Schroeder v. CIR

Decision Date23 June 1961
Docket NumberNo. 16439.,16439.
Citation291 F.2d 649
PartiesHarry and Amanda SCHROEDER, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
CourtU.S. Court of Appeals — Eighth Circuit

Bert B. Rand, Washington, D. C., Leland C. White, Harlan, Iowa, Hans A. Nathan, Laurence D. Pearl, of Trammell, Rand & Nathan, Washington, D. C., on brief, for petitioners.

Gilbert E. Andrews, Jr., Attorney, Department of Justice, Washington, D. C., Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson and Robert N. Anderson, Attorneys, Department of Justice, Tax Division, Washington, D. C., were with Gilbert E. Andrews, Jr., Washington, D. C., on brief, for respondent.

Before VOGEL and BLACKMUN, Circuit Judges, and DAVIES, District Judge.

RONALD N. DAVIES, District Judge.

This case comes to us on petition of Harry and Amanda Schroeder for a review of the decision of the Tax Court of the United States, 16 TCM 707, Amending Order 17 TCM 836, which sustained a determination by the Commissioner of Internal Revenue of deficiencies in the income taxes of Harry Schroeder for 1944 and 1945 and of deficiencies in the income taxes of both petitioners for 1946 and 1947. Addition to tax was determined under § 291(a) for the year 1946 for failure to file a return as required by § 51(a) within the time prescribed, and further additions were determined for the years 1944 through 1946 under § 293(b) because of fraud with intent to evade tax.

The petitioners are residents of Tabor, Iowa, where Harry Schroeder has been engaged in cattle feeding a good share of his life. Although the petitioner dealt in other animals, most transactions herein concerned cattle which were purchased from livestock commission merchants, brokers and dealers. Normally, two and three year old grass fed cattle were selected, the number purchased at any one time ranging from a few dozen to more than two thousand head. These cattle were placed in feed lots for periods from thirty days to four or five months before being marketed. Immature cattle were grazed until ready for feed lots, and as many as twenty months could elapse between time of purchase and sale. The cattle were commingled in various feed lots irrespective of purchase date or price paid. Petitioner financed his cattle purchases with loans, and a part of approximately eighty per cent of his purchases was mortgaged.

Petitioner Harry Schroeder reported his annual income on a cash receipts and disbursements basis, deducting from gross receipts the computed cost of cattle sold in that year without regard to purchase date. Cost of the livestock sold was based upon an estimate prepared by petitioner and his accountant. In preparing the estimate a cutoff date was chosen, usually on or about September 15th, it being assumed that all cattle purchased after that time were on hand at the end of the year. The 1945 return indicated that the livestock carry-over from 1945 to 1946 was $680,010.70. On the 1946 return the livestock carry-over from 1945 was $496,281.05. The return for 1946 showed a livestock carry-over to 1947 in the amount of $605,300.58. The return for 1947 shows a livestock carry-over from 1946 of $555,168.88.

No separate records or identification of the various herds were maintained although petitioner visited the feed lots almost every day and was familiar with the types and number of cattle there. No formal books were kept of feeding operations, the records consisting of bank statements, liability ledger sheets, canceled checks, bills of sale and purchase invoices. Most of the business was handled by telephone with no records or memoranda being made of the transactions. Not all of the proceeds from cattle sales were deposited in bank accounts, some being applied directly on notes payable to banks. The only actual head count of livestock taken was in September of 1947 when the petitioner formed the Harry Schroeder Cattle Co., Inc., and Harry Schroeder, Inc.

A thirty day extension of time in which to file an income tax return for 1946 was obtained by petitioner and a tentative individual return filed April 15, 1947, disclosing a net income of $51,500 and tax liability of $25,479. The return contained no computation of gross receipts, cost of livestock sold or gross profits, and no schedules showing computation of net income. On July 15, 1948, a joint return for 1946 was filed which did contain a schedule reflecting gross receipts, cost of livestock sold, gross profits, net income and which disclosed tax liability of $185,374.14.

The Commissioner computed petitioners' taxable incomes for the years involved by alternate methods, net worth and by a statement of income and expense, both computations reaching the same total taxable incomes. The sources of both computations were basically the same, the principal disputed item being the cost of livestock on hand at the beginning of each taxable year. Since error in either computation will be reflected as well in the other, our discussion will be limited to that of the net worth method. Because of petitioner's failure to make regular physical head counts, the Commissioner worked backward from the actual head count taken in 1947 and, using petitioner's records and memoranda, established a cost basis of livestock on hand December 31, 1946. To determine this for livestock on hand as of December 31, 1944 and 1945, respectively, it was assumed that all livestock purchased in the last ninety days of each year were still on hand at the end of that year.

The Tax Court held that (1) the Commissioner was justified in adopting the net worth method of computing petitioners' income, (2) the lack of proper record keeping compelled the use of the ninety day cutoff in determining the livestock carry-over, (3) a part of the deficiencies for each of the years 1944 through 1946 was due to fraud with an intent to evade tax and (4) petitioners were liable for additions to tax for failure to file a timely return for the year 1946 within the meaning of § 51(a), Internal Revenue Code of 1939, 26 U.S. C.A. § 51(a).

"Decisions of the Tax Court are to be reviewed by the same standards as are applied to decisions of the district court in civil cases tried without a jury. Findings of fact by the Tax Court shall not be set aside unless they are clearly erroneous. Greenspon v. Commissioner, 8 Cir., 229 F.2d 947, 949; Omaha Nat. Bank v. Commissioner, 8 Cir., 183 F.2d 899, 902, 25 A.L.R. 2d 628; Doll v. Commissioner, 8 Cir., 149 F.2d 239, 247." Luehrmann\'s Estate v. C. I. R., 8 Cir., 287 F.2d 10, 15.
"* * * A finding is `clearly erroneous\' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746.

It is unnecessary for the Commissioner to show that inadequate books and records have been kept by the taxpayer before resorting to the net worth method of computing taxable income for the years in question. Holland v. United States, 348 U.S. 121, 75 S.Ct. 127, 99 L. Ed. 150.

In Schultz v. C. I. R., 5 Cir., 278 F.2d 927, 929, the Court said:

"The Taxpayer insists that under § 412 the net income is to be computed in accordance with the method of accounting regularly employed by a taxpayer. Consequently, where a taxpayer keeps books and records, the Commission has the burden of first establishing that the records are faulty or either negligently or fraudulently fail to reflect items of income or disbursements. But this is clearly not so. This Court, with many others, is conscious of the dangers in the use of the net worth method3 and will require that there be adequate evidence4 to support a determination that the true income is represented by the process of reconstruction. But once that is satisfied, neither the method nor the evidence under-goes an added scrutiny because the taxpayer\'s books are to this extent disregarded. Indeed, the determination that the trier of fact had requisite basis for concluding that income was truly that shown by the reconstruction process is a simultaneous determination that no matter how neatly or diligently or consistently or conscientiously kept, the books and records were inadequate. * * *"

The Commissioner's determination of a deficiency is prima facie correct, and the burden is upon the taxpayer to disprove that determination. Marcella v. C. I. R., 8 Cir., 222 F.2d 878; Lusk v. C. I. R., 7 Cir., 250 F.2d 591.

Because a physical head count of cattle was never made prior to September, 1947, that no books were kept of the cattle feeding operations and that even petitioner and his accountant estimated the livestock carry-over each year, resort to the net worth method was necessitated. The principal item here in dispute is the cost of livestock on hand at the beginning of each year for which the instant deficiencies were determined. The petitioner in this court, as in the Tax Court, vigorously attacks the Commissioner's use of the ninety day cutoff to establish cost of cattle carried over into the succeeding year. The Tax Court held that the Commissioner was not only justified in adopting this method but that petitioner's lack of records compelled it. We agree. The method used by the petitioner and his accountant in arriving at the year end cost of the cattle on hand was similar to that used by the Commissioner. In net worth cases the fact finder is warranted in bearing heavily against the contentions of the taxpayer whose inexactitude is of his own making, and where the findings are based upon the entire record, they cannot be said to be clearly erroneous. Gatling v. C. I. R., 4 Cir., 286 F. 2d 139.

In holding that part of the deficiencies for each of the years 1944 through 1946 was due to fraud with intent to evade tax, the Tax...

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