Opinion
Docket No. 20619.
1951-10-11
ROSS BOWMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Joe A. Roddy, Esq., for the petitioner. Homer F. Benson, Esq., for the respondent.
1. Upon the record it is found that respondent's determination as to the amount of petitioner's income for the years 1942 and 1943 was erroneous and it is held that there are no deficiencies in income tax and no penalties due from petitioner for those years.
2. Respondent determined a deficiency in income tax, together with fraud and negligence penalties, for 1943, from which the petitioner failed to file a timely petition with this Court, and the deficiency and penalties were assessed. Following this, respondent determined a deficiency, together with penalties, for the year 1942 and an additional deficiency with fraud and negligence penalties for the year 1943. Petitioner filed a timely appeal with this Court from this later determination. At the hearing, respondent moved to withdraw and cancel the additional deficiency and penalties determined for 1943. Held, that such action by respondent does not oust the jurisdiction of this Court to redetermine the tax liability of the petitioner for the year 1943. Joe A. Roddy, Esq., for the petitioner. Homer F. Benson, Esq., for the respondent.
The respondent has determined deficiencies of $8,143.31 and $8,805.04 in income taxes for the calendar years 1942 and 1943, respectively, together with fraud penalties of 50 per cent for each of the two years and a negligence penalty of 25 per cent for 1943. An issue for each year is whether petitioner understated his taxable income in making his return for such year and, if so, whether such understatement was made with intent to defraud. Another issue with respect to the year 1943, raised by respondent on motion to dismiss the appeal for such year, is whether this Court has jurisdiction under the facts here shown to determine petitioner's tax liability for that year.
FINDINGS OF FACT.
The petitioner is an individual residing in Chattanooga, Tennessee. His returns for the taxable years involved were filed with the collector of internal revenue, Nashville, Tennessee.
Petitioner acquired a retail liquor license in 1940 and from that year until the end of 1943 owned and operated a retail liquor store at 2 West 2d Street, Chattanooga, Tennessee. This business was conducted under the trade name of Ace Liquor Store. Petitioner was licensed as a retail liquor dealer in the city of Chattanooga, Tennessee, by the State of Tennessee and the city of Chattanooga, throughout 1942 and 1943, but renewal of his license for 1944 was refused. He sold the store about the beginning of 1944. He did not have a wholesale liquor license from the State of Tennessee or from the Federal Government during either of the years 1942 or 1943. Petitioner did not maintain a set of books covering the operations of the business, his records consisting of his bank statements, invoices for liquor purchased, his canceled checks and adding machine tape. He maintained no record of individual sales other than his cash register record.
In each of the taxable years involved petitioner employed a public accountant doing business in Chattanooga, to prepare his Federal income tax returns. These returns for each of the years were prepared by the accountant upon the basis of the records maintained as above detailed. The return for the calendar year 1942 reported cost of merchandise sold in the amount of $90,304.49 and gross sales of $98,819.45, this latter amount representing his total bank deposits for that year. Net income of $6,446.75 was reported. The return for the calendar year 1943 reported cost of merchandise sold in the amount of $75,502.52, gross sales of $83,393.74, which amount represented his total bank deposits for that year, and net income of $5,801.82.
Respondent, by notice of deficiency dated March 14, 1947, determined a deficiency in income tax for 1943 in the amount of $8,805.04, a 50 per cent fraud penalty and a 25 per cent negligence penalty, or a total amount of $15,408.82. This notice of deficiency carried no details as to how these amounts were arrived at, petitioner being advised that such statement would be furnished later. By letter of March 26, 1947, respondent forwarded a detailed statement to petitioner showing the deficiency assessed was $9,082.50 in income tax, $4,541.25 fraud penalty and $2,270.63 negligence penalty, or a total of $15,894.38, which was slightly in excess of the total of the deficiency asserted in the deficiency notice. Petitioner was advised that in case he filed a petition with this Court an increase in the deficiency to the amount of this increase would be moved by respondent.
Upon receipt of the aforementioned notice of deficiency, petitioner employed an attorney who took the matter up with the collector of internal revenue but failed to file a petition with this Court within the time permitted by statute, and the deficiency was assessed.
Following this, by notice of deficiency dated August 31, 1948, respondent determined a deficiency of $8,145.31 and a fraud penalty of 50 per cent for the taxable year 1942, and an additional deficiency of $277.46 in income tax for the calendar year 1943, together with fraud and negligence penalties of 50 per cent and 25 per cent, respectively. Thereafter, within the time permitted by the statute, petitioner filed the petition herein, contesting the deficiencies for both the years 1942 and 1943.
Petitioner's liquor business was a retail store doing a cash business, and its location at 2 West 2d Street, Chattanooga, Tennessee, was a poor one for a business of this type. The location was in a second-class neighborhood. There were no parking facilities and little transient trade. Petitioner and his wife operated the store, with occasional help from a boy employed for that purpose.
During the year 1942 liquor was very plentiful and there was keen competition among those in the liquor business. Toward the close of the year 1943 liquor, especially in some brands, became less plentiful and competition lessened.
Petitioner kept no individual record of the separate cash sales to customers showing the brand of liquor sold and the amount of money received, the custom being merely to ring up the amount of the sale on the cash register.
In each of the two years here in question the petitioner increased his income by making certain sales of liquor at wholesale, although he was not licensed by the State of Tennessee or the Federal Government as a wholesale liquor dealer. For this petitioner was indicted, pleaded guilty and paid a fine. These sales were made to customers who wished to buy liquor in wholesale case-lot quantities. Sales of this amount could be made legally by a wholesale liquor dealer to petitioner, as a retail dealer, but could not be made legally by a wholesaler to an individual. It was petitioner's custom with respect to these sales to buy such liquor from a wholesaler with money furnished by the customer, and the customer would thereupon take delivery of the liquor, paying petitioner a profit of from 25 cents to $1.50 per case of liquor, depending upon the number of cases purchased. Liquor purchased by petitioner in this manner and resold at wholesale was in a total amount of $17,814.54 for the year 1942 and a total amount of $4,555.92 for 1943. These totals in each year of cash purchases by petitioner from wholesalers were not included by the accountant in taxpayer's returns for those years either in the total amount of cost of goods sold or gross income for those years. Information as to these purchases was given by petitioner to the accountant, but the purchases were eliminated by the latter as not, in his opinion, constituting goods bought by petitioner and taken into his inventory. Such transactions were treated by the accountant as reflected in petitioner's business only to the extent of the profit of from 25 cents to $1.50 per case realized by petitioner thereon. Had such purchases been included in inventory, it would merely have resulted in an increase in cost of goods sold and corresponding increase in the same amount in gross income, leaving the exact amount of profit as computed by the accountant and included in the return for each year.
Petitioner's returns for each of the taxable years were investigated by internal revenue agents and his inventory figures as computed by the accountant making his returns were found to be correct, except that upon checking purchases shown by invoices from the wholesale liquor dealers with which petitioner did business it was discovered that cash purchases had been made by petitioner at these establishments in the two amounts for the two years as set out above. Upon questioning of petitioner by the revenue agents as to these purchases, they were advised by petitioner that they were cash purchases made with money of his customers and were reflected in his business only to the extent of the profit. This statement was rejected by the revenue agents as untrue, due to the fact that petitioner was not a licensed wholesale dealer and consequently had no legal right to make sales of this character.
For the year 1942 a ceiling price was placed upon the sale of liquor wholesale to retail dealers, and the latter in turn were permitted a mark-up of 25 percent above this price for retail sales purposes. For the year 1943 the mark-up price permitted by O.P.A. to retailers was 33 1/3 per cent.
Upon rejecting petitioner's explanation as to his cash purchases from wholesalers in each of the years, the revenue agents proceeded to reconstruct a gross income for petitioner upon the basis of all of his purchases of liquor, both those included in his inventory and the cash purchases in each year stated to have been made for disposition at wholesale. Petitioner's income for 1942 was recomputed in an amount representing a profit of 25 per cent on the cost of all liquor purchased and sold by him for that year, and for 1943 gross income was computed upon the basis that he had sold all liquor purchased by him at a profit of 33 1/2 per cent above cost. In both of these years there were included in the purchases the so-called cash purchases upon which petitioner received a profit of from 25 cents to $1.50 a case.
OPINION.
LEECH, Judge:
The first question presented is whether this Court is without jurisdiction to redetermine petitioner's tax liability for the year 1943. As set out in our findings, respondent determined a deficiency for that year from which petitioner failed to appeal to this Court within the statutory time, and such deficiency was assessed but appears to have been unpaid. Approximately one year later respondent, by statutory deficiency notice mailed to petitioner, determined deficiencies for 1942 and an additional deficiency for 1943. Petitioner has filed his timely petition here, contesting the deficiencies asserted for each of these taxable years. This the petitioner unquestionably had a legal right to do, and upon the filing of this petition this Court acquired jurisdiction as to each of these taxable years. Sec. 272(a)(1) and (f), I.R.C.; Wilburn Smith, 18 B.T.A. 289; Lewis E. Smoot, 25 B.T.A. 1038.
Upon the hearing of this proceeding, counsel for the respondent asked to cancel and withdraw the additional deficiency asserted for the year 1943, as made in error, and here takes the position that this action deprives this Court of jurisdiction to consider that taxable year. There is no question but that respondent has the right to confess error here as to the assertion of a deficiency for the year 1943, but under such circumstances the action of this Court would necessarily be the entry of a decision of no deficiency, which would result in the determination of an overassessment in the amount of the deficiency previously asserted for that year. To avoid this, respondent seeks to secure a dismissal of the action as to 1943 for lack of jurisdiction.
Having unquestionably obtained jurisdiction for 1943, this Court may not be ousted from that status by action of the respondent nor deprived of its right to enter a final decision with respect to the petitioner's tax liability for that year. The reason for this rule is clear. A litigant in a matter before a court of competent jurisdiction who brings the other party into court is entitled to an ultimate judgment, and the opposing party cannot defeat the jurisdiction of the court by a waiver or disclaimer on his part. The rule is aptly stated by the Supreme Court in the case of Last Chance Min. Co. v. Tyler Min. Co., 157 U.S. 683, in which it is said:
* * * When an action has been instituted in the court to determine such a controversy, it is not within the competency of the defendant to take himself out of court. A defendant may withdraw his answer and thus let judgment go by default, but he does not thereby deprive the court of a jurisdiction which has been once established. The rule applicable here is no different from that which applies in any other case. When a defendant has by personal service or appearance once been brought into a court, having jurisdiction of the subject-matter, he cannot at his election oust the court of jurisdiction, or prevent the case from passing to judgment. Whether he confesses plaintiff's right or defaults in answer, or files a denial or a disclaimer, is alike immaterial. In each and all of these cases the jurisdiction remains and the court may enter the appropriate judgment. Where the defendant simply withdraws his answer, as was this case, the court is under no obligations to inquire whether he has lost all interest, but may proceed to judgment, and its judgment is an adjudication of the rights of the plaintiff, as shown by the complaint and testimony. * * *
Respondent cites in support of his contention the case of Stanley A. Anderson, 11 T.C. 841, which has no application here. There a deficiency was asserted by the respondent and paid and satisfied by the taxpayer, and subsequent thereto the latter decided to file a petition with this Court. At the time this petition was filed no deficiency was being asserted by the respondent against the taxpayer, and the petition there was no more in fact than a claim for refund, of which we had no jurisdiction. In the present case, at the time of the filing of the petition a deficiency was being asserted by respondent against the petitioner, and the filing by petitioner of the petition in this case contesting such deficiency unquestionably gives us jurisdiction under the statute. Respondent's motion to dismiss the proceeding as to 1943 is denied.
The remaining issue is whether or not the petitioner understated the amount of profit realized by him on the sale of liquor for each of the years 1942 and 1943. He testifies positively that the proceeds from all retail sales of liquor from his store were recorded on his cash register and the full amount thereof deposited in bank, and that, in addition, there was recorded on his cash register the profit realized in certain so-called cash purchases he made with funds furnished to him by customers for delivery of liquor to them, not out of his stock but from wholesale dealers from whom he procured it with the money furnished.
It is perfectly true that the petitioner could have kept a more detailed record had he made and kept an individual sales slip for each sale of liquor showing the amount sold and the price received. However, with the records maintained by petitioner, the parties are able to determine definitely the full amount of liquor purchased and sold, and the disagreement is wholly upon the amount of profit reported by petitioner. It is agreed that petitioner has reported the full amount of his bank deposits as gross income and has computed his net income upon this basis, so the matter comes down to a question mainly as to the truth of petitioner's testimony, since it is perfectly evident that in the case of any small business operated on a cash basis the profit, even with exact records, rests for its accuracy upon the honesty of the proprietor.
In the audit of petitioner's returns, from which these deficiencies arise, there seems to have been no effort made nor is there any contention here for computing income upon the basis of an increase in net worth over the years in question, and there are no facts of expenditures by the petitioner in the record in amounts in excess of the income reported by him during these years together with capital possessed by him prior thereto. Upon careful consideration of the record it appears quite evident to us that the results arrived at by the revenue agents in their investigation of petitioner's returns are in error. The increase in reported income arises first through a refusal to accept the evidence that petitioner had made cash purchases and sales at wholesale on which he had realized a profit of from 25 cents to $1.50 a case. The fact that petitioner made such purchases and sales is established to our entire satisfaction by the record. Petitioner's testimony as to these sales and the profit realized is supported by the testimony of other witnesses which we cannot disregard. The general fact that he did make sales of this character is supported by his plea of guilty, payment of a fine on prosecution for having done this very thing. The revenue agents were manifestly in error in computing a profit upon these sales in the amount of 25 per cent over cost in the year 1942 and 33 1/3 per cent for the year 1943. We think they are manifestly in error in applying this same percentage of profits arbitrarily to all the sales by petitioner of liquor from his stock during those years.
Petitioner's location was a bad one for carrying on a retail liquor business, and his customers were not those from whom the highest price could be exacted if business was to be done. Others in the liquor business in Chattanooga during these years have testified that it was impossible for petitioner to have made the percentage of profit which has been used in recomputing his net income as a basis for the deficiencies.
We think the facts demonstrate affirmatively that respondent's determination is in error. No facts were established from which we could determine that any portion of the increased income was justified. The determination seems to have been predicated largely upon the fact that the schedules attached to petitioner's returns for the years in question did not include in inventory the amounts of cash purchases in each year from the wholesale liquor dealers. We think the explanation of this by petitioner and his accountant is reasonable. These purchases were made not with petitioner's funds but from funds of his customers. Delivery was taken immediately by the customers and the liquor purchased was not taken into petitioner's stock. The testimony of the accountant employed by petitioner to prepare his return is clear and there is no basis in the record discrediting the testimony or the character of this witness.
The determination of the respondent having been shown to be in error, the presumption of correctness in respect thereto passes out and the burden is upon respondent to establish by evidence an understatement of income. Helvering v. Taylor, 293 U.S. 507. We cannot find such evidence and we cannot disregard the positive testimony supporting the accuracy of the amount of income reported by the returns.
We, therefore, conclude that there is no deficiency for the year 1942 or 1943. The penalties asserted fall with the deficiencies.
Decision will be entered for the petitioner.