W. Frank LEE, Jr., as Administrator of the Estate of W. Frank Lee, Deceased, and Anne H. Lee, surviving wife, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent, 227 F.2d 181

HUTCHESON, Chief Judge. This appeal from unreported decisions and orders of the Tax Court involves deficiencies in income taxes and fraud penalties determined by the commissioner to be- due for the fiscal years ended February 28, 1942 to February 28, 1950, on account of income tax liabilities of W. Frank Lee, who died March 15, 1950. It also involves a penalty for the delinquent filing of taxpayer’s return for the fiscal year 1947.

Because the deficiencies were not timely assessed and, but for proof of= :fraud all of such deficiencies except that for the last year in controversy would have been barred, the respondent had the burden of proving by clear and convincing evidence that the decedent filed false and fraudulent returns. The Tax Court in its decision expressly declared, “The respondent has the burden of proving by clear and convincing evidence that the decedent filed false and fraudulent returns for all but the last yéar in controversy”, and as expressly found that the respondent had sustained that burden.

Petitioners are here insisting that the record will not support the determination and redetermination that there were deficiencies and if it will, it will certainly not support the finding that any part of them was due to decedent’s fraud with intent to evade the tax. In addition to-these attacks on the fact findings of .the court, petitioners put forward two grounds of attack upon its conclusions of la,w.

One of these is that the net worth theory of reconstruction of income, which was employed by the respondent in-making his determinations and in supporting his position below, could not properly b.e used in this case because the investigation was not commenced and the audit was not made until subsequent to-the taxpayer’s death, and that this deprived the taxpayer of the prime essential to a -fair defense in a net worth theory case, the right and opportunity to explain the evidence put forward by the commissioner in support of it.

The other is that, since at common law tax penalties did not survive the death of a wrong doer, a fraud penalty may not be assessed against a deceased taxpayer. The commissioner, on his

part insisting that the evidence is not only sufficient to support his contention that there were deficiencies and frauds in the years in question but that the proof almost compelled a finding that this was so, urges that upon the record nothing more than questions of fact are presented by this appeal, and that it cánnot be said that the findings were clearly erroneous.

Of petitioner’s legal positions that the fact of the death of taxpayer before the deficiencies were assessed prevents fraud penalties from being assessed against his estate or the net worth method from being used, the commissioner, citing in support Holland, Fried-berg & Smith v. U. S., 348 U.S. 121, 142, and 147, 75 S.Ct. 127, 138, 194, and United States v. Calderon, 348 U.S. 160, 75 S. Ct. 186, points out that, as there held, proof of tax delinquencies by the net worth method is merely to prove a case by circumstantial evidence.

So pointing, he insists that the petitioners’ contention, that the death of the taxpayer should operate as a bar to proof of a case by circumstantial evidence, is without support in reason or authority. No statute forbidding the use of such evidence is cited, and the consideration put forward by petitioners, that the taxpayer is deprived of an opportunity for explanation, while of course entitled to its due weight with the trier of the facts in determining the probative effect of the circumstantial evidence, can really have no proper bearing upon its admissibility.

As to the contention that fraud penalties are in the nature of penal assessments which may not be exacted of a decedent, the commissioner points to cases which have considered the contention and held to the contrary, under the authority of Helvering v. Mitchell, 303 U.S. 391, 58 S.Ct. 630, 82 L.Ed. 917, that fraud penalties added under Sec. 293(

b) are but civil administrative sanctions of a remedial character in aid of the assessment and collection of taxes, and that they are not to be considered or treated as penal sanctions which die with the offender. We find ourselves in agreement with the commissioner in these contentions. Of the fraud issue, we think it need only be said that the Tax Court, in its unreported opinion, correctly placed the burden on the commissioner, and, marshaling the evidence and making findings in accordance therewith, correctly, we think, determined that that burden was carried.

It is settled law that where, as here, there is credible evidence supporting a charge that an understatement of income by taxpayer was due to fraud with intent to evade tax, whether the charge has or has not been proved is a question of fact for the Tax Court to determine, and its finding on this issue, just as on any other issue of fact, is final unless shown to be clearly erroneous. It will, therefore, serve no useful purpose for us to set out the testimony on which the petitioners on their side and the Tax Court and Commissioner on theirs rely.

Neither will it avail anything for us to enter into a discussion of the dangers inhering in the careless and indiscriminate use of the net worth method, nor the obligations imposed upon the commissioner to exercise care and restraint in its use. It is sufficient to say that this court has written many times on the subject of the dangers inherent in the use of the net worth method in criminal cases, and the Supreme Court in the Holland case, referring to cases written by us, has written in the same vein.

In reviewing convictions in criminal cases by the use of the net worth method where the proof of the guilt must be beyond a reasonable doubt, as well as in civil cases where preponderance will suffice, we have always kept this firmly in mind. However, we and the Supreme Court, as we are both bound to do, have recognized at all times that after all the question for decision in each case is whether the evidence, though circumstantial, constituted sufficient proof to sustain the challenged finding.

Considering the evidence in this case in the light of these principles, though we agree with appellant that the inability of the taxpayer to confute or explain what unconfuted and unexplained has damaging weight, has to that extent increased the factual difficulties of the taxpayer and lessened those of the commissioner, we are bound to hold that this consideration fully expends itself when giving it all the proper weight it is entitled to, we still cannot say, as we cannot here, that on the examination of the evidence as a whole we are left with the firm conviction that the findings were wrong and must be set aside.

Leech v. Sanders, 5 Cir., 158 F.2d 486; United States v. United States Gypsum Co., 333 U.S. 364, 68 S.Ct. 525, 92 L.Ed. 746. There remains for determination only the small penalty liability assessed for failure to timely file the 1947 return. While we agree with the taxpayers that there is no affirmative evidence that the delayed filing was deliberate, this will not avail them as a defense as this is not the language of the statute.

It, on the contrary, provides that the penalty is to be assessed unless reasonable cause for not filing is shown, and it has been held repeatedly that whether there is reasonable cause for failure to file a timely return is a question of fact in respect to which the burden is on the petitioner and that its solution is peculiarly within the province of the Tax Court. Plunkett v. Commissioner, 1 Cir., 118 F.2d 644;. Burford Oil Co. v. Commissioner, 5 Cir., 153 F.2d 745; Commissioner of Internal Revenue v. Lane-Wells Co., 321 U.S. 219, 64 S.Ct. 511, 88 L.Ed. 684; Southeastern Finance Co. v.

Commissioner, 5 Cir., 153 F.2d 205. Nor is there any more merit in taxpayer’s contention that the penalty for late filing cannot be imposed upon a deceased taxpayer. The appellant cites no cases so holding and in principle, if, as we have held, fraud penalties may be imposed, this particular penalty may be. We find no basis for overturning the decisions and judgments of the Tax Court, and they are affirmed. . “§ 293. Additions to the tax in case of deficiency **-*-**•* “(

b) Fraud. If any part of-any deficiency is diie to fraud with intent to evade tax, then 50 per centum of the total amount of the deficiency (in addition to such deficiency) shall be so assessed, collected, and paid, in lieu of the 50 per centum addition to the tax provided in

section 3612(d) (2)”. 26 U.S.C. 1952 ed., § 293. - . “§ 275. Period of limitation upon assessment and collection “Except as provided in

section 276— “(

a) General rule. The amount of income taxes imposed by this

chapter shall be assessed within three years after the return was filed, and no proceeding in court without assessment for the collection of such, taxes shall be begun after the expiration of such period.” 26 U.S. C. 1952 ed. §275. . . “§ 276. Same — Exceptions “(

a) False Return or No Return. — In the case of a false or fraudulent return with intent to evade tax or of a failure to filé a 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.” 26 U.S.C. 1952'ed. § 276. . “§. 1112. Burden of proof in fraud cases “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 Commissioner,” 26 U.S.C. 1952 ed. § 1112. ' . Scadron’s Estate v.

Commissioner, 2 Cir., 212 F.2d 188; Estate of Reimer v. Commissioner, 12 T.C. 913, affirmed 6 Cir., 180 F.2d 159; and Estate of Briden v. Commissioner, 11 T.C. 1095, affirmed in Kirk v. Commissioner, 1 Cir., 179 F.2d 619, 15 A.L.R.2d 1031. . Cf. Bryan v. Commissioner, 5 Cir., 209 F.2d 822; Boyett v. Commissioner, 5 Cir., 204 F.2d 205; O’Dwyer v. Commissioner, 5 Cir., 110 F.2d 925. . Sec. 291. “Failure to file return “(

a) In case of any failure to make and file return required by this chapter, ■within the time prescribed by law or prescribed by the Commissioner in pursuance of law, unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the tax: * * Title 26 U.S.C.A. § 291.