Richardson v. CIR

• Decision Date: 03 March 1959
• Docket Number: No. 7774.,7774.
• Citation: 264 F.2d 400
• Parties: Eugene RICHARDSON and Anna W. Richardson, Eugene Richardson, and Estate of J. W. Richardson, Deceased, Eugene Richardson, Executor, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fourth Circuit

264 F.2d 400 (1959)

Eugene RICHARDSON and Anna W. Richardson, Eugene Richardson, and Estate of J. W. Richardson, Deceased, Eugene Richardson, Executor, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 7774.

United States Court of Appeals Fourth Circuit.

Argued January 19, 1959.

Decided March 3, 1959.

Elden McFarland, Washington, D. C. (Gerard Hartzog, Columbia, S. C., on brief), for petitioners.

Morton L. Rothschild, Atty., Dept. of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson and I. Henry Kutz, Attys., Dept. of Justice, Washington, D. C., on brief), for respondent.

Before SOBELOFF, Chief Judge, HAYNSWORTH, Circuit Judge, and PAUL, District Judge.

SOBELOFF, Chief Judge.

The appeals in these three consolidated cases are from Tax Court decisions upholding income tax deficiencies and fraud penalties assessed against petitioners Eugene Richardson, his wife, Anna W. Richardson, and his brother, J. W. Richardson for the years 1946, 1947, and 1948.

For many years Eugene and J. W. Richardson engaged in the ship chandlering business in the port of Charleston, South Carolina. In an earlier period the business had been incorporated, but during the years in question the two men traded as Richardson Brothers, a partnership. Anna W. Richardson was not directly involved in the business and is a party only because she filed a joint tax return with her husband for 1948.

It has become a general practice for chandlers in the larger coastal ports of the United States to give captains or masters of foreign flag ships a commission or "kickback" on their orders. Generally the commission equals 5 per cent of the gross invoice. These payments augment the salaries received by captains of foreign vessels, which are notably lower than those paid captains of American ships. The Commissioner of Internal Revenue has ruled¹ in accordance with the principle laid down in Lilly v. Commissioner, 1952, 343 U.S. 90, 72 S.Ct. 497, 96 L.Ed. 769,² that such payments are deductible by the chandlers as ordinary and necessary business expenses.³

As a practical matter, it is extremely difficult for chandlers to substantiate the actual amount of payments claimed to have been made by them. Because many ships sail after banking hours, when checks cannot be cashed, payments often must be in cash; and the ships' officers normally refuse to sign receipts. Several cases have resulted recently from the Commissioner's refusal to allow deductions for such unsubstantiated claimed commissions. Fiambolis v. United States, D.C.E.D.S.C.1957, 152 F.Supp. 10; Valetti v. Commissioner, 1957, 28 T.C. 692 affirmed in part and reversed in part, 3 Cir., 1958, 260 F.2d 185.

The instant case likewise involves a refusal by the Commissioner to allow unsubstantiated commissions, but it is further complicated by the fact that Richardson Brothers used accounting methods which not only failed to record commissions paid, but also omitted certain items of gross income. It was the company's practice to cash some incoming checks without entering them on the books and then to pay commissions out of the proceeds. The result was that the partnership's books and tax returns understated gross receipts in the three years by $108,454.78, the amount of the cashed checks, but also failed to show any commissions as expense.

The Commissioner assessed a deficiency based on the amount of the omitted checks and added a 50% civil fraud penalty. The taxpayers admitted that the gross receipts had been understated by the amount of the unrecorded cashed checks, but they claimed that all of the money so derived had been used for commissions to the foreign captains and masters. They pointed to the fact that in their returns no deductions had ever been claimed for commissions and insisted that the net effect was the same as if the offsetting items had been reported.

The commissions which the taxpayers claimed to have paid equalled 12.5%, 11.5% and 9.9% of their total gross receipts in the years 1946, 1947 and 1948 respectively. In support of their claims, the taxpayers offered certain invoices bearing notations of commissions paid. These invoices had been kept in folders which Richardson Brothers maintained for each ship with which they did business. Eugene Richardson claimed to have made these notations at the time of the sales, and in this he was supported by the testimony of one of his bookkeepers.

The Tax Court rejected the evidence of the taxpayers "for reasons set out in the Valetti case." In Valetti, where the taxpayer claimed commissions averaging 14.10% of gross sales, the Tax Court emphasized the ease with which cash commission payments may be asserted in fraud of the government's revenue, and for that reason, in the absence of corroboration from the alleged recipients, refused to make a finding that the taxpayer's actual payments so far exceeded the normal 5%. However, the Tax Court estimated and allowed a deduction equalling 7½% of gross business, not limiting itself to the standard 5%.

In the instant case, having rejected the taxpayers' evidence, the Tax Court decided that only 65% of Richardson Brothers' total sales were to foreign ships, to whose captains commissions had to be paid, and that only the standard 5% commission had been paid on those sales. (65% of 5% equals 3.25%) Tax deficiencies were then assessed on the difference between the amount of the partnership's unreported income and the allowed deductions for commissions.

The taxpayers argue that in limiting the deductions to 3.25% of gross receipts, the Tax Court erred. They point out that here, when the only evidence as to actual commissions — that presented by Eugene Richardson — was rejected, the court allowed only 3.25%, while in the Valetti case, where the Tax Court also refused to accept the taxpayer's evidence, it allowed commissions of 7.5%. They also insist that there was insufficient basis in the record for the Tax Court's estimate that only 65% of Richardson Brothers' gross sales were made to foreign flag vessels.

While a taxpayer's records are relevant and competent evidence, they are self-serving, and this fact may be considered in determining the weight to be given them. Valetti v. Commissioner, 3 Cir., 1958, 260 F.2d 185; Helvering v. Midland Insurance Co., 1937, 300 U.S. 216, 57 S.Ct. 423, 81 L.Ed. 612. In addition, the records submitted by the taxpayers in this case were not normal accounting ledgers, but consisted of penciled notations by Eugene Richardson on individual invoices and on the ships' folders themselves. The Tax Court cannot be said to be clearly erroneous in refusing to accept this evidence at face value.

The Tax Court's allowance to Valetti of deductions equal to 7.5%, which is half again as much as commissions normally paid in the industry, did not bind it to do the same here. Such a determination rests upon the credence the court accords to the evidence submitted by a particular taxpayer. There is no justification for the apellants' insistence that if the Court allowed more than normal commissions in one case it must do so in every case.

We have not failed to consider that the evidence upon which the Court based its 65% estimate is not very strong. It was predicated upon an admittedly "offhand" approximation by another Charleston chandler that 65% of the ships coming into that harbor were foreign owned. But the taxpayers offered no evidence to show what percentage of the partnership's sales was to foreign vessels, and without such evidence, the testimony of the other chandler afforded the only basis upon which the court could make its determination. Having rejected the taxpayers' lists of commissions paid, the Tax Court was forced to make an estimate. It did the best it could in the circumstances. Under the Cohan rule, the Tax Court is enjoined to make as close an approximation as it can, but in so doing it may bear heavily if necessary upon the taxpayer whose inexactitude is of his own making. Cohan v. Commissioner, 2 Cir., 1930, 39 F.2d 540.

In its original computation of deductible commissons, the Tax Court allowed 3.25% of the partnership's total reported sales including, in addition to merchandise sold, fees received for rental of the taxpayers' launches. The taxpayers then filed a motion pointing out that the court had failed to take into consideration...