Court Opinion

ID: 9444811
Source: CourtListenerOpinion
Date Created: 2023-08-03 21:12:43.148611+00
Date Added: 2024-06-11T17:30:00.801080
License: Public Domain

CAMERON, Circuit Judge
(dissenting).
I.
I am unable to agree with the majority opinion because a review of the entire evidence in this case leaves me with the definite and firm conviction that a mistake has been committed. To begin with, the Tax Court made a mistake of law by admitting, over due objection, proof that the decedent had been adjudged a bankrupt ten years before the beginning point of the net worth computation. Although the Commissioner made no adequate explanation of decedent’s finances-during that ten year hiatus, the Tax Court evidently laid stress on the fact of the bankruptcy. It was entirely too remote for consideration.
The decedent kept a set of books and the record contains no convincing proof of their inaccuracy. They were of the-single-entry type, which the proof showed to be in common use in small businesses such as the decedent had operated. These books were entitled to consider*185ation despite the fact that some features were in code, — also a common practice in that territory. Neither the Commissioner nor the Tax Court placed any reliance at all upon them.
The attempted proof of the initial net worth valuation of decedent’s property was incomplete, and the government witness who made it so admitted. He was removed from that territory before he •completed it, and assumed that his successor would complete it and furnish vital missing data. The Government did ■not introduce the successor as a witness nor bring in his report.
The accountant for petitioner also constructed net worth statements for the period involved, commencing at the latest •date and checking backward. His figures varied quite materially from those •developed by the Commissioner and were much more convincing. He demonstrated that the results achieved by the partial investigation of the government agent led to a virtual mathematical impossibility. Since the Tax Court’s decision was based largely upon the work of this accountant, with respect to which we are in about as good a position to judge as was the Tax Court, it is our duty to weigh and analyze the figures adduced and, so doing, it is apparent to me that the finding of the Tax Court is clearly erroneous.
II.
As stated by the majority, most of the Taxes assessed were barred by limitation unless rescued by a showing of fraud. The showing by the Commissioner was, in my view, entirely inadequate. The entire structure of proof was built upon the assumption that the net worth valuation placed by the government agent as of February 28, 1941 was correct. There was little competent proof tending to establish the correctness of this initial computation. It is manifest that the Tax Court presumed it to be correct on the ground that petitioner had not been able to meet the burden of disproving it; and, on that presumption alone and using those figures as a foundation, the Tax Court found that the decedent had grossly understated his taxes for the years in question. Based wholly upon that finding, the Tax Court found fraud. It is not permissible thus to establish a case “by piling one presumption or inference upon another presumption or inference”, Standard Accident Ins. Co. v. Nicholas, 5 Cir., 1944, 146 F.2d 376, 378.
Even against the living, fraud cannot be inferred from the mere understatement of income as reflected by this record, but such proof must be buttressed by “direct evidence of ‘conduct, the likely effect of which would be to mislead or to conceal’ ”.1
This case reveals a cruelty which ought to be avoided if the ends of justice will permit. Decedent was a leading and respected citizen of a small town in Georgia for all of his life. Subsequent to his death the respondent began an investigation resulting in the assessment of these deficiencies and fraud penalties. Considerably more than half of the estate he left his widow is condemned to the tax gatherer by this decision. More than that, it filches decedent of his good name and “Takes that which not enriches him and makes me poor indeed”. The words of Mr. Justice Storey in Prevost v. Gratz, 6 Wheat. 481, 498, 5 L.Ed. 311, rise to condemn what is here done:
“Fraud, or breach of trust, ought not lightly to be imputed to the living; for the legal presumption is the other way; and as to the dead, who are not here to answer for themselves, it would be the height of injustice and cruelty to disturb *186their asíies, and. violate the sanctity of the grave,-unless the evidence of fraud be clear, beyond a reasonable doubt.”
III.
It is said that the net worth method of computing income taxes is nothing more than the use of circumstantial evidence. But, as pointed out by the majority opinion, both this Court and- the Supreme Court have recognized that its application must be held within fair and sensible limitations. “We concluded- that the method involved something more than the ordinary use of circumstantial evidence * * *,” — so said the Supreme Court in the Holland case, supra, 348 U.S. at page 124, 75 S.Ct. at page 130. Moreover, it continued, 348 U.S. at page 129, 75 S.Ct. at page 132:
“While we cannot say that these pitfalls inherent .in the net worth method foreclose its use, they do require the exercise of great care and restraint. The complexity of the problem is such-that it cannot be met merely by the application of general rules. * ' * * Trial courts should approach these cases in the full realization that the taxpayer may be ensnared in a system which, though difficult for the prosecution to utilize, is equally hard for the defendant to refute. * * * Appellate courts should review the cases, bearing constantly in mind the diffieul-tiés that arise when circumstantial evidence as to guilt is the chief weapon of a method that is itself only an approximation.” 2
That opinion further states that it is an essential condition in such a case that the Government establish “with reasonable certainty * * * an opening net worth”. 348 U.S. at page 132, 75 S.Ct. at page 134. We have used similar and not less poignant words of warning ourselves with-respéct to the nature and limits of this method of developing a case against a taxpayer. Cf. Bryan v. United States, 5 Cir., 1949, 175 F.2d 223, 227, affirmed 338 U.S. 552, 70 S.Ct. 317, 94 L.Ed. 335; and Demetree v. United States, 5 Cir., 1953, 207 F.2d 892.
Also, in Holland v. United States, supra, 348 U.S. at page 126, 75 S.Ct. at page 130, the Supreme Court made this significant . statement: “One basic assumption in establishing guilt by this method is that most assets derive from a taxable source, and that when this is not true the taxpayer is in a position to explain the discrepancy”. (Emphasis supplied.) This one sentence indicates clearly that the cautious approval given the net worth method is based primarily upon the assumption that a living taxpayer, with his intimate knowledge of all the facts, can and will destroy a man of straw constructed by the Commissioner. It follows that the device has no place in the Government’s dealings with the estates of its citizens after they are dead and unable to protect themselves. Doubtless if this decedent had been alive and able, by' his oral testimony, to apply the key to the code3 and supplement the set of books which was manifestly sufficient for his own needs, this injustice would have been averted.
It is fundamental in the Anglo-Saxon scheme of justice, recognized at common law and by statutes in practically all the states, that those who are not able to speak for themselves shall be accorded protection by the sealing of the lips of their adversaries as to transactions between them. We ought to apply such a principle of rudimentary justice here. We ought to avoid giving color to the thesis that the exigencies of the exchequer are such that those employed to keep it replenished may deal with taxpayers in any spirit not dominated by *187absolute fairness, tinctured even by a touch of chivalry and magnanimity.
For these reasons, I would reverse the decision of the Tax Court.

. Holland v. United States, 348 U.S. 121, 125, 75 S.Ct. 127, 130, quoting from Spies v. United States, 317 U.S. 492, 499, 63 S.Ct. 364, 87 L.Ed. 418. Although this and others cited were criminal cases, the underlying principles enunciated apply to all cases, and especially so where fraud is charged. In the Holland case, the court further stated, 348 U.S. at pages 137-138, 75 S.Ct. at page 136: “Increases in net worth, standing alone, cannot be assumed to be attributable to currently taxable income.” There was no proof here of any source of income except decedent’s business.

. The Supreme Court said in that case also, 348 U.S. at pages 126-127, 75 S. Ct. at page 131: “The net worth method, it seems, has evolved from the final volley to the first shot in the Government’s battle for revenue, and its use in the ordinary income-bracket cases greatly increases the chances for error.” In this case it constituted all the shots in between, also.

. The use of the code dated back to 1906, long before the first income tax law.-