Schwarzkopf v. Commissioner of Internal Revenue
| Decision Date | 10 July 1957 |
| Docket Number | No. 12130.,12130. |
| Citation | 246 F.2d 731 |
| Parties | George SCHWARZKOPF, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Third Circuit |
Logan Morris, Philadelphia, Pa. (Joseph J. Pugh, Nesbit, Morris, Pugh & Noonan, Philadelphia, Pa., on the brief), for petitioner.
Arthur I. Gould, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Ellis N. Slack, I. Henry Kutz, Attorneys, Department of Justice, Washington, D. C., on the brief), for respondent.
Before GOODRICH, STALEY and HASTIE, Circuit Judges.
A challenge to the Commissioner's use of the net worth method of determining income is presented by this petition seeking review of a decision of the Tax Court of the United States.
Petitioner George Schwarzkopf, an oculist and eye surgeon, was a resident of Atlantic City, New Jersey, during 1947 through 1951, the taxable years under review. His residence contained not only his living quarters but also his office, operating room, and hospital rooms. Taxpayer kept his own receipts book from which he reported his yearly income. He admitted that many of the sums entered on his receipts book represented not gross but net fees, after deducting certain hospitalization expenses. Taxpayer did not show any of the receipts from these expenses to the investigating agents, and most of the receipts from earlier years were admittedly destroyed.
Finding a substantial discrepancy between bank deposits and reported income, the Commissioner reconstructed the income of Schwarzkopf by resort to the net worth method, with the following comparative results:
Unreported
Net income as taxable income
Net income determined by determined by
Year reported respondent respondent
1946 $14,688.25 $ 49,140.24 $ 34,451.99
1947 14,244.31 31,908.91 17,664.60
1948 14,200.40 50,744.70 37,544.30
1949 16,040.59 34,376.53 19,335.94
1950 17,000.79 48,125.46 31,124.67
1951 21,721.06 175,466.96 153,745.90
The Commissioner then determined the taxpayer's deficiencies for the respective years and additions to tax under sections 293(b)1 and 294(d) (2)2 of the Internal Revenue Code of 1939 as follows:
Additions to tax
Year Deficiency § 293(b) § 294(d) (2)
1946 $ 20,027.69 $10,208.94 $1,322.46
1947 9,356.04 4,678.02 545.66
1948 19,942.57 9,971.28 1,157.59
1949 9,301.21 4,650.60 586.66
1950 17,020.85 8,510.42 984.73
1951 125,811.42 62,905.71 7,710.98
Most of the amounts utilized in the Commissioner's net worth analysis were stipulated. Only undeposited cash on hand was disputed, and the Commissioner determined that there was none as of January 1, 1946 and $32,000 undeposited cash as of December 31, 1951; these amounts were prorated over the years in question. The Tax Court, however, found that taxpayer had $101,000 in undeposited cash as of January 1, 1946, and the following amounts thereafter:
December 31, 1946 $62,000
December 31, 1947 52,000
December 31, 1948 32,000
December 31, 1949 32,000
December 31, 1950 32,000
December 31, 1951 32,000
The Tax Court determination, of course, completely eliminated the 1946 deficiency and made certain changes in the deficiencies of the other years involved. Finally, the Tax Court found that petitioner's income tax returns for 1947 through 1951 were false and fraudulent and were made with intent to evade tax, and that part of the deficiency for each of the years 1947 through 1951 was due to fraud with intent to evade tax.
The salient thrust of petitioner's principal argument is that the Commissioner's use of the net worth method of income reconstruction was unwarranted as his books of account were correct and adequate.
Holland v. United States, 1954, 348 U.S. 121, 75 S.Ct. 127, 99 L.Ed. 150, has become the fons et origo of the law concerning the use of the net worth method of income reconstruction. In giving its approval to the net worth method, the Supreme Court said, 348 U.S. at page 132, 75 S.Ct. at page 134:
"* * * To protect the revenue from those who do not `render true accounts,\' the Government must be free to use all legal evidence available to it in determining whether the story told by the taxpayer\'s books accurately reflects his financial history."
This quoted portion of the Holland case is recognized by petitioner as sanctioning the use of the net worth method to test the accuracy and completeness of the books of account. Thus, the net worth method serves two purposes: first, it may be used to test the correctness of the books; secondly, it is cogent evidence of the amount of income which went unreported. The fact that the books on their face appear to be adequate does not preclude the use of the net worth method. Holland v. United States, supra, 348 U.S. at pages 131-132, 75 S.Ct. at page 133. In any event, the books involved here contained items of net income with hospital expenses already deducted. The disposal by the taxpayer of bills evidencing these expenses made the computation of their amount impossible, and thus left vague and unreported some unknown amount of income. The taxpayer's practice of cashing checks representing his patients' fees and receiving the money in large denominations rather than depositing the checks themselves made it impossible to test the accuracy of the books from that source. If taxpayer's contention is...
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...year in issue, even when the return for the preceding year was held to have fraudulently understated income, Schwarzkopf v. Commissioner, 246 F.2d 731, 734–735 (3d Cir.1957), affg. on other issues and remanding on that issue T.C. Memo.1956–155, or when such return was not filed until after ......
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...year in issue, even when the return for the preceding year was held to have fraudulently understated income, Schwarzkopf v. Commissioner, 246 F.2d 731, 734-735 (3d Cir. 1957), affg. on other issues and remanding on that issue T.C. Memo. 1956-155, or when such return was not filed until afte......