Opinion ID: 1484845
Heading Depth: 1
Heading Rank: 1

Heading: Numbers 3816 and 3817 Max Cohen

Text: For the years 1936 to 1943, inclusive, the Commissioner determined deficiencies and penalties against Max Cohen in the aggregate sum of $148,080.11. The deficiencies were determined by resort to what the internal revenue agent chose to call the excess cash expenditure method, under which the agent assumed that Cohen was broke on January 1, 1936, and that all expenditures as reflected by the available books and records in excess of the amount the taxpayer is shown to have had available to spend from reported sources, constituted additional and unreported taxable income. In other words, the deficiencies were based upon the premise that the taxpayer was shown to have spent more money in each of the taxable years than his returns showed was available to him as income. Thus, for each succeeding year the Commissioner started with the cash carry-over, if any on hand, and added to that the ascertainable cash receipts. He then aggregated all cash expenditures, from which he deducted the sum of the cash on hand, and ascertained cash receipts to arrive at the additional unreported income for each of the years in question. While conceding that the methods employed by the Commissioner are justified in cases where the income is from illegal sources and no records are kept, on which taxable income can be ascertained with accuracy, see Kenney v. Commissioner, 5 Cir., 111 F.2d 374, and cases cited, Cohen earnestly argues that adequate records were maintained by him for the taxable years in question, from which competent accountants computed his taxable income and prepared proper returns, on which he paid the tax; that since the Commissioner concedes that his returns for the years in question are in agreement with his available records, resort to the so-called excess cash expenditure method does not provide a proper basis for determination of deficiencies, and is unwarranted. The Tax Court found, and the record shows, that in the year 1936, Cohen was engaged in the oil business, and that upon the advice of an attorney, an accountant set up double entry ledgers to record all of his oil transactions, and that these books were kept by the accountant, and his income and disbursements accurately recorded and reflected in his income tax returns. The record also shows that before and after 1936, Cohen received large sums of money from the operation of establishments in Sedgwick County, where liquor was sold, gambling conducted, and bets on horse races were booked. For these activities, he maintained no books or records, except daily work sheets, reflecting the total amount of the take, with directions to his accountant concerning its apportionment to the joint adventurers, whose returns the same accountant also prepared. The income from these activities was reported on the tax returns as derived from outside activities. No other books or records or explanation has ever been made available. As the Tax Court observed in respect to the deficiencies assessed for the years 1936 to 1939, inclusive, there was credible evidence that during these years, Cohen received large sums of money from night club operators and from various illegal enterprises, in addition to the sums reported from outside activities in his return for those years, and that since Cohen elected not to take the witness stand to refute or explain the testimony and evidence on which the Commissioner's determinations were based, the court must indulge in their presumptive correctness. Cohen further contends that the Commissioner erroneously assumed that he was broke on January 1, 1936, as a basis for determining his taxable income for that year and succeeding years. He says in that connection that the Commissioner's determination and the Tax Court's approval flies in the face of uncontradicted testimony that he had substantial funds in the Fall of 1936. There was testimony to the effect that in November 1936, he had in his possession $37,500.00, and other testimony tending to show that he possessed large sums of money in cash at that time. The taxpayer's returns for the years preceding 1936 did not reflect any income. In fact, he filed no returns for the years 1931 through 1935. The taxpayer did not choose to enlighten the court in that regard; the court was not convinced by the testimony, and we cannot say that its conclusion in that respect is clearly erroneous. For the taxable year 1940, the Commissioner determined no excess cash expenditures, but Cohen complains of the disallowance of an item of $2,552.27, claimed as net loss carry-over. In its treatment of this item, the Tax Court stated that at the outset of the hearing, counsel for the petitioner abandoned any contention of error in the determinations for the taxable year 1940, except fraud, and observed that no proof was introduced specifically referring to that item; and that since the record was barren of proof in respect to the deficiency, it was presumptively correct and must therefore stand. The court accordingly approved the deficiency, and disapproved the fraud penalty for that year. We accept the Tax Court's version of the matter, and agree with its conclusions. In respect to the deficiency for the year 1941, Cohen complains of the failure of the court to find that he borrowed the sum of $35,000.00 in cash from his mother-in-law, Mrs. Myrtle Hale, on or about September 1, 1941, and its consequent treatment of that sum as taxable income to him for that year. In rejecting as false, testimony tending to show that the loan was made to him for the purpose of purchasing oil properties, the Tax Court took into consideration the fact that although Cohen had a complete set of books and records for his oil business, there was no record on these books of the loan, or any other evidence of the debt; that it was not shown to have come into his bank account, and no mention of it had been made during the investigation of his income tax liability until the hearing before the Tax Court. The court also treated as significant the fact that the $35,000.00 claimed loan was almost exactly the amount of the excess cash expenditures of $36,916.26, determined for the year 1941, and observed that Cohen, who should know most about the matter remained silent. Again we cannot say that the Tax Court, as the trier of the facts and judge of the credibility of the witnesses, arrived at an unwarranted conclusion. During the taxable years 1941, 1942 and 1943, Cohen and Carnahan financed one Ray Watson in the operation of a slot machine route, under an agreement that Watson would receive 25% of the profits accruing to the owners of the machines, and Cohen and Carnahan 75% until the capital investment was returned, after which the profits would be divided 50% to Watson and 50% jointly to Cohen and Carnahan. In his income tax returns for the years 1941, 1942 and 1943, Cohen reported 25% of the proceeds. The Commissioner increased it to 37½%, on the basis that Cohen and Carnahan received for the taxable years in question 75% of the income. It is admitted that Cohen and Carnahan received 75% of the income during all of these years, but Cohen contends that he is indebted to Watson for the difference and intends to pay him; that since Watson's testimony supports this contention and reported the 50% in his returns for these years, the Commissioner could not repudiate the arrangement and arbitrarily increase his income by that amount. The Tax Court sustained Cohen's contention for the year 1941, on the theory that he was entitled to a return of his investment, and sustained the Commissioner for the years 1942 and 1943, on the grounds that Cohen admittedly retained the money. It refused to give credence to the testimony that it was a debt to be repaid. We do not think the court's appraisal of the facts was clearly erroneous. Cohen also attacks the determination of the Commissioner, approved by the Tax Court, of deficiencies based upon excess cash expenditures for the years 1941, 1942 and 1943, and particularly complains that the court failed to give consideration to an analysis of his income tax liability for these years prepared by an accounting firm from the same records and data used by the revenue agent in arriving at the excess cash expenditures. A summary of this analysis, purporting to show that cash available to Cohen during the years was understated by the revenue agent in his report, was offered and received in evidence, and the accountant who prepared it was also interrogated in court concerning the adjustments forming the basis for the discrepancy. The record shows that the Tax Court gave consideration to this summary and the testimony of the accountant. There is nothing in the record to suggest that the Tax Court did not give full consideration to the proffered testimony. It chose to accept the Commissioner's determinations, and its decision, resting as it does upon competent proof, is controlling here. Cohen complains that the Tax Court erroneously refused to allow the accountant who prepared the analysis of his income tax for the years 1941, 1942 and 1943, to substantiate his summary in detail, and also urges as reversible error the refusal of the Tax Court to grant a rehearing after findings and opinion for the same purpose. The record does not indicate that the Tax Court limited in any respect evidence offered on behalf of the petitioner. Instead, it afforded the parties every opportunity to offer any proof bearing upon the issue. The question whether the court should grant a rehearing for the purpose of hearing substantiating testimony was entirely within its discretion in these circumstances. In sum, the evidence shows, without dispute, that Cohen and Carnahan derived large sums of money from establishments located in Sedgwick County, Kansas, openly engaged in selling liquor, conducting gambling games and slot machines, and accepting bets on horse racing. In his income tax return for 1941, Cohen reported from outside activities the sum of $58,002.56; for 1942 he reported $158,630.46, and for 1943 he reported $95,179.78, all directly attributable to the illicit enterprises conducted by petitioners Comeaux, Clemons, Polk and others. No books or records were available to substantiate these returns, except the daily work sheets handed to the accountant showing cash received, with directions for apportionment among the participants according to their syndicated shares. There was also evidence that during these years in question, Cohen received other substantial sums of money from other illicit sources, which he did not report in his income tax returns. From this and other evidence of excess cash expenditures, the Commissioner determined the deficiencies for each of the years and assessed the penalties. After a full hearing, the Tax Court has, with modifications and adjustments, approved its assessments. Cohen elected to remain silent in the proceedings, and has pleaded nolo contendere to criminal charges for tax evasion for some of the years in question. While his failure to testify in his own behalf, and his plea of nolo contendere are no evidence tending to support the Commissioner's determinations and the Tax Court's approval thereof, they do tend to account for approximations where details might otherwise be filled in. It is sufficient to say that the Tax Court's decision rests upon the best available evidence, and we think it is sufficient. Stinnett v. United States, 4 Cir., 173 F.2d 129; Harris v. Commissioner, 4 Cir., 174 F.2d 70; Greenfield v. Commissioner, 4 Cir., 165 F.2d 318. See also Helvering v. Safe Deposit & Trust Co., 316 U.S. 56, 62 S.Ct. 925, 86 L.Ed. 1266, 139 A.L.R. 1513; Cohan v. Commissioner, 2 Cir., 39 F.2d 540, 543.