Mallette Bros. Const. Co., Inc. v. U.S.

• Decision Date: 14 January 1983
• Docket Number: Nos. 81-4374,s. 81-4374
• Citation: 695 F.2d 145
• Parties: 83-1 USTC P 9144 MALLETTE BROS. CONSTRUCTION CO., INC., Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant. GAUTIER ASPHALT COMPANY, INC., Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant. MALLETTE BROS. TRUCK LINES, INC., Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant. to 81-4376.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 145

695 F.2d 145

83-1 USTC P 9144

MALLETTE BROS. CONSTRUCTION CO., INC., Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

GAUTIER ASPHALT COMPANY, INC., Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

MALLETTE BROS. TRUCK LINES, INC., Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

Nos. 81-4374 to 81-4376.

United States Court of Appeals Fifth Circuit.

Jan. 14, 1983.

Michael L. Paup, Chief App. Sec., Carleton D. Powell, Terry L. Fredricks, Glenn L. Archer, Jr., Asst. Atty. Gen., Tax Div., Dept. of Justice, Washington, D.C., for defendant-appellant.

C. Everette Boutwell, Laurel, Miss., for plaintiff-appellee.

Appeals from the United States District Court for the Southern District of Mississippi.

Before WISDOM, RANDALL and TATE, Circuit Judges.

RANDALL, Circuit Judge:

These suits for tax refunds essentially involve the tax effect of funds and assets transferred among three related corporations having few financial records. Following an audit of those records that did exist, the Internal Revenue Service assessed deficiencies against each corporation for its fiscal years ended in 1972 and 1973. The corporations paid the assessments and sued for refunds. Following a trial, the jury rendered verdicts in favor of the corporations on all issues. The Government appeals, contending in the case of two of the corporations that there is no evidence to support the jury verdicts, and in the case of the third corporation that it was error for the district court to submit to the jury an issue not raised in the corporation's claim for a refund. We agree with the Government and reverse the judgments of the district court.

I. FACTS AND DECISION BELOW.

Mallette Bros. Construction Co., Inc. ("Construction") is in the business of building and paving highways, parking lots and parking areas. Gautier Asphalt Company, Inc. ("Gautier") manufacturers asphalt in its own plant. Mallette Bros. Truck Lines, Inc. ("Truck") operates long-haul trucks. The capital stock of each of these corporations is owned in equal shares by Glynn Mallette and his brother, Mosely A. Mallette. All the corporations use the accrual method of accounting; however, each has a different tax year. Construction's tax year ends on January 31; Gautier's ends on June 30; and Truck's ends on February 28.

Early in 1974, the Internal Revenue Service conducted an audit of all three corporations for their tax years ended in 1972 and 1973. The audit was conducted by Revenue Agent William H. Shelton. Testimony at trial indicates that the corporations did not maintain any general ledgers. The records of the corporations reviewed by Agent Shelton included tax returns, invoices, cancelled checks, deposit tickets, bank statements, minute books, stock books, a log book maintained by Construction listing its asphalt purchases, delivery tickets prepared by Gautier listing the respective dates, buyers and quantities of asphalt delivered by Gautier and work papers prepared by Buck Albin, an independent accountant hired by the corporations to prepare all tax returns at issue here other than Construction's tax return for the year ended January 31, 1972. In general, Agent Shelton used the bank deposits method, supplemented with his audit of various records and documents maintained by the corporations, in reconstructing the three corporations' gross taxable income. He relied almost exclusively on his audit of the underlying documents and records in determining what deductions and credits each of the corporations was entitled to claim.

Based on Agent Shelton's audit, the Internal Revenue Service assessed the following deficiencies against the three corporations:

                  Fiscal
                Year Ended  Construction   Gautier      Truck
                ----------  ------------  ----------  ----------
                 1-31-72     $ 8,461.40
                 2-28-72                              $ 4,242.67
                 6-30-72                  $ 5,838.74
                 1-31-73      24,712.70
                 2-28-73                               15,076.43
                 6-30-73                   11,994.68
                

The three corporations paid the deficiencies, together with interest, on July 8, 1974, and filed claims for refunds. After these claims were denied, each of the corporations instituted a separate suit for a refund.

Before trial, Gautier conceded that the Internal Revenue Service's determination as to its tax liability for the year ended June 30, 1973 was correct. Additionally, as a result of net operating loss carrybacks, the Internal Revenue Service issued a refund for a portion ($4,216.89) of Truck's tax liability for the year ended February 28, 1973 (leaving only $10,859.54, plus interest, remaining in issue at the trial), and a complete refund of Truck's tax liability for the year ended February 28, 1972. Accordingly, these amounts are not at issue here.

The district court ordered that the separate cases brought by the corporations be consolidated for all purposes. Subsequently, the case was tried to a jury on special interrogatories. During the trial, the Government moved for a directed verdict following the presentation of the corporations' case and again following the presentation of the Government's case. The court denied both of these motions. The jury decided each of the issues presented to it adversely to the Government. Initially, with respect to Construction, the jury found that for the year ended January 31, 1972, the "plaintiff [Construction was] entitled to deduct, as expenses paid or incurred, the amount of $21,977.26, and that this deduction was not allowed by the Government." As to Construction's year ended January 31, 1973, the jury found that Construction was "entitled to deduct, as expenses paid or incurred, the amount of $93,326.79 and that this deduction was not allowed by the Government." As to Gautier's year ended June 30, 1972, the jury found that Gautier did not "understate its accounts receivable by $37,687.32, as determined by the Internal Revenue Service." Finally, as to Truck's year ended February 28, 1973, the jury found that Truck "in its federal income tax return ... [did not] understate its gross income by $39,994.62, as determined by the Internal Revenue Service...." The district court subsequently entered judgments on the jury verdict reflecting the jury's findings.

On April 27, 1981, the Government filed motions requesting judgments notwithstanding the verdict. Primarily, the Government argued in each of these motions that its "motion for directed verdict should have been granted because the plaintiff's evidence, including all reasonable inferences which may be drawn therefrom, considered in its most favorable light to the plaintiff, does not establish" that the deficiency assessed by the Internal Revenue Service was in any way erroneous. As to Truck, the Government renewed an objection made at trial that there had been a fatal variance between Truck's claim for a refund and the claims presented by Truck at trial concerning alleged loans from Construction to Truck. Additionally, the Government noted that the district court had entered a judgment holding that the Government's adjustments had resulted in an overstatement in Truck's gross income of $39,994.62 when Truck had not even challenged that determination except insofar as the judgment exceeded $11,794.62. Following a hearing, the district court entered orders denying the Government's motions. This appeal followed.

II. PROPRIETY OF A JUDGMENT NOV AS TO CONSTRUCTION AND GAUTIER.

On appeal, the Government urges that the district court erred in not entering a directed verdict or a judgment notwithstanding the verdict in favor of the Government as to each of Construction and Gautier. Specifically, the Government argues that there was no evidence to support the jury's determination that Construction was entitled to deduct, as expenses paid or incurred, the amounts of $21,977.26 for 1972 and $93,326.79 for 1973, and that these deductions had not been allowed by the Government. As to Gautier, the Government argues that there was no evidence to support the jury's determination that Gautier had not understated its accounts receivable (and its gross income) for 1972 by $37,687.32.

Before we review the evidence, it would be useful to set forth the taxpayers' burden in these cases and the standard of appellate review. Every taxpayer must maintain accounting records which enable him to file a correct tax return. I.R.C. Sec. 6001; Treas.Reg. Sec. 1.446-1. Where a taxpayer's books and records are incomplete or do not accurately reflect income, the Internal Revenue Service is authorized to use whatever method it deems appropriate to reconstruct the taxpayer's income. I.R.C. Sec. 446(b); Webb v. Commissioner, 394 F.2d 366, 371-72 (5th Cir.1968); see also United States v. Firtel, 446 F.2d 1005, 1006-07 (5th Cir.1971). Any ensuing deficiency notice is accompanied by a presumption of correctness which places the burden on the taxpayer of establishing all matters necessary to show that it does not owe the taxes in question. Southwestern Life Insurance Co. v. United States, 560 F.2d 627, 635 (5th Cir.1977), cert. denied, 435 U.S. 995, 98 S.Ct. 1647, 56 L.Ed.2d 84 (1978) (citing Helvering v. Taylor, 293 U.S. 507, 55 S.Ct. 287, 79 L.Ed. 623 (1935)); Webb, supra, 394 F.2d at 372. A taxpayer seeking a refund must demonstrate not only the error in the asserted deficiency but also the amount of the refund to which he is entitled, i.e., the correct amount of his tax liability. United States v. Janis, 428 U.S. 433, 440, 96 S.Ct. 3021, 3025, 49 L.Ed.2d 1046 (1976); Griffin v. United States, 588 F.2d 521, 530 (5th Cir.1979).

The district court is required to direct a verdict in favor of the Government or to enter a judgment notwithstanding the verdict in its favor if, considering all of the evidence in the light and with all reasonable inferences favorable to the taxpayer, the district court concludes that the taxpayer has failed to present substantial evidence...