*259 Decision will be entered under Rule 50.
Proof of contents of returns claimed to be fraudulent, held, necessary to sustain respondent's burden of proving inapplicability of statute of limitations on ground that returns filed were false or fraudulent, with intent to evade tax under section 276 (a), I. R. C. 1939.
*861 Respondent determined the following deficiencies in income tax and additions to tax of petitioner: *862
| Additions to tax | |||
| Year | Deficiency | ||
| Sec. 293 (b) | Sec. 294 (d) (2) | ||
| 1942 | $ 1,600.05 | $ 800.03 | |
| 1943 | 1 4,711.45 | 2,277.54 | |
| 1944 | 7,596.98 | 3,798.49 | |
| 1945 | 7,209.83 | 3,637.82 | $ 443.32 |
| 1946 | 42,811.20 | 21,405.60 | 2,568.90 |
The remaining issues are (1) whether the returns filed for 1942 and 1944 were false or fraudulent with intent to evade tax, and if so, (2) whether petitioner understated his income for each of those 2 years, and*260 (3) whether a part of any deficiencies for each of those years was due to fraud. Petitioner concedes all deficiencies in tax and additions to tax for 1943, 1945, and 1946.
FINDINGS OF FACT.
Certain facts are stipulated and are hereby found.
Petitioner filed individual income tax returns with the collector of internal revenue at Newark, New Jersey, for 1942 and 1944 on or before March 15 of the following years, respectively. Respondent destroyed those returns prior to the trial.
Petitioner engaged in the business of gambling from 1942 through 1950, and had no other business. He maintained no books of account or records of his gambling activities during those years.
On May 20, 1952, respondent made jeopardy assessments of taxes and additions to tax in the amounts determined in the statutory notice of deficiency issued on July 17, 1952.
It is stipulated that petitioner's net worth increased during 1942 and 1944, as follows:
| 1942 | 1944 | |
| Net assets, January 1 | $ 22,362.96 | $ 32,171.39 |
| Net assets, December 31 | 24,149.56 | 55,519.50 |
| Annual increment | 1,786.80 | 23,348.11 |
| Estimated cost of living | 7,800.00 | 7,800.00 |
| Federal taxes paid | 507.53 | 954.21 |
| Increase in net worth and | ||
| nondeductible expenditures | 10,094.13 | 32,102.32 |
*261 It is further stipulated that petitioner had no cash on hand on January 1, 1942, and that none of the increases in net worth or nondeductible expenditures for any of the years represent capital items received from loans, bequests, inheritances, or other capital sources. Petitioner's wife had no income or deductible expenses in any of the years.
*863 Petitioner's net worth and nondeductible expenditures increased and his net income was unreported during the following years, in the following amounts:
| Year | Increase | Unreported |
| income | ||
| 1943 | $ 16,447.32 | $ 11,794.78 |
| 1945 | 21,858.92 | 17,036.72 |
| 1946 | 76,179.56 | 70,565.42 |
Petitioner customarily cashed checks received in payment of wagers won by him over the counter at his bank without passing them through his bank accounts.
Petitioner's 1942 income tax return showed tax due of $ 625.49. The income tax computed on the increase in net worth and personal and living expenses would total $ 1,438.95.
Petitioner's 1944 income tax return disclosed tax due of $ 633. The tax computed on the increase in net worth and personal and living expenses would total $ 14,218.51.
The stipulated net worth statement includes no depreciable*262 property owned by petitioner at the end of 1942 or 1944 and no debt or account receivable as of the end of 1941 or 1943 which might be the subject of a deduction for a bad debt.
Respondent has not shown that income tax returns filed by petitioner for 1942 and 1944 were false or fraudulent with intent to evade tax.
OPINION.
The narrow question is whether respondent has carried his burden of proving that a fraudulent return was filed so as to avoid the statute of limitations 1 under the circumstances of this case, including the fact that he is unable to show what return was filed in the first place. This is not a case where the contents of the return have been demonstrated by secondary evidence. The only thing shown is the amount of tax due as entered on the collector's assessment list. If this indicated, even by inference, the gross income and deductions entered upon the return, there might be some validity to respondent's argument that the burden should shift to petitioner.
*263 But the complications of setting out deductible items, subtracting them from gross income, giving effect to available credits, and then computing and entering the net tax due are too well known to permit a valid inference that the tax shown by the return is of itself sufficient *864 measure either of gross income actually reported or of deductions properly taken.
Here we regard the failure to produce adequate evidence of the contents of the returns, upon whose falsity respondent relies, as fatal. On this issue petitioner is sustained.
Decision will be entered under Rule 50.
Raum, J., dissenting: My difficulty with the prevailing opinion is that I don't know what it holds. Certainly, it doesn't purport to hold that proof of the contents of a return by secondary evidence is necessarily insufficient in establishing fraud. But here there was evidence as to the amount of tax due that was shown on the return, and that fact could furnish the basis for determining the maximum amount of taxable net income appearing on the return. This is particularly true where petitioner's exemptions are known, and where, through information supplied by the net worth statement, such *264 items as capital gains or losses, depreciation, and the like are susceptible of reasonable determination.
The tax is imposed upon net income, and it might well be immaterial in a particular case whether the Government can show what items of gross income or deduction were reported on the return. Where it shows that the net income was substantially understated, that fact together with other facts of record may be convincing evidence that the return was a fraudulent one. If the majority opinion is to be construed as laying down an inflexible rule that fraud cannot be proved without producing the return or reconstructing all the components of net income appearing on the return, I think it is wrong. It should be sufficient to show by cogent evidence that net income was substantially understated on the return and that, in conjunction with other facts of record, such understatement was false or fraudulent.
Footnotes
1. Includes Victory tax.↩
1. SEC. 276. SAME -- EXCEPTIONS.
(a) False Return or No Return. -- In the case of a false or fraudulent return with intent to evade tax or 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.↩