COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. Constantine THOMAS et al., Respondents, 261 F.2d 643

HARTIGAN, Circuit Judge. This is a petition for review by the Commissioner of Internal Revenue of decisions of the Tax Court of the United States holding that the taxpayers, Constantine and Marie Thomas, were not liable for deficiencies for the years 1945, 1946, 1947 and 1948 and that Constantine Thomas was not liable for deficiencies for the years 1943 and 1944. This matter was previously before this court upon petition for review filed by the taxpayers and in our opinion, Thomas v.

Commissioner of Internal Revenue, 1 Cir., 1956, 232 F.2d 520, the decisions of the Tax Court finding the taxpayers liable for the deficiencies in the above years plus fraud penalties were reversed and the cases were remanded for the admission of further evidence, for findings as to the taxpayers’ cash on hand at the commencement and termination of each of the tax years involved, for findings of a likely source of taxable income, and for other proceedings consistent with that opinion.

Upon remand the Tax Court, after hearing additional evidence, held that because the Commissioner’s finding of deficiencies was based on increases in the taxpayers’ net worth, it was incumbent upon the Commissioner to prove by affirmative evidence a likely source of taxable income to which such net worth increases could be attributed. Following this opinion by the Tax Court, the Supreme Court in United States v.

Massei, 1958, 355 U.S. 595, 78 S.Ct. 495, 2 L.Ed.2d 517, held that where all possible sources of nontaxable income were negatived, there would be no necessity for proof of a likely source of taxable income. The Commissioner now contends that the Tax Court committed reversible error in deciding for the taxpayers solely because of the failure of the Commissioner to prove the existence of a likely source of taxable income. There is no question but that the Commissioner is correct in this contention.

The taxpayers concede this but maintain that a burden still remains upon the Government to prove that increases in the taxpayers’ net worth are attributable to currently taxable income. They further maintain that such burden can only be borne by providing evidence from which it could be inferred that either there exists a likely source of taxable income or that there do not exist any sources of nontaxable income. In the instant case the Commissioner was unable to prove a taxable source of the taxpayers’ net worth increases. The taxpayers testified that they had received a large amount of cash as a gift from Mrs.

Thomas’ father. The Commissioner then presented some evidence which he contended was incompatible with the gift of such a large sum of money to the taxpayers from Mrs. Thomas’ father. Due to the Tax Court’s reliance upon our previous decision in this matter, it did not make any finding upon remand as to whether the taxpayers’ net worth increases were attributable to this nontaxable source claimed by the taxpayers.

It is, therefore, necessary for us to remand this case to the Tax Court for a determination by it as to whether the Commissioner has borne the burden of negativing by a preponderance of evidence that these alleged gifts were the sources of the taxpayers’ net worth increases. We do not accept the taxpayers’ suggestion that the evidence compels us to make a finding for them on this point.

The weight to be given to their evidence turns to a great extent upon the Tax Court’s belief in the credibility of their oral testimony and this determination is properly the function of the trier of fact and not of an appellate court. The decisions of the Tax Court are reversed and the cases are remanded for further proceedings consistent with this opinion. On Petition for Rehearing.