Welch v. CIR

• Decision Date: 23 December 1961
• Docket Number: No. 8387.,8387.
• Citation: 297 F.2d 309
• Parties: Robert H. WELCH and Rosa Lena Welch, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fourth Circuit

297 F.2d 309 (1961)

Robert H. WELCH and Rosa Lena Welch, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 8387.

United States Court of Appeals Fourth Circuit.

Argued October 17, 1961.

Decided December 23, 1961.

J. B. Fisher, Charleston, W. Va., for petitioners.

Edward L. Rogers, Atty., Dept. of Justice, Washington, D. C. (Louis F. Oberdorfer, Asst. Atty. Gen., and Lee A. Jackson and Robert N. Anderson, Attys., Dept. of Justice, Washington, D. C., on the brief), for respondent.

Before SOPER and BELL, Circuit Judges, and BARKSDALE, District Judge.

SOPER, Circuit Judge.

This petition brings up for review a decision of the Tax Court which approved a determination by the Commissioner of Internal Revenue of a deficiency of $5,651.20 in the income tax of Robert H. Welch and Rosa L. Welch, his wife, as shown in their joint return for the year 1952.¹ Whether there was in fact a deficiency in income tax for the year 1952 it is difficult to say for, as will appear from an examination of the record, the parties to the proceeding in the Tax Court directed their efforts to maintaining their legal positions rather than to ascertaining the facts.

The taxpayer resided in South Charleston, West Virginia, and derived his income in part as an employee of a corporation engaged in the food machinery business and in part from activities in the real estate business. His income tax returns for the years 1950 to 1956 came under examination and the Commissioner determined deficiencies in all of them, and the taxpayer filed petitions for review in the Tax Court, all of which were consolidated for trial.

The Commissioner based his determination of deficiencies on net worth computations as to all of the years except 1952. For that year, according to the opinion of the Tax Court, the Commissioner determined the taxpayer's income by making specific adjustments to his return on the cash receipts and disbursements method. It was necessary, however, in computing the net worth of the taxpayer in the other years to ascertain the assets and liabilities of the taxpayer at the beginning and the end of 1952; and he contends that this data demonstrates that the Commissioner's determination of deficiency for that year is incorrect. In response the Commissioner contends that the net worth computation for the year 1952 does not show the taxpayer's income for that year because the taxpayer failed to show the amount of his non-deductible expenses and, therefore, it was necessary to choose the taxpayer's method of accounting and to make adjustments for the correction of errors which are listed in the Commissioner's notice of deficiency for the year 1952 as is shown below. The taxpayer gave testimony in his own behalf and offered the testimony of an accountant at the trial. This testimony is not in the record, but it is clear that the taxpayer based his case for the year 1952 on the net worth statement for that year. The court found, however, that the taxable income for 1952 could not be ascertained from that schedule, and decided the case as to 1952 against the taxpayer, pointing out that the Commissioner's determination was presumptively correct and that the taxpayer had introduced no evidence regarding the amount of the deductions. The crucial question in the case is whether the determination may be shown to be incorrect by reference to the net worth computation filed in the consolidated cases.

In his return for 1952 taxpayer reported rental and other income which the Commissioner did not question. He also claimed as deductions the sum of $9,445 representing the cost of a lot and a building sold in 1952, and also the sum of $8,485.54 for expenses of operating his apartment houses during the year, or a total of $17,930.54. The latter deduction included $1,898.40 for interest paid, $2,154.79 for depreciation, $1,550.37 for repairs, $272.60 for taxes, $345.74 for janitor services, and the balance for miscellaneous purposes. The Commissioner disallowed all of the deductions. This action was taken notwithstanding disclosures in the net worth schedules for the years 1950 to 1956 inclusive filed by the Commissioner with his notice of deficiency for the net worth years. Therein it was shown that the taxpayer had real estate valued at $64,060.22 at the end of 1951 and $68,312.16 at the end of 1952. Moreover, the net worth schedule listed among the items of...