Cox v. Commissioner , 54 T.C. 1735 ( 1970 )

Adell D. Cox and Mary T. Cox, Petitioners v. Commissioner of Internal Revenue, Respondent

Cox v. Commissioner

Docket No. 5761-66

United States Tax Court

54 T.C. 1735; 1970 U.S. Tax Ct. LEXIS 63;

September 24, 1970, Filed

---

Decision will be entered for the respondent.

1. The petitioner has, since 1951, been engaged in farming. He failed to file income tax returns for the taxable years 1951 through 1963. In the absence of adequate records, the respondent computed the petitioner's taxable income on the net worth plus nondeductible expenditures method. The petitioner had no net worth at Jan. 1, 1951, and it was possible to compute his net worth as of Dec. 31, 1963. However, the petitioner's net worth as of the end of any of the intervening years could not be determined. Accordingly, the respondent computed the petitioner's increase in net worth over the entire 13-year period and allocated it equally to each of the years. Held, that, under the circumstances, the respondent's method of computing and allocating the increase in net worth was proper. Held, further, that in determining the petitioner's net worth as of Dec. 31, 1963, the respondent properly used the cost of assets rather than the fair market value thereof.

2. Prior to the filing of an income tax return for the taxable year 1964, the petitioner had not filed any returns and hence had not theretofore adopted any method for computing depreciation on farm equipment. In the 1964 return the petitioner computed the depreciation on the straight-line method and stated as the amount of prior years' depreciation an amount computed on the straight-line method. Held, that the signing and the filing of such return for the taxable year 1964 constituted an election to adopt the straight-line method for depreciating farm assets for all years, and that he is not entitled, in computing his tax liability for the years in question, to use the declining-balance method.

Adell D. Cox, pro se.

Robert S. Leigh and F. Timothy Nichols, for the respondent.

Atkins, Judge.

---

ATKINS

The respondent determined deficiencies in income tax and additions to tax against petitioners as follows:

Year	Tax
1951	$ 421.00
1952	458.00
1953	458.00
1954	413.00
1955	521.45
1956	521.45
1957	535.01
1958	535.01
1959	548.57
1960	779.75
1961	659.75
1962	620.38
1963	631.17
Total	7,102.54

	Additions to tax
Year	Sec. 291(a),	Sec. 293(a),	Sec. 6651(a),	Sec. 6653(a),
	I.R.C. 1939	I.R.C. 1939	I.R.C. 1954	I.R.C. 1954
1951	$ 105.25	$ 21.05
1952	114.50	22.90
1953	114.50	22.90
1954			$ 103.25	$ 20.65
1955			130.36	26.07
1956			130.36	26.07
1957			133.75	26.75
1958			133.75	26.75
1959			137.14	27.43
1960			194.94	38.99
1961			164.94	32.99
1962			155.10	31.02
1963			157.79	31.56
Total	334.25	66.85	1,441.38	288.28

The issues for decision are: (1) Whether assessment and collection of deficiencies and additions to tax for any of the taxable years are barred by the statute of limitations; (2) whether the respondent properly determined deficiencies for the taxable years 1951 through 1963 by using the net worth plus nondeductible expenditures method for establishing petitioners' taxable income; (3) whether petitioners' failure to file income tax returns for the taxable years 1951 through 1963 was due to reasonable cause and not willful neglect; and (4) whether any part of any deficiency or underpayment of tax for any of the taxable years 1951 through 1963 was due to negligence or intentional disregard of rules and regulations.

FINDINGS OF FACT

Petitioners Adell D. and Mary T. Cox are husband and wife and were such during the taxable years 1951 through 1963. At the time of the filing of the petition herein, they were residents of Rector, Ark. Petitioners did not file Federal income tax returns or pay income taxes for any of the taxable years involved. As a matter of convenience, Adell D. Cox will hereinafter be referred to as the petitioner.

At the time of trial, petitioner was 43 years of age. He had been engaged in farming operations for most of his life. He ceased attending school in the ninth grade and began farming. Near the end of World War II he entered the U.S. Army and served for 2 years. After World War II, he was employed as a driver of a gravel truck. Petitioner continued to do this and also did some small-scale farming on rented land until 1951. On January 1, 1951, he had no assets in excess of his liabilities.

On December 8, 1951, petitioner purchased entirely on credit 80 acres of farm land near Marmaduke, Ark., for $ 7,500, and began his own farming operations, consisting of growing cotton, wheat, and soybeans. He had a cotton allotment from the U.S. Government which varied in size from year to year.

On December 18, 1954, he purchased another tract of 40 acres for $ 4,000. In 1958 he bought a large amount of farm equipment and began to farm on a larger scale.

By December 31, 1963, petitioner had paid for both of the above parcels of land from the proceeds of his farming operations and owned them free and clear of any indebtedness. During the period 1951 through 1963, petitioner also farmed on rented land. The amount of rented acreage has varied year to year, with a range of from 200 to 250 acres per year.

Between 1958 and 1963, petitioner acquired the following equipment, used in his farming operations at the following costs:

Kind of property	Date acquired	Cost
Gleaner combine	10/ 1/58	$ 7,882.50
Hume pickup reel	10/ 1/58	249.95
4-row cultivator, A.C. front	12/ 1/58	650.00
D-17 A.C. tractor	12/ 1/58	3,750.00
13 1/2 ft. tandem disk	12/ 1/58	750.00
5-bottom plow	12/ 1/58	650.00
4-row Burch planter	12/ 1/58	50.00
10-ft. Cultipacker	6/ 1/59	554.00
1948 Ford 1/2-ton truck	10/ 1/59	435.00
4 Kewanee trailer and beds	12/ 1/60	1,675.00
A.C., 2-row cottonpicker	8/ 1/60	15,593.00
Electric welder	2/ 1/60	137.02
4-row cultivator	3/ 1/61	665.00
4-row John Blue side dress	3/ 1/61	215.00
Pre-merge kit and pump	5/ 1/61	167.00
1950 Chevrolet 1/2-ton truck	3/ 1/61	275.00
5-bottom plow	3/ 1/61	425.00
4-row oiling bar	6/ 1/62	169.95
Hover burner kit	7/ 1/62	292.08
4-row Barrentine roller	5/ 1/63	400.00
Model "A" combine cab	11/ 1/63	400.00
Combine control header	11/ 1/63	375.00
Kent seeder spreader	11/ 1/63	335.00
Total cost		36,095.50

As of December 31, 1963, petitioner continued to own all of the above equipment. He had by that time paid for all of this equipment from the proceeds of his farming operations except for a loan of $ 5,000 owing to E. H. Grady and a loan of $ 4,355 owing to the Production Credit Administration resulting from the refinancing of the cottonpicker.

As of December 31, 1963, petitioner also owned personal assets, on which there were no liabilities, with costs as follows:

Assets	Cost
Cash on hand in Security Bank & Trust, Paragould, Ark	$ 640
Improvements to personal residence	600
Built toolshed, 1960	300
1957 Mercury, personal automobile	1,500
Boat and trailer, purchased 1961	775
Outboard motor, purchased 1962	450

The source of these assets was the proceeds from petitioner's farming operations.

During each of the taxable years 1951 through 1959, petitioners had personal and living expenses of $ 1,449.20, consisting of food, clothing, utilities, etc. During each of the taxable years 1960 through 1963 they had personal and living expenses of $ 2,384.

During the taxable years 1951 through 1963, petitioner's only source of income was the proceeds from his farming operations. He kept no books and had few records of these operations. Petitioner did not receive any funds by way of gift or inheritance, or from any other nontaxable source.

Petitioners did not file any income tax returns or pay any tax for any of the taxable years in question. In February 1965, the petitioner voluntarily contacted representatives of the respondent and informed them that he had not filed any income tax returns since about 1948. Several meetings were had at which the petitioner presented such records as he had. These records were incomplete and inadequate for the computation of his taxable income. Petitioner was requested to furnish a list of his assets and liabilities as of the beginning of the taxable year 1951, the year that he purchased land and began farming on his own, and as of the end of the taxable year 1963, for the purpose of computing the tax liability upon the increase in net worth plus nondeductible expenditures method. The petitioner advised the representatives of respondent that he had no net worth as of the beginning of the taxable year 1951. He supplied them with a list of his assets and liabilities as of the end of the taxable year 1963. He also supplied them with other information upon which the notice of deficiency was based.

On April 14, 1965, the petitioners filed a joint Federal income tax return for the taxable year 1964. The return was prepared for them by a firm of certified public accountants in Kennett, Mo. On such return all of the assets used in the farming operations were listed and depreciation was claimed on the straight-line method. Included in such assets were those which were owned on December 31, 1963, with respect to which there was shown prior years' depreciation of $ 14,347.87, computed on the straight-line method. In computing the depreciation on such assets, the petitioners used the same amounts as cost as were used by the respondent in determining the increase in net worth and in calculating the allowable depreciation. On subsequent returns for the taxable years 1965, 1966, and 1967, the straight-line method was also employed by petitioners for claiming depreciation.

In the notice of deficiency, which was dated July 26, 1966, the respondent, asserting the absence of adequate records, computed petitioners' taxable income upon the basis of the increase in petitioner's net worth during the taxable years with adjustment for personal expenses and other nondeductible amounts paid. Respondent determined petitioner's increase in net worth as follows:

Assets	Jan. 1, 1951	Dec. 31, 1963
Cash on hand	0	0
Cash in Security Bank & Trust, Paragould, Ark	0	$ 640.00
80 acres land, purchased 12/8/51	0	7,500.00
40 acres land, purchased 12/18/54	0	4,000.00
Improvements to personal residence	0	600.00
Built toolshed, 1960	0	300.00
1957 Mercury, personal automobile	0	1,500.00
Farm equipment	0	36,095.50
Boat and trailer, purchased 1961		775.00
Outboard motor, purchased 1962	0	450.00
Total assets	0	51,860.50
Liabilities
Notes payable:
E. H. Grady, Rector, Ark	0	5,000.00
P.C.A., Jonesboro, Ark	0	4,355.00
Depreciation reserve	0	14,348.27
Total liabilities	0	23,703.27
	0	28,157.23
Net worth
Net worth at Jan. 1, 1951		0
Increase in net worth for years 1951 through 1963		28,157.23

Computation of earnings per year:

Increase in net worth over 13-year period, $ 28,157.23 / 13=$ 2,165.94 per year

The respondent determined the depreciation reserve by using the straight-line method. Respondent then determined adjusted gross income by adding, as nondeductible expenditures, petitioner's annual living expenses to the increase in net worth as follows:

	Increase in	Non-business	Adjusted
Year	net worth	expense	gross
	per year		income
1951	$ 2,165.94	$ 1,449.20	$ 3,615.14
1952	2,165.94	1,449.20	3,615.14
1953	2,165.94	1,449.20	3,615.14
1954	2,165.94	1,449.20	3,615.14
1955	2,165.94	1,449.20	3,615.14
1956	2,165.94	1,449.20	3,615.14
1957	2,165.94	1,449.20	3,615.14
1958	2,165.94	1,449.20	3,615.14
1959	2,165.94	1,449.20	3,615.14
1960	2,165.94	2,384.00	4,549.94
1961	2,165.94	2,834.00	4,549.94
1962	2,165.94	2,384.00	4,549.94
1963	2,165.94	2,384.00	4,549.94

The respondent allowed the petitioner two exemptions for each of the taxable years 1951 through 1960 and three exemptions for each of the years 1961 through 1963, and in computing the tax used the tax tables provided in the statute. The deficiencies for the taxable years 1955 through 1963 include self-employment taxes and the deficiencies for the taxable years 1962 and 1963 take into account investment credits.

For each of the taxable years the respondent also asserted a 25-percent addition to tax for failure to file returns under section 291(a) of the Internal Revenue Code of 1939 and section 6651(a) of the Internal Revenue Code of 1954. He also determined that the underpayment of the tax for each year was due to negligence or intentional disregard of rules and regulations and asserted a 5-percent addition to tax under section 293(a) of the Internal Revenue Code of 1939 and section 6653(a) of the Internal Revenue Code of 1954.

For each of the taxable years in question the petitioners' failure to file a return was not due to reasonable cause.

Some part of the deficiency for each of the years 1951 through 1953, and some part of the underpayment of tax for each of the years 1954 through 1963, is due to negligence or intentional disregard of rules and regulations.

OPINION

In the petition, petitioner asserts that assessment and collection of the deficiencies and additions to tax for 10 of the years involved are barred by the statute of limitations. Section 276(a) of the Internal Revenue Code of 1939¹ and section 6501(c)(3) of the Internal Revenue Code of 1954² both provide that the tax may be assessed, or a proceeding in court for the collection thereof may be begun without assessment, at any time where there has been a failure to file a return. For the taxable years 1951 through 1963, petitioner failed to file any tax returns. Clearly, assessment and collection of any taxes due for the years in question are not barred by the statute of limitations.

In computing petitioner's adjusted gross income, the respondent employed the increase in net worth plus nondeductible expenditures method. He calculated the increase which had occurred over the period January 1, 1951, through December 31, 1963, and allocated such increase equally over each of the 13 years in question. He then added petitioner's annual living expenses to arrive at adjusted gross income. Petitioner does not question the propriety of using the net worth method. He also concedes that he had no net worth at January 1, 1951, that he owned the assets which the respondent listed as of December 31, 1963, that the respondent correctly determined his liabilities as of that date, and that in the various years he had personal and living expenses in the amounts determined by the respondent. However, he objects to the respondent's application of the net worth method in certain respects.

Petitioner objects to the respondent's use of cost of assets, rather than market value thereof, in computing his closing net worth as of December 31, 1963. It is apparent that the petitioner does not fully understand the underlying rationale of the net worth method, ³ which is that amounts expended in the taxable period, including amounts expended to acquire assets, are to be considered income of such period unless such amounts were on hand at the beginning of the period or represented nontaxable receipts such as gifts or inheritances. Obviously, the value of the assets at the end of the period is immaterial since it has no bearing upon the amount expended during the period to acquire the assets. Accordingly, petitioner's assertion that market value should have been used is without merit.

Petitioner also contends that the respondent erroneously included in the cost of farm equipment on hand at December 31, 1963, amounts representing deductible sales taxes and insurance costs. He testified that some of the cost figures that he supplied to respondent included such amounts. However, he did not testify as to what these amounts were or which costs used by respondent included such amounts. Furthermore, on his return for the taxable year 1964 the petitioner used, as a basis for calculating the allowable depreciation, the same costs of farm equipment as were used by the respondent in the net worth computation. Under the circumstances, for failure on the part of the petitioner to show error in specific costs used by the respondent, we are not in a position to disturb the respondent's determinations in this respect.

Petitioner further contends that the respondent erred in calculating the increase in net worth over the full 13-year period and in allocating such increase equally over each year in such period. He points out that the farm equipment which was included in the net worth computation as of December 31, 1963, at a cost of $ 36,095.50 was bought commencing in 1958, and that in 1958 he began to farm on a larger scale. He therefore contends that the increase in his net worth, and hence his taxable income, was greater in the years 1958 to 1963 than in the earlier years. Obviously it would be preferable, in the interest of accuracy, to compute the increase in net worth by use of opening and closing net worth for each year. However, petitioner concedes that his net worth cannot be determined as of the beginning or end of any particular year in the 13-year period except the opening net worth at January 1, 1951, and the closing net worth at December 31, 1963. The respondent commenced the net worth computation as of January 1, 1951, because that was the year the petitioner commenced the farming operations which accounted for all his income and increase in net worth over the years, and because the petitioner advised the respondent that he had no net worth at January 1, 1951. The petitioner has not adduced evidence to show that he did not have sufficient taxable income in the early years to give rise to tax liabilities. Indeed he concedes that he expended about $ 1,450 in each of the early years for personal and living expenses and that this was derived from his farming operations. From his testimony we also gather that he purchased some farm equipment in the early years. Under the circumstances, we fail to see how the respondent had any alternative to computing the increase in net worth for the years in question in the manner in which he did. Of course, it is obvious that the petitioner's net worth did not increase in precisely the same amount in each of the years over the 13-year period and it may be, although on this record we cannot so find, that there were greater increases in the later years. In this connection, it should be pointed out that there is no way of knowing precisely in which of the years the petitioner accumulated funds which he expended, including payments on the various assets which he purchased. The record shows that the respondent's agents had several conferences with the petitioner and attempted to obtain any information which might protect the interest of the petitioner. We feel that the respondent did the best that he could under the circumstances, and in the absence of proof by the petitioner of a more precise method of allocating the increase in net worth we are constrained to approve the respondent's allocation. See Estate of W. D. Bartlett, 22 T.C. 1228">22 T.C. 1228. Cf. United States v. Ridley, (N.D.Ga.) 120 F. Supp. 530">120 F. Supp. 530. And it may be added that we have no reason to believe that in the final analysis the method of allocation employed by the respondent reaches an inequitable result from the standpoint of the petitioner. ⁴

Petitioner's final objection to respondent's application of the net worth method concerns respondent's use of the straight-line method of calculating the depreciation sustained on petitioner's farm equipment. He contends that the declining-balance method should have been used, which would have been to his advantage. ⁵ The respondent contends, among other things, that the petitioners elected to use the straight-line method and may not now change the method since respondent's consent was not requested or granted.

Under the circumstances here presented, we think the respondent's action must be sustained. Prior to the taxable year 1964, the petitioners had not filed any returns and hence had not theretofore adopted any method for computing depreciation on the farm equipment. In this situation the respondent in his initial approach might have employed the declining-balance method, which would have reduced petitioners' tax liability for the years in question, although we have some question as to whether it would have been appropriate for him to have done so in the absence of an indication by petitioners that they wished to adopt such method. However, we do not think the respondent was required to use such method in his initial computations since the petitioners had not elected such method. By the time the respondent issued the notice of deficiency for the years in question the petitioners had filed an income tax return for the taxable year 1964 in which were listed all the farm equipment that the respondent had used in the net worth computation and depreciation on such assets was claimed on the straight-line method. Therein, consistently, the amount stated as prior years' depreciation was computed on the straight-line method, the amount being $ 14,347.87 which is almost exactly the amount which the respondent had allowed as a depreciation reserve in the net worth computation. It is our conclusion that by signing and filing such return the petitioners thus effectively elected the straight-line method for depreciating such assets for all years, and that they may not now employ the declining-balance or any other method for the years in question. See the Income Tax Regs., pertinent portions of which are set forth in the margin. ⁶ See Henry M. Rodney, 53 T.C. 287">53 T.C. 287, and cases cited therein.

In the petition the petitioners put in issue the action of the respondent in determining additions to tax under section 291(a) of the Internal Revenue Code of 1939 and section 6651(a) of the Internal Revenue Code of 1954 for failure to file returns within the time prescribed by law. Those sections provide for such additions to tax "unless it is shown that such failure is due to reasonable cause and not due to willful neglect." The petitioners were required to file returns for each of the years in question under section 51(a) of the Internal Revenue Code of 1939 and section 6012(a) of the Internal Revenue Code of 1954 since they had gross income of $ 600 or more in each year. On brief the petitioners do not present any argument upon the issue. The petitioner testified that at the beginning his failure to file a return was due to the fact that he could not himself prepare a return and could not afford to pay someone else to do it for him, and that after once having failed to file he did not file returns for subsequent years because he was afraid he would get into a lot of trouble. In a statement given to agents of the respondent he also stated that he had not filed returns because he owed so much money that he did not think he made enough to file returns. These reasons advanced by the petitioner do not constitute reasonable cause for failure to file. See Genevra Heman, 32 T.C. 479">32 T.C. 479, affd. (C.A. 8) 283 F.2d 227">283 F. 2d 227. We have accordingly concluded and have found as a fact that for each of the years in question the petitioners' failure to file a return was not due to reasonable cause. The respondent's determination of the additions to tax is approved.

In the petition the petitioners also put in issue the action of the respondent in determining additions to tax under section 293(a) of the Internal Revenue Code of 1939 and section 6653(a) of the 1954 Code. Such sections provide that if any part of any deficiency or underpayment of tax is due to negligence or intentional disregard of rules and regulations, an additional amount of 5 percent of the total amount of the deficiency or underpayment shall be assessed, collected, and paid. Here again the petitioners have not on brief presented any argument. Based upon the record as a whole, and particularly the fact that the petitioner did not keep adequate records for the computation of his tax liability, as required by section 54(a) of the Internal Revenue Code of 1939 and section 6001 of the Internal Revenue Code of 1954, and regulations thereunder, it is our conclusion, and we have found as a fact, that some part of the deficiency for each of the years 1951 through 1953, and some part of the underpayment of tax for the years 1954 through 1963, is due to negligence or to intentional disregard of rules and regulations. See H. A. Hurley, 22 T.C. 1256">22 T.C. 1256, affd. (C.A. 6) 233 F. 2d 177. Accordingly, these additions to tax are approved.

Decision will be entered for the respondent.

---

Footnotes

• 1. Sec. 276(a) of the Internal Revenue Code of 1939 provides as follows:

  (a) False Return or No Return. -- In the case * * * of a failure to file 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.↩

• 2. Sec. 6501(c)(3) of the Internal Revenue Code of 1954 provides as follows:

  (3) No Return. -- In the case of failure to file 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.↩

• 3. On brief petitioner states in part:

  "In the 4 years this case has been in dispute, has given me a chance to partially understand the issues. It seems to me that a net worth audit is summing everything up to date and yet machinery which is an expense was said to be a profit. IRS's claim is on an expense instead of a profit."↩

• 4. See Estate of John H. Engwall, T.C. Memo. 1956-6↩.

• 5. Sec. 167 of the Internal Revenue Code of 1954 provides in part as follows:

  SEC. 167. DEPRECIATION.

  (a) General Rule. -- There shall be alowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) --

  (1) of property used in the trade or business, or

  (2) of property held for the production of income.

  (b) Use of Certain Methods and Rates. -- For taxable years ending after December 31, 1953, the term "reasonable allowance" as used in subsection (a) shall include (but shall not be limited to) an allowance computed in accordance with regulations prescribed by the Secretary or his delegate, under any of the following methods:

  (1) the straight line method.

  (2) the declining balance method, using a rate not exceeding twice the rate which would have been used had the annual allowance been computed under the method described in paragraph (1),

  (3) the sum of the years-digits method, and

  (4) any other consistent method * * *↩

• 6. Sec. 1.167(c)-1, Income Tax Regs., provides in part as follows:

  (c) Election to use methods. Subject to the limitations set forth in paragraph (a) of this section, the methods of computing the allowance for depreciation specified in section 167(b)(2), (3), and (4) may be adopted without permission and no formal election is required. In order for a taxpayer to elect to use these methods for any property described in paragraph (a) of this section, he need only compute depreciation thereon under any of these methods for any taxable year ending after December 31, 1953, in which the property may first be depreciated by him. * * *

  Sec. 1.167(e)-1, Income Tax Regs., provides in part as follows:

  In general↩. Any change in the method of computing the depreciation allowances with respect to a particular account is a change in method of accounting, and such a change will be permitted only with the consent of the Commissioner, except that certain changes to the straight line method shall be permitted without consent * * *.