Kurnick v. Commissioner of Internal Revenue
| Citation | 232 F.2d 678 |
| Decision Date | 19 April 1956 |
| Docket Number | No. 12632.,12632. |
| Parties | John F. KURNICK and Celia Kurnick, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | United States Courts of Appeals. United States Court of Appeals (6th Circuit) |
J. P. Mikesell, Detroit, Mich., J. P. Mikesell, E. Reed Hunt, Detroit, Mich., on brief, for petitioners.
S. Dee Hanson, Washington, D. C., H. Brian Holland, Ellis N. Slack, John J. Kelley, Jr., Washington, D. C., on brief, for respondent.
Before SIMONS, Chief Judge, and ALLEN and MILLER, Circuit Judges.
This case arises out of a petition to review a decision of the Tax Court finding deficiencies against petitioners and imposing penalties for fraud. The Commissioner determined deficiencies and penalties as follows for the years 1943 to 1950:
SECTION 293(b)
YEAR TAX DEFICIENCY PENALTY
1943 Income and Victory $ 461.77 $ 230.89
1944 Income 2,318.66 1,566.23
1945 Income 2,590.04 1,295.02
1946 Income 1,819.35 909.68
1947 Income 1,627.61 813.81
1948 Income 726.36 363.18
1949 Income 1,448.92 724.46
1950 Income 876.44 438.22
The Tax Court materially reduced the deficiencies but retained penalties for fraud.
The case arises out of the following facts:
Petitioners, husband and wife, during the taxable years sold groceries, cigarettes, etc., in a retail store, at which they also made retail liquor sales. Under 13 Mich.Stat.Ann. Section 18.985, Section 14, Comp.Laws 1948, § 436.14, such dealers were called specially designated distributors (or "SDD's") and were subject to the control of the Michigan Liquor Control Commission. The prices at which SDD's purchased and sold liquors were controlled by the Michigan Liquor Control Commission, which set the actual selling price. An SDD could not deviate from the price either in the way of increase or decrease. The Commissioner investigated petitioners' income tax returns because the gross profit reflected on their returns on retail liquor sales was much less than that realized by similar retail liquor stores throughout the state which, from 1943 to 1947, realized an average gross profit of 8.15% on purchases and thereafter of 11.11%. For the years 1943-1947 petitioners' books and returns showed a gross profit of not more than 1.15%. The Commissioner determined that petitioners' gross profit on all other merchandise, such as groceries, cigarettes, etc., should have been at least 22%. While in 1948, 1949 and 1950 petitioners showed a gross profit on liquor of 9.2% 7.9% and 11%, respectively, during these particular years they showed a gross profit on all other merchandise of 10.8%, 1.1% and 13.5%, respectively. This was contrasted with the gross profit on all other merchandise sold by them during the years 1943-1947, inclusive, which was from 19.8% to 27.8%. The Commissioner used the figures shown on petitioners' income tax returns for the years 1944 to 1950. He treated these figures as reflecting the petitioners' liquor inventory and assumed that the inventory of other merchandise remained constant through the years. After making adjustments to reflect inventory variations the Commissioner by applying a 10% markup on liquor purchases determined that petitioners had received substantial additional gross income. The amounts of deficiencies found by the Commissioner were decreased by the Tax Court, which found the following deficiencies for the respective years, together with penalties for fraud:
ADDITIONS TO TAX
YEAR INCOME TAX UNDER SEC. 293(b)
DEFICIENCY (I.R.C. OF 1939)
1944 $1,644.72 $1,229.56
1945 1,543.66 771.83
1946 1,787.81 893.91
1947 1,163.02 581.51
1948 691.92 345.96
1949 876.14 438.07
1950 876.44 438.22
The Tax Court stated that it was satisfied that petitioners realized a margin of profit on liquor for the years 1944-1947 substantially in excess of that shown on their books and that the books and the returns prepared from the books did not correctly reflect their income. These findings are amply sustained by the record.
During the taxable years petitioners kept books on which the purchases and sales of liquor were separately recorded and their tax returns were prepared from these books. They had at least two cash registers in the store, one of which was used exclusively for liquor sales. While the registers had totalizers they had no tapes. The books of account were made up from slips purporting to be written off each day by one of the petitioners or by their daughter from the totals of the cash register. The books, therefore, were merely a computation made up from these slips from the totals of the cash register. As the Tax Court found, since the petitioners were not buying and selling on a free market, the price at which they both purchased and sold liquor being rigidly fixed by the Michigan Liquor Control Commission, the Commissioner was justified in reconstructing petitioners' income by use of the percentage markup.
Petitioners claimed that the percentage figures used did not take into consideration losses due to leakage, breakage, or pilfering, but no substantial evidence as to the amount of these claimed losses was given. In fact, the claim as to...
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