Section 292 (a) and (b); Cameron Iron Works, Inc..

Section 302; Smith....

Section 322 (b) (1); Stuart___.

Section 710 (a) (5); Cameron Iron Works, Inc..

Section 722; Cameron Iron Works, Inc.---

Section 3771 (b) (1); Abney Mills..

Section 3771 (b) (1), (b) (2) and (e); Matson Navigation Co. -
Section 3772; Detroit Trust Co.---


No. 10124; Golding--..













THE UNITED STATES COURT OF CLAIMS March 1, 1955, to May 31, 1955, and other cases not heretofore published. Opinions are not ordinarily published until final judgment is rendered. Cases in which motions have been filed are not published until disposition of such motions.


[No. 483-52. Decided November 30, 1954. Plaintiff's motion for new trial overruled April 5, 1955.]

On the Proofs

Income tax; use of net worth method of establishing annual income; burden of proof.-Plaintiff, during the taxable years 1944, 1945, 1946, and 1947, filed his individual income tax returns on the cash receipts and disbursement basis of accounting. The Commissioner of Internal Revenue made a deficiency assessment for each of these years, using the increase in net worth computation method. The Commissioner collected the deficiency for each year, together with penalty and interest, and plaintiff in turn filed a timely claim for refund. It is held that the plaintiff is entitled to recover the deficiency, penalty and interest collected for the fiscal year 1944, with interest as provided by law.

Internal Revenue 1288

Same; Commissioner's use of net worth method proper in instant case. Under the applicable statutes, the Commissioner is permitted to use another method of ascertaining the taxpayer's taxable income where the method used by the taxpayer in his return does not clearly reflect his income. It is held that in the circumstances of the instant case the Commissioner's use of the net worth method was proper.

Internal Revenue 1288

Same; determination of Commissioner prima facie correct.-The determination of the Commissioner of Internal Revenue is


Opinion of the Court

131 C. Cls.

prima facie correct unless arbitrary, capricious or excessive, and the burden is upon the taxpayer to show that the tax assessed is not due.

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Same; method approved for 1945, 1946, and 1947.—In the years 1945, 1946, and 1947 the net worth computation is approved where the taxpayer did not show that the increase of his net worth from his furniture business, returns on his investments and market transactions in that period was not due to unreported income.

Internal Revenue 1288

Same; statute of limitations. For the fiscal year ending October 31, 1944, it is held that the Commissioner did not prove that the taxpayer had understated his income by more than 25 percent. When the Commissioner made his assessments for that year the normal 3-year statute of limitations had expired and the Commissioner was relying on the 5-year statute of limitations where the taxpayer has understated his income by more than 25 percent. In such case the burden of proof is on the Commissioner. Since the Government has not sustained its burden of proof the 5-year statute is not applicable and the 3-year statute of limitations precluded a lawful assessment for that year. The plaintiff is entitled to recover.

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Mr. John R. Stivers for plaintiff. Messrs. Lowrance & Stivers were on the briefs.

Mr. J. W. Hussey, with whom was Mr. Assistant Attorney General H. Brian Holland, for defendant. Messrs. Andrew D. Sharpe and Robert N. Anderson were on the brief.

JONES, Chief Judge, delivered the opinion of the court: Plaintiff brought this action to recover $293,759.50 taxes, penalties, and interest which he alleges the defendant has collected illegally.

Plaintiff filed returns, on a fiscal year basis (ending October 31), for each of the years 1944, 1945, 1946 and 1947. The Commissioner of Internal Revenue made deficiency assessments using an increase in net worth computation for these same years. He subsequently collected the deficiency together with penalty and interest, and plaintiff in turn filed a timely claim for refund. The following table shows the amounts involved:

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During the years in question plaintiff received income from his business, which he sold in mid-1945, from returns on his investments, and from dealings in the market. It appears that, on the basis of the available records and information, plaintiff returned his income from known sources correctly. During this same period plaintiff's net worth, computed on the basis of visible assets, increased by amounts greatly in excess of the income reported by him. The Government contends that this increase is attributable to income from an unknown source. The plaintiff replies that there was no increase, in fact, that his net worth at the beginning of the taxable period in question was much greater than the Government's computation indicates. The issue in this case is, therefore, essentially a factual one: the origin of the increase in plaintiff's apparent net worth.

At the outset plaintiff makes a preliminary contention with regard to the Government's authority to use the net worth method in computing plaintiff's income. Section 41 of the Internal Revenue Code of 1939 provides:

The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. **

Plaintiff contends that this section means that the Commissioner can use this method only where the taxpayer either kept no books or where the taxpayer's accounting procedure does not reflect his income. He cites cases which restrict the use of this method to situations where the taxpayer keeps

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