rejecting Commissioner's analysis of changes in taxpayer's net worth as an indirect means of identifying unreported income but upholding deficiency based on taxpayer's books and records
How later courts described this case
- rejecting Commissioner's analysis of changes in taxpayer's net worth as an indirect means of identifying unreported income but upholding deficiency based on taxpayer's books and records
Written by the judges who cited it.
The opinion
Raum, J. concurring: I am willing to accept the trial judge’s factual conclusion that upon the basis of the testimony and voluminous evidence before him the books and records in the peculiar circumstances of this case provide a more accurate measure of the taxpayer’s income than does the particular net worth statement relied upon by the Government. That can and should end the matter. But the prevailing opinion contains further discussion, not necessary to the disposition of the case, which I think is founded upon incorrect principles of law.
Thus, the opinion places reliance upon Thomas A. Talley, 20 T.C. 715 , which appears to hold that by reason of section 41 of the 1939 Code the Commissioner is without authority to use the net worth method where the method of accounting employed by the taxpayer clearly reflects income. The fallacy of this theory has since been exposed. The net worth method is n ot a method of accounting at all. When properly employed, it is merely evidence of unreported income, and there is no rule that prohibits its use merely because the taxpayer keeps books utilizing a system of accounting that is capable of accurately reflecting income. This was plainly articulated in Holland v. United States, 348 U.S. 121, 132 , where it was pointed out that even where no specific false entries are detected, the books may nevertheless be “more consistent than truthful.” This view has been repeatedly expressed in one form or another in a large number of cases, of which the following are but random samples: Morris Lipsitz, 21 T.C. 917 , 931, affirmed 220 F. 2d 871 (C.A. 4), certiorari denied 350 U.S. 845 ; Estate of W. D. Bartlett, 22 T.C. 1228, 1230 ; Estate of George L. Cury, 23 T.C. 305, 333-334 ; Davis v. Commissioner, 239 F. 2d 187, 189 (C.A. 7), affirming a Memorandum Opinion of this Court, certiorari denied 353 U.S. 984 ; Schwarzkopf v. Commissioners, 246 F. 2d 731, 733 (C.A. 3), affirming a Memorandum Opinion of this Court.
The theory of the Talley case has been thoroughly discredited, and I do not believe that a majority of the Court today approves it, if indeed it is approved by a single member of the Court other than the author of the prevailing opinion. This concurring opinion is therefore being filed so that the bar may not be misled into concluding that new life is now being breathed into Talley.
Tietjens, Atkins, Forrester, Fat, Dawson, Tannenwald, Simpson, and Featherston, JJ., agree with this concurring opinion.