Lias v. COMMISSIONER OF INTERNAL REVENUE, 7177

• Citation: 235 F.2d 879
• Decision Date: 03 August 1956
• Docket Number: 7178.,No. 7177,7177
• Parties: William G. LIAS, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. William G. LIAS and Alice B. Lias, his wife, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

235 F.2d 879 (1956)

William G. LIAS, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

William G. LIAS and Alice B. Lias, his wife, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 7177, 7178.

United States Court of Appeals Fourth Circuit.

Argued June 22, 1956.

Decided August 3, 1956.

Thurman Hill, Washington, D. C., and Charles J. Margiotti, Pittsburgh, Pa. (Samuel Goldstein, Pittsburgh, Pa., on the brief), for petitioners.

Homer R. Miller, Atty., Dept. of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., A. F. Prescott, John J. McGarvey and Arthur I. Gould, Attys., Dept. of Justice, Washington, D. C., on the brief), for respondent.

Before PARKER, Chief Judge, and SOPER and PRETTYMAN, Circuit Judges.

PRETTYMAN, Circuit Judge.

These are individual tax cases for the years 1942 to 1948, inclusive. The Tax Court of the United States sustained deficiencies and penalties totaling some $2,000,000. One taxpayer, our petitioner William G. Lias, is involved in all years, and his wife is jointly and severally liable for 1947 and 1948. The Tax Court made long and detailed findings of facts and rendered an exhaustive opinion.¹ To relate the background of this controversy, or to recite the underlying material upon which decisions of the present issues must be based, would be to repeat at considerable length what was said by the Tax Court. We see no need to do so. We shall therefore superimpose the following discussion upon the Tax Court's findings and discussion without repeating them.

Petitioners urge (1) that the Tax Court erred in approving the use of a net worth computation upon a family group basis as a means to the ascertainment of a single individual's net income; (2) that the net worth computation was erroneous, in that (a) the opening statement of assets was erroneous, (b) credit was not given petitioner for monies borrowed during the period involved, and (c) credit was not given for use of a certain distributive share of the profits of one of the enterprises in which petitioner was engaged; and (3) that the Tax Court erroneously found fraud and erroneously found that the statute of limitations did not bar the deficiencies for 1942, 1943 and 1944.

The Supreme Court, in Holland v. United States,² approved the use of the net worth method of ascertaining net income in certain classes of cases. Even prior to that the Court had approved the use of the method where the owner of a network of gambling houses had received unreported income in a substantial amount.³ The present case presents a situation similar to the ones faced in those cases. The application of the net worth method is thus firmly established. But petitioner urges that the Commissioner and the Tax Court in the case at bar extended the use of the method beyond permissible bounds.

The taxing authorities faced an unusual problem in attempting to ascertain the accuracy of the petitioner's income tax returns. During the taxable years here involved he received income from five partnerships, in which he and his brother, John Lias, were partners, and from seven corporations, of which he and members of his family were record owners. The revenue agents ascertained that the petitioner carried out many large cash transactions as to which no records were kept by him. He stated repeatedly to the agents that all assets, regardless of whether they were in the names of his wife, brother, mother-in-law or brothers-in-law, were his to do with as he saw fit. He was unable to identify the source of funds used to acquire various assets. He refused to furnish a net worth statement. Corporate dividends were not paid in accordance with stock record ownership. Stocks of record were not in the names of the true owners. Bank accounts and assets other than cash were shifted from one name to another. The Tax Court found that "The petitioner so conducted his own affairs and those of the `Lias Group' as to make it impossible to identify the individual ownership of assets." Faced with this situation the revenue agents made a net worth computation on the Lias family group as a whole. They then allocated to the wife, brother, mother-in-law and brothers-in-law the amounts of net income on which they had paid income tax. The balance of the net income shown by the net worth computation they allocated to petitioner. When the case came on for trial before the Tax Court the Commissioner established with meticulous detail the computations of his agents. Petitioner took the stand and, without documentary or other support, proffered his explanation. He was on the stand for several days. The Tax Court concluded: "Making due allowance for the petitioner's unfortunate position the Court, after a considered appraisal, is not disposed to give any credibility to his unsupported testimony." The court also said, "He was evasive, contradictory, and unresponsive."

Some of the figures are startling. For the year 1945, the year of the maximum tax deficiency, the total net income reported by the family group, as adjusted with the revenue agents, was $121,977.54, and the net income reported by petitioner was $76,336.18, or a total of $198,313.72. The net assets of the group increased by $540,575.21 during that year, and total expenditures of $245,456.03 were made, indicating a consolidated net income of some $785,000. Among the events of the year was the issue to petitioner and his wife of stock in Laconia, Inc., at a cost of $235,194.98. For part of this stock Laconia, Inc., received a building known as the Firestone Building, which petitioner had purchased in 1944 for cash in the amount of $200,000, placing the title in the name of his wife. During the year 1945 petitioner purchased with cash $75,000 of United States Treasury Bonds. In that year a bank account in the name of petitioner and his brother, John, was closed out by transferring some $51,000 to a savings account in the name of petitioner and his wife. During the year petitioner and his wife purchased a residence for $46,000 cash. During the year he advanced $69,679.34 to Laconia, Inc., on open account, and the next year, against the cash thus advanced, stock was issued to petitioner, his wife, his brother, his nephew, and the latter's wife. During the year 1945 five new bank accounts were opened and seven were closed. The agents found that during the year cash was advanced to Wheeling Downs, Inc., in the amount of $167,500. These details are not recited as a full explanation of the computations but are given as illustrative of the factual background with which the cases are concerned.

The agents were unable to find property in any considerable amounts belonging to members of the family. The various partnerships and corporations were all engaged in gambling enterprises of some sort, and the petitioner was undoubtedly the owner, backer and operator of those enterprises. The Tax Court found as...