Opinion ID: 285503
Heading Depth: 1
Heading Rank: 2

Heading: Deductions for Fertilizer Expense

Text: 14 In operating his fertilizer business, Estes kept his books on the accrual basis and recorded as an expense and liability the cost of fertilizer as billed to him by the Commercial Solvents Corporation. His books indicate that fertilizer supplied by Commercial Solvents cost between $80 and $90 per ton and in his tax returns for 1959-61 he claimed deductions based on a cost of between $80 and $90 per ton. However, he filed a financial statement with a federal agency in which he omitted the fertilizer expense and liability in computing his net worth. On the basis of his failure to state the true extent of his liabilities, the Government instituted a criminal case against him for filing a false financial statement with a federal agency. At his trial in 1965, Estes took the stand and testified that he had not filed a false financial statement but rather that his books were false. He said his liability for fertilizer was much less than the recorded cost of $80 to $90 per ton would indicate because he had an under-the-table deal with the president of Commercial Solvents, who was dead by the time of the trial, to pay only $40 per ton. After he was acquitted of the criminal charge, the Government turned his testimony against the Trustee in bankruptcy and creditors by asserting that the deductions of $80 to $90 per ton should be disallowed. The referee rejected this contention, but the district judge set aside the referee's finding. 15 We are faced with the purely factual question of whether the deductions of $80 to $90 per ton should be disallowed. 1 The principal evidence supporting the deductions is that the books kept by both Estes and Commercial Solvents reflected a price of $80 to $90 per ton. Moreover, three of the company's officers filed affidavits to the effect that the price shown on the books was the actual price and that there was no oral agreement or under-the-table deal for a lower price. On the other hand, the evidence supporting the Government's position is that Estes testified at his criminal trial that he had a deal with the former president of Commercial Solvents to pay only $40. Also, there was hearsay testimony at the bankruptcy proceeding to the effect that two other people said they overheard Estes negotiating with the president of Commercial Solvents. One factor that casts doubt on Estes' testimony at the criminal trial is that it was completely self-serving: To rebut the prosecution's charge that he had filed a false financial statement in which he understated his liability for fertilizer expense, he testified that the liability shown on the financial statement was not understated but rather that the fertilizer price shown on his books was overstated. A second factor detracting from the Government's case is that Commercial Solvents is a well- established company whose books are audited by Ernst and Ernst and whose stock is listed on the New York Exchange. The idea that the president made an under-the-table deal with Billy Sol Estes which would cost his company millions of dollars but was never detected by other officers or the auditors is not altogether credible. 16 We think the best that can be said for the Government's position is that there is some evidence to support it. Likewise, there is some evidence to support the Trustee. With the factual dispute in this posture on appeal, the standard of review becomes determinative. Under Bazemore v. Stehling, supra, we look to the referee's finding in favor of the Trustee to determine whether it was clearly erroneous. We cannot say that it was, since our review of the entire record does not leave us 'with the definite and firm conviction that a mistake has been committed.' United States v. United States Gypsum Co., 1948, 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746. Since his finding was not clearly erroneous, the district judge was bound to accept it and erred when he set it aside. 2 17 The judgment of the district court is affirmed as to the unreported income and reversed as to the deductions for fertilizer expense.