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Masters v. Commissioner of Internal Revenue

decided: March 28, 1957.


Author: Mclaughlin

Before McLAUGHLIN, STALEY and HASTIE, Circuit Judges.

McLAUGHLIN, Circuit Judge.

The taxpayers, operators of restaurants, kept two sets of business records during the years 1943-1947 and filed income tax returns reporting admittedly understated gross receipts. They contend the Commissioner has not proved fraud nor the correct amount of the understatement, and that there are compensating understatements in deductible items in precisely the same amount consisting of premiums paid for blackmarket food and bonus payments to key employees in excess of the compensation permitted by the wage stabilization regulations.

The three restaurants involved are all located in Philadelphia; at 326 North Broad Street, at 5221 Frankford Avenue, and at 6940 Market Street. Williams owned and ran the Broad Street and Frankford Avenue places in his individual capacity. Masters and Williams were partners in the Market Street restaurant since 1937. The profits were divided one-third to Masters and two-thirds to Williams since approximately 1943. All of the restaurants offered counter and table service, were operated twenty-four hours a day, serving breakfasts, luncheons, dinners and food for consumption off the premises.

The cashiers made daily entries of cash receipts and disbursements as determined by cash register readings in a book known as a "Diary" for the Broad Street and Market Street restaurants. Each diary covered one year. On the back of each book a record was kept of miscellaneous receipts from the sale of grease and for music box use. The cashier at Frankford Avenue restaurant made a similar record on sheets of paper of the cash receipts and disbursements.

The second set of books was under the supervision of Costas Demetriou, a bookkeeper employed by Williams since 1939 He also prepared monthly statements, Williams' income tax returns for the taxable years 1943 to 1947, inclusive, and Masters' returns and the partnership returns for the years 1944 to 1947, inclusive.Expenses were copied from the first set of books to the second set of books by either the restaurant cashiers, the bookkeeper or an employee of the latter. Under instructions of Williams and Masters the receipts were not entered in the second set of books until the end of the year, at which time Williams told Demetriou how much income to report for the year.

Williams showed Demetriou various memoranda purporting to contain a record of approximate amounts of unrecorded over-ceiling payments claimed to have been made for food products and wages paid to employees. During the years in question the prices for food products purchased and wages paid employees were fixed by the Emergency Price Control Act of 1942, 56 Stat. 23, 765, as amended, and the Stabilization Extension Act of 1944, 58 Stat. 632, as amended, respectively. 50 U.S.C.A.Appendix, ยง 901 et seq. The bookkeeper allegedly computed how much the daily receipts should be understated to balance the amount of the asserted over-ceiling payments. The latter were not entered as expenses on the books of the restaurants nor sought as deductions on the tax returns.

In the absence of fraud with the intent to evade tax,*fn1 the statute of limitations is a bar for all years in controversy except 1944. The 1944 tax may be assessed without fraud if there was a 25% understatement of gross income.*fn2 The Commissioner has the burden of proof on the fraud issue.*fn3 In this matter the returns were acknowledged to be false. The taxpayers concededly failed to report all their gross receipts from business. Such full report is indispensable to the proper computation of taxable income. The taxpayers were aware of the falsity of the returns. The only purpose their failure served was to conceal the receipts. Evidence of a conscious failure to include in the return receipts from a taxable source is sufficient to take the fraud issue to the trier of fact, - in this case the Tax Court. There is hardly a more routine badge of income tax fraud than a double set of records. Spies v. United States, 1943, 317 U.S. 492, 63 S. Ct. 364, 87 L. Ed. 418.

The bookkeeper, Demetriou, testified that he wrote Greek notations on various ledger pages, "100 - 25 Daily"; "$10"; "Less $140 daily".As to the meaning of these notations he testified:

"A. The first ones that he gave me, Mr. McBride, was only a plain figure there, which could make me remember what happened; but after I saw the other handwriting with the Greek words where it says 'Less $100 daily', then I realized that is what must have happened.

"Q. What must have happened? A. The receipts were understated by that amount.

"Q. Now, wherever it says 'Less $100' that means you deducted $100 from receipts? A. Daily, from the receipts.

"Q. But only where it says that? A. That is right.

"Q. Where it doesn't say 'Less $100 daily' or '$50 daily' it doesn't mean that, does it? A. If it says anything else, a figure ...

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