1 Findings of Fact 23. After his Army service plaintiff worked for J. H. Mednikow in Memphis at $150 per month. Having spent from four to six months on that job, he was employed briefly by the Sailors Clothing Co. Early in 1920 he began to work for the Leo Kahn Furniture Company as an office man at a salary of $300 per month. Leo Kahn died in 1934. The following year plaintiff helped found and began working for the Jacobs Furniture Company, a corporation. Forty-seven of the corporation's fifty shares were issued to plaintiff's father and the latter testified he had put up some money for this venture. The plaintiff maintained, however, that he owned the business in fact from the very beginning. The corporation was dissolved in 1940 at which time the business became a sole proprietorship in plaintiff's name. Plaintiff continued to operate the business until he sold it on July 16, 1945, for from $85,000 to $90,000. 24. Prior to his Army service plaintiff dealt in the commodity market to some extent. He also was buying second mortgage bonds. Sometime after he started to work for the Leo Kahn Furniture Company plaintiff resumed his activities in the commodity market. At about that time he also traded in stocks, diamonds, and mortgages. Subsequent to his marriage in 1927 plaintiff pulled out of the stock market. He did not reenter it until 1943 or 1944. As noted in finding 7 there is no evidence in the record on plaintiff's income until the year 1944. 25. During the tax years here in question plaintiff had several known sources of income. He received the income from his furniture business until its sale in July 1945. He also engaged in dealings on the security and commodity markets, principally through the firms of W. E. Richmond & Co. and James E. Bennett & Co. His holdings in notes yielded interest which for the most part was collected through the bank. Plaintiff also received returns from the securities and other assets which he held during this time. 26. In connection with the operation of his furniture business, plaintiff maintained a complete set of business records in bound volumes, consisting of ledgers, check journals, cash journals, sales and collection journals, all of which are in evidence, Findings of Fact 131 C. Cls. 27. The accounting firm of Seidman & Seidman prepared the Federal income tax returns of the plaintiff for all years here involved, namely, the fiscal years ended October 31, 1944, October 31, 1945, October 31, 1946, and October 31, 1947, and a representative of the accounting firm audited the books and records and made the closing entries that appear in all of the books and records of Jacobs Furniture Company. 28. The books and records of the furniture business were kept on the installment sales basis of accounting and the records reflecting the other business transactions of plaintiff were kept on the cash receipts and disbursements basis of accounting. 29. With respect to his transactions in stocks and commodities, plaintiff received from his brokers individual and specific purchase and sales advices in written form representing each transaction. Plaintiff also obtained at the end of each year from his brokers detailed statements in permanent journal form verifying each individual purchase and sale advice and reflecting all transactions for the year. These records were kept and preserved by plaintiff as his permanent records of his stock and commodity transactions and were turned over to his accountants at the time the Federal income tax returns were prepared. 30. With respect to the interest received by plaintiff, almost all of it was collected by the National Bank of Commerce in Memphis and the bank gave plaintiff a written collection advice reflecting the receipt of the interest. All of these collection advices were kept by plaintiff as his permanent records and were turned over by plaintiff to his accountants for use in preparing his Federal income tax returns. 31. Plaintiff did not transcribe into a book or books a record of the transaction evidenced by these written advices from his brokers and the banks. 32. After Revenue Agent Huddlestone's report on his examination of plaintiff's returns for the years ended October 31, 1944, October 31, 1945, October 31, 1946, and October 31, 1947, was issued, the late F. E. Hagler, Esq., as attorney for plaintiff, employed Mr. Lucian Minor, a well-qualified certified public accountant, who did not know plaintiff, to make a comprehensive review of plaintiff's financial transactions, 1 Findings of Fact both business and personal, with instructions to make as thorough an investigation as possible regardless of the time involved and in the event that there was any doubt as to the taxability of any item to resolve such doubt against the plaintiff, and in the manner producing the most tax. 33. In the course of his investigation, Mr. Minor made a detailed analysis of all security and commodity transactions of plaintiff from October 31, 1943, to October 31, 1947. Minor scheduled by months and analyzed every deposit and disbursement of plaintiff's bank accounts. A complete reaudit of the books of Jacobs Furniture Company was made. A thorough analysis was made of the collection advices provided by the National Bank of Commerce in Memphis, and Mr. Minor charged plaintiff with the receipt of interest in instances where there was a real doubt as to the receipt of such interest by plaintiff, in accordance with the instructions given by F. E. Hagler, Esq. 34. Mr. Minor's investigation showed that, on the basis of information and records made available to him, plaintiff's tax returns for the years in question had, with minor exceptions, stated his income correctly. 35. An additional investigation of plaintiff's financial affairs was made by James B. Allen, certified public accountant of Nashville, Tennessee, and a former Internal Revenue Agent from 1927 to 1934. This investigation corroborated that of Mr. Minor. 36. The accountants' investigation could not trace all of plaintiff's financial transactions. Plaintiff had not retained or had lost some of his cancelled checks and in such cases disbursements from his bank accounts could not always be clearly identified. Furthermore, the accountants were unable to specifically state the source of certain deposits in plaintiff's bank accounts. Mr. Minor estimated that from $250,000 to $275,000 of plaintiff's bank deposits during this period could not be traced to payments made to the plaintiff by the Richmond and Bennett firms. Mr. Allen likewise was unable to determine the source of $296,000 cash deposits which plaintiff made during this time. He stated that his investigation did not find that these deposits were from income other than what plaintiff reported on his returns. Findings of Fact 131 C. Cls. Plaintiff did not furnish his accountants with records which purported to give a complete account of all his cash transactions. 37. The evidence on plaintiff's net worth is not precise. In 1918, when plaintiff entered the Army, he turned over to his mother for safekeeping between $75,000 and $90,000 in cash. In addition, he kept a bank balance of $10,000. Plaintiff testified his net worth in 1927 was a little more than $300,000. He further testified that, as of October 31, 1943, he had cash (currency, cashier's checks, New York exchange, St. Louis exchange), or "the equivalent of cash, stocks," worth over $400,000. He did not include the value of his business in this figure. 38. There are in evidence two statements of net worth as of October 31, 1943, and October 31, 1944, which plaintiff furnished his bank. The 1943 statement lists, under the heading of "Bonds-notes etc.," assets worth $50,000. The 1944 statement lists, under the heading of "Bonds-etc.," assets in the amount of $87,000. The statements were submitted on stationery of the Jacobs Furniture Company and plaintiff claims they were intended to cover merely the worth of his business and not of himself personally. Plaintiff testified that he included sufficient personal assets in these statements to insure what he said was their purpose, obtaining of a line of credit. He said he wished to show that the business was solvent but did not make any effort to list everything he owned. 39. Plaintiff testified that he had made lists of his assets but that he no longer had any of these lists. He also testified that his $300,000 net worth in 1927 was partly in cash and partly in securities. Plaintiff at about that time showed a portfolio of securities to his friend Mr. Weiss who estimated, on deposition, they were worth from $150,000 to $200,000. Plaintiff himself estimated the contents of this portfolio as having had a value of from $100,000 to $150,000 but added it represented only a part of his holdings at that time. He could not recall what part of the securities in that portfolio were stock, what type of stock, or when he sold the stock, 1 Findings of Fact 40. Plaintiff was unable to give a breakdown between cash and stock in the $400,000 which he said he held in those two assets in 1943. He kept these assets in his store, at home, on his person, and in a vault. He has always had a lockbox since being grown up. He was unable to state how much money he had in his lockbox on October 31, 1943, nor how much money he had in his lockbox or lockboxes on October 31, 1944. He estimated that he customarily kept $100,000 either in his money belt or at home. In 41. Certain of plaintiff's business transactions indicate that he had a considerable amount of cash or readily available credit. In 1934, he made an offer to pay $75,000 cash for an interest in the Leo Kahn Furniture Company. 1942, he made an offer to purchase a certain piece of real estate in Memphis for $175,000 cash. During the years 1939-1946 plaintiff made loans ranging from $5,000 to $50,000 to Mr. Edgar Haas, a personal friend. These loans were made in cash, cashier's checks, and New York exchange, which plaintiff had on his person or on his premises. 42. The records of his brokers for the fiscal years here in question show that he transacted a very substantial part of his business there in cash or by redeposit of checks he received from the broker. During these same years plaintiff deposited $296,000 in cash to his bank accounts. Records submitted by two Memphis banks, approximately covering the period 1940-1947, show that plaintiff made frequent purchases there of cashier's checks and New York exchange, payable to Saul B. Jacobs, in amounts that ranged from $63.50 to $35,000. Where the records list the date of payment, they indicate that payment in every case occurred within a year after the date of issuance. 43. On the other hand, one of plaintiff's bankers testified that plaintiff has borrowed money over the years and heavily around 1946. He borrowed as much as $50,000 in 1943 and 1944. Sometimes he would borrow on open account and when he borrowed as much as $25,000 he would put up collateral. 44. When plaintiff was divorced in 1940, his father and mother paid off an $1,800 lien on a parcel of real property |