Hoffman v. CIR, 13610.
| Decision Date | 25 January 1962 |
| Docket Number | No. 13610.,13610. |
| Citation | 298 F.2d 784 |
| Parties | Robert C. HOFFMAN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Third Circuit |
Elmer M. Morris, York, Pa. (J. Richard Budding, York, Pa., Morris & Vedder, York, Pa., Budding & Yost, York, Pa., on the brief), for petitioner.
Earl J. Silbert, Washington, D. C. (Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Robert N. Anderson, Attys., Department of Justice, Washington, D. C., on the brief), for respondent.
Before KALODNER, HASTIE and GANEY, Circuit Judges.
This proceeding is upon petition by the taxpayer for a review of the decision of the Tax Court of the United States, denying in part the taxpayer's petition for a redetermination of the Commissioner of Internal Revenue's assessment of deficiencies in the taxpayer's income tax returns for the years 1948, 1949 and 1950.1
A record of the returns, as filed and determined by the Commissioner, follows:
Income Income Tax Deficiency Estimated
Reported Determined Paid Tax Tax Paid
1948 $22,894.06 $172,095.20 $7,006.51 $41,640.56 $8,000.00
1949 $25,817.17 $ 88,399.99 $8,505.55 $ 6,789.19 $7,006.51
1950 $22,272.01 $ 64,118.71 $6,933.06 $12,541.22 $8,800.20
For all three years mentioned, there were penalties imposed with the deficiency tax, under Sec. 294(d) (2).2
During the years in question, the petitioner, who resides in York, Pennsylvania, was engaged in several businesses. He owned a company which manufactured and sold numerous types of weight lifting and body building equipment; a publishing company that printed a magazine and books written by him on health, body building, weight lifting and related subjects; a factory where casts for barbells were manufactured and custom work performed for others; and an establishment where light fixtures were sold. In addition, he was a stockholder in a corporation that manufactured carbon dioxide dispensing equipment. Since 1936, a bookkeeper, one Dietz, who was not an accountant, and had only taken one course in bookkeeping, kept separate records and books on the accrual basis for each of the companies involved, while maintaining a separate record of transactions of the petitioner which were kept on the cash receipt and disbursement method of accounting. The above books and records were incomplete, inadequate and in no wise covered the entire transactions involved over the years in question. The Commissioner after inspecting the records of the petitioner discovered that the cash expenditures for the years involved were substantially in excess of the net income reported, although he did not assert that he found any false items in the petitioner's books of account.
The petitioner claims: First. That the Tax Court erred in sanctioning the Commissioner's use of the so-called "cash expenditure" method of determining his alleged unreported income for the years in question. Second. That the Commissioner had not met the requirements for the use of that method in reconstructing income. Third. That the Tax Court erred in holding that the presumption of correctness of the Commissioner's determination remained, as to those items which the taxpayer did not prove incorrect. Fourth. That the Tax Court erred in including penalties under Sec. 294(d) (2) of the Internal Revenue Code of 1939 for the years 1949 and 1950.
We shall now examine the contentions of the taxpayer.
The taxpayer insists that unless there are no records, or that the records are totally inadequate, or where there is a strong suspicion that the taxpayer has received income from undisclosed or illegal sources, the use of the "cash expenditure" method of determining income is capricious, arbitrary and unwarranted. In view of Holland v. United States, 348 U.S. 121, 130-132, 75 S.Ct. 127, 99 L.Ed. 150, as well as Hargis v. Godwin, 8 Cir., 221 F.2d 486, 491; Davis v. Commissioner, 7 Cir., 239 F.2d 187; Canton v. United States, 8 Cir., 226 F.2d 313, 322-323; Stephens v. Commissioner, 10 Cir., 255 F.2d 108, 109; Olinger v. Commissioner, 5 Cir., 234 F.2d 823, this argument may no longer prevail.
The use of the "cash expenditure method," an outgrowth of the more well known net worth method of reconstructing income, has been applied in civil as well as criminal cases and has been frequently sustained. Friedberg v. United States, 6 Cir., 207 F.2d 777, affirmed 348 U.S. 142, 75 S.Ct. 138, 99 L.Ed. 188; Viles v. Commissioner, 6 Cir., 233 F.2d 376; Cohen v. Commissioner, 10 Cir., 176 F.2d 394; Marcella v. Commissioner, 8 Cir., 222 F.2d 878, 884; Thomas v. Commissioner, 1 Cir., 232 F.2d 520 and Schwarzkopf v. Commissioner, 3 Cir., 246 F.2d 731, 733-734, decided in this circuit, where it was said that this method has a two-fold purpose. First. To test the taxpayer's books and records. Second. To serve as evidence of unreported income. We feel that in this instance the Commissioner's use of the net worth or cash expenditure method of computing income was fair and proper and in no sense capricious or arbitrary.
With respect to the second contention of the petitioner that the Tax Court held that the Commissioner had not met the requirements for the use of the "cash expenditure method" of reconstructing income, we do not agree.
It is now well established that when the Commissioner resorts to the "cash expenditure method" of reconstructing income, it is necessary that he meet the requirements for its use established by the Supreme Court and the Courts of Appeals. Holland v. United States, supra; United States v. Caserta, 3 Cir., 199 F.2d 905; Friedberg v. United States, supra. The Supreme Court, in the Holland case, laid down the requirements for the use of the "cash expenditure method" of reconstructing income when it said at p. 132, 75 S.Ct. at p. 134:
Again, in United States v. Caserta, supra, at pp. 906-907, a case in this circuit, Judge Goodrich pointed out:
This rule has been followed in civil cases as well as criminal cases. Marcella v. Commissioner, supra; Goldberg v. Commissioner, 5 Cir., 239 F.2d 316, 318; Cohen v. Commissioner, supra.
The taxpayer presses upon us for consideration, among other cases, United States v. Caserta, supra, and Thomas v. Commissioner, supra. In the latter case the Court said, referring to the Tax Court's ruling:
We can find no inconsistency in these cases with the holding of the Tax Court in the...
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