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Hoffman v. Commissioner of Internal Revenue

decided: January 25, 1962.

ROBERT C. HOFFMAN, PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.



Author: Ganey

Before KALODNER, HASTIE and GANEY, Circuit Judges.

GANEY, Circuit Judge.

This proceeding is upon petition by the taxpayer for a review of the decision of the Tax Court of the United States, denying in part the taxpayer's petition for a redetermination of the Commissioner of Internal Revenue's assessment of deficiencies in the taxpayer's income tax returns for the years 1948, 1949 and 1950.*fn1

A record of the returns, as filed and determined by the Commissioner, follows:

Income Income Tax Paid Deficiency Estimated

Reported Determined Tax Tax Paid

1948 $22,894.06 $172,095.20 $7,006.51 $41,640.56 $8,000.00

1949 $25,817.17 $88,399.99 $8,505.55 $6,789.19 $7,006.51

1950 $22,272.01 $64,118.71 $6,933.06 $12,541.22 $8,800.20

For all three years mentioned, there were penalties imposed with the deficiency tax, under Sec. 294(d) (2).*fn2

During the years in question, the petitioner, who resides in York, Pennsylvania, was engaged in several businesses. He owned a company which manufactured and sold numerous types of weight lifting and body building equipment; a publishing company that printed a magazine and books written by him on health, body building, weight lifting and related subjects; a factory where casts for barbells were manufactured and custom work performed for others; and an establishment where light fixtures were sold. In addition, he was a stockholder in a corporation that manufactured carbon dioxide dispensing equipment. Since 1936, a bookkeeper, one Dietz, who was not an accountant, and had only taken one course in bookkeeping, kept separate records and boods on the accrual basis for each of the companies involved, while maintaining a separate record of transactions of the petitioner which were kept on the cash receipt and disbursement method of accounting. The above books and records were incomplete, inadequate and in no wise covered the entire transactions involved over the years in question. The Commissioner after inspecting the records of the petitioner discovered that the cash expenditures for the years involved were substantially in excess of the net income reported, although he did not assert that he found any false items in the petitioner's books of account.

The petitioner claims: First. That the Tax Court erred in sanctioning the Commissioner's use of the so-called "cash expenditure" method of determining his alleged unreported income for the years in question. Second. That the Commissioner had not met the requirements for the use of that method in reconstructing income. Third. That the Tax Court erred in holding that the presumption of correctness of the Commissioner's determination remained, as to those items which the taxpayer did not prove incorrect. Fourth. That the Tax Court erred in including penalties under Sec. 294(d) (2) of the Internal Revenue Code of 1939 for the years 1949 and 1950.

We shall now examine the contentions of the taxpayer.

The taxpayer insists that unless there are no records, or that the records are totally inadequate, or where there is a strong suspicion that the taxpayer has received income from undisclosed or illegal sources, the use of the "cash expenditure" method of determining income is capricious, arbitrary and unwarranted. In view of Holland v. United States, 348 U.S. 121, 130-132, 75 S. Ct. 127, 99 L. Ed. 150, as well as Hargis v. Godwin, 8 Cir., 221 F.2d 486, 491; Davis v. Commissioner, 7 Cir., 239 F.2d 187; Canton v. United States, 8 Cir., 226 F.2d 313, ...


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