Before PHILLIPS, Chief Judge, and BRATTON and MURRAH, Circuit Judges.
These several appeals, here on a consolidated record from the United States Tax Court, involve assessed deficiencies and fraud penalties against each of the petitioners for different years, between 1936 and 1944, for income allegedly derived from the illegal traffic in liquor, gambling and betting on horse races, outside the city limits of Wichita, in Sedgwick County, Kansas.
The assessments and penalties against each of the petitioners for the specified years were based upon the hypothesis that petitioners Comeaux, Clemons, Polk and others owned and operated establishments in Sedgwick County, Kansas, where liquor was sold, gambling conducted, and betting on horse races booked; that petitioners Cohen and Carnahan, acting in concert, afforded them protection against raids and arrests by state and county law enforcement officers for a percentage of the profits derived from the operation of the illicit businesses; and that each of the petitioners fraudulently failed to report accurately or truthfully all of the income derived from such illegal activities for the years in question to the extent of the assessed deficiencies.
On review, the Tax Court consolidated Cohen and Carnahan's cases for purposes of trial, over the objection of the parties. All of the cases were tried consecutively, and it was agreed that the records in the other cases, insofar as material and pertinent, might be considered as evidence in the consolidated cases. With immaterial modifications and adjustments, the Tax Court affirmed the Commissioner's determination in each case. See Cohen v. Commissioner, 9 T.C. 1156; Carnahan v. Commissioner, 9 T.C. 1206; Comeaux v. Commissioner, 10 T.C. 201.*fn1
On appeal here, the petitioners Cohen and Carnahan complain of the consolidation of their cases, contending in effect that their tax liability being separate, and not governed by the same facts, it was prejudicial to each of them to have their cases tried and considered together. But the record shows that Cohen and Carnahan were associated together in the activities which gave rise to the deficiency assessments, and that much of the evidence introduced, both on behalf of the Commissioner and the petitioners, was competent in both cases. The question of consolidation therefore rested in the sound discretion of the Tax Court. See Skirvin v. Mesta, 10 Cir., 141 F.2d 668; United States v. Hauck, 2 Cir., 155 F.2d 141.
All of the petitioners seek to annul the respective decisions of the Tax Court on the grounds that the opinions do not sufficiently set forth a complete statement of the "findings and conclusions, as well as the reasons or basis therefor, upon all the material issues of fact, law * * *" as required by Section 8(b) of the Administrative Procedure Act, 60 Stat. 237, 5 U.S.C.A.§ 1007(b). Without deciding whether the Tax Court of the United States is a "court" within the exclusionary meaning of Section 2(a) of the Act, 5 U.S.C.A. § 1001(a), we are convinced that Section 8(b) has no application to the procedure of the Tax Court in a proceedings of this kind. Kennedy Name Plate Co. v. Commissioner, 9 Cir., 170 F.2d 196. It may be said, however, that the decision of the Tax Court in each case is based upon extensive and detailed findings of fact and well reasoned conclusions. Its accompanying opinions are full and comprehensive treatments of the facts and every question presented for decision there and here.
Numbers 3816 and 3817 Max Cohen
For the years 1936 to 1943, inclusive, the Commissioner determined deficiencies and penalties against Max Cohen in the aggregate sum of $148,080.11. The deficiencies were determined by resort to what the internal revenue agent chose to call the "excess cash expenditure" method, under which the agent assumed that Cohen was "broke" on January 1, 1936, and that all expenditures as reflected by the available books and records in excess of the amount the taxpayer is shown to have had available to spend from reported sources, constituted additional and unreported taxable income. In other words, the deficiencies were based upon the premise that the taxpayer was shown to have spent more money in each of the taxable years than his returns showed was available to him as income. Thus, for each succeeding year the Commissioner started with the cash carry-over, if any on hand, and added to that the ascertainable cash receipts. He then aggregated all cash expenditures, from which he deducted the sum of the cash on hand, and ascertained cash receipts to arrive at the additional unreported income for each of the years in question.
While conceding that the methods employed by the Commissioner are justified in cases where the income is from illegal sources and no records are kept, on which taxable income can be ascertained with accuracy, see Kenney v. Commissioner, 5 Cir., 111 F.2d 374, and cases cited, Cohen earnestly argues that adequate records were maintained by him for the taxable years in question, from which competent accountants computed his taxable income and prepared proper returns, on which he paid the tax; that since the Commissioner concedes that his returns for the years in question are in agreement with his available records, resort to the so-called excess cash expenditure method does not provide a proper basis for determination of deficiencies, and is unwarranted.
The Tax Court found, and the record shows, that in the year 1936, Cohen was engaged in the oil business, and that upon the advice of an attorney, an accountant set up double entry ledgers to record all of his oil transactions, and that these books were kept by the accountant, and his income and disbursements accurately recorded and reflected in his income tax returns. The record also shows that before and after 1936, Cohen received large sums of money from the operation of establishments in Sedgwick County, where liquor was sold, gambling conducted, and bets on horse races were booked. For these activities, he maintained no books or records, except daily work sheets, reflecting the total amount of the "take", with directions to his accountant concerning its apportionment to the joint adventurers, whose returns the same accountant also prepared. The income from these activities was reported on the tax returns as derived from "outside activities". No other books or records or explanation has ever been made available. As the Tax Court observed in respect to the deficiencies assessed for the years 1936 to 1939, inclusive, there was credible evidence that during these years, Cohen received large sums of money from night club operators and from various illegal enterprises, in addition to the sums reported from "outside activities" in his return for those years, and that since Cohen elected not to take the witness stand to refute or explain the testimony and evidence on which the Commissioner's determinations were based, the court must indulge in their presumptive correctness.
Cohen further contends that the Commissioner erroneously assumed that he was broke on January 1, 1936, as a basis for determining his taxable income for that year and succeeding years. He says in that connection that the Commissioner's determination and the Tax Court's approval flies in the face of uncontradicted testimony that he had substantial funds in the Fall of 1936. There was testimony to the effect that in November 1936, he had in his possession $37,500.00, and other testimony tending to show that he possessed large sums of money in cash at that time. The taxpayer's returns for the years preceding 1936 did not reflect any income. In fact, he filed no returns for the years 1931 through 1935. The taxpayer did not choose to enlighten the court in that regard; the court was not convinced by the testimony, and we cannot say that its conclusion in that respect is clearly erroneous.
For the taxable year 1940, the Commissioner determined no excess cash expenditures, but Cohen complains of the disallowance of an item of $2,552.27, claimed as net loss carry-over. In its treatment of this item, the Tax Court stated that at the outset of the hearing, counsel for the petitioner abandoned any contention of error in the determinations for the taxable year 1940, except fraud, and observed that no proof was introduced specifically referring to that item; and that since the record was barren of proof in respect to the deficiency, it was presumptively correct and must therefore stand. The court accordingly approved the deficiency, and disapproved the fraud penalty for that year. We accept the Tax Court's version of the matter, and agree with its conclusions.
In respect to the deficiency for the year 1941, Cohen complains of the failure of the court to find that he borrowed the sum of $35,000.00 in cash from his mother-in-law, Mrs. Myrtle Hale, on or about September 1, 1941, and its consequent treatment of that sum as taxable income to him for that year. In rejecting as false, testimony tending to show that the loan was made to him for the purpose of purchasing oil properties, the Tax Court took into consideration the fact that although Cohen had a complete set of books and records for his oil business, there was no record on these books of the loan, or any other evidence of the debt; that it was not shown to have come into his bank account, and no mention of it had been made during the investigation of his income tax liability until the hearing before the Tax Court. The court also treated as significant the fact that the $35,000.00 claimed loan was almost exactly the amount of the excess cash expenditures of $36,916.26, determined ...