Court Opinion

ID: 9445564
Source: CourtListenerOpinion
Date Created: 2023-08-03 21:33:07.632158+00
Date Added: 2024-06-11T17:30:19.789852
License: Public Domain

HASTIE, Circuit Judge
(dissenting).
I differ with the majority in my understanding and analysis of the facts found by the Tax Court. The majority seem to read the Tax Court opinion as rejecting the taxpayers’ factual claim that substantial over-ceiling payments for wages and commodities were among the costs of their business. However, I think the Tax Court found that such expenditures were made, although the method of accounting for them in the tax returns was improper and the stated amounts were questionable. To make pDjnt clear it is necessary to quote gome iength from the findings of the Tax Qourt_ After stating that the taxpayers kept a second set of books in which gross receipts were stated at less -tlian their correct figure as shown in the original records, the findings below continue as follows:
“ * * * This second set of books was, under instructions from Williams and Masters, kept open as far as receipts were concerned until the end of the year, at which time *340Williams told Demetriou [bookkeeper] how much income to report for the year and gave him various mem-oranda purporting to contain a record of unrecorded over-ceiling payments he claimed to have made dur-mg the year m the case of each of the restaurants. Thereupon, Deme-tnou computed the amount the daily receipts should be understated to balance such unreported items and the resulting understated receipts were then entered in the second diary for each restaurant. The understatements as determined by respondent were as follows[A detailed table is inserted at this point.]
From the receipts and expendí-tures recorded m the second diaries, , , _ summaries were prepared by Deme- , . ,,, , ¿ . . tnou at the end of each year on work . . , . ., , , _ sheets, and from these sheets Deme- ,. , ,, , tnou prepared the income tax returns involved herein.
“ * * * The over-ceiling payments referred to above were those approximated by Williams in excess of prices fixed by law to obtain certain scarce commodities in sufficient quantity for the restaurants and those made to certain employees in the form of extra wages. The black-market overpayments and, in the case of commodities, in some instances the entire purchase price, were not entered as expenses on the records of the restaurants nor were they claimed as deductions on any of the tax returns involved herein. This method of understating receipts to compensate for any over-ceiling payments was devised to circumvent the law and OPA regulations and to keep Williams from having trouble with the Rationing Board in case an examination of his books was made thereby. Williams also did not wish to have trouble with the merchants who were thus supplying him. Social security taxes were neither withheld nor paid on excess wages.”
To me thig amountg to & finding ^ 0Ver.Ceiling payments were made and credit was taken for them in income tax returns by understating gross receipts.
^en ^ax Court, in calculating ^ie taxpayers' tax deficiency, refused ma^ie_ anJr allowance for these payments, justifying its position by saying:
“ * * * Albeit, the amounts allegedly paid by Williams in excess of the maximum price fixed by law for commodities used by the restaurants during the years involved, if proved, might be includible m determmmg the cost of goods sold by the restaurants m such years, Lela Sulienger, 11 T.C. 1076, and I.T. 4104, C.B. 1952-2, p. 71, this record contains no reliable evidence as to the amounts actually expended for over-ceiling prices of commodities and for extra wages. This being true, the record made affords no basis for our making a reasonable estimate.”
It is at this point that I think the Tax Court erred. It had first concluded, on the basis of the evidence introduced by the taxpayers, that expenditures made in the course of their business included over-ceiling payments for wages and commodities. However, the Tax Court may well have believed that, in reporting the dollar amounts of such payments to their bookkeeper from time to time, the taxpayers transmitted inaccurate and exaggerated figures. But this belief that the items were inflated did not justify the elimination of this entire expense category from the court's computation of tax liability.1
*341Judge Learned Hand’s often cited treatment of George M. Cohan’s estimate of his deductible entertainment expenses seems so much in point as to warrant an extended quotation:
„ , . . ‘In the Production of his plays Cohan was obliged to be free-handed m entertaining actors employees, and, as he naively adds, dramatic critics. He had also to travel much, , ,. rm at times with his attorney These expenses amounted to substantial sums but he kept no account and probabiy could not have done so. At the trial before the Board he . estimated that he had spent eleven „ , , „ . ,, . J , . thousand dollars m this fashion during the first six months of 1921, twenty-two thousand dollars, between July first, 1921, and June thirtieth, 1922, and as much for his following fiscal year, fifty-five thous- and dollars in all. The Board refused to allow him any part of this, on the ground that it was impossible to tell how much he had in fact spent, in the absence of any items or details. The question is how far this refusal is justified, in view of the finding that he had spent much and that the sums were allowable expenses. Absolute certainty in such matters is usually impossible and is not necessary; the Board should make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making. But to allow nothing at all appears to us inconsistent with saying that something was spent. True, we do not know how many trips Cohan made, nor how large his entertainments were; yet there was obvious-1 y some basis for computation, if necessary by drawing upon the Board’s personal estimates of the minimum of such expenses. The amount may be trivial and unsatisfactory but there was basis for gome allow and it was wrong to refuge an eyen th h _t were ^ traveling. expenses of a singIe trip. T, . , « . , ,, , ,, 14. It is not fatal that the result will inevitably be speculative; many important decisions must be such. We tMnk ^ Board wag in error &g ^ tMg and mugt recongider the ., „ „ , „ . . evidence. Cohan v. Commissioner ,, T ,. , „ n r<- mor. of Internal Revenue, 2 Cir., 1930, „Q „ „ _
^ would reason in the same way here, Compare, in a different context, Judge Kalodner’s reasoning in Commissioner Internal Revenue v. Thompson, 3 Cir., 1955, 222 F.2d 893, 895.
Accordingly, I would vacate the de-cisión of the Tax Court and remand the cause for fact finding as to the amounts spent by the taxpayers in the course of their business for over-ceiling payments, to be followed by a recalculation of tax liability taking these expenditures into account. And even if one should be less confident than I that the language of the Tax Court amounts to an affirmative finding that money was spent for over-ceiling charges, at very least the findings contain a strong intimation to that ef-feet and nothing contrary. Even this would call for a remand for clear and definitive fact finding as to whether such payments were made and, if so, in what amounts. Cf. Showell v. Commissioner of Internal Revenue, 9 Cir., 1956, 238 F.2d 148.

. I find unpersuasive a contention that as a matter of law over-ceiling payments of wages are not deductible. This argument is based upon Executive Order No. 9250, 7 Fed.Reg. 7871. But this basis was lost when Executive Order No. 9250 was superseded with Presidential approval on October 27, 1942, by other and different Regulations of Economic Stabilization Director, Title 32, Chapter XVHI, sub-chapter A, Part 4001, 7 Fed.Reg. 8748.