Lumbard, Chief Judge, Anderson, Circuit Judge and Wyatt, District Judge.*fn*
Petitioner Raymond A. O'Connor, a certified public accountant, has conducted an accounting business in Niagara Falls, New York since 1922. From 1923 until sometime into the 1950's, he practiced in an accounting partnership with his brother Julian under the firm name of R. A. O'Connor & Company. Julian was an active member of the partnership except for the years 1943 to 1945 when he was on active duty in the United States Navy. In addition to his accounting practice, Raymond operated two farms owned by his wife, Bertha, managed a canning plant, was treasurer and sole stockholder of Burt Cold Storage, Inc., and dealt in real estate.
Petitioner Bertha O'Connor, housewife, held in her own name several real properties, including the two farms just mentioned. Although she was generally familiar with the labor and financial problems associated with her farms, she did not assist her husband in the management of them. On the other hand, Bertha personally collected and retained the rents from some of her other real estate.
Petitioner Burt Cold Storage, Inc. (hereinafter "Burt"), incorporated in 1923, had cold storage facilities at Burt and Olcott, New York. In September 1941, one month after Raymond became treasurer and sole shareholder, Burt transferred its property and storage facilities through an intermediary to Burt Packing and Warehouse, Inc. (hereinafter "Burt Packing"), a newly formed corporation in which Julian O'Connor had a 50% interest. Among the properties transferred was a 1941 storage contract with the United States Department of Agriculture. That Department, however, refused to recognize the transfer and insisted on doing business with Burt. Indeed, in 1947 another contract was arranged with Burt, and from 1942 to 1949, Burt received payments totalling $300,099.53 from the Government. Burt in turn transferred $294,496.36 to Burt Packing as alleged compensation for fulfilling the contracts assigned to it.
In October 1951, respondent Commissioner of Internal Revenue mailed to Raymond and Bertha a joint statutory notice of deficiency. The Commissioner's determination of their income and victory tax liability for 1943 through 1949 disclosed alleged deficiencies of $233,594.62 on unreported income of $417,289.93, and alleged penalties of $129,717.04 for fraud and for substantial underestimation of estimated tax in accordance with §§ 293(b) and 294(d) (2) of the Internal Revenue Code of 1939, respectively.*fn1 These calculations were based on the disallowance of certain deductions claimed by the O'Connors and the unexplained increase in their net worth in each year.
At the same time, the Commissioner advised petitioner Burt of alleged deficiencies in income tax of $22,535.48, in declared value excess profits tax of $35,152.51 and in excess profits tax of $201,895.95; alleged penalties for fraud and for failure to file income and excess profits tax returns in accordance with §§ 293(b) and 291(a) of the Code, amounted to $193,305.06. These determinations were made by treating cash deposits in Burt's checking account, less allowable withdrawals from that account, as taxable income.
In January 1952, petitioners filed in the Tax Court timely petitions for a redetermination of the deficiencies and penalties assessed, and shortly thereafter the Commissioner filed his answer. There followed a long period of investigation and review by the Commissioner,*fn2 until May 1964 when the latter filed an amendment to the answer which included a recalculation of the O'Connors' net worth statement and which showed a reduction in the amount of unreported income for the period to $303,694.38. The trial in the Tax Court finally commenced in September 1965. Near the end of the proceedings, on April 14, 1966, petitioners amended their petition allegedly "to conform to the proof", stating that Raymond made and filed individual not joint returns and that Bertha did not make or file any tax returns for the years in question.
At the conclusion of the trial, the Tax Court found that Raymond and Bertha had filed joint returns, that the Commissioner's determination of deficiencies in his amended answer was fair, reasonable and substantially correct, and that fraud had been proven for each year. The Tax Court rejected, however, the Government's claim for an additional tax under § 294. With respect to Burt Cold Storage, the Commissioner's determinations were completely sustained.
On this appeal, petitioners' principal claims are that the Tax Court erred in holding (1) that Raymond and Bertha filed joint returns, (2) that the Commissioner discharged his burden of proving that the alleged deficiency in the O'Connors' return for each year was the result of fraud, (3) that the Commissioner's net worth statement of the O'Connors' income was fair, reasonable and correct, (4) that the Commissioner's determination of Burt's income was correct, and (5) that petitioners were not deprived of a fair trial by the Government's failure to produce petitioners' checkbooks which were allegedly last known to be in the Government's possession. Taxpayers also contend that Raymond's statements to an Internal Revenue Agent before he received a warning of his right to remain silent and to be assisted by counsel were improperly admitted at trial, and that a memorandum of Raymond's assets was improperly excluded.
The first major issue in this appeal concerns the Tax Court's finding that Raymond and Bertha O'Connor filed joint tax returns in each of the seven years in question. The evidence from which the court reached this decision was conflicting. On the one hand, the tax returns filed by Raymond from 1943 through 1949 bore neither Bertha's name nor her signature, except for the 1948 return which she signed, according to her testimony, only because someone in her husband's accounting firm advised her that the law required her signature, not because she was intending to file jointly. Also, Bertha testified at the 1965 trial that she never intended to file a joint return during the years under investigation. On the other hand, Bertha, who also had business experience, did not file an individual return during the same period although she clearly had sufficient income from her properties to require the filing of a return and she knew it. Her farm income and expenses, however, were included in the returns signed by Raymond. Moreover, the Tax Court noted that, upon receipt of respondent's notice of deficiency in 1951, the O'Connors filed a joint petition for review in which they did not attack or reject the Commissioner's joint treatment of them and which they did not amend until near the conclusion of the proceedings in the Tax Court some 15 years later. Finally, Raymond, who was in a position to shed much light on his understanding of the returns and his wife's knowledge and approval thereof, was not called as a witness on behalf of his wife.
It is well settled in this Circuit that the determination that income tax returns are joint is a factual issue of the intention of the parties, Federbush v. C.I.R., 325 F.2d 1 (2 Cir. 1963), and must be affirmed unless clearly erroneous. Lamont v. C.I.R., 339 F.2d 377 (2 Cir. 1964). While the wife's failure to sign the return does not preclude a finding of a joint return, Kann v. Commissioner of Internal Revenue, 210 F.2d 247, 251 (3 Cir. 1953), it removes the presumption of correctness ordinarily attaching to the Commissioner's determination of jointness. Moreover, it shifts to the Government the burden of producing additional evidence on the issue. Proof that the return in the husband's name alone actually included both his and his wife's income and deductions would not, standing alone, satisfy that burden. Cf. McCord v. Granger, 201 F.2d 103 (3 Cir. 1952). There is, however, in the present case additional evidence to support the finding that there was a joint return. In the context of Bertha's substantial gross income, her knowledge that a return had to be filed showing that income and of Raymond's expert knowledge of the requirements for preparing and filing tax returns, it may be inferred that Bertha intended to have Raymond file for her whatever statement of income was legally required. To this extent, Raymond was acting as her agent. His inclusion of Bertha's income and deductions in the return filed and his subsequent failure to testify on the issue during the trial furnish additional supporting inferences. Also the O'Connors' joint petition in the Tax Court and their 15 year delay in challenging the Commissioner's view of the returns support the proposition that Bertha, as well as Raymond, acquiesced in the Commissioner's characterization of the returns, especially since the court found to be unconvincing, Bertha's explanation of her intentions throughout the period. In light of all these circumstances, we cannot say that we are left with a definite and firm conviction that a mistake has been made; accordingly, the Tax Court's finding must be affirmed as not clearly erroneous. United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S. Ct. 525, 92 L. Ed. 746 (1948). Nor is our emphasis on the presence of both taxpayers' genuine signatures on the tax returns under consideration in Bauer v. Foley, 404 F.2d 1215 (1968), rehearing granted, April 8, 1969, controlling here. In that case, cited by the appellant here, there was no evidence, direct or circumstantial, that Mrs. Bauer intended to file a joint return with her husband, except for her allegedly forged signature upon the return. Indeed, she had no reason to believe that she was obligated to file a return at all. It was imperative, therefore, that her signature be genuine in order to sustain the Commissioner's determination. The evidence of Bertha's intent differentiates the present case from the circumstances underlying the rationale of Bauer.
The taxpayers' second major allegation of error concerns the Tax Court's finding that the deficiencies in the O'Connors' income were the result of fraud. Unlike his other factual determinations, the Commissioner's allegation of fraud enjoys no presumption of correctness, but must be proven for every year. Yet, if any part of the deficiency for one year resulted from fraud, the 50% penalty provision of § 293(b) of the 1939 Code is computed against the total deficiency for that year. The O'Connors contend that the Commissioner has not carried his burden in any of the years under review.
Against the background of experience, knowledge and ability which Raymond had acquired as a Certified Public Accountant, intimately acquainted with the rules and regulations of the Internal Revenue Service and the obligations of a taxpayer thereunder, and in the light of a record showing omissions of items of income from interest, dividends, rental receipts and other sources; the inclusion of deductions for excessive and duplicate depreciation and non-allowable deductions for dependents; inadequate records; an attempt to destroy bank records to conceal transactions, and a consistent and substantial understatement of income, the Tax Court held that Raymond had acted in bad faith and with intent to defraud. We have examined the record and conclude that that finding is not clearly erroneous. In each year, there are omissions of income and improper deductions for which no satisfactory explanation is given. For example, petitioners took non-allowable deductions for dependents in 1944, 1945, 1947, 1948 and 1949. They failed to report, from 1944 to 1949, interest totalling $4,211.40 from 14 bank accounts in 11 banks. In 1943 and other years, Raymond deposited in his own account, but omitted from the tax return, dividends on Maid of the Mist stock allegedly owned by his children. In addition, income was improperly reduced by the excessive depreciation of equipment and by unlawful income splitting arrangements. Such consistent and substantial understatement of income is strong evidence of fraud, Merritt v. C. I. R., 301 F.2d 484 (5 Cir. 1962); when there is also evidence of the taxpayer's false statements, ...