Miller v. Commissioner of Internal Revenue

• Decision Date: 02 November 1956
• Docket Number: No. 15969.,15969.
• Citation: 237 F.2d 830
• Parties: Morris MILLER, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

237 F.2d 830 (1956)

Morris MILLER, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 15969.

United States Court of Appeals Fifth Circuit.

November 2, 1956.

Hal Lindsay, Atlanta, Ga., for petitioner.

Meyer Rothwacks, Atty., Dept. of Justice, Washington, D. C., Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, Atty., John Potts Barnes, Chief Counsel, Int. Rev. Ser., Rollin H. Transue, Sp. Atty., I. Henry Kutz, Atty., Dept. of Justice, Washington, D. C., for respondent.

Before TUTTLE, CAMERON and JONES, Circuit Judges.

TUTTLE, Circuit Judge.

In this petition for review of a decision of the Tax Court there are three important questions: 1. Is an income tax return signed by the taxpayer's wife, at his instance, in the presence of the accountant who prepared it and whose tacit approval was given to this method of signing, such a return as would commence the running of the statute of limitations; 2. Did the filing of a return signed in such manner satisfy the requirements as to timely filing of a return so as to prevent the imposition of the negligence penalty for late filing; and 3. Did the Tax Court correctly determine the taxable income of petitioner for the years in question by accepting the basic determination of the Commissioner (made in the absence of books and records truly reflecting his income) by making substantial adjustments in favor of the taxpayer by application of its own formula of increasing allowable deductions, instead of accepting the taxpayer's computations on increase in net worth or some other allegedly more accurate method?

There is a subsidiary question arising from the Tax Court's refusal to reopen the record after it had concluded the hearing on the merits and had made its findings of fact and rendered its conclusion of law, to permit the taxpayer to amend his petition to allege that the assessment for 1943 had been barred by the Statute of Limitations (assuming that question 1 above is to be answered in the affirmative).

The case originated when the Commissioner issued a deficiency letter asserting that the taxpayer had understated his income taxes for the years 1943, 1944, 1945, 1946 and 1947 by some $59,000; that he was subject to a fraud penalty of $34,000 and over $9,000 in other penalties. The facts as brought out in the Tax Court are briefly as follows:

During the calendar years 1943 to 1947, inclusive, Morris Miller, referred to as the taxpayer, operated a beer parlor, lunch counter and pool hall known as the Marietta Buffet in Atlanta, Georgia. During those years he was married to, and living with, Dora G. Miller, with legal residence in Atlanta. Dora G. Miller filed no separate tax returns for the period in question.

The taxpayer filed timely individual income tax returns for 1944 and 1946. On March 14, 1944, March 15, 1946, and March 15, 1948, documents purporting to be returns for 1943, 1945, and 1947, respectively, were filed, bearing the caption "Morris Miller." The taxpayer did not sign these purported returns. The signature line of the purported return for 1943 bore the inscription "Morris Miller by Mrs. M. Miller." The signature line of the purported return for 1947 bore the inscription "Morris Miller by D. G. Miller." All of the inscriptions were affixed by the taxpayer's wife, upon his oral authorization and direction, at the place on the return pointed out by the accountant who had prepared the return.

The taxpayer was not physically incapacitated and was not outside the continental limits of the United States during any of the years 1943 to 1947, inclusive. Dora G. Miller did not have a power of attorney to sign any of his tax returns for him.

In connection with the examination of the taxpayer's income tax returns for the period in question, the revenue agent was informed that the books and records had been destroyed because it had not been thought necessary to keep them any longer. The agent then began an analysis of all of the taxpayer's financial affairs from third party records, and a computation of income upon an analysis of bank deposits. Frequent regular deposits, at least weekly, were made in the bank accounts, and the agent concluded there was a direct relationship between the deposits and the taxpayer's income.

The agent rejected the idea of computing the taxpayer's net income by the so-called net worth method because, he testified, he was unable to procure sufficient, trustworthy information to enable him to verify the taxpayer's asserted beginning net worth as of January 1, 1943.

Shortly after the revenue agent's examination had begun, the taxpayer employed a certified public accountant, to make a computation of his income for each of the taxable years. This accountant received a number of invoices and some books and records from the taxpayer. However, he regarded these as wholly inadequate for the purpose of computing the taxpayer's net income, and decided to employ the so-called net worth method. In a computation of the taxpayer's total assets on hand as of January 1, 1943, he used a figure of $25,000 for cash on hand. That figure, which he did not independently verify, was based on the taxpayer's representation that he had that amount in his safe on that date.

On the basis of the taxpayer's figures arrived at from the increase in his net worth, he filed an amended return for each of the years in question admitting an understatement for the five years of approximately $20,000 in income.

Thereafter, the Commissioner issued his ninety-day letter asserting income deficiencies totalling $125,299.26 on the basis of the original returns for the five years, and imposing fraud and negligence penalties.

The taxpayer's income was reconstructed by the Internal Revenue agent by what is known as the bank deposit method. This was made possible by the fact that all of the bank statements were available, but none of the cancelled checks for 1943 through 1946. He considered that the taxpayer deposited all of his receipts after having disbursed all of his expenses from the cash drawer, but that he frequently drew out by check amounts in even hundreds of dollars or amounts in excess of $100 divisible by 25 for his cash drawer revolving fund. He recognized that taxpayer cashed many checks out of his cash. He therefore deducted from the bank deposits all withdrawals shown on the bank statements as being for multiples of $100 or for an amount in excess of $100 if divisible by 25. This was done on the agent's theory that all such disbursements were to the taxpayer and were used by him to pay for deductible expenses or to cash customers' checks, in which case the amount would show up again as income when the cashed checks were later deposited.

The method of computing taxpayer's true income used by the Commissioner would, of course, be accurate if it was proven that all of taxpayer's deductible expenses were paid by him by cash from his revolving fund; that his revolving fund was replenished solely by checks drawn on his bank account of the denominations selected by the agent; and that all of the net proceeds from sales went regularly into the bank account. The taxpayer, both before the Tax Court and here, asserts that the first assumption was incorrect. Principally he insists that he paid many thousands of dollars of deductible expenses each year by check, and it is conceded by the Government that no account was taken by the Commissioner of these amounts for any year except the year 1947, for which the actual checks were available. For this year this category of deductible items amounted to $8,228.70. As to the other years, the agent testified:

"In the computation of income for the years 1943 through 1946, the handicap was that we did not have the canceled checks, or, in fact, any record whatsoever, invoices or otherwise, which would permit any type of analysis as to what the taxpayer had paid by check.

"In the absence of such checks, it\'s virtually impossible for anyone to say that he had paid a definite amount of expenses by check. It is my opinion that the extent of any purchases they had paid by check would have been resolved by arbitration between the parties, and I don\'t believe that has reached a satisfactory stage in this case."

As this became apparent to the Tax Court, it was obvious that one of the essential assumptions on which the Government rested its case was lacking. Referring to the $8,228.70, the court said:

"Now, it may well be argued by the Petitioner that at least that much should be found as having been expended in a similar manner for these other years. He may argue a greater amount. I don\'t know. That\'s a question of argument. Now, Respondent will probably argue for lack of evidence nothing should be allowed in that respect, but it seems to me the Court will have as one of its tasks, if it should adopt the bank deposits method as the best method, would have to reduce these gross figures by some amount that the Court would determine as having been paid by check. I don\'t think the Court could possibly assume that in the year 1947 some 12 or 13 percent was paid in that manner and nothing paid in that manner in prior years * * *."

The court, in its findings of fact, accepted the bank deposit method of computation, but made substantial deductions from the Commissioner's figures for the years 1943 through 1946, without expressly stating the formula which it applied to reach the figures of taxable income for each of the years in question. It made a slight upward revision for 1947.

The Tax Court found in favor of the taxpayer on the fraud issue, but upheld the imposition of the negligence penalty.

After the Tax Court filed its findings of fact and conclusions of law, the taxpayer moved for the first time for leave to file an amendment setting up the bar of the statute of limitations for the year 1943, asserting that counsel had belatedly discovered the absence of a waiver for that year, and asserting that if...