J. J. DIX, Inс., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ESTATE of Jacob J. DIX, Deceased, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
Nos. 23-24, Docket 22989-22990
United States Court of Appeals Second Circuit
June 2, 1955
223 F.2d 436
Argued April 21, 1955.
H. Brian Holland, Ellis N. Slack, A. F. Prescott and S. Dee Hanson, Washington, D. C., for respondent.
Before FRANK, MEDINA and HINCKS, Circuit Judges.
FRANK, Circuit Judge.
The facts and rulings of the Tax Court are set forth in the opinion of Judge Van Fossan, reрorted unofficially in 12 T.C.M. 536.
I. The Corporate Taxpayer‘s Appeal
The Tax Court found that the corporate taxpayer, during the years 1938 through 1944, realized net taxable income amounting to $62,054.23 in excess of the amounts recorded on its books and reported on its tax returns filed for those years. It is undisputed that the corporation during the above period realized from its sales the sum of $196,870.60 which was secretly deposited in two banks, and that the amounts so received were not recorded on its books or included in gross receipts on its tаx re
The Tax Court found, and taxpayer conceded, that the corporate gross income had been understated in the total sum of $196,870.60. It found further, however, that the corporation was entitled to deductions aggregating $134,816.37, and thеrefore that its taxable income had been fraudulently understated and unreported in the remaining sum of $62,054.23, redetermining the deficiencies and fraud penalties accordingly.
Taxpayer contends that the corporation is entitled, in addition to the deductions allowed by the Tax Court, to further deductions exceeding $62,000 as follows: (a) overceiling payments of approximately $25,000 purportedly made in behalf of the corporation by its president, Jacob Dix, to black market wastepaper dealers; (b) overceiling wages totalling about $28,800 allegedly paid in cash by Jacob to the corpоration‘s production employees; (c) approximately $3,000 paid by Jacob as commissions over and above the total amount thereof ($20,000) allowed by the Tax Court; and (d) overceiling extra salaries of $5,317.41 allegedly paid to the corporation‘s office and factory employees by vice-president Monroe Dix. The Tax Court, for failure of proof, denied the deduction of these additional items, and the taxpayers assert that this is error.
We think the Tax Court‘s decision correct. Judge Van Fossan‘s opinion, analyzing in detail the taxpayer‘s evidence, shows that taxpayer did not discharge its proof-burden. And its proof left the matter so vague and conjectural as to render it impossible, as the Tax Court hеld, to apply the doctrine of Cohan v. Commissioner, 2 Cir., 39 F.2d 540.
Taxpayer contends, alternatively, that the sum of $56,736.82, out of the total unreported sаles proceeds, represents corporate funds misappropriated by Jacob, and therefore the сorporation is entitled to deduction of this sum as a loss sustained during the years 1938 through 1945, under Section 23(f) of the 1939 Code,
The evidence, and entirely reasonable inferences drawn from the evidence, demonstrate that the Commissioner discharged the burden of establishing fraud by clear and convincing evidence of wilful intent to evade taxation, and that therefore the imposition of 50% fraud penalties was justified. Because of the fraud, the statute of limitations was inoperative.
The adjustment of income for the several tаxable years caused over-assessments of excess profits for other years. Taxpayer contends that it is entitled, as an equitable setoff against deficiencies, to refunds of such over-assessments, although such refunds are barred by the statute of limitations. We do not agree. See Babcock & Wilcox Co. v. Pedrick, 2 Cir., 212 F.2d 645, 648-649.
II. The Estate of Jacob J. Dix
The Tax Court held that Jacob Dix realized taxable income of $56,736.82, i. e., the аmount of corporate funds he misappropriated. We think this was error. Jacob withdrew those moneys from the corporate bank accounts with
Affirmed as to J. J. Dix, Inc.; reversed as to Estate of Jacob J. Dix.
HINCKS, Circuit Judge (dissenting in part).
Although I concur in the holding of the court in so far as it affirms the decision below, I am unable to join in the partial reversal. I share the difficulty which this court had in United States v. Bruswitz, 2 Cir., 219 F.2d 59, in distinguishing the rationale of Commissioner of Internal Revenue v. Wilcox, 327 U.S. 404, 66 S.Ct. 546, 90 L.Ed. 752, from that of Rutkin v. United States, 343 U.S. 130, 72 S.Ct. 571, 96 L.Ed. 833. But having in mind the findings below—well supported by the record—that Jacob Dix, who dominated the corporate taxpayer, a family corporation, by deceiving his son, who was the only other resрonsible corporate executive, fraudulently withheld the entry of corporate receipts from the corporate books and utilized his authorized power to draw on corporate bank accounts by diverting funds to his own personal use, I think the facts here are stronger against the taxpayer than in Wilcox and come within the rationale of the Rutkin Case. Cf. Kann v. Commissioner, 3 Cir., 210 F.2d 247, and Marienfeld v. United States, 8 Cir., 214 F.2d 632. And if such facts are not enough to distinguish the case here from Wilcox, I think the court below was right in following the later pronouncement of the Supreme Court.