Hurley v. Commissioner

Raum, J., dissenting: I do not agree that the Commissioner has failed to show an omission from gross income of an amount in excess of 25 per cent of the amount stated in the return. The net worth method, approved by the Court, shows an increase in net income of about 50 per cent of the amount of gross income in the return. Although it is true that the increase may theoretically be explained as attributable to excessive deductions taken on the return, I think the Commissioner has made out a prima facie case. The total deductions on the return amounted to $65,432.57, whereas total receipts were shown as $663,270.71 and cost of goods sold as $582,757.21. There was obviously far more room for manipulation in these latter two figures, which are ingredients of gross income, than in the first figure, which plays no part in gross income. The effect of the majority opinion is to require the Commissioner to prove conclusively that the increase in net income was not attributable to excessive deductions. However, the very circumstances that make necessary the use of the net worth method would render impossible such a showing. The result of the decision is that the Commissioner is faced with a more difficult burden of proof here than in the more serious net worth cases where fraud is asserted, and where, upon the proof of fraud, no period of limitations at all is applicable. I cannot believe that Congress desired to impose greater burdens upon the Commissioner when he seeks to enlarge the 3-year period to 5 years than when he seeks the advantage of no period of limitations whatever. Here, the Commissioner has shown an understatement of net income in an amount of about 50 per cent of gross income, and it is difficult for me to see why he has not made out a prima facie showing, in the circumstances of this case, that there has been an omission of at least 25 per cent of gross income reported on the return. The burden of going forward, after such prima facie showing, should be on the petitioner. The decision of the majority emasculates section 275 (c) in net worth cases. I cannot believe that Congress intended any such result.

BRUCE, J., agrees with this dissent.