PHILLIPS'ESTATE v. Commissioner of Internal Revenue, 16235.

• Decision Date: 16 July 1957
• Docket Number: No. 16235.,16235.
• Citation: 246 F.2d 209
• Parties: ESTATE of Albert D. PHILLIPS, Deceased, Viola T. Chartrand, formerly Viola T. Phillips, Administratrix, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

246 F.2d 209 (1957) ESTATE of Albert D. PHILLIPS, Deceased, Viola T. Chartrand, formerly Viola T. Phillips, Administratrix, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 16235.

United States Court of Appeals Fifth Circuit.

July 16, 1957.

John J. Trenam, and Robert W. Patton, Tampa, Fla., Fowler, White, Gillen, Yancey & Humkey, and Massari & Patton, Tampa, Fla., of counsel, for petitioner.

Kenneth E. Levin, I. Henry Kutz, Lee A. Jackson, Attys., Dept. of Justice, Washington, D. C., Charles K. Rice, Asst. Atty. Gen., Dept. of Justice, John Potts Barnes, Chief Counsel, Internal Revenue Service, Rollin H. Transue, Sp. Atty., Internal Revenue Service, for respondent.

Before BORAH, RIVES and BROWN, Circuit Judges.

JOHN R. BROWN, Circuit Judge.

The Taxpayer's appeal from adverse judgment of the Tax Court for a deficiency (but without fraud or statutory penalties) based upon the increase in net worth and non-deductible expenditure method presents the sole question whether there was an adequate showing of the cash on hand in the opening net worth statement as of January 1, 1947. A corollary to this is whether the presumptive correctness of the Commissioner's deficiency is enough without more to allow the Tax Court to take the admitted cash on hand at the end of the period (November 17, 1948) and dispense with the necessity of having some proof on any amount at the opening on the ground that the Taxpayer has failed to show that he did not have an equal amount on hand at the beginning dates of each year.

We say solely because we find no substance whatsoever to the contention of Taxpayer that there was no "* * * proof of a likely source from which the court could reasonably find that the net worth increases sprang * * *," Holland v. United States, 348 U.S. 121, 138, 75 S.Ct. 127, 136, 99 L.Ed. 150, 165, and applicable here even though this is a civil, not criminal, matter "because the same limitations inhere in the net worth method wherever it is sought to be applied," Fairchild v. United States, 5 Cir., 240 F.2d 944, 948. Nor is there any support in the record as made for petitioner's complaint that the Commissioner failed to check leads which might establish the correct amount of cash on hand January 1, 1947.

The Taxpayer had a multiple business. He operated a legitimate orange grove on a business-like basis with traditional books and records apparently accurate and adequate. He ran a pool hall apparently legal, but on a cash no-books basis. And, admittedly as the source of his wealth, he operated the revolting, but profitable, illegal Bolita, Cuba Numbers racket, Clay v. United States, 5 Cir., 239 F.2d 196. The numbers game produced large revenues, all handled furtively in cash by pickup men. The few records kept, partial summaries of the gross, net after commissions, and the "hits" of illusory lucky numbers by patrons, showed a thriving going concern with ample access to customers, business, revenue, profits and cash.

While the net worth method is one adaptable to this situation, this is a civil tax matter in which exactions are for taxes due, not penalties for criminal conduct. We need to recall that this technique "is not an accurate method and its results are at best approximations," Goldberg v. Commissioner, 5 Cir., 239 F.2d 316, 318; Demetree v. United States, 5 Cir., 207 F.2d 892; Olinger v. Commissioner, 5 Cir., 234 F.2d 823.

By stipulation a net worth statement as of the opening, January 1, 1947, January 1, 1948, and closing date, November 17, 1948, was agreed to as accurately reflecting all assets and the admitted apparent increases in net worth except as to cash on hand January 1, 1947, and January 1, 1948. Cash on the closing date November 17, 1948, found in Taxpayer's home safe was stipulated to have been $4500.

Instead of starting with cash as an important¹ item in the opening statement the Tax Court reasoned backward and held² that the final figure on closing would be considered the opening figure unless Taxpayer proved, which he did not do, that there was a change.

Two assumptions, each faulty, are implicit in this action of the Tax Court. First, that the cash balance has no significance, and second, that there was some basis for considering that Taxpayer's cash position had remained relatively constant throughout this time.

As to the first, it developed on argument and was confirmed by supplemental memoranda, that if the Tax Court's assumption is accepted, the failure of the Commissioner in the opening net worth statement to include a like figure ($4500) for cash on hand (January 1, 1947 and 1948) assumed to have been the same, actually produced an excessive³ tax for the last year, 1948.

On the second, which is more important, this record affords absolutely no basis whatsoever for the implied finding of the Commissioner or Tax Court that the cash was substantially the same at opening and closing. Whatever weaknesses the Taxpayer's affirmative case might have had in establishing a large amount on hand, due in large part undoubtedly to the fact that Taxpayer's cause was now carried on by his surviving widow whose knowledge of operations, while considerable, was naturally limited on actual financial matters, this record contains not a syllable from which the most enthusiastic trier could find that the cash position was constant.

Reported in Taxpayer's 1947 return at $117,715.20 and recomputed by the Tax Court from weekly summaries of the "in," "out," and "hits," the numbers game produced a gross cash income of $124,734.65 with a profit, also in hard cash, of $22,439.10. So-called "sales" for a sample period in 1948 ran from $2887.95 to $4572.25 per week. Estimates of the operating profit made by the widow, ran from 10% to 20%. All revenues and profits in the numbers business was kept in cash in the safe.

Moreover, the only bank account maintained by Taxpayer was for his orange grove operation. It was undisputed that substantial deposits, all taken from the safe in his home, were made during these years. Deposited in various amounts was the total sum of $25,000 for the year 1946, the sum of $37,005 for 1947, and $28,735 for the year⁴ 1948. Of even greater significance is the timing and size of some of those payments. For within three weeks of the critical⁵ date January 1, 1947, $19,000 in cash was taken from the safe and deposited in the grove account. Whatever the source of these cash deposits, they indisputably came from the safe and show convincingly that large sums of cash necessarily were frequently kept on hand.

Actually, in view of the peculiar nature of Taxpayer's business, the Commissioner's argument and the Tax Court's finding seems almost self-defeating. The additional unreported business income reconstructed on the net worth-nondeductible expense basis was $18,128.11 for 1947 and $52,185.91 for 1948. There is no suggestion in this record that this enormous income could have come either from a small-time pool hall or an orange grove with admitted losses of $8,170.41 in 1947 and $9,651.30 in 1948. The course then had to be the numbers racket which, either on the estimate of the widow (20%) or the margin of profit computed by the Tax Court ($22,439.10, supra) would require substantial sums⁶ of cash on hand. Consequently if the Taxpayer, as the inference drawn by Commissioner and Tax Court asserts, had added income, it necessarily required more and larger cash balance.

That the Commissioner's deficiency starts with a presumptive correctness which is continued in favorable findings by the Tax Court, Burford-Toothaker Tractor Company v. Commissioner, 5 Cir., 192 F.2d 633, certiorari denied 343 U.S. 941, 72 S.Ct. 1033, 96 L.Ed. 1347; Hightower v. Commissioner, 5 Cir., 187 F.2d 535, 536; Archer v. Commissioner, 5 Cir., 227 F.2d 270; Goldberg v. Commissioner, 5 Cir., 239 F.2d 316; Olinger v. Commissioner, 5 Cir., 234 F.2d 823, does not alter the basic nature of income reconstructed on the inference that increase in net assets plus known nondeductible expenditures must have come from currently unreported income. The quality of the proof, its weight and the burden of proving it may differ between criminal, civil with fraud penalties, and the simple civil proceeding for tax only without fraud. But in each, the inference of unreported income can be drawn only if, and the if is a big one, a starting, opening net worth statement is established with some reliability. See, Holland v. United States, 348 U.S. 121, 75 S.Ct. 127, 99 L.Ed. 150; Fairchild v. United States, 5 Cir., 240 F.2d 944; Thomas v. Commissioner, 6 Cir., 223 F.2d 83; Thomas v. Commissioner, 1 Cir., 232 F.2d 520; Bryan v. United States, 5 Cir., 175 F.2d 223, affirmed 338 U.S. 552, 70 S.Ct. 317, 94 L.Ed. 335; Lee v. Commissioner, 5 Cir., 227 F.2d 181, certiorari denied 351 U.S. 982, 76 S.Ct. 1048, 100 L.Ed. 1497; Meyers v. United States, 134 F.Supp. 520, 133 Ct.Cl. 123, certiorari denied 352 U.S. 989, 77 S.Ct. 388, 1 L.Ed. 2d 368.

If the opening statement is not substantially reliable, the whole intricate house of cards falls. For then current expenditures for nondeductible purposes (income tax, living, family expenses, personal diversions etc.) and investment in new and added assets can just as reasonably be explained as coming from property already owned.

In establishing that opening net worth all types of assets (less liabilities) are included. Perhaps from a conceptual point of view, cash stands no differently than other...