Court Opinion

ID: 6853534
Source: CourtListenerOpinion
Date Created: 2022-07-23 20:39:18.906196+00
Date Added: 2024-06-11T16:05:06.995108
License: Public Domain

DAYIS, Circuit Judge
(dissenting).
I cannot concur in the decision of the court upon the first question considered in this case which relates to the adjustment of inventories taken at the end of the year on the basis of cost or market price, whichever was lower. The testimony was unequivocal that the detailed inventory sheets prepared in accordance with an approved system contained fair adjustments-and correct figures as to the cost or market price, whichever was lower, of the merchandise at the time the inventories were made and that these figures were transferred to summary sheets. These sheets, detailed inventory and summary, showing the reasons for the adjustments in question here, which resulted in a reduction of taxes, were preserved by the petitioner from 1916 until after February, 1921, when the petitioner received notice from the Commissioner of Internal Revenue advising it of additional assessments, as a result of an examination of the petitioner’s records by Revenue Agent Gaumer, which lasted five months. These assessments were satisfactorily adjusted and paid. The petitioner then felt that there was no further need for the detailed inventory working sheets for the years in question, and so in accordance with its general practice, they were destroyed. But the summary sheets were preserved.
In 1923 another examination of the petitioner’s books and records was made in connection with taxes for the years in question. While, as above stated, the detailed inventory sheets had been -destroyed, the “summary or work sheets” had been retained, and from these summary sheets the petitioner says that the adjustments in controversy and the reasons therefor can be ascertained and determined. But these sheets were turned over to the revenue agent who made the second examination on which the tax in controversy is based.
Now the Commissioner' says that because the petitioner cannot, in the absence of the summary sheets delivered to his agent, give the reasons for “particular” adjustments, the reductions resulting from these adjustments are disallowed.
The petitioner stated in open court at the hearing before the Board that it* held a receipt for these summary sheets. This was not denied nor even questioned. But the Board paid no attention to this fact, apparently for the reason that “the receipt was not offered in evidence, no demand was made and no subpoena was issued to have the government produce any particular sheets.” Counsel for the petitioner tried to get the sheets before the hearing as he stated to the Board as follows:
“Mr. Haynes: In view of the statement of counsel, I would like the record to show that quite a few days before this trial came on I made an effort to secure from the Government the summary sheets which had been furnished the revenue agent. I not only made an effort through Mr. Baekstrom’s office, which contained a large number of files, but I also made an effort through the income tax unit to obtain whatever records they might have, and they were not able to locate any of the sheets; but, as we said before, we have a signed statement from the revenue agent to whom the reports were furnished.
“Mr. Backstrom: Your Honor, I do not like to burden the record too much, but I think I would like to make this motion, that that portion of Petitioner’s Exhibit No. 14 which states ‘List of deductions to reflect inventory qn the basis of cost or market, whichever is lower,’ be stricken.
“The Member: Stricken from what?
“Mr. Backstrom: From this exhibit, for the reason that the witness has identified the exhibit, and through his testimony it has been introduced, but he is not able to say whether those figures represent-”
There the quotation suddenly stopped. Exhibit No. 14 follows:
“Petitioner’s Exhibit No. 14.
“Philadelphia Store.
“List of Deductions to reflect inventory on Basis of Cost or Market, Whichever is Lower.
January 31, 1915.............$360,407.36
1916 ............. 366,005.00
1917 ..............471,710.60
1918 ............. 479,379.62
1919 ............. 770,583.95
1920 ............. 823,666.35.”
Without the use of the summary sheets the petitioner could not tell whether those deductions represented cost or market price, but said with the aid of them it could be done.
The assessment of:1 the Commissioner is presumptively correct. The Board expressly *405approved the petitioner’s system of determining the adjustments which led to the deductions claimed. This was the system which it had always used. If, however, there is no evidence to overcome the prima facie correctness of the Commissioner’s assessment, it must stand. But in this case, the testimony is unequivocal that the adjustments, made under an approved system, were correct and that this could be shown from the summary sheets.
Under these circumstances, it seems to me that the Commissioner cannot sit still without denying the possession of the summary sheets, and say to the petitioner, “you have not proved your case,” while he holds in his possession the only material taken from the petitioner which would enable it to make such proof. The burden then shifted to the Commissioner. It became his duty to deny that he had the summary sheets or that from these the correctness of the deductions could be shown.
Of course, as the court says, the burden of establishing that a taxpayer is entitled to a deduction is upon him, but the ease of Burnet v. Houston, 283 U. S. 223, 51 S. Ct. 413, 415, 75 L. Ed. 991, which the court cites to show that the petitioner failed to bear the burden in this case, is inapplicable. In that ease we said it was a “sheer impossibility” to establish the fact upon which the claim to deduction depended and so excused the taxpayer from proving that fact, but the Supreme Court held that assuming the fact could not be proved, that simply left the taxpayer with an unenforceable claim, a misfortune to be borne by him. But it further said: “We think the record is far from demonstrating the impossibility of supplying evidence from which the required fact might be found.” But in the case at bar, the petitioner says that the adjustments are proper, the deductions allowable, and that the evidence turned over to the Commissioner will enable it to establish the correctness of the deductions claimed.
The Board was in error when it said that, “It does not appear that there are complete records with which ho (the Commissioner) could make an investigation independently of the proof offered or that he has ever had a reasonable opportunity to make such an investigation,” for ho had his agent at the petitioner’s place of business for five months examining the records and he then had before him the “complete records.”
But assuming that the summary sheets will not enable the petitioner to give the reasons for the adjustments resulting in the reduction of taxes, it must be borne in mind that the testimony shows that the final figures contained on the detailed inventory sheets were transferred to the summary sheets and that these inventory sheets containing the reasons for the adjustments. and reductions were in the possession of the Commissioner for five months when he audited the returns of the petitioner for the years in question. He must have examined not only the final figures, now contained in the summary sheets, but also the detailed inventory sheets which gave the reasons for the adjustments. He presumptively placed his construction upon them and determined a large additional tax which was adjusted and paid. At that time, both the petitioner and the Commissioner acted in good faith and honestly interpreted the information contained in those sheets. There is not a hint anywhere in the record that those adjustments were not honestly and fairly made by the method which has been approved by the Commissioner. The petitioner believed that after this determination of the Commissioner the detailed inventory sheets would not be required. The petitioner evidently could not keep these sheets forever and so in accordance with its practice it destroyed them. It seems to me that the Commissioner cannot now say, “You must again bear the burden of satisfying me of the correctness of these adjustments and furnish to me again the same detailed proof which you once furnished me and which I now know is unavailable.”
Under these facts it would seem that in the interest of justice and the proper administration of law, we ought to remand the case to the Board so that a further hearing may be had and the petitioner given an opportunity to “demand” with subpoena the production of the summary sheets and produce what testimony it can.