandise purchases actually ascertained by agents of the Bureau of Internal Revenue disclose a wide variance. * * *

"Taxpayer offered no evidence to refute the figures of gross purchases as found by the agents of the Bureau of Internal Revenue. The difference in the gross purchases as reported by the taxpayer and as found by the agents indicates that the taxpayer failed to report purchases of gasoline made by him. This conclusion is reached by the fact that the difference in the figures of the taxpayer and the agents approximates the cost of gasoline for the years in question."

Under these circumstances the Commissioner of Internal Revenue, in attempting to reconstruct taxpayer's income from the sale of gasoline, determined that the excess gallonage of gasoline purchased in 1942 and 1943 over the amount purchased in 1941 was sold at the prevailing black market price of 35 cents per gallon, instead of the regular rate of 23 cents per gallon. We think the facts clearly justified that determination by the Commissioner. It is also significant that for the three years in question the taxpayer's original tax returns reported a total income of only $3,704.51,...