Opinion
No. 41864.
May 7, 1934.
Action by S. A. Moore against the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
Petition dismissed.
This case having been heard by the Court of Claims, the court, upon the evidence and the report of a Commissioner, makes the following special findings of fact:
1. Plaintiff is an individual and a resident of Charleston, W.Va., where he was engaged in the loan and real estate business, as will more fully appear below.
2. Plaintiff filed his income tax returns for the calendar years 1918, 1919, and 1920, and paid the tax as shown due thereon as follows:
Includes $1.20 as interest.
3. The Commissioner of Internal Revenue caused various examinations to be made of the foregoing returns the results of which are summarized as follows:
------------------------------------------------------------------------ Date of report 1918 1919 1920 Total ------------------------------------------------------------------------ 5/24/23........ $7,499.62 $9,791.07 $38,189.81 $55,480.50 2/14/24........ 8,020.94 13,299.62 42,195.01 63,515.57 12/30/24....... 3,792.24 16,348.24 15,280.42 35,420.90 ------------------------------------------------------------------------ That is, the additional tax for each of the years was changed on the dates and to the amounts shown above, and, in making the foregoing changes, various conferences were held on the basis of protests filed by plaintiff. Each of the investigations was of a very extensive nature, the first consuming thirty-one days and each of the last two thirty-three days. Following the report of December 30, 1924, a conference was held by the Commissioner's representatives with plaintiff and his representatives at which time explanations were offered as to various items, which resulted in some further adjustment in favor of plaintiff. May 7, 1925, the Commissioner advised plaintiff of his final determination for the three years in question, showing a total additional tax of $23,290.34 — 1918, $3,469.093; 1919, $12,310.65; and 1920, $7,509.76. Prior to that time an abatement claim had been filed on account of an additional assessment of $8,020.94 for 1918, and September 24, 1925, $4,551.01 was abated, thus leaving $3,469.93, which was paid October 7, 1925. The additional tax as shown in the Commissioner's letter of May 7, 1925, for 1919 and 1920, was paid October 10, 1925.4. October 3, 1929, plaintiff filed claims for the refund of income taxes for 1918, 1919, and 1920 in the respective amounts of $3,782.22, $9,236.67, and $5,436.50. Detailed schedules were attached to each claim showing the basis therefor which in general terms involved the items which had previously been in controversy and a determination of plaintiff's net income on a receipts and disbursements basis. The foregoing claims were considered by the Commissioner in connection with a further report of a revenue agent dated May 21, 1931, but no changes were made from the results as shown by the deficiency letter of May 7, 1925. July 10, 1931, plaintiff was advised that the three claims would be rejected, and they were rejected on a schedule dated January 8, 1932.
5. During 1918, 1919, and 1920, and for many years prior thereto, plaintiff was engaged in making loans at a discount, in dealing in real estate and stocks and bonds, and in promoting business enterprises.
6. Plaintiff's books of account consisted of a cashbook, a ledger containing entries pertaining to stocks, bonds, and real estate transactions, and a personal ledger. The system of bookkeeping employed was of a hybrid nature, being a combination of the receipts and disbursements and the accrual bases. One source of income to plaintiff was from rents, and as to this character of item the amount was usually recorded when the payment was made, though in some instances accrued rent appeared on the books. Another source of income was from bonuses on loans, which business was carried on and recorded in the following manner: When a loan was made, the debtor was required to sign a note for the amount of the loan plus a bonus, and the bonus was immediately credited by plaintiff to profit and loss even though it would not be paid until the loan itself was paid. In some instances plaintiff would receive compensation in the form of stock for the organization of a corporation, and in some instances the stock was entered on plaintiff's books at its supposed value, though in other instances it was not assigned a value on the books because plaintiff considered its value doubtful and only of a potential nature.
7. Plaintiff's books were used as a basis for preparing its returns for 1918, 1919, and 1920. The first two revenue agents' reports, referred to in finding 3, did not conform to a receipts and disbursements basis, in that they included items as income which had not been reduced to cash. Beginning with the third revenue agent's report and continuing with the subsequent adjustments, the Commissioner endeavored to place plaintiff on a receipts and disbursements basis. Some items of income which were not excluded by the Commissioner but which plaintiff contended should be excluded were items on which plaintiff could not offer an explanation of their character satisfactory to the Commissioner.
8. In 1931 plaintiff employed an accountant to determine his profits for 1918, 1919, and 1920 on a receipts and disbursements basis. In making such audit, which was likewise extensive and consumed five hundred and fifty hours, the accountant endeavored to analyze each account and sought to eliminate all except cash items. After such analysis had been completed, a segregation was made as between items which the accountant considered represented income and those which he considered did not come in such classification. The audit report and explanations offered by the accountant in connection therewith do not satisfactorily prove or tend to prove that plaintiff has overpaid his income taxes for the calendar years 1918, 1919, and 1920.
9. The evidence submitted is insufficient to show that the Commissioner erred in his determination of plaintiff's net income as set out in his letter of May 7, 1925 (referred to in finding 3), or that a more nearly accurate determination could be made than is shown by such communication.
Theodore B. Benson, of Washington, D.C. for plaintiff.
Joseph H. Sheppard, of Washington, D.C. and Frank J. Wideman, Asst. Atty. Gen. (Elizabeth B. Davis, of Washington, D.C. on the brief), for the United States.
The plaintiff brings this suit to recover income taxes paid for the calendar years 1918, 1919, and 1920.
It appears that the plaintiff was engaged in a variety of business activities — making loans at a discount, dealing in real estate, stocks and bonds, and in promoting business enterprises. The nature of plaintiff's vocations and assorted avocations was of such character and color that he did not undertake to keep books reflecting clearly the actual income, whether on a cash receipt and disbursement or accrual basis. Some items were studiously entered which in no way reflected income or loss. Others were entered without any attempt to show accruals. Accruals of rent were sometimes entered as cash and stocks of corporations taken in payment of promotion fees were entered without any present value. Large bonuses received from the discount of notes were disregarded because the notes were slow in payment or were paid in installments in subsequent years.
The plaintiff filed his income tax returns for the years in question. The Commissioner of Internal Revenue caused three examinations to be made of the three years' returns made by the plaintiff, and as a result of these audits his taxes were greatly increased. It was discovered during the course of the audits that it was impossible to ascertain the income on a cash receipt and disbursement basis or on an accrual basis. The books were not kept on either basis but on a combination of both. Although every attempt was made by the revenue agents to analyze each item so it could be definitely placed in the cash receipt and disbursement class, nevertheless, after most painstaking efforts, it was found impossible to arrive at the net income under this method. It was the duty of the plaintiff to keep his books according to some method of accounting which would truly reflect his actual income. The Commissioner had to take the books as he found them.
Section 212(b) of the Revenue Act of 1918 ( 40 Stat. 1064) provides: "The net income shall be computed * * * in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income. * * *"
An examination of the books of the plaintiff, which have been placed in evidence, conclusively shows that no particular method of accounting was regularly employed which would clearly reflect the income.
The Commissioner assessed additional taxes for the years in question; payment was made by the plaintiff; refund claims were filed and duly rejected.
In a suit to recover income taxes illegally collected, the burden of proof is on the plaintiff to show by the preponderance of the evidence that the decision of the Commissioner is incorrect and should be reversed by the court. The decision of the Commissioner stands unless the plaintiff can sustain this burden. Johnson Motor Co. v. United States (Ct.Cl.) 6 F. Supp. 122, decided March 5, 1934.
The evidence of the plaintiff has been most carefully considered, and it totally fails to impress the court with its weight or accuracy. Its whole tenor is merely to throw doubt on certain items which have been included by the Commissioner as income and to give rise to an inference that certain other items should have been excluded as losses. There is a significant lack of effort to clear the chaos in which these books exist so that a definite, clear, unmistakable income can be established upon which to place the tax. The state of the record is such that the court is unable to say what plaintiff's taxable income was, and it may reasonably be inferred that plaintiff is now unable to establish it.
There is lacking any evidence which brings a conviction that the Commissioner is in error in deciding that plaintiff's income is what he determined it to be for tax purposes. We have here a case where the true income cannot be determined in any satisfying way except by the setting up of an entirely new set of books for the taxable years in question. Plaintiff had no voucher system, and memoranda used as authority for bookkeeping entries have been destroyed. It is apparent that a reliable set of books is now practically impossible to establish.
Plaintiff has failed to overcome the presumption that the Commissioner's determination is to be taken as correct, and, in our opinion, his decision should be sustained.
The petition is dismissed. It is so ordered.
BOOTH, Chief Justice, and WILLIAMS, LITTLETON, and GREEN, Judges, concur.