Lessmann v. CIR

• Decision Date: 19 February 1964
• Docket Number: 17385.,No. 17384,17384
• Citation: 327 F.2d 990
• Parties: Herbert F. LESSMANN and Mildred Lessmann, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Herbert F. LESSMANN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Eighth Circuit

327 F.2d 990 (1964)

Herbert F. LESSMANN and Mildred Lessmann, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Herbert F. LESSMANN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 17384, 17385.

United States Court of Appeals Eighth Circuit.

February 19, 1964.

COPYRIGHT MATERIAL OMITTED

Ennie McCall, Newton, Iowa, Brierly, McCall & Girdner, Newton, Iowa, for petitioners.

Norman H. Wolfe, Attorney, Dept. of Justice, Washington, D. C., Louis F. Oberdorfer, Asst. Atty. Gen., Tax Division Dept. of Justice, a Washington, D. C., Lee A. Jackson, Harry Baum and J. Edward Shillingburg, Attorneys, Tax Division Dept. of Justice, Washington, D. C., for respondent.

Before VAN OOSTERHOUT, MATTHES and MEHAFFY, Circuit Judges.

VAN OOSTERHOUT, Circuit Judge.

In the two cases here before us upon timely petitions for review, the Tax Court (opinion not reported) upheld the Commissioner's determination of income tax deficiencies, fraud penalties and certain other penalties. Case No. 17385 relates to individual tax returns filed by Herbert F. Lessmann for the fiscal years ending January 31, 1945, 1946, 1947, and 1948. Case No. 17384 covers joint returns filed by Herbert F. Lessmann and his wife Mildred covering the fiscal years ending January 31, 1949, 1952, 1953 and 1954.¹

Herbert F. Lessmann, whom we shall refer to as taxpayer, conducted a business as sole proprietor under the name of Lessmann Manufacturing Company in Des Moines, Iowa. He invented, developed, manufactured and sold power loaders and has been so engaged for many years. He assembled the loader on an Oliver tractor, but since 1947 he has assembled the complete unit — tractor and loader. The employees in the business numbered from 16 to 30. Some of the loader units were sold direct to customers by the taxpayer and in such instances the list price was usually charged and collected. Other units were sold through distributors who were usually allowed a 22% commission which ordinarily was deducted from the purchase price. The taxpayer sold his business in December, 1952, for $259,200.

It would serve little purpose to set out in detail the vast volume of conflicting evidence contained in this record. Much of the pertinent evidence is set forth in the Tax Court's opinion. We have carefully examined and considered the record and will refer to some of the evidence during the course of this opinion.

The Tax Court determined deficiencies in income and additions² to tax as follows:

                       "Deficiency Additions to tax
                                                  Section
                  Fiscal              Income      293(b)
                  Year                  Tax      1939 Code
                  1945 .............$26,051.91   $13,025.96
                  1946 ............. 30,254.51    15,127.26
                  1947 .............  9,030.56     4,515.28
                  1948 .............  3,780.26     4,694.61
                  1949 .............  1,942.88       971.44
                  1952 .............  6,873.85     3,436.93
                  1953 ............. 18,776.96     8,988.48
                  1954 .............  2,882.10        None"
                

Taxpayer relies upon the following points for reversal:

I. The Government failed to meet its burden of proving by clear and convincing evidence that part of the deficiencies in each of the fiscal years 1945, 1946, 1947, 1948, 1949, 1952 and 1953, was due to fraud with intent to evade tax.

II. There is no substantial evidence to support the determination of a deficiency in income tax for the fiscal year 1954.

III. The Tax Court abused its discretion in denying taxpayer's motion for a continuance.

IV. The Tax Court erred in permitting the Government to audit the 1949 return which had been previously audited.

V. The Tax Court erred in ruling upon the admissibility of certain evidence.

I.

Taxpayer insists the Government has failed to establish fraud by clear and convincing evidence. The issue of fraud on the part of the taxpayer is of importance in this case in two respects: 1. The returns for the fiscal years 1945 through 1949 and 1951 are barred by § 275 I.R.C.1939 unless fraud is shown as provided by § 276 (a). 2. Under § 293 (b) I.R.C.1939, the 50% fraud penalty is imposed "If any part of any deficiency is due to fraud with intent to evade tax * * *."

It is clear that the burden is upon the Government to establish fraud both for the purpose of avoiding the bar of the statute of limitations and for justifying the imposition of fraud penalty with respect to each taxable year. § 1112 I.R.C. 1939; § 7454(a) I.R.C.1954; Kisting v. Commissioner, 8 Cir., 298 F.2d 264, 269; Klassie v. United States, 8 Cir., 289 F.2d 96, 99.

Courts have often stated that the Government must establish fraud by clear and convincing evidence. Klassie v. United States, supra; Gunn v. Commissioner, 8 Cir., 247 F.2d 359, 365; 10 Mertens, Law of Federal Income Taxation, § 55.16.

The question of whether a substantial understatement of income is due to fraud ordinarily presents an issue of fact. Fraud is never presumed. Fraud may be established by direct or circumstantial evidence. Taxpayer's failure to overcome the presumption of correctness of the Commissioner's determination of a tax deficiency will not, standing alone, support a finding of fraud. However, a consistent pattern of underreporting large amounts of income over a period of years is substantial evidence bearing upon an intent to defraud, particularly in situations where no satisfactory explanation for such understatement is forthcoming. Holland v. United States, 348 U.S. 121, 139, 75 S.Ct. 127, 99 L.Ed. 150; Klassie v. United States, supra; Schwarzkopf v. Commissioner, 3 Cir., 246 F.2d 731, 734; Owens v. United States, 8 Cir., 197 F.2d 450, 451.

The clearly erroneous standard applies to findings made by the Tax Court. Findings supported by substantial evidence on the record as a whole which are not against the clear weight of the evidence or induced by an erroneous view of the law will not be disturbed upon appeal. Probative evidence, direct as well as circumstantial, shall be considered in applying the clearly erroneous standard. Banks v. Commissioner, 8 Cir., 322 F.2d 530, 537, and cases there cited.

When the foregoing standards are applied to the facts in this case, it is apparent that the record contains clear and convincing evidence supporting the Tax Court's fraud findings. With respect to the unreported income, the Tax Court states:

"We have included in our findings of fact the schedule showing the increases in receipts as computed under the bank deposit and cash expenditures method. Petitioner\'s witness, a certified public accountant, expressed general agreement at the trial with the various items which appear in the respondent\'s computation and could find no fault with them. Nor does petitioner make any serious effort on brief to challenge the items that appear in the schedule. We find correct the additions to petitioner\'s gross income determined by respondent, with the concessions made at the trial and other adjustments as noted in our findings of fact."

Taxpayer was allowed the deductions claimed in his return except for some personal expenses such as wages for domestic help and personal utility bills which were disallowed. The court specifically found that taxpayer had offered insufficient evidence to support the claimed deductions disallowed and also found that the taxpayer had failed to prove that he was entitled to any deductions beyond those claimed in his return and those conceded by the Government.

Taxpayer has failed to overcome the presumption of correctness of the deficiency determination arising out of the substantial understatements of income for the tax years. This standing alone would not establish fraud. Taxpayer admits that some substantial items of income were omitted in his tax returns but attempts to excuse himself upon the basis that he relied upon his bookkeeper, Mrs. Swindler, and the accountants who prepared his returns.

The resolution of the fraud issue depends largely upon credibility determinations. Taxpayer takes the position that Mrs. Swindler's testimony, which supports the fraud claim, is not worthy of belief. He also challenges some of his accountants' testimony. The taxpayer as a witness disclaimed any fraudulent intent. The court was not compelled to accept such statement at face value. Banks v. Commissioner, supra; Heil Beauty Supplies, Inc. v. Commissioner, 8 Cir., 199 F.2d 193, 195.

There is evidence that the taxpayer enjoyed a good reputation and that he was in no sense a gangster. While, as taxpayer states, quite a number of tax fraud cases involve gangsters, taxpayer's prior good reputation does not in and of itself conclusively negative fraud in this case. The fraud issue must be resolved upon the basis of the record as a whole.

There is evidence of failure by the taxpayer to report substantial specific items of income. His explanation of such omissions falls far short of being convincing.

The taxpayer's books for years prior to fiscal year 1952 were wholly inadequate. They consisted largely of a check register which was used for determining deductible expenses. A file of sales invoices was maintained but some of these were withdrawn by the taxpayer. A number of machine unit sales were not reported as income. Commissions were deducted or units sold direct upon which no commission was allowed or paid. Substantial sales of repair parts were omitted from income in 1945, 1946 and 1947.

Mrs. Swindler's testimony, which is controverted by the taxpayer, is that the taxpayer told her which checks representing the proceeds of sales were to be deposited. Cashier's checks and bank drafts aggregating some $175,000 were purchased during the various years involved with unreported business receipts. Such checks are listed by year in the Tax Court's opinion.

Taxpayer's attempt to shift the responsibility for omissions to the accountants preparing his returns is not persuasive. The only information as to receipts given the accountants was summaries and other...