Henry v. Commissioner of Internal Revenue

• Decision Date: 22 June 1966
• Docket Number: No. 22619.,22619.
• Parties: Horace Evans HENRY and Sue Seitz Henry, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

362 F.2d 640 (1966)

Horace Evans HENRY and Sue Seitz Henry, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 22619.

United States Court of Appeals Fifth Circuit.

June 22, 1966.

Fountain D. Dawson, Greenville, Miss., William E. Logan, Floyd J. Logan, Gulfport, Miss., for petitioners.

Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Atty., Dept. of Justice, Mitchell Rogovin, Chief Counsel, Richard P. Milloy, Atty., I. R. S., Richard M. Roberts, Acting Asst. Atty. Gen., Jeanine Jacobs, Meyer Rothwacks, David O. Walter, Attys., Dept. of Justice, Washington, D. C., for respondent.

Before WISDOM and GEWIN, Circuit Judges, and McRAE, District Judge.

GEWIN, Circuit Judge:

This case presents a petition to review a decision of the Tax Court of the United States (District of Mississippi) which found a deficiency in the amount of $25,936.92 in taxpayer's¹ reported income tax for the year 1957 and assessed in addition to the tax the sum of $12,963.46 for fraud pursuant to Section 6653(b)² of the Internal Revenue Code of 1954.

During 1957, taxpayer was engaged in the business of subdividing, constructing and selling residential houses in Greenville, Mississippi. In his return for that year he showed gross receipts of $136,360, with costs and other deductions totaling $135,255, for a taxable net income of some $1,105. In 1959, the Internal Revenue Service began an investigation of taxpayer's return and in 1961 mailed him a deficiency notice for the year 1957 in the amount of $63,679.33 with an additional assessment for fraud in the amount of $31,839.66.

Prior to trial, taxpayer entered into the following stipulation:

"4. The parties herein agree that the petitioners' correct net profit from the sale of houses in 1957 was at least in the amount of $62,369.98, computed as follows:

                  Total receipts                                             $212,313.94
                  Merchandise purchased       $78,532.76
                  Taxes, interest and
                   insurance                    7,424.71
                  Depreciation                  3,850.27
                  Truck, car and tool
                    expense                     2,586.90
                  Misc. building expense       11,379.56
                  Subcontract and labor        22,174.16
                  Cost of lots sold            14,695.60
                  Misc. rent expense              300.00
                                              __________
                  Total expenses not in
                    dispute                                  $140,943.96
                  Less
                  Building expenses in
                    dispute                   $ 3,000.00
                  Depreciation expenses in
                    dispute                     1,000.00
                  Cost of lots in dispute       5,000.00
                                              __________
                  Total expenses in dispute                     9,000.00      149,943.96
                                                             ___________     ___________
                  Net profit                                                 $ 62,369.98"
                

Taxpayer further stipulated that he had underestimated his taxable income by at least $59,891 ($62,369.98 less $1,105 originally declared, less a $2,478.12 farm loss conceded by the Commissioner). Once the stipulation had been signed, there were but four disputed issues to be decided: (1) $3,000.00 building expense; (2) $1,000.00 depreciation expense;³ (3) $5,000.00 additional cost of lots; (4) fraud under Section 6653(a). Only (3) and (4) are pertinent to this appeal.

During trial, taxpayer introduced evidence showing an expenditure of $3,480.00 for utility improvements made on lots sold during 1957. He contended the entire amount should be allowed. The Government showed that the expenditure in question was made to improve a total of 45 lots, but that only 20 of them were actually sold during 1957. Therefore, it was argued, only 20/45ths of the expenditure or $1,546.67 should be allowed.

Taxpayer also attempted to introduce evidence of other costs of lot development greatly in excess of the $5,000 left in dispute by the stipulation. He contended that he had signed the stipulation in ignorance and that justice required that he be allowed to repudiate that portion dealing with cost of lots. Counsel for the Commissioner protested vigorously, pointing out that taxpayer had many months during investigation and conferences to come forward with such evidence and that the final stipulation was in his possession for an entire week prior to his signing it. After the stipulation was drafted, the petitioner took it home for consideration and study. It was signed by his attorney and mailed back a week later.

As to the fraud issue, taxpayer contended he had used the "bank deposits" (cash) method of accounting and that his attorney had mistakenly included loan renewals along with loans outstanding in arriving at the gross receipts figure. He admitted he kept inadequate records, but contended that the error on the part of his attorney did not amount to an intentional understatement. The Government introduced evidence showing the taxpayer had attempted to conceal three bank accounts and that taxpayer and his attorney had given inconsistent statements concerning their method of preparing the return. Taxpayer testified he had turned over all his underlying records to his attorney, while the attorney testified taxpayer had not given him such records.

The Tax Court allowed 20/45ths of the $3,480 (or $1,546.67) paid for utility improvements to forty-five lots under the theory that such improvements were a capital investment and could only be deducted during the year of sale, it being undisputed that only 20 lots were sold during the year in question. It refused to allow the taxpayer to repudiate that portion of the stipulation limiting cost of lot development to $19,695.60 ($14,695.60 undisputed; $5,000 disputed). The Court also found taxpayer had understated his income in his return with intent to defraud. (This case is not officially reported, but see Henry, 23 CCH TCM 1005; 33 P-H TCH 110)...