# Petition — Ocean Sands Holding Corp. v. Commissioner

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1983
- **Citation:** 464 U.S. 827

## Text

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892 - 2081 ELLE D
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ALEXANDER L. STEVM&S,
CLERK

No.

IN THE SUPREME COURT
OF THE UNITED STATES

October Term, 1982

OCEAN SANDS HOLDING CORPORATION,
a Virginia Corporation, et al.,
Petitioners,

Vv.

COMMISSIONER OF INTERNAL REVENUE,
Respondent.

PETITION FOR A WRIT OF CERTIORARI
FROM THE UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

Carter R. Anderson, Jr.

Counsel for Petitioners

2240 N. Great Neck Road

Virginia Beach, Virginia
23451

Carter R. Anderson, Jr.

Counsel of Record

2240 N. Great Neck Road

Virginia Beach, Virginia
23451

(804) 481-4646

June 17, 1983

zeegt®

The other petitioners are as
follows in these consolidated cases:
(1)Sea Fin Holding Corporation v.
Commissioner, (2) Chattel Corporation
v. Commissioner, (3) Sea Star
Corporation v. Commissioner, (4) Colony
Holding Corporation v. Commissioner,
(5) Russell W. Chaplain, Jr. and Mary
H. Chaplain v. Commissioner, (6)
William G. Chaplain and Sandra B.
Chaplain v. Commissioner, (7) Russell
W. Chaplain, Sr. and Elsie B. Chaplain
v. Commissioner, (8) William J. Newton,
III and Linda G. Thornton, nee Linda G.
Chaplain, formerly Linda G. Newton v.

Commissioner.

he

QUESTIONS PRESENTED

I

Did the Commissioner of Internal
Revenue violate the Seventh Amendment
rights of the petitioners in assessing
duplicate and unjustifiably prohibitive
notices of deficiency against them
which precluded the payment of taxes
and suit for refund, with trial by
jury, in the United States District

Court.

II
Should the separate tax cases of
the petitioners been consolidated and
tried by the United States Tax Court

over their objections.

II!
Did the United States Tax Court
err in finding that the gross receipts
of the corporate taxpayers were

understated.

IV
Did the United States Tax Court
err in finding that the deductions for
depreciation and expenses of the

corporate taxpayers were overstated.

Vv
Did the United States Tax Court
err in finding that the statute of
limitations did not bar assessment and
collection of alleged deficiencies for
Ocean Sands Holding Corporation for
1967.

vi
Did the United States Tax Court
err in assessing fraud penalties
against two of the corporate
petitioners when it held the individual
taxpayers did not commit fraud based

upon identical conduct and evidence.

TABLE OF CONTENTS

Questions Presented

Table of Authorities

Opinions Below

Jurisdiction

Statutes Involved

Statement of the Case

Reasons for the Granting
of this Writ

Conclusion

3
Be ee _ : fete te Bunl » 2 ie x ae at ? a |

10

1l

13

24

65

TABLE OF CONTENTS (APPENDIX)

Appendix A:

Memorandum Findings of Facts
and Opinion of the United
States Tax Court

Opinion of the United States
Court of Appeals for the
Fourth Circuit (Unpublished)

A-197

TABLE OF AUTHORITIES

CASES: Page
CANDELA v. UNITED STATES 60

635 F. 2a l2?72 (7th Cir. 1980)

CARTER v. CAMPBELL 61
264 F. 2d 930 (5th Cir. 1959)

COHEN v. COMMISSIONER 38
266 F. 2d 5 (9th Cir. 1959)

DARTMOUTH COLLEGE v. WOODWARD 29
4 Wheat (17 US) 518 (1819)

FOSTER v. COMMISSIONER 59
487 F. 2a 902 (6th Cir. 1973)

HALLE v. COMMISSIONER 42
7 T.C. 245 (1946)

HOLLAND v. UNITED STATES 33,59
348 U.S. 121 (1954)

JUD PLUMBING & HEATING v. 29
COMMISSIONER
153 F. 2d 681 (5th Cir. 1946)

KAHR v. COMMISSIONER 55
414 F. 2a 621 (nd Cir. 1969)

LOFTIN AND WOODARD, INC. v. 54,58
577 F. 2d 1206 (5th Cir. 1978)60,62

MEAD CORP. v. COMMISSIONER 29
F. (3rd Cir, 40)
MILLS v. COMMISSIONER 44
399 F. 24 744 (4th Cir. 1968)
-6-

Pave

POTTS, DAVIS & COMPAN* v.
COMMISSIONER
43 F. 2d 1222 (1970)

REVELL, INC. v. RIDDELL

273 F. 24 649 (9th Cir. 1959)

RUIDOSO RACING ASSOCIATION, INC.

v. COMMISSIONER

476 F. 2d 502 (10th Cir. 1973)

SAMMONS v. UNITED STATES
433 F. 2d 728 (5th Cir. 1970)

STONE v. COMMISSIONER
22 T.C. 8893 (1954)

STONE v. COMMISSIONER
56 7.C. 213 (i971)

WEIMENSKIRCH v. COMMISSIONER
596 F. 2d 358 (9th Cir. 1979)

WEIR v. COMMISSIONER
283 F. 2d 675 (6th Cir, 1960)

CONSTITUTIONAL PROVISIONS:

U.S. CONST. AMEND. VII

44

37

55

46

33

56

38

36

1l

OPINIONS BELOW
The Memorandum Findings of Fact
and Opinion of the United States Tax
Court, Tax Court Memorandum 1980-423 is
printed in Appendix A hereto, infra ,

page A-l.

The unpublished opinion of the
United States Court of Appeals for the
Fourth Circuit concerning the
consolidated cases of Ocean Sands
Holding Corporation, et al is printed
in Appendix A hereto, infra , page A-
197.

,
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7

)
.

JURISDICTION

The judgment of the United States
Court of Appeals for the Fourth Circuit
(Appendix A, infra , page A-l) was
entered on February 11, 1983. The
jurisdiction of the Court is invoked
under 26 U.S.C. Section 7482(a) and 28
U.S.C. Section 1254(1).

CONSTITUTIONAL PROVISIONS

AND STATUTES INVOLVED

U.S. CONST. AMEND. VII

In Suits at common law, where the
value in controversy shall exceed
twenty dollars, the right of trial by
jury shall be preserved, and no fact
tried by a jury shall be otherwise re-
examined in any Court of the United
States, than according to the rules of

the common law.

26 U.S.C. Section 6501(e)(1)(A)

General rule. If the taxpayer
omits from gross income an amount
properly includible therein which is in
excess of 25 percent of the amount of
gross income stated in the return, the
tax may be assessed, or a proceeding in

court for the collection of such tax

may be begun without assessment, at any
time within 6 years after the return

was filed.

26 U.S.C. Section 7454(a)

Fraud. In any proceeding involving
the issue whether the petitioner has
been guilty of fraud with intent to
evade tax, the burden of proof in
respect of such issue shall be upon the

Secretary.

-ll-

sf

STATEMENT OF THE CASE

These cases originated in 1967
when, after reading newspaper accounts
concerning various individual members
of the Chaplain family being embroiled
in non-tax controversies with local
authorities, Internal Revenue Service
agents , who had been assigned cases on
individual taxpayers Russell Wilson
Chaplain, Sr. and his wife, Elsie B.
Chaplain, began investigations of
corporations owned by members of the
Chaplain family. the matters were
referred to the Criminal Investigation
Division of the Internal Revenue
Service for investigation of criminal
fraud and investigations of both
individual and corporate taxpayers were

begun.

As stated by the Tax Court “some

understanding of the, family history of

the Chaplains and their financial
transactions is essential to a fair and
proper evaluation of the merits of
these cases"; that family history
includes the following facts which are

not in dispute.

Russell Wilson Chaplain, Sr.
married his wife, Elsie B. Chaplain, in
1941 and together they raised eight
children, several of which have become
parties, as individual taxpayers to the

consolidated cases.

In 1950 the senior Chaplain was
found to have sugar diabetes and,
because of this, and other health
problems, he withdrew from active
involvement in the family businesses.
From 1950 on the senior Chaplain did
not participate in the family
businesses other than to occasionally

consult with those _penbers of the

family who were responsible for the
operation of the various businesses on
methods of building construction and
design and discuss generally how the

family interests might be advanced.

Russell Wilson Chaplain, Sr. never
owned stock in any of the corporations,
and was never a director, officer or

employee of any of the corporations.

Although the Tax Court
characterized Russell Wilson Chaplain,
Sr. as “the patriarch and the brain of
the Chaplain family" it was always
Elsie B. Chaplain who directed the
family in its various enterprises.
Elsie B. Chaplain was the sole
stockholder of any stock that had been
issued by any of the corporations. At
no point in time has Russell Wilson
Chaplain, Sr. ever claimed ownership or

involvement, Legh. oF beneficial, in

the corporations operated by his wife

and children.

Elsie B. Chaplain directed the
operation of the corporations; the
eldest son, Russell W."“Chappy"
Chaplain, Jr., and his brother, William
G. “Jerry” Chaplain, were in charge of
construction and maintenance of the
corporate properties and the eldest
daughter, Suzanne Chaplain Goldsticker,
was responsible for the maintenance of
all corporate records and the majority
of banking and bookkeeping for the

corporations.

The Commissioner determined
deficiencies in tax and additions to
tax against the petitioners for years
between 1967 through 1973.

Duplicate notices of deficiency,

by the admissions of the Internal

ines

Revenue Service, were assessed against
both individual and corporate taxpayers
in the cases. Due to the prohibitive
amounts alleged in the notices of
deficiency and the fact that these were
duplicated, the petitioners were unable
to pay the tax and then sue for a
refund in the United States District

Court.

Accordingly, the taxpayers filed
petitions for redeterminations of the
asserted taxes and additions to tax in

the United States Tax Court.

Separate cases were instituted bv
these petitioners in the Tax Court. By
order of the Tax Court, these cases
were consolidated for trial, briefing
and opinion over the objection of the
petitioners. Among these cases was the
case of Ocean Sands Holding Corporation

v. Commissioner of Internal Revenue

(Record No. 81-1467) in which the Tax
Court held that the 6 year statute of
limitations as set forth in 26 U.S.C.
Section 6501(e)(1) did not prohibit the
Commissioner from attempting to collect
an amount alleged in his notice of
deficiency to be in excess of 25
percent of the gross income stated in
the return of the petitioner even
though the only evidence presented by
the Commissioner was unsubstantiated ,
hearsay to which timely objection was

made by the petitioner.

During the years in question there
were five corporations owned and
operated by Elsie B. Chaplain and her
children:

1. Ocean Sands Holding
Corporation.

2. Colony Holding
Corporati.on.

3. Sea Yin Holding
Corporation.

4. Chattel Corporation.
5. Sea Star Corporation.

-17-

eos

Ocean Sands Holding Corporation
owned and operated the Kona Kai motel,
which consists of the land and
improvements located at 18th Street
between Atlantic Avenue and the

oceanfront in Virginia Beach, Virginia.

Colony Holding Corporation owned
and operated the Kona Kai East motel ,
which consists of the land and
improvements located at 16th Street
between Atlantic Avenue and the

oceanfront in Virginia Beach, Virginia.

Sea Fin Holding Corporation owned
and operated the Colony Motel and
Trailer Park and a Phillips 66 service
station, all of which consist of the
land and improvements located in the
900 block of Virginia Beach Boulevard

in Virginia Beach, Virginia.

-18-

Chattel Corporation and Sea Star
Corporation each owned one unimproved
let between 18th and 19th Streets on
the oceanfront in Virginia Beach,

Virginia.

The investigations by the
Commissioner as well as the proceedings
before the Tax Court were saturated
with hostility between the Commissioner
and his agents and individual members
of the Chaplain family; the Tax Court
recognized that there existed
“emotionalism and ... venom among the
parties". The Tax Court determined that
"Petitioners ... failed to preserve
diligently those business records that
were made" and assigned responsibility
for this failure to statements made by
the senior Chaplain. The
interpretations of the Tax Court of the

personalities and circumstances
-19-

revealed through the evidence became
its findings of fact. These findings of
fact were drawn from proceedings
typically marred by confusion,
invective, innuendo and in a pervasive

atmosphere of hostility.

The Tax Court filed its Memorandum
Findings of Fact and Opinion on
September 23, 1980 , and entered its
decisions on April 27, 1981. The Tax
Court entered its decisions in favor of
the Commissioner in three of the 22
consolidated proceedings, and in the 19
other cases, it determined amounts
owing somewhere between the amounts
asserted by the Commissioner and those

claimed by the taxpayers.

The Tax Court determined that the
conduct of the individual taxpayers did
not constitute fraud but that the

identical conduct Of, the same

individuals, in their capacity as
corporate officers, did constitute
fraud on the part of the corporate

taxpayers.

Taxpayers filed timely notices of
appeal and the cases were consolidated
for appeal in the United States Court
of Appeals for the Fourth Circuit by
its order dated July 16, 1981.

On February ll, 1983, in an
unpublished opinion, the United States
Court of Appeals for the Fourth Circuit
affirmed the decision of the United

States Tax Court.

The petitioners filed a timely
Petition for Rehearing with the United
States Court of Appeals for the Fourth
Circuit, which petition was denied by

that court on March 21, 1983.

-21-

REASONS FOR GRANTING THIS WRIT

The Commissioner initially filed
grossly inflated notices of deficiency
against these petitioners alleging huge
deficiencies and additions to tax due
becuase of alleged fraud. These figures

were in excess of $3,600,000.00.

The deliberate, gross
overstatement of deficiencies and
additions to the tax by the
Commissioner economically prohibited
the petitioners from paying the tax and
then suing for a refund in the United
States District Court and exercising
their Constitutional right to a trial

by jury.

The petitioners contend that the

record clearly shows that the huge
-22-

notices of deficiency and additions to
the tax were deliberately filed by the
Commissioner and that, based upon the
findings of the Tax Court these notices
of deficiency and additions to the tax
claimed by the Commissioner were,

without exception, greatly in error.

The petitioners contend that they
owe no tax; however had the
Commissioner utilized an accurate and
sensible method of estimation of income
the petitioners would have been well
able to pay the alleged tax and then

sue for a refund before a jury.

The Tax Court recognized the
hostility that existed between the
Commissioner and the petitioners. The
hostility was not one sided and the
petitioners submit that, as a result of
their hostile feelings towards the

petitioners agents of the Commissioner

-23-

intentionally inflated all of the
figures in the notices of deficiency
and additions to the tax to such an
incredible level for the purpose of
ensuring that the petitioners could not
pay the tax and thus sue for a refund
before a jury in the United States

District Court.

The petitioners submit that this
constant course of conduct by agents of
the Commissioner was in derogatiion of
their civil rights and was intended to,
and did, effectively prevent them from
exercising their Constitutional rights
under the Seventh Amendment to the

United States Constitution.

It

The petitioners involved in these
consolidated cases noted their

separate, distinct. Apa independent

appeals. Unfortunately, the findings of
fact and determinations of the United
States Tax Court, and thus the fates of
the corporations, became inextricably
enmeshed with the cases of the
individuals, most notably that of

Russell Wilson Chaplain, Sr..

The Tax Court's interest in the
personality of Russell Wilson Chaplain,
Sr. led it to anthropomorphize the
petitioner corporations and attribute
to them his motivations, passions,
emotions and thought processes. This
line of association eventually led the
Tax Court to refer to the senior
Chaplain as a corporate officer when
there is no evidence upon which to base

this deduction.

It is important to keep in mind
the magnitude of the cases against

petitioners. The Commissioner asserted

over $3,600,000 in deficiencies and
additons to tax which covered sixty
separate matters to be considered by
the Tax Court. There were thirteen
separate individual and corporate

petitioners.

Yet, at the hearing held January
17, 1979, the Tax Court ordered the
cases of the individual and corporate
petitioners consolidated for trial,

briefing and opinion.

The petitioners desired, and were
entitled to, separate consideration of
each of their cases on the merits.
There can be no question that a
corporation is a separate legal entity.
This was first established by the
decision of this Court in the case of

Dartmouth College v. Woodward , 4 Wheat

(17 US) 518, 635 (1819). It is also

equally clear that she corporate entity

"is not to be disregarded merely
because the corporation is controlled

by a single family" Mead Corporation v.

Commissioner , 116 F2d 187 (3rd Cir.

1940); Jud Plumbing & Heating, Inc. v.

Commissioner , 153 F2d 681 (5th Cir.

1946).

In denying the petitioners
separate trials the Tax Court ruled to

the prejudice of the petitioners.

III

The Tax Court determined that
Ocean Sands Holding Corporation (Kona
Kai), Colony Holding Corporation (Kona
Kai East) and Sea Fin Holding
Corporation (Colony Trailer Park and
Motel) gross receipts were understated
by petitioners for various tax years
from 1967 to 1973.

-27-

or

These findings were reached after
presentation at trial, by the
Commissioner, of multiple, often
conflicting, methods of reconstruction

of the income of petitioners.

The Commissioner utilized three
basic methods of reconstruction of
income of the petitioners and altered
his approach towards reconstruction in
an effort to maximize the liability of
the petitioners as opposed to trying to
ascertain the actual liability, if any,
actually existing. These methods were:

1. Direct Method: This method

consisted of reconstruction
of gross income based upon
the records of petitioners,
such as motel registration
cards.

2. Linen Expense Method: This

method was initially employed
-28-

by state tax investigators in
investigating alleged sales
tax deficiencies. The method
consisted of estimating the
occupancy of motels by
interpolation of linen
expense for that motel.

3. Income from Comparable

Motels: This approach was
"based upon the assumption
that gross receipts per room
per month must have been
equal to the average receipts
per room per month of a group
of comparable motels in

Virginia Beach."

A fourth, ancillary method
employed by the Commissioner to
increase his determination of
petitioners' alleged income was the

reconstruction of alleged income from
-29-

telephone charges. Evidence was
introduced at trial which showed that
during the years in question C&P
Telephone Company charged five cents
($.05) per message unit to petitioners
for telephone service. IRS agents
assumed, without substantiation, that

| appellants charged motel guests twenty-
five cents ($.25) per call and
therefore charged petitioners with
twenty-cents ($.20) income for each
telephone message unit. This unfounded

assumption remained unproven at trial.

A fifth, ancillary method employed
by the Commissioner in reconstructing
income for Sea Fin Holding Corporation
(Colony Trailer Park and Motel)
consisted of a review of the records of
Virginia Electric and Power Company
(Vepco) which purported to accurately

ascertain the number of paying tenants

staying at the park at any given time.
The record continually reflects that
the estimates of spaces available at
the park during any given tax year were

a source of continuing controversy.

Citing Holland v. United States ,

348 US 121 (1954). The Tax Court held
that where the taxpayer's records were
inadequate or nonexistent, the
Commissioner would be allowed to
reconstruct income by the use of any
method which would, in the opinion of
the Commissioner, clearly reflect

income.

The only restriction on this rule
is that the method adopted must be
reasonable. Stone v. Commissioner , 22

T.C. 893, 905 (1954).

After finding the Commissioner to

have inflated his determinations by an
-3l-

average of 50%, the Tax Court further
reduced those determinations by
arbitrary percentages to reflect the
existence of special factors affecting
the various petitioners. It would seem
that if the methodology of the
Commissioner was reasonable then it
would have reached reasonable
determination of reconstructed income
and the equitable intervention of the
Tax Court would not be have been

necessary to protect the taxpayers.

The decision of the Tax Court
reflects the following margins of error

by the Commissioner.

1. Ocean Sands Holding Corporation
(1967, 1968 and 1969):

The Court determined that the
Commissioner had inflated

determinations approaching an average

—

margin of error of 50% for the years in

question
V4

Ocean Sands Holding Corporation

(1971, 1972 and 1973): The Tax Court
determined that the Commissioner
overstated his determinations of
deficiency, on the average, by a margin

of error of 50%.

3. Colony Holding Corporation

(1972 and 1973): based upon the same

methods and evidence the Tax Court
found that the Commissioner overstated
his determinations of deficiency
against this petitioner, on the

average, by a margin of error of 72%.

4. Sea Fin Holding Corporation
(1971, 1972 and 1973):

The Tax Court found that the
Commissioner overstated his

determinations of Sot Set pacr against

this petitioner on the average, by a
margin of error of 18%; this is
contrasted with the average of 5.5%
error of understatement attributed to

the petitioner.

These petitioners were constantly
required by the Tax Court to prove that
they did not receive income as
determined by the Commissioner. The

case of Weir v. Commissioner of

Internal Revenue , 283 F.2d 675 (6th

Cir. 1960) states,

"The law imposes much less of
a burden upon a taxpayer who
is called upon to prove a
negative - that he did not
receive the income which the
Commissioner claims ..."

The Sixth Circuit, in the above
case, goes on to state,

"The Commissioner's
determination is presumed
correct, but if error is
shown, the presumption
disappears and the
Commissioner then has the
burden ~. roving the

correctness of his
determination, or at least
the correct amount actually
due."

In these cases the Commissioner made

conflicting determinations against

these petitioners. In Revell, Inc. v.

Riddell , 273 F.2d 649 (9th Cir. 1959)
the Court observes that,

"Conceivably the Commissioner
may lose the benefit of such
presumption if it should be
made to appear to the Tax
Court that the Commissioner
has made conflicting
determinations against the
same person in respect to the
same income. In such event
the burden of proof would be
upon the Commissioner to
establish the correctness of
his determination."

A deficiency determination which
is not supported by the proper
foundation of substantive evidence is
clearly arbitrary and erroneous.
Weimenskirch v. Commissioner , 596 F.2d
358 (9th Cir. 1979).

-3$-

The core flaw running throughout
all of these consolidated cases is the
consistent arbitrary determination, by
the Commissioner, of huge amounts of
income deficiencies asserted against
the petitioners, both individual and
corporate. The Commissioner blatantly
duplicated huge determinations of
deficiency. Coupled with this is the
consistent holding of the Tax Court
that the Commissioner repeatedly
overstated deficiencies by an average

margin of error of 50%.

The Ninth Circuit states the law,
and petitioners' argument, eloquently

in the case of Cohen v. Commissioner of

Internal Revenue , 266 F.2d 5 (9th Cir.
1959) in the following opinion,

"When the Commissioner's
determination has been shown
to be invalid, the Tax Court
must redetermine the
deficiency. The presumption
as to the correctness of the

Commissioner's determination
is then out of the case. The
Commissioner and not the
taxpayer then has the burden
of proving whether any
deficiency exists and, if so,
the amount. It is not
incumbent upon the taxpayer
under these circumstances to
prove that he owed no tax or
the amount of the tax which
he did owe.

The Commissioner's
determination is invalid when
it is arbitrary or erroneous.
Whether or not the
Commissioner's determination
in this case was arbitrary,
it was at least erroneous in
substantial respects, Cohen
accordingly met his burden of
proof of proving that the
Commissiner's determination
was invalid.

The question is not whether
the determination was invalid
after the Tax Court had
reduced it by 85%. The
pertinent inquiry is whether
it was invalid as originally
computed by the Commissioner.

Cohen, having met his burden
of proving the Commissioner's
determination invalid, and
thus taking the presumption
of the correctness of that
determination out of the
case, was not chargeable with
failure to make a further
showing. fgnee it was

improper for the Tax Court in
making its redetermination to
accept its maximum possible
gross income figure as the
actual figure only because
Cohen failed to show a lesser
amount."

In the cases before this Court the
above opinion applies with equal force.
The holdings of the Tax Court clearly
show the Commissoner's initial
determinations of deficiency against
these petitioners to have been
arbitrary, or at the very least,
grossly erroneous. This being the case,
the Tax Court should have held that the
Commissioner had forfeited the
presumption of correctness that
normally attaches to his determinations
and the Tax Court should have ensured
that the burden of proof was shifted
upon the Commissioner instead of
allowing it to remain, wrongly, upon

these petitioners to combat the
-38-

incredible allegations levied by the

Commissioner.
IV

The Tax Court determined that
depreciation and business expense
deductions were overstated by the
corporate petitioners in these

consolidated cases.

Ocean Sands Holding Corporation's
basis for depreciation of the Kona Kai
was $301,000. Colony Holding
Corporation's basis for depreciation of
the Kona Kai East was $473,622. In the
notices of deficiency the Commissioner
adjusted the Kona Kai's basis to
$204,600 and did not allow the Kona Kai

East any depreciation expense.

The Commissioner also disallowed
numerous expense deductions in addition

to depreciation for, Ocean Sands Holding

Corporation, for Colony Holding
Corporation and for Sea Fin Holding

Corporation.

Although the Commissioner touted
the validity of the comparable method
for reconstruction of the income of
petitioners, he refused to even
consider comparable expenses of the

other motels.

In looking at these obvious
inconsistencies it is apparent that the
Court erred in allowing the
Commissioner to retain the presumption
of correctness while it invoked Halle

v. Commissioner 7 T.C. 245 (1946) to

claim that the evidence of the
petitioner's amounted to mere
reaffirmance of return data which was

unworthy of consideration.

-40-

When faced with these cases the
taxpayers were faced with substantial
difficulty in reconstructing events due
to the length of time that had passed
and the sheer volume of research

necessary.

The one person who could
adequately bring all of this
information together was Russell W.
"Chappy” Chaplain, Jr. and he did so by
painstakingly itemizing and

reconstructing the costs of the motels.

The Tax Court recognized that the
cost basis for the Kona Kai and the
Kona Kai East was considerably less
than the appraised value of the
structures when they were completed.
The Court correctly indicated that the
tax basis for depreciation was the
actual cost of the buildings. Again,

the only person with any knowledge of

the cost basis was "Chappy”™ and yet the

Court largely ignored his evidence.

In Potts, Davis & Company v.

Commissioner ,43l1 F.2d 1222 (1970) the

Court stated "the Tax Court is not ...
free to ignore the uncontroverted
testimony of the taxpayer". It is
clearly error for the court to have
ignored the testimony of the witness
most knowledgeable in these matters on
the basis that he was a party to the

proceedings.

An arbitrary assessment by the
Commissioner may destroy the
presumption that his determination of
deficiency is correct. Mills v.
Commissioner , 399 F.2d 744 (4th Cir.
1968).

It logically follows that, with

the articulated cognizance of the Court
-42-

of the distrust, hate and disharmony
between the parties, to allow the
Commissioner to retain his presumption
of correctness in the disallowance of
petitioner's proper depreciation and
business expense deductions after such
obviously arbitrary exercise of this
presumption that the Court clearly

erred.

The Tax Court, basing its opinion
on Section 6501(E) of the Internal
Revenue Code determined that the
Commissioner was not barred by the
Statute of Limitations in assessing tax
for the year 1967 against Ocean Sands

Holding Corporation.

The deficiency notice for 1967 was
dated March 10, 1972. Where the

Commissioner aotre oe the above

cited section in the assessment or
collection of tax he has the burden of
proving facts and circumstances
entitling him to the application of the

section. Sammons v. United States , 433

F.2d 728 (5th Cir. 1970).

The Tax Court determined that the
Commissioner had met his burden based
on the Court's findings that the
corporation had gross income of $62,010
in 1967 and had reported gross income
of $29,106.51 on its 1967 corporate

return.

The gross receipts in the subject
year, as found by the Tax Court, were
based upon Ocean Sands reconstructed
income as determined from the use of
spread sheets showing alleged laundry

expenses and telephone charges.

-44-

The Tax Court also held that
during at least a portion of 1967,
construction on all the motel rooms was
not completed; the elevator was not
completed and that for varying periods
between 1967 and 1973 as many as four
rooms were used by Suzanne Chaplain
Goldsticker as a manager's apartment.
It was uncontradicted that, during
1967, there were only 24 rooms
available for rent in the motel

operated by the corporation.

The laundry expenses were based
solely upon work papers prepared by

Virginia State Tax authorities.

During the course of trial, a
subpoena duces tecum was served on
National Linen Service demanding the
production at trial of records
pertaining to Ocean Sands Holding

Corporation to inclyde invoices,

delivery tickets, books of entry and
journal ledger entries through which
the Commissioner intended to attempt to
justify the figures contained in the
spread sheets prepared by the state tax
investigator, subsequently obtained by
the Commissioner and upon which the
Commissioner relied for his proof in
establishing deficiencies against the

petitioner for the year 1967.

However, at the time of trial, the
records were not available, having been
routinely destroyed by National Linen
Service pursuant to their usual
administrative procedure in purging old
records. The only documentary evidence
available through the linen service was
the National Linen Service Price List
in effect in 1967 . The delivery
invoices and other records had only

been maintained for a period of three
-46-

years and then were destroyed as

outlined above.

Statutes of limitation are enacted
for the very purpose of preventing what
happened in this case. The Commissioner
has utilized a state revenue agent's
schedule based upon records which no
longer exist because of the passing of

time.

Despite the continuing objection
of the petitioners, the Tax Court
admitted this hearsay and the
Commissioner accordingly argued, that
based upon this hearsay, he had met his
burden of proof in proving that facts
in this case merited the exception to

the three year statute of limitations.

Since the issue in controversy was
the amount of gross income received by

the corporation in 1967, and since the
-47-

resolution of this controversy turned
on proof of laundry expenses, it was
therefore, exceedingly prejudicial to
the corporation for the Tax Court to.
admit this tainted information that was

so clearly rank hearsay.

The Tax Court reduced the gross
receipts claimed by the Commissioner by
a straight fifteen per cent, and giving
as its reason the facts that 1967 was
the first year of operation for the
motel, that the elevator was missing
and that the building was still under
construction, reduced the gross
receipts by yet another ten per cent,
all for a total 25% reduction in the
Commissioner's proof by the comparable
method. The overall reduction from the
original deficiency determination by
the Commissioner was in the amount of

$32,181; this Sigesy means that the Tax

Court found that there was a 52% error
between the Commissioner's
determination of deficiency as stated
in the notice of deficiency and the
evidence the Commissioner presented at
trial. It is clear from the decision of
the Tax Court that the Commissioner

failed to meet his burden.

On review, the Commissioner should
be barred by the three year statute of
limitations from further attempts to
assess or collect alleged deficiencies

from this taxpayer for the year 1967.

VI

The Tax Court's findings of fraud
on the part of the corporate
petitioners, Ocean Sands Holding
Corporation and Colony Holding
Corporation, are illogical and

inconsistent with its other findings of

lack of fraud in these consolidated

cases.

In the cases of the eight
individual taxpayers the Tax Court
held, correctly, that the Commissioner
had “not carried that burden in proving
fraud in the cases of any of the
individual petitioners". This holding
was based upon " the conduct of the
individuals involved and the
surrounding circumstances". The case of

Stone v. Commissioner , 56 T.C. 213,

223-224 (1971) was referenced by the
Tax Court as authoritative in adopting
this viewpoint. With this the corporate

petitioners agree.

Similarly, in the cases involving
Sea Fin Holding Corporation, the Tax
Court correctly found that the
Commissioner had “failed to carry his

burden of proof of clear and

convincing'. proof with respect to the

fraud penalties against Sea Fin".

Therefore, the holdings of the Tax
Court that these two corporate
petitioners should be singled out held
to have committed fraud does not

logically follow.

That these findings are illogical
is only accentuated by the Tax Court's
own observations that it recognized the
" inherent imprecision in the method of
reconstruction". used by that Court in
determining income to the corporations.
and that the weakness of the
Commissioner's case was underscored by
the huge discrepancies between cash
dividends asserted for fraud purposes
and figures asserted for deficiency

purposes.

~$l<

The Tax Court correctly held that
“the burden of establishing fraud, by
clear and convincing evidence, is upon

the Commissioner. Foster v.

Commissioner , 487 F.2d 902, 903 (6th

Cir. 1973), 26 U.S.C. Section 7454(a).

In the case of Loftin and Woodard,

Inc. v. United States , 577 F.2d 1206

(Sth Cir. 1978), Court warned,

"Fraud is not easily shown.
It implies bad faith,
intentional wrongdoing, and a
sinister motive ...
negligence, whether slight or
great, is not equivalent to
the fraud with intent to
evade tax named in the
statute. The fraud meant is
actual, intentional wrong-
doing, and the intent
required is the specific
purpose to evade a tax
believed to be owing ...
added to this is the burden
placed upon the
Commissioner."

The specific intent referred to by
the Court was addressed in the case of

Kahr v. Commissioner , 414 F.2d 62l,
=S30

627 (2d Cir. 1969) where it was clearly

stated that,

",.. the requirements that
specific intent be proved
before either the civil fraud
addition may be assessed or
the criminal sanction may be
imposed are identical."

Keeping well in mind the holding
of the 10th Circuit that,

"The Commissioner has the
burden to prove fraud for

each year by clear and
convincing evidence" Ruidoso

Racing Association, Inc. v.
Commissioner , 476 F. 2d 502
(10th Cir. 1973).

Based upon the record in the Tax
Court it is clear that, as regards the
five tax years for which it is asserted
that these two corporations understated
income, that the Commissioner inflated
determinations in the total amount of
$263,250 and averaged over a 51% margin
of error. These gross inaccuracies on

the part of the Commissioner were part
-53-

LS Lae

of a continuing course of conduct
against these petitioners. For the
taxable years 1967, 1968 and 1969 the
Commissioner inflated determinations
against Ocean Sands Holding Corporation
in a total amount of $135,025 at an

average margin of error of 49%.

The Commissioner “alleged as his
basis for fraud that gross receipts
were understated and that adequate

records were not maintained".

If the findings of the Tax Court
are contrasted with its findings as to
the errors in deficiences determined
and asserted by the Commissioner the
results are extremely instructive.
According to the Tax Courts own
findings, during the years 1971, 1972
and 1973 Ocean Sands Holding
Corporation understated income by an

average of 19%; in Page the same

years the Tax Court found the
Commissioner's determinations to have
been inflated by an average of over
37%. Remembering that the Tax Court's
reconstruction of income was based upon
an “inherently imprecise method" Ocean
Sands Holding Corporation was still
almost 20% more correct than the
Commissioner on the average. For the
years 1972 and 1973 the Tax Court found
Colony Holding Corporation to have
understated income by an average of
33%; yet during these same years the
Commissioner's determinations were
found to have been inflated by an
average of 72%. Both corporate
petitioners, averaged together, were
found to have understated income by an
average of approximately 26% for the
taxable years in question. For the same
taxable years the Commissioner was
found to have ee his assertions

‘

of deficiency by an average of more
than 54%. Simple arithmetic shows that,
based upon the Tax Court's own
findings, that the corporate
petitioners were more than 100% more
accurate than the Commissioner in their
reported income for the taxable years

in question.

In finding that these two
corporate petitioners committed fraud,
the Tax Court relied upon its finding
of a pattern of substantial
understatement of gross receipts as the
basic factor for its holding. In the

case of Loftin and Woodard, Inc. v.

United States , supra, the Court held

that “case law does not indicate that
consistent and substantial
understatement of income is sufficient,
by itself, to support a finding of

fraud". The Tax Court found the
-56-

Commissioner to have consistently made
grossly inflated determinations and to
have consistently overstated the

determinations without substantiation.

In the case of Holland v. United States

, 348 US 121 (1954), this Court warns,
"Appellate courts should
review the cases, bearing
constantly in mind the
difficulties that arise when
circumstantial evidence as to
guilt is the chief weapon of
a method that is itself only
an approximation"

Petitioners contend that the above

admonition is especially applicable in

these cases.

Inadequacy of Records The Tax
Court found as a “badge of fraud" that

the "petitioners failed to keep
complete books and records and that
their bookkeeping system was wholly
inadequate". Again, in the case of

Loftin and Woodard, Inc. v. United

States , we are told that an indicia of

WS shot St |

eee

fraud is the “lack of adequate books
and records which one would expect of
the particular taxpayer, based upon his
business experience, education,
knowledge of books and records, etc."
The record is replete with evidence
that these are corporations operated by
family members who do not have the
benefit of sophisticated, formal
educations. Taxpayers with limited
education and training in the keeping
and maintaining of business records are
not held to the same standard of
accountability as those with extensive
background and education in the field.
Candela v. United States , 635 F. 2d

1272 (7th Cir. 1980). The record
further shows that the petitioners
maintained adequate, albeit simple,
records and that the difficulty
concerning the records results from the

fact that numerous specords have been

lost, stolen or destroyed by fire over
the past 17 years. The Tax Court holds
another “badge of fraud" to be the
"history of repeated incidents,
including a series of fires (two of
which are highly suspicious), in which
records were allegedly destroyed.” The
petitioners have consistently explained
their inability to produce certain
records; the Commissioner has
consistently hinted that this is

“suspicious”. In Carter v. Campbell ,

264 F. 2d 930 (5th Cir. 1959), the
Court states,

"Fraud implies bad faith,
intentional wrongdoing and a
sinister motive. It is never
imputed or presumed and the
courts should not sustain
findings of fraud upon
circumstances which at most
create only suspicion."

Lack of Cooperation The Tax Court

found "Petitioners' officers' refusal

to cooperate with the revenue agents in
-59-

their investigation" to be an
additional “badge of fraud". Again, in

Loftin and Woodard, Inc. v. United

States , supra, the Fifth Circuit

reminds us that,

"Where fraud is alleged
against a corporate taxpayer,
the requisite proof of
fraudulent is to be found in
the acts of its officers,
inasmuch as the corporation,
being an artificial person
created by law, can have no
separate intent of its own
apart from those who direct
its affairs."

In that same case the Court also

advises that,

"In investigating the issue
of corporate fraud, the court
must determine whether the
conduct and intentions of the
corporations and/or agents
may be imputed to the entity
itself.”

It is clear from the record that,
even after being advised that she and
her husband were personally under
criminal investigation, Elsie B.

Chaplain cooperated fully with revenue
-60-

o, Sa

agents investigating the petitioner
corporations and that Suzanne Chaplain
Goldsticker, who was a corporate
officer and is not a party to any of
these proceedings, also cooperated
fully. The Tax Court prejudices the
petitioner corporations when it
attributes the alleged non-cooperative
attitude of Russell Wilson Chaplain,

Sr. to the corporations.

Use of Cash The Tax Court finds,

as a further factor in its
determination against these
petitioners, the “extent to which the
petitioners dealt in cash" and "the
general custom of each of the
corporations of dealing substantially
in cash". Again, the Tax Court
prejudices the petitioner corporations
when it links the emotional aversion of
Russell Wilson enagnes. Sr. to dealing

peg

with banks to the corporations. Russell
Wilson Chaplain, Sr. was not an owner,
director, officer or employee of these
corporations. The personal feelings of
Russell Wilson Chaplain, Sr. about
banks, or anything else, are not proper
evidence, much less proof of fraud,
against the corporations. These
corporations operate motels. Travelers
deal in cash. Merchants and suppliers
give discounts for cash payment. The
Tax Court's findings as to the use of
cash in the business dealings of the
petitioner corporations constitute

error against them.

=-2-

CONCLUSION

For the foregoing reasons this
Petition for a Writ of Certiorari
should be granted.

Respectfully submitted,

Se Kad

Carter R. Anderson, @r.
Counsel for Petitioners

Carter R. Anderson, Jr.
Counsel of Record

2240 N. Great Neck Road
Virginia Beach, Virginia 23451
(804) 481-4646

June 17, 1983

ae

CERTIFICATE OF SERVICE

Pursuant to Rule 28.5(b) of the
United States Supreme Court I hereby
certify that on the _17th day of June,
1983, by my bt suatien, Susan S.
Williams of Lawyers Printing Company,
Suite B-115, 7th and Franklin Building,
Richmond, Virginia, mailed first class
postage prepaid, from Richmond,
Virginia, three copies of the foregoing
Petition for a Writ of Certiorari to
Glenn L. Archer, Jr., Esq., Assistant
Attorney General and Michael L. Paup,
Esq., Ann B. Durney, Esq., and Stanley

S. Shaw, Jr., Esq., Attorneys, Tax

Division, Department of Justice,

Washington, D.C. 20530.

LAV.

Carter R. Anderson, Jry

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385010_1176%3A1. Public record. Not legal advice.