Masters v. Commissioner

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 black-market 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 ówned and ran the Broad street and Frankford Avenue places in his individual c it Masters and WilliamB were ^ in the Market gtreet restaurant since 1987. 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 ® ? so , PrePare morJ y ® a fime|n S> Williams income tax returns for the taxable years 1943 to 1947, inclusive, and ,, J , , tii , , • Masters returns and the partnership re- , - ««¿A j. iKAr, • i turns for the years 1944 to 1947, mclu- „ J sive. Expenses were copied from the „ , J7 ^ 7 , * first set of books to the second set oí , . books by either the restaurant cashiers, the bookkeeper or an employee of the latter. Under instructions of Williams and f JT . , , , 7 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 ree-ord 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, § 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,¹ the statute of limitations is a bar for all years in controversy except 1944. The 1944 tax may assessed without fraud if there was a 25 % understatement of gross income ²Commissioner has the burden of proof on the fraud issue.³ In this mat^er returns were acknowledged to be false. The taxpayers concededly failed , , ,, . . , ,, to report all their gross receipts irom buginegg_ ^ fuR ,g ^ gable to ^ proper computation of tax. able income. The taxpayers were aware of ^ f of the returns. The only , , purpose their failure served was to con- , ,, . , „ ., * ceal the receipts. Evidence of a con- . « , scious failure to include m the return re- . , « » vi ceipts from a taxable source is sum- , . , ,, . . cient to take the fraud issue to the trier of fec thig case the Tax CourL Tbere ,g bar more routine foa . , « , , ,, , * 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 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? Jhe receiPts were understated 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 is there; it might be the same.”

Regarding the alleged over-ceiling payments for food and wages, there is only the self-serving testimony of Williams. It is uncorroborated by any receipts, checks or other documentary evidence. None of the recipients of the contended for over-ceiling payments was produced. Since the taxpayers failed to furnish the investigating Internal Revenue agents the information regarding the claimed over-ceiling payments, the government was under no obligation to negative this exculpatory evidence. Cf. Holland v. United States, 1954, 348 U.S. 121, 135-136, 75 S.Ct. 127, 99 L.Ed. 150

The Commissioner added to gross re-eeipts the amounts indicated by the notations on the ledger sheets described above. Taxpayers say that since there is testimony of over-ceiling payments having been made which were not recorded in the books used by the Commissioner to compute the deficiencies, the Tax Court was required to estimate and allow additional deductions under Cohan v. Commissioner, 2 Cir., 1930, 39 F.2d 540, 543-544. The Tax Court held that there was no reliable evidence on which to base an estimate, inferential^ discrediting Williams’ testimony.

On their returns, and on their books, the taxpayers recorded their claimed deductions. A reasonable in-ferenee arises therefrom that they had no additional deductions. These records were admissions against the taxpayers’ pecuniary interest. The Commissioner and the Tax Court were justified in relying on them. The vague, unsupported statements of Williams about additional unrecorded expenses, are unconvincing in contrast. The Tax Court was not required to believe them. . Chesbro v. Commissioner, 21 T.C. 123, affirmed 2 Cir., 1955, 225 F.2d 674, certiorari denied 350 U.S. 995, 76 S.Ct. 544, 100 L.Ed. 860.

Petitioners also challenge three rullngs of the Tax Court on admission and exclusion of evidence. Two of those concern exclusions for irrelevancy. Those decisions were well within the discretion of the trial judge. The third has to do with the allowance in evidence of proof of the convictions of both taxpayers re-suiting from their pleas of nolo contendere to indictments for income tax evasion for the years 1945 through 1947.

What we are dealing with is not a mere plea but a judgment of conviction an<^ sentence thereon. Appellants urge under ^ose circumstances their con-visions may not be put into evidence as affecting their credibility. The argu“ent w without merit. There is no valid dlstinction between a judgment of conviction based on a plea of “nolo contendere” and such judgment entered after a piea of “guilty”. The former is an attempted face saving process. A trial judge may at times consent to that procedure but when it is followed by judgment of conviction and sentence it mere-]y provides a surface language cloak which is completely removed by the judgment and sentence. That type of conviction is admissible evidence for impeachment purposes. Kilpatrick v. Commissioner of Internal Revenue, 5 Cir., 1955, 227 F.2d 240, 243; Pfotzer v. Aqua Systems, 2 Cir., 1947, 162 F.2d 779, 785; Fisher v. United States, 1 Cir., 1925, 8 F.2d 978, 981; United States v. Dasher, D.C.E.D.Pa.1943, 51 F.Supp. 805, 806.

The Tax Court is bound by the rules of evidence applicable in the courts of the District of Columbia, Section 1111, Internal Revenue Code 1939 and its successor, Section 7453 of the 1954 Code, where there is a statute providing that the conviction of a crime may be given in evidence to affect credibility. Section 14-305, District of Columbia Code 1951 Ed. Apparently there is no reported case to date in the District of Columbia specifically holding that a conviction under the present circumstances is within the above referred to statute but from bo th Thomas v. United States, 1941, 74 App.D.C. 167, 121 F.2d 905, 907 and Crawford v. United States, 1930, 59 App.D.C. 356, 41 F.2d 979, 980 it is in-ferable, contrary to the contention of appellants, that when the problem does come before the courts of the District the evidence will be held admissible in accordance with the great weight of authority. Kitchen v. United States, 1955, 95 U.S.App.D.C. 277, 221 F.2d 832 cited by appellants is not pertinent.

In connection with this point it is suggested that the acceptance into evidence of the conviction of appellant Masters although he did not testify at the hearing was error. While Masters did not personally take the stand, his sworn tax returns were in evidence as were his other records. The evidential credibility of those documents ^ which actually amounted to Masters individual evidential credibility was the predominant issue in this cause as far as he was concerned, just as much as if he had been sworn as a witness. Under the trial circumstances the acceptance of the record of his conviction was within the statute,

It is suggested that because the Tax Court did not categorically note that the Masters’ conviction evidence was received under the District of Columbia law it must be concluded that it was given undue decisional weight. This thought ignores the all important fact that the Tax Court in the trial of this case, by the direct command of its governing law, the Internal Revenue Code, was functioning evidentially in accord-anee with the District of Columbia statute.⁴ There was no necessity here of spelling this out in the findings of fact,

The decision of the Tax Court wi]] be aiRrmed

1 . Section 275 and 276(a) of the Internal Revenue Code of 1939, 26 U.S.C. §§ 275, 276(a), 1952 ed.

2 . Section 275(c) of Internal Revenue Code of 1939.

3 . gecti0n 7454 of the Internal Revenue Code of 1954.

4 . In a recent District of Columbia district court opinion, Stagecraftc-rs’ Club, Inc., v. District of Columbia Division of Amorican Legion, supplemental opinion, D.C. 1953, 111 F.Supp. 127, 128 (main opinion D.C., 110 F.Supp. 481), affirmed per curiam 1954, 94 U.S.App.D.C. 74, 211 F.2d 811, the court, in a sound consideration of the scope of the admissibility of a prior conviction in a related civil suit, held that: “However, where the issne in the criiriinal case was clear, the defendant appeared, was represented by counsel, had all opportunity to testify and present his witnesses and to cross-examine the witnesses against him, and was duly convicted, there is no sound reason why the judgment of conviction should not be admitted in a civil case based on the same facts as at least prima facie evidence of those facts.”

In that suit, there being no rebutting evidence, the court ruled the convictions were conclusive proof of the unlawful use of the premises and decisive of the civil action. Though the analogy of that situation to the one at bar has not been argued, it would seem to bear a close relationship and to strongly support not only the admission of the conviction rec-erds but their use, prima facie at least, to show appellants’ fraud in filing false and fraudulent income tax returns for the years 1945 to 1947 inclusive.