
    SAUL B. JACOBS v. THE UNITED STATES
    [No. 483-52.
    Decided November 30, 1954.
    Plaintiff’s motion for new trial overruled April 5, 1955.3
    
      
      Mr. John R. Stivers for plaintiff. Messrs. Lowrance & Stivers were on the briefs.
    
      Mr. J. W. Hussey, with whom was Mr. Assistant Attorney \Q-eneral H. Brian Holland, for defendant. Messrs. Andrew D. Sharpe and Robert N. Anderson were on the brief.
   Jones, Chief Judge,

delivered the opinion of the court:

Plaintiff brought this action to recover $293,759.50 taxes, penalties, and interest which he alleges the defendant has collected illegally.

Plaintiff filed returns, on a fiscal year basis (ending October 31), for each of the years 1944,1945,1946 and 1947. The Commissioner of Internal Revenue made deficiency assessments using an increase in net worth computation for these same years. He subsequently collected the deficiency together with penalty and interest, and plaintiff in turn filed a timely claim for refund. The following table shows the amounts involved:

During tlie years in question plaintiff received income from his business, which he sold in mid-1945, from returns on his investments, and from dealings in the market. It appears that, on the basis of the available records and information, plaintiff returned his income from known sources correctly. During this same period plaintiff’s net worth, computed on the basis of visible assets, increased by amounts greatly in excess of the income reported by him. The Government contends that this increase is attributable to income from an unknown source. The plaintiff replies that there was no increase, in fact, that his net worth at the beginning of the taxable period in question was much greater than the Government’s computation indicates. The issue in this case is, therefore, essentially a factual one: the origin of the increase in plaintiff’s apparent net worth.

At the outset plaintiff makes a preliminary contention with regard to the Government’s authority to use the net worth method in computing plaintiff’s income. Section 41 of the Internal Revenue Code of 1939 provides:

The net income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be) 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 income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. * * *

Plaintiff contends that this section means that the Commissioner can use this method only where the taxpayer either kept no books or where the taxpayer’s accounting procedure does not reflect his income. He cites cases which restrict the use of this method to situations where the taxpayer keeps no accounts, or very inadequate or inaccurate accounts, or where the taxpayer is engaged in activities which justify the conclusion that he has unreported income. In most of the cases in which the net worth method has been applied there was either a defect in the books or evidence of outside income-producing activities.

The law allows the Commissioner to use another method if the taxpayer’s method does not clearly reflect income. To determine this question itself involves the computation of income by some alternative method. Another method of accounting may not be used unless one can show by use of that method that the taxpayer’s own method does not clearly state income.

The circumstances in which it may be used are well stated in Lipsitz v. Commissioner, 21 T. C. 917, at 931:

The net worth method is not a system of accounting; it is not a substitute for either the cash or the accrual basis of accounting or any other recognized method of keeping books. When correctly applied to the facts of a particular situation it is merely evidence of income. And when the increase in net worth is greater than that reported on a taxpayer’s returns or is inconsistent with such books or records as are maintained by him, the net worth method is cogent evidence that there is unreported income or that the books and records are inadequate, inaccurate, or false. It is not correct to say that the use of the net worth method is forbidden where the taxpayer presents books from which income can be computed, for the net worth method itself may provide strong evidence that the books are unreliable.

It should be pointed out that the plaintiff here did not keep a complete set of accounts covering all his personal transactions. As far as his known market transactions and interest income were concerned, he submitted only the primary data from which such accounts could be and were constructed. But by his own admission and from his bank records there is evidence of considerable transfers of cash of which he submitted no further records. We think, therefore, that the Commissioner’s use of the net worth method was proper.

Having determined by the use of the net worth method that there was unreported income, the Commissioner assessed taxes upon it. The determination of the Commissioner is •prima facie correct unless arbitrary, capricious, or excessive, and the burden is upon the taxpayer to show that the tax as assessed was not due. Reinecke v. Spalding, 280 U. S. 227; Hague Estate v. Commissioner, 132 F. 2d 775; Hoefle v. Commissioner, 114 F. 2d 713. Where there have been large unexplained bank deposits, the Commissioner’s determination of taxable income is not arbitrary if the surrounding circumstances indicate that they came from income. Hague Estate v. Commissioner, supra. Proof of such bank deposits standing alone does not establish income, but the evidence need not link the bank deposits to an identified income-producing activity. Many other circumstances may create the inference that the deposits represent income. Goe v. Commissioner, 198 F. 2d 851. We believe that the same rule should apply in this case and that the circumstances surrounding the unexplained increase in net worth justify an inference that the increase was due to unreported income.

This case has some strange features. The plaintiff and his parents were a closely knit family. They were energetic, industrious and thrifty, qualities which people admire. If the parents were frugal almost to the point of miserliness, that is at least partially explained by the fact that they were immigrants. It is to their credit that they wanted to make their own way. That they became reasonably well-to-do and wished to become wealthy is creditable rather than otherwise.

They found many advantages in this new land and they made the most of them which is also to their credit.

But they also owed an obligation to the free and fruitful land that had given them the opportunities which they so much desired.

If they were somewhat miserly in their own affairs they were generous with their own son, who naturally inherited many of the qualities of his parents. If they did not worship money they certainly did not despise that commodity, the love of which the ancient prophet referred to as the “root of all evil.”

The plaintiff claims that in the latter part of 1943, he had on hand in cash or “the equivalent of cash, stocks” over $400,000. But for each, of the years 1918 to 1989, plaintiff either filed no income report or a report showing no taxes due. Two deficiency assessments were made in the year 1924, totaling $10.74.

For the year 1940 plaintiff filed a report showing income tax due in the sum of $360.59 (later amended to show an additional $83.51). Subsequently an additional assessment of $237.37 was made for that year.

Plaintiff changed to a fiscal year basis and for the first ten months of 1941 filed a report and paid $308.91. An additional assessment for that period was made in the sum of $2,057.99, which was paid.

In 1942 plaintiff filed his individual income tax disclosing a tax due in the sum of $4,842.54, which was paid. An additional assessment in the sum of $379.08 was levied and paid.

By this time the understating of income seemed to have risen above the level of a practice and reached the dignity of a habit.

Plaintiff’s individual income tax report for the fiscal year ending October 31, 1943, including the Jacobs Furniture Company which was his individually owned business after November 1,1940, showed a tax of $5,686.50 to be due.

In the year 1949, the defendant assessed deficiency taxes for the fiscal years 1944 through 1947 in the aggregate sum of $227,103.10 plus penalties and interest.

If we accept plaintiff’s testimony it seems strange that he had so little income to report during the 25 previous years.

True the plaintiff and his parents evidently had considerable cash on hand on their persons, in the home, and in lock boxes. The plaintiff had access to one of his mother’s lock boxes. Evidently the members of the family trusted each other completely. They could move their money around and between each other like show producers move the sun and the moon around in a theater.

In this case, as in the theater, it is easy to create an illusion when one controls the props and scenery. We recall seeing the original production of the play entitled “Bain.” The showers on the South Sea huts were so realistic that we caught ourselves wondering how all those finely dressed people would be able to get taxis after the show was over. But when we went outside at the end, the drouth was still on. It hadn’t rained for weeks.

The record does not show the detail nor the specific times of the exchange of funds between the members of this family. But when funds are kept in the form that the plaintiff claims, they can be handled in such a way that the Collector has difficulty in determining which shell the coin is under. These circumstances tend to lessen our confidence in the details of plaintiff’s account of what actually transpired.

The facts on the issue of plaintiff’s real net worth at the beginning of the period in question are thus shrouded in uncertainty. Plaintiff claims that he had over $400,000 in cash or its equivalent at that time. The record unfolds a picture of a man who had many dealings in cash and who possessed a large store of cash. But there is a paucity of corroborative detail for the plaintiff’s figure of over $400,000. He could produce no inventory of his hoard nor could he give a breakdown between the constituent elements of his holdings. While it is clear that plaintiff received substantial gifts from his parents, it is also clear that they did not amount to $400,000. It is possible that plaintiff by wise investments received income from those gifts which over the years increased the original gifts to a sum approaching $400,-000. But the fact that plaintiff during most of the period 1918-1943 reported an income so small as to be free from taxation and that a part of the gifts remained uninvested in cash argue against so large an increment in the value of his patrimony.

Reference to the table in finding 15 will show that plaintiff’s net worth increased gradually throughout the period 1943-1947, both by increase of bank deposits and by increase of security holdings. This gradual increase coupled with the plaintiff’s penchant for cash dealings and his vagueness as to the details of his accumulation justified the Commissioner’s inference that the increase in net worth was due to income. As a consequence the burden shifts to the plaintiff to prove that he did not have the income which the Commissioner attributed to him. We find that plaintiff has not met his burden of showing that the increase of his apparent net worth between October 31, 1944, and October 31, 1947, was not due to unreported income, or, to put it another way, that plaintiff’s actual net worth on October 31,1944, exceeded $200,000.

The situation as to the 5-percent penalty is essentially the same. Unlike a fraud penalty, the burden is upon the taxpayer to prove the 5-percent penalty to have been imposed in error. Gibbs & Hudson, Inc. v. Commissioner, 35 B. T. A. 205. Plaintiff’s failure to report his income under the circumstances of this case amounted to negligence or an intentional disregard of rules and regulations. 26 U. S. C. § 293 (a). Avery v. Commissioner, 11 B. T. A. 958.

For the year ending October 31,1944, a different rule must apply. When the Commissioner of Internal Revenue made his assessment for that year the normal 3-year statute of limitations had already expired and the Commissioner was relying on the 5-year statute of limitations applicable in cases where the taxpayer has understated his income by more than 25 percent of the amount on his return. 26 U. S. C. § 275 (c) (1952 ed.). To avail himself of this longer limitation period the Commissioner must assume the burden of proving that the taxpayer has understated his income by more than 25 percent. Moyer v. Commissioner (1952 P-H T. C. Memorandum Decisions, par. 52, 274) ; Ratto v. Commissioner, 20 T. C. 785, 788. The Government has not sustained the burden of proving that the unexplained increase in plaintiff’s apparent net worth in the fiscal year 1944 was due to income in excess of that shown in the taxpayer’s report for that year. In other words, it has not shown that plaintiff’s actual net worth at the beginning of that fiscal year was less than about $200,000. In fact, the testimony of two disinterested witnesses and other circumstances indicate that plaintiff’s net worth as of October 1943 was probably near that amount. Since the Government has not sustained its burden of proof, the 3-year statute of limitations precluded a lawful assessment of that year.

It is evident, therefore, that plaintiff’s cause, to the extent that it failed, has failed for lack of proof. While a thorough record of the furniture business was kept, no records, notes, diaries or memoranda were ever made of the gifts or when plaintiff actually took possession of them. The record does not show that plaintiff’s parents made any report of gifts in their tax reports. The vague testimony as to the time of making, and amount of such gifts, even if accepted as definite proof, falls short of establishing the existence of an amount equal to the $400,000 which plaintiff claimed to possess in cash or equivalent in October 1943. His income tax reports do not show appreciable earnings during that period, certainly not enough to anything like make up the difference. If he made such sums, he did not report them. He should not be heard now to take advantage of any possible delinquencies on his part as a reasonable explanation of his net worth during the taxable years in question.

In addition if large gifts had been made as far back as before the First World War, it seems strange that plaintiff would have kept a considerable part of them in cash without allowing them to produce income. There is nothing to show that he buried his talents, or like Silas Marner just liked to feel and touch the gold.

The Collector of Internal Bevenue has a difficult assignment at best. To permit plaintiff to recover for the years 1945-1941 under the vague uncertain state of the record largely on the unsupported self-serving declaration of the plaintiff would be unfair to the thousands of citizens who pay their taxes, perhaps not joyfully, but without mental reservation or purpose of evasion.

We conclude that plaintiff cannot recover for the fiscal years 1945,1946, and 1947, but is entitled to recover the deficiency, penalty, and interest collected for the fiscal year 1944, that is, $86,097.87, with interest as provided by law.

It is so ordered.

Laramore, Judge; Whitaker, Judge; and Littleton, Judge, concur.

Madden, Judge,

dissenting in part:

I do not agree with the court’s conclusion that the plaintiff may recover the tax, penalty, and interest assessed and paid for the year 1944. That conclusion means that the court is not satisfied that the plaintiff did not have, at the beginning of the 1944 tax year, approximately $20,0,000 in assets. If he did have that amount, then the Commissioner of Internal Eevenue’s determination that bis net worth increased during 1944 by an amount which justified the assessment made, was wrong. The court does not, of course, decide that it was wrong. It only decides that it has not been proved that it was right. This result is reached because, the normal period of the statute of limitations having elapsed before the 1944 deficiency was assessed, the Government had the burden of proving that the plaintiff’s return for 1944 understated his proper tax by at least 25 percent.

I think the plaintiff has not given us all the evidence that he could have given us about his assets and his income. It seems incredible that a person who was carrying on a successful business, who, in addition, had substantial commercial and savings bank accounts and a considerable quantity of bonds, notes, and stocks, could not, if he would, tell us what else he had and where he had it. Vague and indefinite statements about prodigious quantities of money in jars, money belts and pockets, with no real explanation as to how or when the money got there, or why it was removed from those receptacles and placed where other people place their valuables, during the tax years in question, do not ring true. The net result may be that the plaintiff, merely by keeping silent and saying to the tax authorities, “You have the burden of proof; I am the only one who knows the facts and I won’t tell you,” has his Government at his mercy.

I think the burden which is on the Government when it attempts to apply Section 275(c) of the Internal Revenue Code is the burden of going forward with the evidence. This it did by showing what assets the plaintiff had at the beginning of the 1944 year, in those places where people ordinarily keep their assets. Then the plaintiff could, of course, show that he had other assets which he kept in unusual places. Instead of showing that, he tells us a vague story about total assets of $400,000, most of which were not to be found in places where valuables are ordinarily kept. If the court had believed the plaintiff’s testimony it would have concluded that he owed no income taxes for any of the years in question. It obviously did not believe his testimony. But instead of disregarding it as unworthy of belief, it merely discounted it by some two-thirds.

I see no reason for this treatment of the case. I think that, as the proof stands, and regardless of presumptions of correctness, and burdens of proof, the only trustworthy evidence supports the assessments made by the Commissioner of Internal Revenue. If the real facts are otherwise, our lack of knowledge of them is due to the refusal of the plaintiff to enlighten us.

FINDINGS OF FACT

The court, having considered the evidence, the report of Commissioner Currell Vance, and the briefs and argument of counsel, makes findings of fact as follows:

1. Plaintiff is an unmarried resident of Memphis, Tennessee. He was born in Nashville, Tennessee, on December 23, 1894. He married in 1927 and lived with his wife until 1938. He and his wife were divorced in 1940. One son, Jerome, was born to the couple in 1929.

2. During the taxable years involved in this suit, and prior thereto, plaintiff filed his individual income tax returns on the cash receipts and disbursement basis of accounting. The books and records of the Jacobs Furniture Company from 1941 until the date of sale of that business were kept on the installment sales basis of accounting and on the basis of a fiscal year ending October 31st. During the years involved, plaintiff filed his individual income tax returns on said fiscal year basis and included therein the income of the furniture company until July 16, 1945. On that date, the business was sold for its then book value of $86,979.27. The purchase price was paid half in cash and half in notes which were paid off within two years. On the same date, plaintiff sold the lease on the business premises for $15,000, payable in monthly installments of $306.12.

3. Plaintiff filed no Federal income tax returns for the calendar years 1918 to 1923, inclusive. For the calendar year 1924, he filed a return showing no tax due, but deficiency assessments of $4.85 and $5.89 were subsequently made and paid. That total would be the tax on a net income of approximately $2,500. Plaintiff filed no income tax returns for 1925, 1930, and 1931. For the years 1926, 1927, 1928, 1929, 1932, 1933, 1934, 1935, 1936, 1937, 1938, and 1939, plaintiff filed individual Federal income tax returns showing annual income in such small amounts that no taxes were due. The returns were accepted by the Collector of Internal Revenue for the District of Tennessee as filed.

4. For the calendar year 1940, plaintiff filed a Federal income tax return disclosing tax due of $360.59, but an amended return for that year disclosed additional income tax due of $83.51, plus interest of $3.49. Subsequently, a further additional assessment was made against plaintiff of $237.37, plus interest of $23.93. All of the above amounts were duly paid.

5. Having received permission to change to a fiscal-year basis, plaintiff filed his individual income tax return for the fiscal period beginning January 1,1941, and ending October 31,1941, showing total tax due of $308.91, which amount was paid. An additional assessment for the fiscal period ended October 31, 1941, in the amount of $2,057.99, plus interest of $104.59, was subsequently made and was paid on December 2,1942.

6. Plaintiff duly filed his income tax return for the fiscal year ended October 31, 1942, disclosing $4,842.54 taxes due, which amount was paid. An additional assessment for the fiscal year 1942 was made in the amount of $379.08, plus interest of $54.56. The additional assessment was paid on June 16,1945.

7. Plaintiff duly filed his individual income tax return for the fiscal year ended October 31, 1943, showing total tax due of $5,686.50. The amount shown due for the fiscal year 1943 was abated under the forgiveness features of the Current Tax Payment Act of 1943, and was treated as part of the taxes assessed for the fiscal year ended October 31, 1944. The amount of plaintiff’s net income for the years 1918 through 1943 is not in evidence, with the exception of the year 1924.

8. For the fiscal year ended October 31, 1944, plaintiff filed an individual income and victory tax return with the Collector of Internal Revenue for the District of Tennessee on December 30, 1944. The return showed victory tax net income of $13,608.19, income tax net income of $13,155.33, and after making adjustments for the forgiveness features of the Current Tax Payment Act of 1943, total taxes due of $6,632.68. The latter amount was paid on or before January 2.1945.

9. For the fiscal year ended October 31, 1945, plaintiff filed an individual income tax return with the Collector of Internal Revenue for the District of Tennessee on November 19.1945. The return showed total income of $33,112.01 and total taxes due of $14,900.64, computed under the so-called “alternative” method. The total tax shown due was paid to the Collector on or before November 18,1945.

10. From November 1,1940, to the fiscal year ended October 31, 1945, plaintiff included the income of Jacobs Furniture Company, his individually owned furniture store, in his individual income tax returns.

11. For the fiscal year ended October 31, 1946, plaintiff filed an individual income tax return with the Collector of Internal Revenue for the District of Tennessee on December 30.1946. The return showed total income of $10,059.26 and total tax due of $1,918.60. The latter amount was paid on or before December 30, 1946.

12. For the fiscal year ended October 31, 1947, plaintiff filed an individual income tax return with the Collector of Internal Revenue for the District of Tennessee on November 21.1947. The return showed total income of $8,809.90 and income tax due thereon of $1,350.74. The latter amount was paid to the Collector on or before November 21, 1947.

13. By a statutory notice of deficiency dated June 28,1949, the Commissioner of Internal Revenue asserted deficiencies in income tax and penalties against the plaintiff as follows:

In explanation of tbe deficiencies, the Commissioner of Internal Revenue stated:

It is held that you are liable for the negligence penalty of 5% of the deficiencies under the provisions of Section 293 (a), Internal Revenue Code.

With respect to the deficiencies proposed for each of the years involved, the Commissioner further stated:

It has been determined on a net worth basis, that you realized taxable income during this year in the amount of * * * in excess of the income reported on your return.

14. For the fiscal year 1944, the Commissioner found unreported income on the net worth basis of $86,496.48; for the fiscal year 1945, $136,608.05; for the fiscal year 1946, $59,240.96, and for the fiscal year 1947, $21,158.20. The penalties proposed for assessment were negligence penalties of 5 percent of the deficiencies under the provisions of Section 293 (a) of the Internal Revenue Code.

15. On June 28, 1949, there was transmitted to plaintiff a report of, examination of Internal Revenue Agent Cameron D. Huddlestone of the tax returns of the plaintiff for the years ended October 31, 1944, October 31, 1945, October 31, 1946, and October 31,1947, and said report set forth the same additional taxes and negligence penalties as appeared in the statutory notice of deficiency referred to in Finding 14. In the report the revenue agent stated that “the principal change in tax liability is due to the addition of income from unexplained sources.” He recommended assessment of the 5 percent negligence penalties under Section 293 (a) of the Internal Revenue Code, and for the fiscal year 1944 he recommended assessment of the principal tax deficiency under the provisions of Section 275 (c) of the Internal Revenue Code. He made the income computations for the fiscal years involved on the Net Worth and Expenditures basis and set up complete detailed charts showing plaintiff’s increasing bank balances, both commercial accounts and savings accounts, securities, real estate, and other assets. He computed plaintiff’s net worth on the basis of all visible assets, minus liabilities, at $123,298.76 on October 31,1943; $198,595.84 on October 31, 1944; $359,008.62 on October 31, 1945; $409,-188.24 on October 31, 1946, and $430,141.50 on October 31, 1947. The detailed net worth statements were as follows:

Saul B. Jacobs, Memphis, Term., net worth statement, period Oct SI, 1948, to Oct. 81, 1947
SCHEDULE 2

16. In computing plaintiff’s taxable net income for tbe fiscal year ended October 31,1944, prior to' deducting plaintiff’s personal exemption, credit for dependents, exempt income, and earned income credit, tbe revenue agent added to plaintiff’s increase in visible net worth during that fiscal year ($75,297.08) plaintiff’s estimated living expenses of $5,000, bis known life insurance premiums paid, his individual income taxes paid, and a small amount paid for tbe support of bis son, an aggregate amount of $24,354.73. Tbe agent thus determined plaintiff’s taxable net income for tbe fiscal year ended October 31,1944, as $99,651.81, upon which the fiscal year tax liability was computed at $69,121.62' at 1944 income tax rates. Since plaintiff had reported a tax liability of $6,632.68, tbe actual deficiency in income taxes due for tbe fiscal year was determined as $63,681.13, upon which a 5-percent penalty of $3,184.06 was also recommended.

17. In computing plaintiff’s taxable net income for tbe fiscal year ended October 31, 1945, prior to deducting plaintiff’s personal exemption, credit for dependents, exempt income, and tbe excess of net long-term capital gains over net short-term capital losses, tbe revenue agent added to the plaintiff’s increase in visible net worth during that fiscal year ($160,412.78) plaintiff’s estimated living expenses of $5,000, bis known life insurance premiums paid, his individual income taxes paid, and a small amount paid for the support of his son, an aggregate amount of $10,138.15. The agent then deducted limitations on capital gains and losses, and nontaxable interest, in an amount of $1,645.51, with a resultant taxable net income for the fiscal year 1945 of $168,905.42, upon which the fiscal year tax liability was determined on the alternative basis as $132,567. Since plaintiff had reported a tax liability of $14,900.64, the actual deficiency in income taxes due for the fiscal year was determined as $117,666.36, upon which a 5-percent penalty of $5,883.32 was also recommended.

18. In computing plaintiff’s taxable net income for the fiscal year ended October 31, 1946, prior to deducting plaintiff’s personal exemption, credit for dependents, exempt income, and the excess of net long-term capital gains over net short-term capital losses, the revenue agent added to the plaintiff’s increase in visible net worth, during that fiscal year ($50,179.62) plaintiff’s estimated living expenses of $5,000, his known life insurance premiums paid, his individual income taxes paid, and a small amount paid for the support of his son, an aggregate amount of $20,622.96. The agent then deducted limitations on capital gains and losses, and nontaxable interest, in an amount of $2,569.79, with a resultant taxable net income for the fiscal year 1946 of $68,232.79, upon which the fiscal year tax liability was determined on the alternative basis as $38,018.37. Since plaintiff had reported a tax liability of $1,918.60, the actual deficiency in income taxes due for the fiscal year was determined as $36,099.77, upon which a 5-percent penalty of $1,804.99 was also recommended.

19. In computing plaintiff’s taxable net income for the fiscal year ended October 31,1947, prior to deducting plaintiff’s personal exemption, credit for dependents, exempt income, and the excess of net long-term capital gains over net short-term capital losses, the revenue agent added to the plaintiff’s increase in visible net worth during that fiscal year ($20,953.26) his estimated living expenses of $5,000, known life insurance premiums paid, individual income taxes paid, and a small amount paid for the support of plaintiff’s son, an aggregate amount of $8,520.24. The agent then deducted limitations on capital gains and losses, and nontaxable interest, in an amount of $1,109.19, with a resultant taxable net income for the fiscal year 1947 of $28,364.31, upon which the fiscal year tax liability was determined as $11,006.58. Since plaintiff had reported a tax liability of $1,350.74, the actual deficiency in income taxes due for the fiscal year was determined as $9,655.84, upon which a 5-percent penalty of $482.79 was also recommended.

20. On June 28,1949, plaintiff was notified of a deficiency for the years 1944,1945, 1946, and 1947. The deficiency for the year 1944 was asserted on the basis of a deficiency in excess of 25 percent of the total tax due for that year in reliance on § 275 (c) of the Internal Bevenue Code of 1939. The deficiency for the year 1945 was claimed pursuant to a waiver, dated December 20,1948, extending the time for assessment until June 30, 1949. On October 13, 1949, there were assessed against plaintiff tlie following deficiencies in income taxes, penalties, and interest:

21. Plaintiff paid to the Collector of Internal Bevenue for the District of Tennessee the deficiencies in income taxes, penalties, and interest in the amounts and on the dates indicated as follows:

22. Plaintiff was born December 23, 1894, in Nashville, Tennessee. His parents moved to Grenada, Mississippi, in 1903. Plaintiff graduated from high school in Grenada in 1912 and thereafter attended a business school in Memphis for seven or eight months. Plaintiff also worked while attending school and he estimates he earned about $10 a week. In 1914 plaintiff returned to Grenada but returned the following year to Memphis when the whole family moved there. From the time of plaintiff’s graduation from business school until his induction into the Army, he was employed by a number of organizations, among them a lumber company paying from $90 to $100 per month and the St. Francis Levee Board at from $125 to $150 per month.

23. After his Army service plaintiff worked for J. H. Mednikow in Memphis at $150 per month. Having spent from four to six months on that job, he was employed briefly by the Sailors Clothing Co. Early in 1920 he began to work for the Leo Kahn Furniture Company as an office man at a salary of $300 per month. Leo Kahn died in 1934. The following year plaintiff helped found and began working for the Jacobs Furniture Company, a corporation. Forty-seven of the corporation’s fifty shares were issued to plaintiff’s father and the latter testified he had put up some money for this venture. The plaintiff maintained, however, that he owned the business in fact from the very beginning. The corporation was dissolved in 1940 at which time the business became a sole proprietorship in plaintiff’s name. Plaintiff continued to operate the business until he sold it on July 16, 1945, for from $85,000 to $90,000.

24. Prior to his Army service plaintiff dealt in the commodity market to some extent. He also was buying second mortgage bonds. Sometime after he started to work for the Leo Kahn Furniture Company plaintiff resumed his activities in the commodity market. At about that time he also traded in stocks, diamonds, and mortgages. Subsequent to his marriage in 1927 plaintiff pulled out of the stock market. He did not reenter it until 1943 or 1944. As noted in finding 7 there is no evidence in the record on plaintiff’s income until the year 1944.

25. During the tax years here in question plaintiff had several known sources of income. He received the income from his furniture business until its sale in July 1945. He also .engaged in dealings on the security and commodity markets, principally through the firms of W. E. Kichmond & Co. and James E. Bennett & Co. His holdings in notes yielded interest which for the most part was collected through the bank. Plaintiff also received returns from the securities and other assets which he held during this time.

26. In connection with the operation of his furniture business, plaintiff maintained a complete set of business records inbound volumes, consisting of ledgers, check journals, cash journals, sales and collection journals, all of which are in evidence.

27. The accounting firm of Seidman & Seidman prepared the Federal income tax returns of the plaintiff for all years here involved, namely, the fiscal years ended October 31,1944, October 31,1945, October 31,1946, and October 31,1947, and a representative of the accounting firm audited the books and records and made the closing entries that appear in all of the books and records of Jacobs Furniture Company.

28. The books and records of the furniture business were kept on the installment sales basis of accounting and the records reflecting the other business transactions of plaintiff were kept on the cash receipts and disbursements basis of accounting.

29. With respect to his transactions in stocks and commodities, plaintiff received from his brokers individual and specific purchase and sales advices in written form representing each transaction. Plaintiff also obtained at the end of each year from his brokers detailed statements in permanent journal form verifying each individual purchase and sale advice and reflecting all transactions for the year. These records were kept and preserved by plaintiff as his permanent records of his stock and commodity transactions and were turned over to his accountants at the time the Federal income tax returns were prepared.

30. With respect to the interest received by plaintiff, almost all of it was collected by the National Bank of Commerce in Memphis and the bank gave plaintiff a written collection advice reflecting the receipt of the interest. All of these collection advices were kept by plaintiff as his permanent records and were turned over by plaintiff to his accountants for use in preparing his Federal income tax returns.

31. Plaintiff did not transcribe into a book or books a record of the transaction evidenced by these written advices from his brokers and the banks.

32. After Revenue Agent Huddlestone’s report on his examination of plaintiff’s returns for the years ended October 31,1944, October 31,1945, October 31,1946, and October 31, 1947, was issued, the late F. E. Hagler, Esq., as attorney for plaintiff, employed Mr. Lucian Minor, a well-qualified certified public accountant, who did not know plaintiff, to make a comprehensive review of plaintiff’s financial transactions, both business and personal, with instructions to make as thorough an investigation as possible regardless of the time involved and in the event that there was any doubt as to the taxability of any item to resolve such doubt against the plaintiff, and in the manner producing the most tax.

33. In the course of his investigation, Mr. Minor made a detailed analysis of all security and commodity transactions of plaintiff from October 31, 1943, to October 31, 1947. Minor scheduled by months and analyzed every deposit and disbursement of plaintiff’s bank accounts. A complete re-audit of the books of Jacobs Furniture Company was made. A thorough analysis was made of the collection advices provided by the National Bank of Commerce in Memphis, and Mr. Minor charged plaintiff with the receipt of interest in instances where there was a real doubt as to the receipt of such interest by plaintiff, in accordance with the instructions given by F. E. Hagler, Esq.

34. Mr. Minor’s investigation showed that, on the basis of information and records made available to him, plaintiff’s tax returns for the years in question had, with minor exceptions, stated his income correctly.

35. An additional investigation of plaintiff’s financial affairs was made by James B. Allen, certified public accountant of Nashville, Tennessee, and a former Internal Revenue Agent from 1927 to 1934. This investigation corroborated that of Mr. Minor.

36. The accountants’ investigation could not trace all of plaintiff’s financial transactions. Plaintiff had not retained or had lost some of his cancelled checks and in such cases disbursements from his bank accounts could not always be clearly identified. Furthermore, the accountants were unable to specifically state the source of certain deposits in plaintiff’s bank accounts. Mr. Minor estimated that from $250,000 to $275,000 of plaintiff’s bank deposits during this period could not be traced to payments made to the plaintiff by the Richmond and Bennett firms. Mr. Allen likewise was unable to determine the source of $296,000 cash deposits which plaintiff made during this time. He stated that his investigation did not find that these deposits were from income other than what plaintiff reported on his returns. Plaintiff did not furnish his accountants with records which purported to give a complete account of all his cash transactions.

37. The evidence on plaintiff’s net worth is not precise. In 1918, when plaintiff entered the Army, he turned over to his mother for safekeeping between $75,000 and $90,000 in cash. In addition, he kept a bank balance of $10,000. Plaintiff testified his net worth in 1927 was a little more than $300,000. He further testified that, as of October 31, 1943, he had cash (currency, cashier’s checks, New York exchange, St. Louis exchange), or “the equivalent of cash, stocks,” worth over $400,000. He did not include the value of his business in this figure.

38. There are in evidence two statements of net worth as of October 31, 1943, and October 31, 1944, which plaintiff furnished his bank. The 1943 statement lists, under the heading of “Bonds-notes etc.,” assets worth $50,000. The 1944 statement lists, under the heading of “Bonds-etc.,” assets in the amount of $87,000. The statements were submitted on stationery of the Jacobs Furniture Company and plaintiff claims they were intended to cover merely the worth of his business and not of himself personally. Plaintiff testified that he included sufficient personal assets in these statements to insure what he said was their purpose, obtaining of a line of credit. He said he wished to show that the business was solvent but did not make any effort to list everything he owned.

39. Plaintiff testified that he had made lists of his assets but that he no longer had any of these lists. He also testified that his $300,000 net worth in 1927 was partly in cash and partly in securities. Plaintiff at about that time showed a portfolio of securities to his friend Mr. Weiss who estimated, on deposition, they were worth from $150,000 to $200,000. Plaintiff himself estimated the contents of this portfolio as having had a value of from $100,000 to $150,000 but added it represented only a part of his holdings at that time. He could not recall what part of the securities in that portfolio were stock, what type of stock, or when he sold the stock.

40. Plaintiff was unable to give a breakdown between cash and stock in the $400,000 which he said he held in those two assets in 1943. He kept these assets in his stoi*e, at home, on his person, and in a vault. He has always had a lockbox since being grown up. He was unable to state how much money he had in his lockbox on October 31, 1943, nor how much money he had in his lockbox or lockboxes on October 31, 1944. He estimated that he customarily kept $100,000 either in his money belt or at home.

41. Certain of plaintiff’s business transactions indicate that he had a considerable amount of cash or readily available credit. In 1934, he made an offer to pay $75,000 cash for an interest in the Leo Kahn Furniture Company. In 1942, he made an offer to purchase a certain piece of real estate in Memphis for $175,000 cash. During the years 1939-1946 plaintiff made loans ranging from $5,000 to $50,000 to Mr. Edgar Haas, a personal friend. These loans were made in cash, cashier’s checks, and New York exchange, which plaintiff had on his person or on his premises.

42. The records of his brokers for the fiscal years here in question show that he transacted a very substantial part of his business there in cash or by redeposit of checks he received from the broker. During these same years plaintiff deposited $296,000 in cash to his bank accounts. Becords submitted by two Memphis banks, approximately covering the period 1940-1947, show that plaintiff made frequent purchases there of cashier’s checks and New York exchange, payable to Saul B. Jacobs, in amounts that ranged from $63.50 to $35,000. Where the records list the date of payment, they indicate that payment in every case occurred within a year after the date of issuance.

43. On the other hand, one of plaintiff’s bankers testified that plaintiff has borrowed money over the years and heavily around 1946. He borrowed as much as $50,000 in 1943 and 1944. Sometimes he would borrow on open account and when he borrowed as much as $25,000 he would put up collateral.

44. When plaintiff was divorced in 1940, his father and mother paid off an $1,800 lien on a parcel of real property held by plaintiff and his former wife. His parents also gave $6,000 in addition for the divorce settlement and signed out some of their property for a $5,000 bond to assure support of plaintiff’s child. From the deposition of plaintiff’s father it appears that plaintiff had told his father that he (the plaintiff) had been advised by his lawyers to borrow the money for the settlement. Plaintiff denied that his parents gave the money for the divorce settlement. He testified that he had had to get the impression over that he did not have anything in order to get his divorce and that he himself actually gave the money for the settlement.

45. Plaintiff’s wealth is attributable to various sources. In view of some evidence tending to show plaintiff’s frugal habits, a part undoubtedly represents savings from his income over the years. The amount of his income prior to 1948 has not been shown.

46. Another part represents gifts from his parents. His parents were immigrants who worked hard, lived frugally, and saved their money. They thus accumulated considerable wealth. They owned a business and valuable realty in Memphis. Plaintiff testified his parents kept substantial amounts of money in hiding places in their home. They rented several lockboxes, one at least as early as 1927. Plaintiff had authority to enter the lockbox his mother rented at the National Bank of Commerce in 1945. Some of plaintiff’s accounts with his brokers were in his parents’ name, as were some of his bonds.

47. Plaintiff’s parents made him gifts of money at various times throughout his life. During plaintiff’s childhood his parents would lay aside some money for plaintiff without, however, relinquishing posssession. Other money was given to him directly at that time. Plaintiff received at birth $1,000 from his mother and $2,000 from his father; at the age of thirteen he received $4,000 from each parent; at the time of his graduation from high school he received $5,000 from each parent. He received other substantial amounts in his early years. By 1918, plaintiff estimated that of the money he left with his mother for safekeeping, $25,000 represented gifts from his parents. By 1927, he estimated he had been given over $200,000. Large gifts stopped between 1927 and 1938. During the years 1944 through 1947 there were no large gifts to plaintiff from his parents. Plaintiff’s father estimated that he and his wife had given plaintiff from $120,000 to $140,000 by 1944. He estimated that each parent gave plaintiff $10,000 during the period 1932-1945.

48. There was no evidence on whether or not plaintiff’s father or mother ever filed a gift tax return, although plaintiff’s father did say he did not know whether such a return was filed. Neither plaintiff’s father nor his mother kept an account or record of the gifts they made to him. There is no evidence whether or not plaintiff kept any record of these gifts.

CONCLUSION OE LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes that as a matter of law the plaintiff is entitled to recover, and it is therefore adjudged and ordered that he recover of and from the United States eighty-six thousand ninety-seven dollars and eighty-seven cents ($86,097.87) with interest as provided by law.  