Opinion ID: 243983
Heading Depth: 2
Heading Rank: 4

Heading: Taxpayer's Claim as to Source of Increase

Text: 51 The taxpayer's salary as a motion picture operator before coming to California from Oklahoma, for a period of three or four years, never exceeded $45 per week. So small an income does not account for an accumulation such as claimed by him, to use his own words, of $2,000 or $3,000, maybe $4,000, which he claims to have brought to California in 1924. His chief contention is that the Tax Court should have taken at its face value his assertion that he made from $12,000 to $16,000 in purchasing at depressed value improvement bonds of the City of Hawthorne, later selling them at higher prices or face value. 52 Briefly, the facts relating to the improvement bonds are these: Early in 1930 the City of Hawthorne was in difficulty because a substantial part of its real estate had been removed from its tax rolls because of the default of special assessment bonds issued under state law. 16 The City arranged for a refunding of the bonds. This was achieved through the firm of Crowell, Weedon & Co., an investment house in Los Angeles. Mr. Tad Traverse was connected with the firm. He testified that, at various times, he held meetings with the heads and members of the various departments of the City, such as the Police Department, Fire Department, Water Department, Street Department, for the purpose of going over in detail the problems of the City and explaining the methods developed to refund delinquent special assessment bonds and restore the property to the tax rolls. Crowell, Weedon & Co. and Traverse bought some of the bonds which were selling for as low as ten, twelve or fourteen cents on the dollar. The City, under the statute, was obligated to pay them off at par at maturity. 17 There were several (probably thirty) series of bonds due at various times. All were bearer bonds and freely transferable. It was the testimony of the taxpayer that between 1932 and 1933, he bought some of these bonds and from their sale he made a profit of $12,000 to $16,000 and had that amount of cash on hand at the beginning of the net worth period. 53 The testimony as to the whole transaction is vague. To his own counsel's question as to the profit he made on the bonds, his answer was: 54 A. $12,000, $13,000, $15,000 maybe $16,000. 55 He kept it at home because, as he put it, 56 my experience as a controversial person in the City of Hawthorne is that you were always subject to a lawsuit because of false arrest or something you had done wrong, so I kept it at home. 57 The purchases were supposed to have been made between 1934 and 1939. There is no showing how they were purchased, — with cash or checks. Nor is there a showing what series they were, when or where they were sold and to whom or at what specific profit. Nor is there any showing that any of them were presented to the City of Hawthorne for redemption at par. The money was kept at home, at times under a rug and at other times in a money belt. When the taxpayer went on vacations he left his hoarded money at home. He took it with him when he moved from one house to another but did not count it. It is to this money, claimed to have been reinvested profitably, that the taxpayer sought to trace the increase in his net worth. While the Tax Court gave credence to some of this testimony and to that of the corroborative witness, Tad Traverse, it may be stated with frankness that, from the cold record one gathers the definite impression that Mr. Traverse added little convincing strength to the taxpayer's unusual tale. After testifying, as already noted, as to the discussions with various officials of the City of Hawthorne about the City's financial situation, he stated that beginning in 1933, he discussed with the taxpayer the purchase of bonds, and that he bought some for him. He expressed himself in this rather nebulous fashion about the amount: 58 Well, it wasn't of any great material amount such as $200,000.00 or so. If it were it would have registered. The best way I could answer that question is to say it would be a limited amount, maybe some place between $15,000 to $35,000. When I am speaking of $25,000 or $35,000, I am speaking of the par value of these bonds which are seven per cent coupon tax exempt bonds, and while that was due and payable by the City, the market value of these bonds at that time, they were selling at ten cents, twelve cents and fourteen cents on the dollar, so I am referring to the amount as $25,000.00 or $15,000.00 or $30,000.00 or $35,000.00, and I am quoting from my memory. 59 Q. By Mr. Bouchard: I understand. A. But the amount I am referring to is the principal amount, which is the obligation to be paid, not the market value. 60 In order to realize the profit claimed by the taxpayer, either a larger number would have had to be purchased or he would have had to resell them at high profit or redeem them at par. He testified that some of the bonds were paid off at par and accrued interest. How many he did not tell. And it was stipulated that 61 the names of M. R. Baumgardner and Pearl E. Baumgardner do not appear on the City of Hawthorne bond records for the years 1925 to 1951, inclusive. 62 Although the witness Traverse was connected with a known investment house which acted as fiscal agent for the City of Hawthorne, he produced no record of theirs or his to show the amount of the sales, the commissions charged or any data from which a definite inference could be drawn as to the precise extent of the transactions alleged to have been carried on by him for the taxpayer. 63 The taxpayer's wife shed little light on the subject. She is California born. She and the taxpayer were married on August 20, 1926 and have two children, a son now 25, a daughter 20. She did not know how much money her husband had when they were married, — only knew that he had some. She told the Government agent that she never saw the money. The taxpayer's testimony was that he kept bills of large denomination, — $20, $50 and $100 bills. To the agent the wife stated: 64 that she did not think her husband was telling the truth, because she never saw any large amounts of cash, certainly never as much as $18,000.00, maybe $1,000.00, but not such a large amount as $18,000.00. (Emphasis added.) 65 At the trial, she denied making this statement. She claimed she saw money under the rug, behind pictures and in tobacco cans in 1932. She could not identify any specific amount, although she claimed that she saw the money when she cleaned under the rug. The following interesting colloquy occurred: 66 Q. Do you know whether or not in any period in the thirties or the forties, if Mr. Baumgardner kept any amounts of money at home? A. Yes. 67 Q. Do you know how much he kept there? A. No. 68 Q. Do you know whether it was much or little? A. Well, I think sometimes he had quite a little bit. 69 Q. Do you know where he kept it? A. Well, yes. 70 Q. Well, where? A. Well, behind pictures and under the rug. 71 Q. Now, do you remember any occasion of any substantial amount of money being taken from under this rug? A. Well, one occasion was when some friends of ours whom we ran around and went to school with, she was expecting her baby and I believe it happened on a Sunday and Johnny came to our house on the Sunday morning and asked Jack if he could loan him any money for the hospital and he would give it back to him as soon as he could get to the bank, and I believe at that time, that Jack took it out from under the rug because it has always been a joke with these people and ourselves that, `If you want any money you can always get it under the rug at Jack's house'. (Emphasis added.) 72 Maternity cases for hospitals are routine. And a Sunday loan to a friend for a hospital advance deposit to be repaid when the banks opened, presumably the next day, could not have been very large. No other witness was produced who saw the taxpayer take any sum of money from his hoarding places or belt. 73 It is inconceivable that a public official should have concealed over the years large amounts of money merely because he feared suits might be instituted against him. After all, he had the right to believe that the City which employed him would assume responsibility for his official acts, or, at least, defend him in any action brought against him arising from his police activities. His marital life seemed to have been a happy one, and he was not concealing any money from his wife, as happened in the criminal case to which counsel called attention at the argument. 18 74 In sum, the testimony in this record as to the hoarded money is so replete with situations that go counter to common experience and the usual tests of verity that the Tax Court would have been justified in rejecting it in its entirety, absent documentary corroborative proof. As it is, they allowed the taxpayer as cash on hand at the beginning of the tax period the sum of $5,000, which, — to use the language of one of the cases cited, was generous indeed. 19 75 It seems to be assumed that once the taxpayer indicated a non-taxable source of increase in net worth, it became the duty of the Government to accept it at its face value or negate it. The cases already referred to indicate clearly that the tax authorities are not required to accept the taxpayer's explanation of his net worth increase. 20 And even in criminal cases, the rule is that 76 where relevant leads are not forthcoming, the Government is not required to negate every possible source of nontaxable income, a matter peculiarly within the knowledge of the defendant. 21 77 The net worth method is not a system of accounting. It is merely indirect evidence of income. When the declared income and non-taxable receipts and increases in value do not account for the taxpayer's net worth increase over a period of years, the method is resorted to in order to show that the increase is due to undeclared taxable income. In the case before us, the Government agent followed all the leads that were given to him by the taxpayer. Some of the omissions to declare interest and failures to account for gains have already been alluded to. The Tax Court was willing to accept in part the taxpayer's claim of alleged profits from buying and selling improvement bonds. It was not required to accept it in full.