author: THORNBERRY, Circuit Judge:

text:
    CUMMINS SALES & SERVICE, INC., Plaintiff-Appellee-Cross Appellant, v. LONDON AND OVERSEAS INSURANCE COMPANY and Provincial Insurance Company Defendants-Appellees-Cross Appellants, v. DEUTSCHE DAMPFSCHIFF. GES. “HANSA”, Defendant-Appellant-Cross Appellee.
    No. 28600.
    United States Court of Appeals, Fifth Circuit.
    March 21, 1973.
    Rehearing and Rehearing En Banc Denied May 17, 1973.

      Robert M. Julian, Houston, Tex., for defendant-appellant-cross appellee.
    Jon W. Montague, Houston, Tex., for defendants-appellees-cross appellants.
    Philip C. Wrangle, Houston, Tex., for plaintiff-appellee-cross appellant.
    Before GEWIN, THORNBERRY and CLARK, Circuit Judges.
   THORNBERRY, Circuit Judge:

Cummins Sales and Service, Inc., brought this suit in admiralty to recover for damage to cargo that was insured by defendants London and Overseas Insurance Company and Provincial Insurance Company (“Underwriters”) and that was shipped from Tripoli, Libya, to Houston, Texas, aboard the M/S GOLDENFELS, a vessel owned by defendant Deutsche Dampfsehiff. Ges. “Hansa” (“Hansa”). On an earlier appeal from a judgment for Cummins against Underwriters and for Underwriters over against Hansa, this court remanded for entry of findings and conclusions, 5 Cir., 426 F.2d 312. We now affirm the judgment as to liability but remand for a re-determination of damages.

The cargo in question was the component parts of a prefabricated metal building. In January 1967, Mid-East Supply Company, a Libyan corporation forty-nine percent of whose stock was controlled by a Cummins affiliate, contracted to purchase the building from a British concern, Taylor Woodrow, Ltd. Terms of the sale were twenty-five percent cash against documentary sight drafts, with the balance to be paid in four equal six-month installments. Taylor Woodrow shipped the building, in the form of 276 packages, to Mid-East in Tripoli aboard the SS WALTER, which arrived in Tripoli on March 3, 1967, and discharged the cargo in good order and condition. Those components which were in boxes and crates were stowed in an uncovered barge in Tripoli harbor, while the structural steel components were stowed on the dock in the open.

On March 30, 1967, while the cargo remained at Tripoli harbor, Cummins, for reasons not material to the instant appeal, assumed Mid-East’s obligation to purchase the building, in return for Taylor Woodrow’s arranging to re-ship the building to Cummins in Houston. Acting on instructions from Taylor Woodrow, T. Gargour & Fils, Ltd., the Tripoli firm which had handled the shipment on the outward voyage from London, made arrangements for re-shipment aboard the GOLDENFELS. After the cargo had been loaded aboard the GOLDENFELS on May 6-7, 1967, T. Gargour & Fils issued a Hansa bill of lading covering the cargo. Although the master of the GOLDENFELS did not sign the bill of lading, it was issued on a Hansa form with the master’s knowledge. With two minor exceptions not relevant here (“one drum short shipped”; “one crate broken, contents loose”), the bill of lading was “clean”: there was nothing in the bill of lading to suggest that the cargo was not taken aboard the GOLDENFELS in good order and condition.

After intermediate stops, the GOLDENFELS reached Houston and discharged her cargo on June 26, 1967, In the meantime, on April 24, 1967, Cummins had paid Taylor Woodrow the twenty-five percent down payment which was then overdue from Mid-East. And on May 24, 1967, while the cargo was still enroute from Tripoli, Cummins accepted sight drafts with the clean bill of lading attached, and agreed to pay them at six-month intervals over two years.

When the cargo was discharged at Houston, it was damaged. Although Cummins claimed a constructive total loss under Underwriters’ policy of insurance, the marine surveyors employed by Cummins denied that the cargo was a constructive total loss, and estimated the damage at between $10,690 and $12,500. A construction company executive, Mr. L. J. Howard, testified by deposition that the damage amounted to “seventy-five percent of the cost of the building”; but later in the deposition, Howard stated that the seventy-five percent figure did not represent a monetary estimate of the cost of repairs or replacement, but was only an estimate of the number of components that had suffered any damage, ranging from minor damage to complete destruction. In addition, a marine .surveyor employed by Hansa estimated the maximum damage at $20,000. Cummins did not attempt to repair or replace the damaged components, and was able to salvage them for only $11,000, in mid-1969.

After awarding judgment for Cummins, the trial court computed damages by multiplying the revised sale price of the building ($50,307.60) by seventy-five percent (the figure supplied by Mr. Howard), and by subtracting from the resulting figure the $11,000 in proceeds from the salvage sale. Judgment was entered for $26,730.70, together with $500 incidental expenses, plus interest and costs. On appeal, Hansa challenges the determination of the liability question favorably to Cummins, and is joined by Underwriters in contending that the damages awarded were excessive. Cummins, on the other hand, contends that the damages awarded were too low.

In order to make a burden-shifting prima facie case under the Carriage of Goods by Sea Act (COGSA), 46 U.S.C. §§ 1300-1315, Cummins had to show receipt of the cargo by the carrier in good condition and arrival of the cargo at Houston in damaged condition. Demsey & Associates v. S. S. SEA STAR, 9th Cir. 1972, 461 F.2d 1009; Daido Line v. Thomas P. Gonzalez Corp., 9th Cir. 1962, 299 F.2d 669; Mamiye Bros. v. Barber Steamship Lines, Inc., S.D.N.Y.1965, 241 F.Supp. 99, aff’d, 2d Cir., 360 F.2d 774, cert. denied, 385 U.S. 835, 87 S.Ct. 80, 17 L.Ed.2d 70 (1966). The damaged condition of the cargo upon its outturn at Houston is not questioned; and the clean bill of lading covering the cargo shipped on the GOLDENFELS is sufficient proof, for purposes of Cummins’ prima facie case, of receipt of the cargo by the carrier in good- condition. Demsey, supra; Daido Line, supra. Although Hansa argues that Gargour & Fils, who actually issued the bill of lading on a Hansa form and who signed it, had no authority to do so from the master of the GOLDENFELS, the master’s testimony contains no suggestion that Gargour & Fils had no authority to issue the bill of lading.

Hansa attempted to rebut this prima facie showing by offering evidence that the cargo had suffered extensive damage through improper stowage and exposure to the elements at Tripoli before being loaded aboard the GOLDENFELS, but the trial judge refused to consider any evidence of pre-shipment damage. In defense of this ruling, Cummins and Underwriters invoke the principle that a carrier is estopped from impeaching a clean bill of lading in a suit by one who has given value in reliance on the bill of lading. See, e. g., Pacific Micronesian Lines, Inc. v. New Zealand Insurance Company, 9th Cir. 1966, 366 F.2d 333; The CARSO, 2d Cir. 1931, 53 F.2d 374. Cummins claims that it gave value in reliance on the bill of lading when, on May 24, 1967, while the cargo was still enroute to Houston, it accepted sight drafts with the clean bill of lading attached.

In support of its claim that this principle of estoppel does not apply to the instant case, Hansa advances three arguments. First, it contends that Gargour & Fils was acting as Cummins’ agent in arranging for re-shipment aboard the GOLDENFELS and that Gargour & Fils’ knowledge of the condition of the cargo when it was loaded aboard the vessel is attributable to Cummins as principal. The record, however, does not support this assertion. It is not clear exactly whose agent Gargour & Fils was. In a March 29, 1967, letter to Cummins, Taylor Woodrow referred to Gargour & Fils as “the Tripoli agents of the steamship company [Transmarin] which carried the [building] on the outward shipment,” and it is conceivable that Gargour & Fils was Hansa’s Tripoli agent as well. It is clear, however, that Gargour & Fils acted on instructions from Taylor Woodrow, not from Cummins. Secondly, Hansa points out that the terms of Mid-East’s contract with Taylor Woodrow were “C.I.F. — Tripoli,” and that Mid-East thus took title to the prefabricated building in London during February 1967. The thrust of this argument is somewhat unclear. On the one hand, Hansa may be arguing that Cummins, through its forty-nine percent control of Mid-East, took title to the building in February 1967, and thus could not have relied on the clean bill of lading in May 1967, when it accepted the sight drafts. On the other hand, Hansa may be pointing out that the re-shipment contract between Taylor Woodrow and Cummins contained the same C.I.F. term as was present in the Taylor Woodrow-Mid-East contract, and thus that Cummins took title to the building in Tripoli, prior to the issuance and negotiation of Hansa’s bill of lading. Neither of these arguments, however, is relevant to a determination of Cummins’ rights as against the carrier, because a C.I.F. term merely allocates the risk of loss of goods in transit as between the buyer and the seller (Taylor Woodrow). Gilmore & Black, The Law of Admiralty, 96, 97 (1957).

Thirdly, Hansa contends that Cummins unconditionally obligated itself to pay Taylor Woodrow for the building on March 30, 1967, that Cummins actually paid Taylor Woodrow the twenty-five percent down payment on April 24, 1967, and therefore Cummins did not change its position in reliance on the clean bill of lading by accepting the sight drafts approximately one month later. This argument, however, overlooks the fact that in a sale such as this one, requiring payment against documents, the purchaser’s unconditional obligation to pay for the goods does not arise until presentment of drafts with a bill of lading attached. Uniform Commercial Code § 2-320(4); Gilmore & Black, supra at 99-104. And although Cummins did pay the twenty-five percent down payment before issuance or negotiation of the bill of lading, it had no reason at that time to believe that the cargo would be otherwise than in good order and condition.

Accordingly we hold that Cummins, like the consignees in The CARSO, supra, gave value in reliance on the bill of lading when, in May 1967, it accepted the sight drafts with the clean bill of lading attached. Hansa was therefore estopped from attempting to show preshipment damage; and because Hansa did not carry its burden of disproving negligence or unseaworthiness or of establishing one of the exceptions to liability under COGSA, we hold that the trial court properly resolved the question of liability favorably to Cummins.

We turn briefly to the question of damages. The basis for the trial court’s computation was Mr. Howard’s statement that the damages amounted to “seventy-five percent of the cost of the building.” The trial court multiplied this percentage by the invoice cost of the building in London, roughly $50,000, and subtracted the $11,000 in salvage sale proceeds from the resulting amount, yielding a net recovery of roughly $27,000 (plus incidental expenses, interest, and costs). In our view, this method of computing damages was erroneous, reflecting a misinterpretation of Mr. Howard’s testimony. As Mr. Howard later explained, the seventy-five percent figure did not represent a monetary estimate of the extent of the damage or the cost of repair or replacement. Rather, it was an estimate of the number of components, by quantity, that had suffered some damage, from minor damage to complete destruction. Thus, the percentage figure was not intended to serve as the basis for computation of money damages.

At the same time, we must reject Cummins’ claim that the cargo was a constructive total loss, even under the liberal American rule that a constructive total loss occurs if costs of repair or replacement exceed one-half the value of the cargo. Gilmore & Black, supra at 77. Aside from Mr. Howard’s seventy-five percent figure, which, as we have seen, cannot be translated into a monetary damage estimate, the trial produced estimates of repair and replacement costs ranging from $10,690 to a maximum of $20,000. Cummins offered evidence that the sound value of the components in 1967 was $41,275; that the invoice cost was $50,307.60; and that the insured value was $55,326.19. It is apparent that the highest meaningful estimate of damage ($20,000) did not exceed one-half of even the lowest of these valuations ($41,275).

We therefore remand the case for redetermination of damages: Upon remand, the trial-court should apply the long-settled rule that the measure of damages is the difference between the market value of the cargo in sound condition in Houston on the date the GOLDENFELS arrived (June 26, 1967), and the market value of the damaged cargo in Houston at that time. See, e. g., Encyclopaedia Brittanica, Inc. v. S.S. HONG KONG PRODUCER, 2d Cir. 1969, 422 F.2d 7, Holden v. S.S. KENDALL FISH, 5th Cir. 1968, 395 F.2d 910; Atlantic Mutual Insurance Company v. Poseidon Schiffahrt, 7th Cir. 1963, 313 F.2d 872. Absent other evidence of the market value of the damaged cargo in Houston on the date of outturn, the proceeds of the salvage sale may be taken as establishing the market value. If no market for the cargo in sound condition existed in Houston on or about June 26, 1967, then Cummins is entitled to the reasonable cost of repairs.

Affirmed in part; reversed and remanded in part.


source: Caselaw Access Project

author: BREITENSTEIN, Circuit Judge.

license: Public Domain

text:
    RUIDOSO RACING ASSOCIATION, INC., Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
    No. 72-1355.
    United States Court of Appeals, Tenth Circuit.
    Argued and Submitted Jan. 9, 1973.
    Decided April 4, 1973.

      Edward Heilbronner, Washington, D. C. (Edward L. Kane, Haskins, Lewis, Nugent & Newnham, La Jolla, Cal., and Sparber, Zemel, Roskin & Heilbronner, on the brief), for petitioner-appellant.
    Richard S. Halberstein, Atty., Tax Div., Dept, of Justice (Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks and Elmer J. Kelsey, Attys., Tax Div., Dept, of Justice, on the brief), for respondent-appellee.
    Before BREITENSTEIN, McWILLIAMS and BARRETT, Circuit Judges.
   BREITENSTEIN, Circuit Judge.

For the taxable years 1959, 1960, and 1961, the Commissioner of Internal Revenue determined that the total federal income tax deficiencies of Ruidoso Racing Association were $417,000 and that the fraud penalties under § 6653(b) of the Internal Revenue Code of 1954 were $208,000. The Tax Court sustained the Commissioner, see T.C.Memo. 1971-194, and the taxpayer has appealed.

Taxpayer is a New Mexico corporation which during the years in question operated a horse racetrack at Ruidoso Downs, New Mexico. At that time its majority stockholder and chief executive officer was Eugene V. Hensley who formulgated policy, maintained complete control of the corporation records, and ran the corporation’s day-to-day business. Hensley’s skill as a racetrack promoter and operator was not equalled by his skill in keeping records or by his ability to comply with federal income tax laws. He was convicted on four counts of income tax evasion and four counts of false returns, all based on his 1959 and 1960 returns and the taxpayer’s returns for the same years. The conviction was affirmed. Hensley v. United States, 10 Cir., 406 F.2d 481. In that opinion we pointed out the use of false invoices and the deduction as business expenses of gratuities to friends and relatives. 406 F.2d at 483, 484. The findings of the Tax Court in the instant case outline with meticulous care the many transactions and occurrences which formed the basis for the Commissioner’s determination and the procedures which the Commissioner used in reaching his results. We will be concerned only with those details necessary to an understanding of this opinion.

The taxpayer acknowledges that improper deductions were claimed on its tax returns as a result of the manipulations of Hensley and the false invoices secured by him. The first question relates to whether the Tax Court correctly found that there was a fraudulent intent which would toll the three-year statute of limitations, see § 6501(c)(1) of the Internal Revenue Code of 1954, and which would justify the imposition of the § 6653(b) penalties.

The Commissioner has the burden to prove fraud for each year by clear and convincing evidence. United States v. Thompson, 10 Cir., 279 F.2d 165, 167. It is not necessary that the Commissioner prove the precise amount of the underpayment resulting from fraud but only that “any part” thereof is attributable to fraud. Int.Rev.Code of 1954, § 6653(b), and Estate of W. Y. Brame, 25 T.C. 824, 831, aff’d per curiam, 5 Cir., 256 F.2d 343.

The determinative issue is whether the fraud of Hensley may be imputed to the corporation. A corporation is not absolved from liability for the fraudulent acts of an agent by the fact that the agent derived personal benefit therefrom. Gleason v. Seaboard Air Line Ry., 278 U.S. 349, 353, 357, 49 S.Ct. 161, 73 L.Ed. 415; Auerbach Shoe Co. v. Commissioner, 1 Cir., 216 F.2d 693, 697. The pertinent questions are (1) whether the corporate agent so controlled the corporation that the corporate entity is destroyed and the corporation becomes the individual’s alter ego and (2) whether the agent was acting in behalf of and not against the corporation with the result that the corporation benefited from his fraudulent acts. Asphalt Industries, Inc. v. Commissioner, 3 Cir., 384 F.2d 229, 234; and Botwinik Brothers of Mass., Inc. 39 T.C. 988, 996. If either (1) or (2) applies, the fraud of the agent may be imputed to the corporation.

During the years in question, Hensley owned or controlled 62% of taxpayer’s stock, was a member of its board of directors, and was its chief executive officer. Regardless of Hensley’s potential control of the corporation, practical restraints inhibited the exercise of that control. He was only one of three members of the board of directors. The New Mexico Racing Commission had ordered him to reduce his stock holdings below 40%. His full exercise of control might well have jeopardized taxpayer’s relations with the Racing Commission. His potential for taking money out of the corporation was more limited than in the ease of a sole stockholder. About 40% of any dividend would go to other stockholders. Cf. Federbush v. Commissioner, 2 Cir., 325 F.2d 1, 2. In the circumstances we are not faced with an alter ego situation.

The question, then, is whether the taxpayer benefited from Hensley’s fraudulent acts. At the outset we reject the argument that benefit is shown by the financial success of the corporation under Hensley’s stewardship and that the corporation condoned Hensley’s fraudulent acts. The issue is whether

Taxpayer urges that no fraud may be found for the year 1961 because the taxpayer filed a “clean return” for that year. The taxpayer sought to avoid carrying Hensley’s fraud into the 1961 return by instructing its accountant to perform a thorough audit for that year, those acts resulted in a tax benefit to the corporation.

A tax benefit could arise in two ways, understatement of income and overstatement of business expense deductions. With regard to the first, the Tax Court found that the taxpayer’s sales of beverages, not recorded on its books or records or reported on its income tax returns, were: 1959 — $73,894.-78; 1960 — $90,340.20; and 1961— $71,334.26. These sales arose from the taxpayer’s operation of two bars. Taxpayer showed that on occasion it provided free drinks to newsmen, television and radio people, celebrities, horseowners, and big bettors, but it maintained no record of the amount of beverages which it provided gratis. We will return later to the question of liquor sales. It is enough to say at this time that the failure to report bar income reduced total income and, hence, produced a tax benefit for the corporation. Although mere understatement of income does not establish fraud, James Nicholson, 32 B. T.A. 977, 989, aff’d, 8 Cir., 90 F.2d 978, and fraud with intent to evade tax must be affirmatively established, United States v. Thompson, 10 Cir., 279 F.2d 165, 167, the omission of the bar receipts from income is a factor which may not be disregarded in this case.

Business expenses were increased through the use of false invoices and fictitious record entries. In considering this phase of the case we are not concerned with items which benefited Hensley, his relatives, and his friends and which were improperly charged to, and paid by, the corporation. The pertinent items include the false enhancement of operational and administrative expense during each of the three years, the treatment of purchase of capital assets as rental thereof, and the expensing of building supplies and labor used for capital construction. As to the last item, taxpayer says that it results from Hensley’s lack of accounting understanding and ability, but we are not impressed. The difficulty is that the accountant told the IRS that there was nothing he could do about false invoices.

The taxpayer relies heavily on Asphalt Industries, Inc. v. Commissioner, 3 Cir., 384 F.2d 229, and Botwinik Brothers of Mass., Inc., 39 T.C. 988. In Asphalt Industries, the company stock was owned equally by two individuals. The question was whether the fraud of one could be imputed to the company and the court held that it could not. In Botwinik there were several stockholders and the holding was that the fraud of a minority stockholder could not be imputed to the company. Each decision recognizes that to impute fraud in a tax case it must be shown that the agent was acting in behalf of, and not against, the interests of the corporation.

Asphalt Industries and Botwinik are distinguishable from the case at bar. Botwinik involved the misstatement of corporation income resulting from a minority shareholder’s attempt to cover her embezzlement. The fraud was not perpetrated to benefit the corporation as in the case at bar. In Asphalt Industries the culpable agent was found to have dominated the corporation’s affairs and intended to effect corporate tax saving by his fraud but the court appeared unwilling to impute fraud to the corporation when the burden of the 50% penalty would fall on an innocent shareholder. Such a consideration is not relevant in the case at bar. A minority stockholders’ derivative suit against Hensley was settled in 1963. In 1969, an agreement for the sale by Hensley and his ex-wife of their stock in taxpayer provided that if the tax liability in the case at bar exceeded $325,000, including penalties and interest, the sellers should reimburse the buyer in the proportion that their stock bore to the total outstanding stock. Such protective measures were not present in Asphalt. Moreover, the fraud penalty is remedial in nature and is a safeguard for the protection of revenue, intended to reimburse the government for the expense of investigation and the loss from fraud. United States v. Thompson, 10 Cir., 279 F.2d 165, 166. Protection of innocent shareholders thus may not be an appropriate concern so long as the other elements necessary to impute fraud to the corporation are present.

The Tax Court found that the affirmative evidence of fraud during all three years was overwhelming. The existence of fraud is a question of fact, and, hence, the Tax Court’s findings are final unless clearly erroneous. Commissioner v. Duberstein, 363 U.S. 278, 291-292, 80 S.Ct. 1190, 4 L.Ed.2d 1218.

On the record presented, no other finding than that of the Tax Court is within the realm of reason. The Tax Court held that, viewing the record in its entirety, the fraudulent acts of Hensley should be imputed to taxpayer. We agree because we are convinced that in each taxable year the fraudulent acts were in substantial part for the tax benefit of, and intended to be for the tax benefit of, the taxpayer. Accordingly, the statute of limitations was tolled, see § 6501(c)(1), and fraud penalties were properly imposed under § 6653(b). These conclusions make it unnecessary to consider whether the limitation period for 1961 was extended by agreement.

Our next concern is with the validity of the deficiency assessments, which are presumptively correct. Wallis v. Commissioner, 10 Cir., 357 F.2d 313, 314. The burden is on the taxpayer to show the invalidity of the Commissioner’s action. Helvering v. Taylor, 293 U.S. 507, 515, 55 S.Ct. 287, 79 L.Ed. 623. With regard to unreported income, the taxpayer must prove that the determination is arbitrary or erroneous, and if it does so the Commissioner must satisfy the court as to the existence and amount of unreported income. Ibid. The unreported bar sales fall into this category. The Commissioner computed the deficiency for unreported sales by taking the amount of liquor purchased and by assigning percentage amounts to sales and promotion. The amount thus determined to have been sold was divided by the standard size of the drinks sold and multiplied by the minimum price therefor. With the exception of draft beer sales, the taxpayer’s objections merit little consideration. Taxpayer says that the Commissioner’s method was arbitrary because it failed to take into account spillage, breakage, and theft. Taxpayer assumes these conditions and adduced no proof that they would have materially affected the amounts found by the Commissioner. The showing is insufficient and does not defeat the presumption of correctness. Taxpayer says that the Commissioner failed to take into account bottle sales. It is enough to say that the testimony of bottle sales was ambiguous and unsatisfactory.

The Commissioner ignored beginning and ending inventories and based his determination on purchases. If there were such inventories, we cannot find them in the record. The frequency of purchases makes it doubtful that inventory was a significant factor. As neither beginning nor ending inventory was taken into account, the effects thereof are, at the most, problematical. In any event, the taxpayer presented no evidence that lack of inventory consideration destroys the validity of the Commissioner’s determination and, hence, failed to meet its burden.

Draft beer sales are in another category. The uncontradicted evidence is that taxpayer made no draft beer sales and that all sales of draft beer were made by a concessionaire. This evidence may not be disregarded. Potucek v. Cordeleria Lourdes, 10 Cir., 310 F.2d 527, 531, cert. denied 372 U.S. 930, 83 S.Ct. 875, 9 L.Ed.2d 734. However this error of the Commissioner does not destroy the presumption of validity as to the balance of the deficiency. Draft beer transactions were separately computed by the Commissioner and are severable from the balance of the deficiency. All that is required is that the case be remanded for a recomputation which excludes draft beer sales.

The taxpayer has a greater burden with regard to deductions. Because these are allowed only as a matter of legislative grace, the taxpayer must establish not only error or arbitrary action but also must sufficiently persuade the fact finder as to the amount of deduction which is allowable on each claimed item. United States v. Olympic Radio & Television, Inc., 349 U.S. 232, 235, 75 S.Ct. 733, 99 L.Ed. 1024, and Burnet v. Houston, 283 U.S. 223, 227, 51 S.Ct. 350, 75 L.Ed. 1439.

Taxpayer does not dispute the propriety or correctness of each individual adjustment made for the taxable years. Instead, it attempts to discredit the entire determination by consideration of particular items. The first has to do with the capitalization of certain expenditures for maintenance, repairs, and labor. The Tax Court found, and we agree, that the taxpayer’s records failed to adequately separate repair expenses and capital expenditures. The Commissioner capitalized 75% of the taxpayer’s disbursements for building materials and an equal proportion of labor costs. In effect, taxpayer argues that the Commissioner’s action was arbitrary because it failed to take into account each board, nail, and hour of labor. The Tax Court found that the method used was reasonable. There was testimony that the 75% figure was based on interviews with those familiar with construction in the area and a personal inspection of the racing plant by the examining revenue agent. Absent accurate accounting, the use of a percentage was not arbitrary. Anson v. Commissioner, 10 Cir., 328 F.2d 703, 706-707.

The taxpayer’s next attack is on the increase in useful life of depreciable assets. We do not agree with the taxpayer’s interpretation of the pertinent schedules. In any event, the allowance of a certain useful life for one year does not preclude the Commissioner from determining a longer useful life for another year and, if there is an error in any year, the burden of proof is on the taxpayer. Broadhead v. Commissioner, 5 Cir., 254 F.2d 169, 170. The claimed inconsistency of the Commissioner is no substitute for proof of actual error. See Gasper v. Commissioner, 6 Cir., 225 F.2d 284, 288.

During the years in question the taxpayer had an airplane and pilot. The Commissioner computed the amount attributable to airplane expense and then disallowed 75% of that amount which was assigned to personal use of the plane by Hensley. Taxpayer offered no evidence of the correct amount of airplane expense. The plane’s logbook was not introduced. In the absence of records showing the use of the plane, the Commissioner’s percentage estimate was not arbitrary. Anson v. Commissioner, 10 Cir., 328 F.2d 703, 706-707. Indeed, an accountant for taxpayer had suggested to it the use of a percentage for computing airplane expense.

The taxpayer attacks the Commissioner’s disallowance of substantial deductions which have been lumped together under the category of “operating expenses.” Within this group are a wide variety of disbursements which were identified with varying degrees of accuracy by witnesses whose testimony was not convincing. The Tax Court held that the showing was insufficient to overcome the presumption of validity, and we agree.

The ease is remanded to the Tax Court for the determination of the receipts from beverage sales without the inclusion therein of draft beer sales, Otherwise, the opinion and order of the Tax Court are sustained. Each party shall bear its own costs.


author: PER CURIAM:

text:
    Michael C. CALLAN and Thomas J. Callan, Jr., Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
    No. 26774.
    United States Court of Appeals, Ninth Circuit.
    March 28, 1973.

      Minot W. Tripp, Jr. (argued), Robert M. Winokur, Taylor, Winokur & Schoenberg, San Francisco, Cal., for petitioners-appellants.
    John A. Townsend, IRS (argued), Johnnie M. Walters, Asst. Atty. Gen., Dept, of Justice, K. Martin Worthy, Chief Counsel, IRS, Meyer Rothwacks, Thomas L. Stapleton, Tax Division, Dept, of Justice, Washington, D. C., for respondent-appellee.
    Before MERRILL and ELY, Circuit Judges, and SOLOMON, District Judge.

       Honorable Gus J. Solomon, United States District Judge for the District of Oregon, sitting by designation.

   PER CURIAM:

The issue here presented for review is whether certain transactions entered into by a dissolved corporation which, after dissolution, had been determined to be a personal holding company during a period of its existence, qualified for the deficiency dividends deduction under § 547 of the Internal Revenue Code.

Appellants each owned fifty percent of the stock of Callan Investment Company, a California corporation. On March 12, 1965, the corporation was dissolved and all assets and liabilities were distributed equally to the Callans in exchange for their capital stock. A certificate of winding up and dissolution was filed with the Secretary of State of California. By state law, West Cal.Corp. Code § 5400 (West 1954), a dissolved corporation “nevertheless continues to exist for the purpose of winding up its affairs, prosecuting and defending actions by or against it, and enabling it to collect and discharge obligations * * *.”

In 1968 the Commissioner determined that for the taxable year ending February 28, 1965, and the period ending March 12, 1965, the corporation was a personal holding company, having undistributed personal holding company income. Deficiencies in the payment of taxes were determined in the sums of $13,943.28 and $671.86. The Commissioner further determined that appellants, as transferees of the assets of the corporation, were jointly and severally liable for the deficiencies.

On March 22, 1968, a special meeting of the corporation’s board of directors was held and resolutions were adopted requesting the shareholders to contribute a total of $21,000 “to enable this corporation to discharge its obligations.” Appellants were authorized to establish a bank account and draw checks on it.

The account was established. Appellants paid $21,000 into it. The board of directors then held another meeting. Pursuant to Internal Revenue Code § 547 they purported to declare “deficiency dividends” in the amounts of $19,918.98 and $959.82, payable to appellants as shareholders. These sums were paid out of the special bank account. On May 13, 1968, the corporation filed a claim for a deficiency dividends deduction. The Commissioner disallowed the claim. Later, appellants filed amended income tax returns for the calendar year 1968, reporting an increase in income in the amounts of the “deficiency dividends” received from the corporation.

The Tax Court upheld the deficiencies determined by the Commissioner. It held the purported distribution in 1968 was not a genuine distribution for purposes of Internal Revenue Code § 316 (b)(2) and therefore did not qualify for the deficiency dividends, deduction under Internal Revenue Code § 547. For the reasons set forth in its opinion, 54 T.C. 1514, we agree.

Affirmed.