dissenting:
The government has failed to prove by clear and convincing evidence that the taxpayer had a fraudulent intent to evade his taxes. Nevertheless, it seeks to impose a 50 percent fraud penalty in this case in addition to the other penalties already assessed with such zeal and enthusiasm that it is puzzling on the one hand and somewhat frightening on the other. The case that the government has put together is made by piling inference on top of inference and suspicion on top of suspicion without any substantial, much less clear and *784convincing, evidence to support it. Statements the taxpayer that are clearly favorable to him have been skillfully and artfully interpreted by the government by inference and innuendo in such a way as to give them a meaning never intended by him, and as so interpreted and changed have actually been used against him. His acts and conduct, even when he was cooperating with the investigative agents of the Internal Revenue Service, have been interpreted by the government from the beginning as suspicious and fraudulent, even though the taxpayer had no such intent. From the outset, his every act and deed have been considered suspect by the government, and it has handled the case on that basis. As was said in another fraud penalty case, “The case on the issues where the burden was on the commissioner was presented and tried too much on the theory ‘Give a dog an ill name and hang him.’ ” Olinger v. Commissioner 284 F. 2d 828, 824 (5th Cir. 1956); Goldberg v. Commissioner, 239 F. 2d 316, 321 (5th Cir. 1956). It appears that this is what happened here.
Reduced to its simplest terms, the case on which the government seeks to convict the taxpayer of civil fraud consists of the following charges:
1. The taxpayer failed to file an income tax return for nine years.
2. When asked why he had not filed tax returns, he is alleged to have said, “just negligence.” “Negligence” means to him — “next year I’ll do it, but next year never comes.”
3. The report of the Internal Revenue Service agent’s conversation with the taxpayer contains a statement— “Has no stocks or bonds” (not in quotation marks in the agent’s report).
4. He kept no records except his bank statements and deposit slips and his cancelled checks.
5. He had previously filed income tax returns.
6. He was a peddler of doughnuts and knew he had taxable income during the years in question.
7. The charges considered as a whole show a fraudulent intent to avoid tax.
The government says that these facts constitute clear and convincing evidence that the taxpayer had a fraudulent intent to evade his taxes. In my opinion they fall far short of *785the kind and quantum of evidence necessary to show fraud by clear and convincing evidence. In fact, they do not prove fraud even by a preponderance of the evidence. If there is any evidence of fraud, it is a mere scintilla, and wholly insufficient to impose the fraud penalty on this taxpayer.
Turning now to the above contentions of the government, I will point out why they are insufficient to meet the burden imposed on the government to show fraud.
I
The Taxpayer Failed To File an Income Tax Return for Nine Tears
The failure of the taxpayer to file an income tax return for nine years was enough to justify the 25 per cent penalty imposed by Section 293(a) of the Internal Revenue Code of 1939,1 which was assessed and paid in this case, but is insufficient to show a fraudulent intent to evade taxes. Counsel for defendant admitted at the oral argument of this case that the failure to file the tax returns was not enough to impose the fraud penalty. This is in accord with the decided cases, one of which was First Trust & Savings Bank v. United States, 206 F. 2d 97 (8th Cir. 1953), which discussed this very question. That case is on all fours with this case, except there the taxpayer had never filed a tax return, but this fact is not controlling on the fraud question. In that case the taxpayer was 70 years of age and had never filed a tax return, although he had earned substantial income and knew about income tax. He kept no books or records except his bank statements, deposit slips and cancelled checks. The government imposed the 25 per cent penalty for his failure to file returns, and indicted him criminally, and on a plea of guilty he was fined $10,000 and given a probated prison sentence. The government imposed a fraud penalty of 50 per cent and the taxpayer sued for a refund of the fraud penalty. He died during the progress of the case. It would be difficult to find two cases more alike than these two (even to the death of both taxpayers after their suits were filed). In that case the *786court held that the taxpayer did not have a fraudulent intent to evade tax. Our decision on this issue should be the same. On the question of failure to file tax returns as grounds for the fraud penalty, the court held in favor of the taxpayer, saying:
* * * his dereliction consisted only in wilful omission and passive neglect to perform the duty of making returns imposed upon him by law.
* * * the 50 percent assessment was erroneously made because his dereliction was passive and included no affirmative act of fraud that caused his tax deficiences. His deficiencies were not “due to fraud with intent to evade tax.”
Although in the nature of things it must inevitably have happened that many people have failed to file the income tax returns required of them by law, it appears that this is the first case in which any federal court has sustained the assessment of the 50 percent fraud penalty against a taxpayer with no more showing of fraud than Ms mere failure to file tax returns required of him, which was the only ‘basis for the assessment proved in this case. * * * Supra at 99.
* * * That omission [to file returns] justifies the addition of 5 percent up to 25 percent of the deficiencies found against the taxpayer but does not afford any basis for the addition of 50 percent to Ms deficimcies. * * * [Emphasis supplied.] Id. at 101.
Again in Cirillo v. Commissioner, 314 F. 2d 478, 482 (3d Cir. 1963) the court held that a mere failure to file an income tax return was not enough to support a fraud penalty in the following language:
But uñllful faihure to file a timely return, which may create both criminal liability and an additional civil liability, does not in itself and without more establish liability for a fraud penalty, though it may be relevant in that connection.* * * [Emphasis supplied.]
There was a deliberate and willful failure to file income tax returns for 1948 and 1949 by the taxpayers in Jones v. Commissioner, 259 F. 2d 300 (5th Cir. 1958), but the court held that was not enough to justify a fraud penalty. The facts there could be said to be very strong for the government’s position in imposing a fraud penalty. There the taxpayer *787Liad filed income tax returns regularly after they were prepared 'by his accountants from 1938 to 1947. He was familiar with the filing of such returns, as defendant argues was the case with the taxpayer in the instant case. There the accountants prepared the returns for 1948 and 1949 and delivered them to the taxpayer in plenty of time for them to be filed. The taxpayer never signed nor filed the returns. The reason given by him for not doing so was that he needed the money to pay other debts. The government imposed a fraud penalty on him, which was upheld by the Tax Court. The Circuit Court of Appeals reversed the Tax Court and said that the fraud penalty was not authorized. In this connection, the court said:
* * * the only specific fact which it [the Tax Court] used as the basis for this conclusion [fraud] was the deliberate failure to file the two tax returns which were prepared for him [taxpayer] by his accountant. * * * Under the decisions of the Supreme Court and of this Court, we do not think that such deliberate failure is enough. Supra at 302. [Emphasis supplied.]
In our case, there was no deliberate failure by the taxpayer to timely file his returns. His deficiency was much less, being merely a negligent failure to file, or a passive omission. But the government attributes an ulterior motive to him because of his negligence, when, on the basis of the Jones case, supra, a fraud penalty would not be justified even if he had acted deliberately. See also Breland v. United States, 323 F. 2d 492 (5th Cir. 1963).
The case of Powell v. Granquist, 252 F. 2d 56 (9th Cir. 1958) cited by defendant is distinguishable on the facts here as it was distinguished by the court in the Jones case, supra.
The cases cited by defendant wherein the taxpayers filed incorrect returns as distinguished from no returns at all are inapposite. Am incorrect return is or could be a deception or a deliberate misrepresentation regarding a taxpayer’s income. This is entirely different from making no representation at all. See First Trust & Savings Bank v. United States, supra; United States v. Croessant, 178 F. 2d 96 (3d Cir. 1949), cert. denied, 339 U.S. 927 (1950).
*788II
The Taxpayer’s Alleged Statement That He Had Failed To File Timely Tax Returns Because of Negligence
The report of a conversation between an agent of the I.K.S. and the taxpayer prepared by the agent was admitted in evidence at the trial over the objection of the plaintiff as a report of an officer prepared in the course of his duties and as an exxception to the hearsay rule. This report was not signed by the taxpayer. In fact, he never saw it. This report contained the following statements:
Asked for explanation for failure to file, he said it was “just negligence.” “Negligence” means to him — “next year I’ll do it, but next year never comes.” 2
It is clear that if the taxpayer made these statements, they mean exactly what they say, that is, the reason he did not file his tax returns was “just negligence.” These are plain unambiguous words of the English language that any schoolboy can understand. It is unquestionably the law that the failure to file tax returns because of negligence does not prove fraud or a fraudulent intent to evade taxes on the part of the taxpayer. Defense counsel conceded this during oral argument and it is supported by the decided cases. For instance, in the case of Mitchell v. Commissioner, 118 F. 2d 308, 310 (5th Cir. 1941) the court said:
* * * Negligence, whether slight or great, is not equivalent to the fraud with intent to evade tax named in the statute. The fraud meant is actual, intentional wrongdoing, and the intent required is the specific purpose to evade a tax believed to be owing. Mere negligence does not establish either. Griffiths v. Commissioner, 7 Cir., 50 F. 2d 782. * * * [Emphasis supplied.]
This principle was repeated in Eagle v. Commissioner, 242 F. 2d 635, 639 (5th Cir. 1957) where the court said:
In Mitchell the Court pointed out that negligence, whether slight or great, is not equivalent to fraud with intent to evade tax. * * * [Emphasis supplied.]
See also Carter v. Campbell, 264 F. 2d 930, 935-36 (5th Cir. 1959).
*789The government, apparently aware that the law is squarely against it on this point, artfully attempts to explain away the taxpayer’s plain and unambiguous statement of “just negligence” by inference and interpretation so as to give the statement a meaning directly opposite and contrary to that intended by the taxpayer. In carrying out these mental gymnastics, the government seizes upon the second part of the alleged statement, namely, “negligence,” means to him— “next year I’ll do it, but next year never comes” and says that “this explanation was actually indicative of an intention to evade the payment of the taxes due” and that this “is not only sound, but is the only normal and reasonable meaning to be gleaned from Lewis Irolla’s explanation.” 3 This is spurious reasoning and a failure to come to grips with reality. It is akin to arguing that something is black when it is obviously white. Certainly, in any event, it is far from being clear and convincing evidence of fraud.
In the first place, it could be argued that Irolla never made the second part of the statement attributed to him as quoted above. It will be noted that the words “means to him” in the agent’s report were not in quotation marks in the report, thereby indicating that such words were what the agent concluded negligence meant to the taxpayer, rather than what the taxpayer said they meant. There was no proof that Irolla ever uttered these words, except the unsworn hearsay report of the agent, and even this report does not prove Irolla made the statement. To infer that he made it, and from that to infer he meant something different from what was said, and then to infer from that that he had a fraudulent intent to evade the tax, is piling inference on top of inference, which cannot be done to establish fraud. See Goldberg v. Commissioner, supra at 320.
In the second place, even if he made the statement, one must take the statement as a whole and determine its meaning and not take only a part of it out of context, as the government has done, so as to give it a meaning different from what the taxpayer intended.
In the next place, the statement as a whole as to the taxpayer’s negligence as the reason for his failure to file timely *790returns, was clearly exculpatory in nature and excused him from any fraud, since it shows he acted only because of negligence. The defendant introduced this exculpatory statement and is bound by it and it cannot now attack it or destroy it by saying the statement did not mean what it said.
Ill
The Report of the Agent That the Taxpayer Has No Stocks or Bonds
The report of the I.B.S. investigative agent contained a statement: “Has no stocks or bonds.” However, in this report this statement was not enclosed in quotation marks, as were other statements which the taxpayer was alleged to have made. The government says the taxpayer made this statement and the plaintiff says he did not make it. The plaintiff objected to the introduction of the statement into evidence, but was overruled, and plaintiff excepted to finding 24(d) of the commissioner to the effect that the taxpayer made the statement.4 I think the plaintiff was right. The statement was not a direct quote of the taxpayer in the report. Furthermore, the agent was a witness for the government at the trial and when asked whether the taxpayer made this statement said that he did not remember. During oral argument of this case, counsel for both sides said that the only evidence on this point was the contents of the agent’s report. It is apparent that there is no proof that plaintiff ever made this statement. The agent’s report was not signed by the taxpayer nor ever shown to him. It was hearsay as to him and received into evidence over plaintiff’s objection. It appears from the report of the agent that this statement was not that of the taxpayer, but that of the agent, especially since no one — not even the agent himself — ever testified that the taxpayer made the statement. It could well have been the conclusion of the agent which he reached during the investigation. In any event, this is more logical than to say it was a statement of the taxpayer, bearing in mind that the government must prove fraud by clear and con*791vincing evidence. But the government is not to be denied this vantage point, which is vital to its theory of this case. It comes forth with the missing link and says that it must be inferred that the plaintiff made this statement. Our majority opinion goes along with this inference. From this point, the government infers that having made the statement that he had no stocks or bonds (by inference as aforesaid), it must be inferred that in making such statement he was hiding and concealing his assets. Of course, this gives rise to the further inference that the taxpayer had a fraudulent intent to evade taxes, so says the government. Furthermore, theorizes the government, the foregoing makes the taxpayer suspect and fraud can be inferred from all of these suspicious circumstances, imagined or otherwise. We must ask ourselves the simple question, is this clear and convincing evidence of a fraudulent intent to evade taxes ?
All of the authoritative decisions hold that fraud cannot be inferred nor based on suspicion. Also, it is the law that you cannot establish a fraudulent intent to evade taxes by piling inference on top of inference, as was done here. This was the holding in the case of Goldberg v. Commissioner, supra at 820, wherein it was stated:
* * * Although the existence of fraud may be gathered from circumstances, the piling of inference upon inference hardly qualifies as the clear and convincing evidence by which fraud must be proved. * * * [Emphasis supplied.]
In Wiseley v. Commissioner, 185 F. 2d 268, 266 (6th Cir. 1950) the court said:
In Rogers v. Commissioner, 6 Cir., 111 F. 2d 987, 989, we said: “Fraud cannot be lightly inferred, but must be established by clear and convincing proof. Duffin v. Lucas, 6 Cir., 55 F. 2d 786.” [Emphasis supplied.]
Again, in Davis v. Commissioner, 184 F. 2d 86, 87 (10th Cir. 1950), the court held: *792There are many cases which follow this rule. See Garter v. Campbell, supra; Goldberg v. Commissioner, supra; Eagle v. Commissioner, supra; and Jones v. Commissioner, supra.
*791* * * It [fraud] is never imputed or presumed and the courts should not sustain findings of fraud upon circumstances which at the most create only suspicion. * * * [Emphasis supplied.]
*792Of course, the whole thrust of the government’s position with respect to the words “Has no stocks or bonds,” is to try to show that the taxpayer was not cooperating with the I.E.S. agent and that he was concealing his assets. Actually, the reverse is true. The agent’s report contained the further statement, “He [the taxpayer] replied that he was trying to straighten this out in the best possible way.” The evidence shows that after the agent talked to him, the taxpayer hired an accountant by the name of Norman Gordon and delivered to him all of his bank statements, deposit slips, and cancelled checks and such other records that he had and asked him to prepare income tax returns for the years in question, showing the correct income and expense of his business for those years. This was done without great difficulty, and the reports were given to the I.R.S. agents before they had finished their investigation. The agents audited the reports and found them to be correct and approved them. So, contrary to what the government would have us believe, the facts show that the taxpayer gave complete cooperation to the representatives of the government and furnished them all possible information about his fiscal affairs and at his own expense. There was no holding back of information nor concealment of assets, but a full disclosure. It should be pointed out here, perhaps, that in this case there was no hiding of property, no double bookkeeping, no placing of property in names of others and no act of deception whatsoever on the part of the taxpayer. He deposited all earnings in the bank where records of them were made, and he paid for his investments and expenses by checks, which were easily verified. There was no intentional wrongdoing nor any affirmative act showing a specific intent or purpose to avoid the tax. Without this, there was no clear and convincing evidence of fraud. The cooperation of the taxpayer here was quite different from the lack of cooperation by the taxpayer in Powell v, Gran-guist, supra, cited by defendant,
*793IV
The Taxpayer Kept No Records Except His Bank Statements and Deposit Slips and His Cancelled Checks
The government points an accusing finger at the taxpayer here because the only records he kept were his bank statements, deposit slips, and cancelled checks. It says this was evidence of concealment and from this fraud can be inferred. I do not agree. It must be remembered that the taxpayer ran a one-man business. He peddled doughnuts from his home in a truck. He had few accounts. His bank records showing deposits and paid expenses were all the records he needed. In fact, Norman Gordon, the accountant he hired to prepare a statement of his income and expenses and his tax returns for the years in question after he was contacted by the I.R.S. agent, testified at the trial in this case, and, in answer to a question of counsel for the government as to what would be the “usual kind of books that a jobber (such as the taxpayer)5 might maintain,” said:
I say of a business of this size you might just keep a checking account as your main book of account for the business. That would be it.6
This is exactly what the taxpayer did. In fact, most business and professional men who operate their own business or profession themselves do not keep any books or records, except bank records and cancelled checks, and they prepare their income tax returns from these bank records and checks. This is not evidence of fraud. There are many cases where the courts have denied a fraud penalty where the taxpayer did not keep adequate books and records. The case of First Trust (& Savings Bank v. United States, supra, is very much in point. There the taxpayer, a cattle buyer, kept no business records except his bank deposits and cancelled checks, just as in the instant case. He was held not to be guilty of fraud in failing to file his tax returns. Other cases are Cirillo v. Commissioner, supra; Mitchell v. Commissioner, supra; Wiseley v. Commissioner, supra; Breland v. United States, *794supra; Carter v. Campbell, supra; and Eagle v. Commissioner, supra.
The Internal Revenue Code does make it the duty of every citizen to keep books and records of his income for the purpose of determining the correct amount of income tax due and payable. But if he fails to do so, the penalty is not one for fraud, but is the penalty of having to disprove the correctness of the Commissioner’s determination of the taxpayer’s income by whatever method the Commissioner deems proper. See Internal Revenue Code of 1939, 26 XJ.S.C. § 41 (1952 ed.) ; Internal Revenue Code of 1954, 26 XJ.S.C. § 446 (1964 ed.); and Breland v. United States, supra.
V
The Taxpayer Had Previously Filed Tam Returns
The government makes much of the fact that the taxpayer had previously filed tax returns and says when he failed to file the returns for the years in question, this proved a fraudulent intent to evade tax. We need look no further than the case of Jones v. Commissioner, supra, to determine there is no merit to this contention. In that case the taxpayer had filed his tax returns prepared by his accountant for ten years (1938-1947). The same accountant prepared his returns for 1948 and 1949, but the taxpayer deliberately did not file them because he needed the money to pay other debts. The court held that these facts did not prove fraud. The fact that he had previously filed tax returns did not make any difference. The real question is whether there was clear and convincing evidence that he had a specific fraudulent intent to avoid the taxes for the years when no tax returns were filed.
YI
The Taxpayer Was a Peddler of Doughnuts and Knew He Had Taxable Income During the Years in Question
The defendant say's the taxpayer peddled doughnuts and earned money during the years in question and by reason of this, plus information on dividend notices on stocks he had purchased, he knew he had taxable income and should file tax returns. It infers from this that he did not file the returns because he wanted to conceal his income and from *795this it infers that he had a fraudulent intent to evade the tax. Here again the Jones case, supra, is squarely against the government’s position. There the returns for 1948 and 1949 had been prepared for the taxpayer by his accountant showing the amounts of taxes due. The taxpayer not only knew he owed the tax, but also the amount. He did not file the returns, but used his money to pay other debts. The court held this did not prove fraud. See also, First Trust & Savings Bank v. United States, supra.
VII
The Charges Considered as a Whole Show a Fraudulent Intent To Avoid Taso
Here the government is in the position of saying that if it has failed to show by clear and convincing evidence by the various specific charges discussed above that the taxpayer had a fraudulent intent to avoid tax, then all of the charges should be considered together to show fraud. This is consistent with the practice mentioned earlier of trying a case on the theory of giving a taxpayer a bad name and then proceeding to find him guilty of the alleged charges. Since none of the separate charges show fraud by clear and convincing evidence, a consideration of all of them in the aggregate would not show it either.
The government makes much of a statement of the taxpayer’s former attorney as to why Mr. Irolla had not filed his tax returns. This statement was objected to at the trial by the plaintiff and the commissioner allowed it in evidence for the limited purpose of being a statement of the attorney but not as a statement of the taxpayer.7 The defendant is now treating it as if it was a statement of the taxpayer.8 This is not only unfair and unjust, but is manifestly improper. The statement actually should not be considered for any purpose. Obviously, the commissioner gave it no weight or consideration whatever.
Defendant cites the case of Stoltzfus v. United States, 264 F. Supp. 824 (E.D. Penn. 1967), in which notice of appeal has been given, as controlling in this case, although it ap*796pears to be in conflict with the decision of the Supreme Court in Spies v. United States, 317 U.S. 492 (1943), and other cases as Cave v. United States, 159 F. 2d 464 ( 8th Cir. 1947), cert. denied, 331 U.S. 847; First Trust c& Savings BamJe v. United States, supra, and other cases cited herein. Defendant argues that the Stoltzfus case is correct in holding that in a civil fraud case all the government has to do to prove fraud is to show what it chooses to call an “affirmative indication” on the part of the taxpayer of the specific fraudulent intent, instead of the “affirmative action” required by the Spies case and the other cases. This appears to be an exercise in semantics, 'and is much like trying to distinguish between “Tweedledee” and “Tweedledum.” There cannot be an “affirmative indication” without “affirmative action.” The government would have us believe that by using this illusory formula of “affirmative indication” a person’s fraudulent intent can be determined as easily as his predilections and characteristics can be shown by reading the signs of the zodiac. This places the proof of fraud on a rather nebulous basis, which falls far short of the clear and convincing evidence required by law. An affirmative indication of fraud is a descriptive term which is based on and results from an affirmative act of fraud. It cannot exist otherwise. The government cannot by such argument reduce its burden of having to prove by clear and convincing evidence an affirmative act of fraud on the part of the taxpayer that shows a specific intent to evade tax.
. The Stoltzfus case does not appear to be correctly decided for another reason. The court there held that when a taxpayer knows of his concrete liability to pay taxes and does not file his return and pay them, he intentionally, willfully, and fraudulently evades taxes, in the absence of a valid justification for his conduct. Such a ruling changes the burden of proof from the government to the taxpayer. No principle is better established in civil fraud cases than that which requires the government to prove by clear and convincing evidence that the taxpayer has a fraudulent intent to evade tax. The Stoltzfus case would shift this burden and require the taxpayer in a civil fraud case to prove he did not have a *797fraudulent intent to evade tax. This is not the law as I understand it.
Before a taxpayer can be liable for a civil fraud penalty, there must be an affirmative commission of an act of fraud by him. A willful omission to file a return is not enough. The cases distinguished between “commission” and “omission.” See Spies v. United States, supra; Cave v. United States, supra; and First Trust & Savings Bank v. United States, supra. In the last cited case, the court correctly stated the law as follows:
* * * But Congress makes the difference on the civil side as it does on the criminal side, between the taxpayer whose deficiencies of tax are due to (or caused by) his affirmati/ve commission of fraud and the one whose deficiencies of tax are due to willful omission to make return. [sic] That omission justifies the addition of 5 percent up to 25 percent of the deficiencies found against the taxpayer but does not afford any basis for the addition of 50 percent to his deficiencies. Only the commission of acts of fraud with intent to evade tax to which “the deficiencies are due” (or which bring about the deficiencies) affords a basis for the 50 percent addition to tax. Id. at 100-01. [Emphasis supplied.]
This being the law, it is obvious that when applied to the facts of this case, no fraud has been shown. Where is the affirmative commission of an act of fraud with intent to evade tax? It is not present. The only tax deficiency of this taxpayer was a negligent omission to file timely returns. This is not enough to authorize the fraud penalty.
Conclusion
A correct definition of civil fraud is stated in Carter v. Campbell, supra, as follows:
* * * There is first the matter of what is and what is not fraud. We have recently given our approval, Olinger v. Commissioner, 5 Cir., 1956, 234 F. 2d 823, 824, to the strong language of Davis v. Commissioner, 10 Cir., 1950, 184 F. 2d 862 87, 22 A.L.R. 2d, 967. “Fraud implies bad faith, intentional wrongdoing and a sinister motive. It is never imputed or presumed and the courts should not sustain findings of fraud upon circumstances which at most create only suspicion.” Equally emphatic is that *798stated for ns by Judge Sibley in Mitchell v. Commissioner, 5 Cir., 1941, 118 F. 2d 308, 310. “Negligence, whether slight or great, is not equivalent to the fraud with intent to evade tax named in the statute. The fraud meant is actual, intentional wrongdoing, and the intent required is the specific purpose to evade a tax believed to be owing. Mere negligence does not establish either.” These principles have been restated frequently and recently with no recession either from emphatic language or like application. [Cases omitted.] Id. at 935-36.
It is clear that fraud has not been proven here by clear and convincing evidence as the law requires. The plaintiff has paid the tax of $58,701.75 which the taxpayer owed for the years in question. Plaintiff has also paid the additional sum of $37,658.87 as a penalty of 25 per cent plus interest, all of which was proper because of the taxpayer’s failure to file timely returns. The taxpayer’s estate has also been required to pay $28,500 as a civil fraud penalty and sues here for its refund. It should be noted that the negligence penalty of 25 per cent was collected under the 1939 code along with the 50 per cent fraud penalty for the period of 1946-1953, but the 1954 code, which governs the taxes for 1954, changed the law and now provides that a taxpayer cannot be required to pay both the negligence penalty and' the fraud penalty. So, only the fraud penalty was collected in 1954. Sections 291 and 293 are now made mutually exclusive.9 This appears to have been the spirit of the law even under the 1939 code, and, no doubt the Congress changed the law to eliminate the double penalties for negligence and fraud being collected by the I.E.S.
Here the taxpayer has paid $58,701.75 as taxes, plus $37,658.87 as interest and a 25 per cent negligence penalty, plus $28,500 civil fraud penalty, plus a fine of $2,000, making a total of $126,860.62. The total amount of interest, penalties, and fine amount to $68,158.87, which includes the $28,500 fraud penalty. It appears to me that the imposition of the fraud penalty under the facts of this case is both confiscatory and unconscionable.
*799To paraphrase the language in Jones v. Commissioner, supra at 304, it could be said:
We think that the record in this case shows that petitioner [Irolla]has satisfied the full penalty of the law; in fact, has, by acquiescing in fines and exactions totaling * * * [$39,658.87], paid rather dearly for whatever obliquity may properly be ascribed to him here. * * *
I think an injustice has been done in this case. I would enter judgment for the plaintiff for the recovery of the civil fraud penalty, plus interest.
Findings oe Fact
1. Margaret Irolla is the widow, and the administratrix of the estate, of Lewis Irolla, deceased.
2. Lewis Irolla was bom in Naples, Italy, in 1898. He immigrated to the United States about 1910. He attended school in New York City, and completed at least two years of high school. Thereafter, he was employed as a clerk or shipping clerk.
3. In 1927, Lewis Irolla became a naturalized citizen of the United States.
4. From at least June 22, 1932 until his retirement in August 1956, Lewis Irolla operated a business under the name of Doughnuts Unlimited. He purchased doughnuts and other bakery products from various bakeries in New York City, and sold them to regular customers, principally to terminals, drug stores, and luncheonettes in the mid-town area of New York City.
5. (a) From 1932 to 1936, Lewis Irolla purchased seven retirement annuity policies from the Equitable Life Assurance Society of the United States, as follows:
(b) The last three annuity policies were issued in consideration of a single payment of $1,000 each.
*800(c) The annual premiums on the first four annuity policies were paid when due each year, from the dates of purchase up through at least 1955.
6. In 1939, Lewis Irolla married the plaintiff, whose maiden name was Margaret Burke. Two daughters were bom of this marriage, Judy, who was born on June 23,1940, and Dolores, who was bom on December 13, 1942. Mrs. Irolla had worked prior to her marriage, but she quit her job shortly after her marriage, and thereafter she devoted substantially all of her time to the care of her children, 'her husband, and the home.
7. Mr. and Mrs. Irolla, with their children, lived frugally and modestly in a one-bedroom apartment in Flushing, Long Island, New York, for the first 8 years of their marriage, paying a rent of $62.50 per month. They then lived in a two-bedroom apartment, paying a rent of $89.12 per month, until 1956. The two apartments were in the same building.
8. Mrs. Irolla knew very little about her husband’s financial affairs. She took no part in the operation of Doughnuts Unlimited, except to stamp the date on her husband’s delivery books, send out statements to some customers once a month and to other customers twice a month, and occasionally make out checks to some of Mr. Irolla’s suppliers. She had no idea how many customers paid in cash or how many customers her husband had, and she had no idea of the gross or net income from Doughnuts Unlimited.
9. (a) Lewis Irolla worked a minimum of 12 hours a day, from about 1 A.M. until about 1 P.M., 6 full days a week, in connection with his bakery products business.
(b) During the period between his marriage in 1939 and his retirement in August 1956, Mr. Irolla took only one vacation, and it was for one week.
(c) Mr. Irolla returned home about mid-afternoon each workday, after making his business rounds. He then got in touch with his suppliers with respect to the bakery products that would be needed for the next day’s business, did some reading, and retired early.
(d) Lewis Irolla never had a bookkeeper or an accountant for his business.
*80110. (a) Lewis Irolla’s principal recreation was reading. He usually read investment reports, the Wall Street Journal, or other materials concerning the stock market.
(b) Mrs. Irolla knew that her husband was interested in the stock market, hut she had no personal knowledge of purchases of stocks or bonds, and she did not know whether her husband owned any stocks or bonds.
11. Lewis Irolla handled all the financial matters for the family. He gave Mrs. Irolla $25 to $30 a week to buy food, and to pay for the children’s piano lessons, dancing lessons, and similar expenses. Mrs. Irolla made the draperies and curtains for the apartment herself. S'he had a checking account at the National City Bank of New York in her name, and it was used to pay the rent, gas, electric, telephone, and other household bills. Mr. Irolla was not liberal with money for the household and the children. He even put a lock on the telephone on one occasion when the bill exceeded the minimum amount somewhat. He restricted the extent to which Mrs. Irolla could use the money in her checking account, and she had to account to him for 'her use of that money. He always objected to spending anything more than he actually had to spend. Once a month, the family would go to a movie; and once or twice a month, the family might go out for dinner.
12. Mrs. Irolla had no independent source of income, and never prepared a tax return during her marriage.
13. (a) Lewis Irolla filed Federal income tax returns for the years 1942, 1943, and 1944, and for years prior thereto. He prepared his own returns for those years.
(b) Mr. Irolla filed a declaration of estimated tax for the year 1945, but did not file a return for that year.
14. In 1946, about the time for the filing of the 1945 Federal income tax return, there was a strike involving Lewis Irolla’s suppliers, and this caused him to devote all of his time trying to keep his customers supplied.
15. (a) In each of the years 1946-1954, inclusive, Mrs. Irolla maintained a checking account with the National City Bank of New York. The account was listed as follows:
*802MES. MAEGAEET IEOLLA 36-20 BOWNE ST. FLUSHING, N.Y.
Mrs. Irolla’s checking account normally had a balance of several hundred dollars, and occasionally a balance of around $1,200 to $1,500. Her husband made all the deposits into that account.
(b) From at least January 1945 until at least J anuary 30, 1946, Lewis Irolla maintained a checking account with the National City Bank of New York. The account was listed as follows:
ME. LEWIS IEOLLA 36-20 BOWNE ST. FLUSHING, LX, N.Y.
That account normally had a balance of several thousand dollars, and occasionally a balance of around $12,000 to $15,000.
(c) From at least February 1946 through 1954, Lewis Irolla maintained a checking account with the National City Bank of New York, listed as follows:
DOUGHNUTS UNLIMITED c/o LEWIS IEOLLA 36-20 BOWNE ST. FLUSHING, N.Y.
That account normally had a balance of several thousand dollars, often around $10,000, and occasionally up to $20,000.
16. Lewis Irolla knew that he easily made a profit of at least $5,000 a year from Doughnuts Unlimited.
17. Except for the bank statements of the Doughnuts Unlimited checking account, Lewis Irolla kept virtually no records for the business of Doughnuts Unlimited. He did not normally retain the daily delivery slips, or have his wife make copies of the statements she sent out to some of the customers, 'although Mrs. Irolla apparently kept some record of the amounts in those statements. Many of the customers of Doughnuts Unlimited paid in cash. There were no general ledgers or cash receipts or disbursements books. There *803were no records as to the gross or the net income from the business of Doughnuts Unlimited; and the only records as to the expenses of that business were canceled checks and bank statements.
18. (a) In the years 1943 through November 1946, Lewis Irolla had an account with Shearson, Hammill & Company, a New York firm of stockbrokers.
(b) From at least March 1946 through 19'54, Lewis Irolla had an account with Burton, Cluett & Dana, a New York firm of stockbrokers.
(c) From at least December 1947 through 1954, Lewis Irolla had an account with Breining & Company, a New York firm of stockbrokers.
(d)1 In 1946, some checks were drawn on the Doughnuts Unlimited bank account to Burton, Cluett & Dana for the purchase of stocks and bonds. Although securities were purchased by Mr. Irolla through Burton, Cluett & Dana after 1946, no checks payable to Burton, Cluett & Dana were issued by Mr. Irolla after 1946.
(e) In purchasing stocks through Breining & Company, Lewis Irolla would draw checks on the Doughnuts Unlimited account, payable to Lewis Irolla personally. These checks, varying from about $2,000 to over $6,000, would be endorsed by Lewis Irolla and cashed by Breining & Company. Such checks cashed by Breining & Company for the purchase of stocks and bonds totalled at least the following amounts:
1948_$7,145.53
1949_ 4,089.88
1950_11, 841. 64
1951_ 31, 765. 02
1952_ 19, 724. 05
1953_ 17,208. 68
1954_ 33,205. 88
19. (a) Lewis Irolla kept most of the stocks and bonds which he purchased in his possession in his home.
(b) In each of the years 1946-1954, inclusive, Mr. Irolla received dividend checks from the various companies in which he owned stocks. Most of these dividend checks were addressed to him at his home address. Most of these dividend checks were deposited in the Doughnuts Unlimited checking account.
*804(o) Mr. Irolla signed Mrs. Irolla’s name on some of the dividend checks and deposited them in her account. Mrs. Irolla never saw any of the dividend checks and was not aware that her husband was receiving them..
(d) The bank deposit slips were not retained, and the bank statements would not disclose that dividend checks were deposited in the Doughnuts Unlimited account and in Mrs. Irolla’s account.
20. Representative samples of dividend checks received by Lewis Irolla at his home address were as follows:
21. Dividend payments were also credited on the customer account ledgers of the various stockbroker firms with which Lewis Irolla maintained accounts. Periodically, those firms sent him statements reflecting the activity in the accounts and the dividend payments. The Burton, Cluett & Dana statements always contained the notation “PLEASE RETAIN THIS STATEMENT FOR INCOME TAX PURPOSES.” The stockbroker firms also sent him a Dividend Credit Notice, reflecting the name of the company paying the dividend, the amount of the dividend, and the date of the *805dividend payment. These Dividend Credit Notices contained a statement advising that the income tax law requires that dividends be reported on Federal income tax returns.
22. Lewis Irolla did not keep any record of the amounts of dividends he received each year. His records as to his dividend, interest, and capital gains income were less complete than the records as to his income from Doughnuts Unlimited.
23. In 1951, Lewis Irolla deposited some $16,000 in cash ($50 bills) in his checking account with the Flushing branch of the National City Bank, and this cash deposit was reported on a routine Treasury Currency Report. As a result of that routine Currency Report, the Internal Revenue Service initiated an investigation, and could locate no record of Lewis Irolla having filed Federal income tax returns. When no record of Mr. Irolla’s Federal income tax returns could be located, he was called on the telephone by an agent from the Intelligence Division of the Internal Revenue Service, who asked him where he had filed his Federal tax returns. Mr. Irolla told the agent that he filed at the office at 45th and Lexington, which was the approximate location of the then Upper Manhattan District of the Internal Revenue Service. The Intelligence Division agent rechecked the records at the Upper Manhattan District, still could not find any record of any tax return filed by Mr. Irolla later than 1944, and sent a letter to Mr. Irolla requesting him to appear at the Intelligence Division office.
24. Lewis Irolla went to the Intelligence Division Office on October 26, 1954, and was interviewed by two special agents, Davis and Skvasik. They did not remember what was said when they testified at the trial. However, on the day of the interview one of the agents, Mr. Davis, prepared a “Memorandum of Conference” which he signed that day and Agent Skvasik the next day. Mr. Irolla never returned for another conference and never verified the accuracy of the memorandum. The portions in quotation marks in the memorandum were intended by Agent Davis to set forth Mr. Irolla’s exact words. The memorandum was admitted (Defendant’s Exhibit 3) as “an official statement and an exception to the hearsay rule.” Findings 24. (a)-(d) infra are based on the memorandum. It reads as follows:
*806
*807
*808(a) Mr. Irolla admitted to the agents that he had not filed a return for 1951 or years subsequent to 1951, but stated that he filed for earlier years, although he could not remember when.
(b) When asked by the agents to explain his failure to file returns for 1951 and subsequent years, Mr. Irolla said that the reason was “just negligence,” indicating that by “negligence” he meant “next year I’ll do it, but next year never comes.”
(c) Mr. Irolla stated to the agents that he made a profit of at least $5,000 per year out of his bakery route business.
(d) Mr. Irolla told the agents at the conference on October 26, 1954 that he did not own any stocks or bonds.
25. On February 15, 1956, an information (Criminal Docket No. 44331) was filed in the United States District Court for the Eastern District of New York, charging Lewis Irolla with willful failure to file his Federal income tax returns for the years 1952 and 1953. On February 28,1956, he was arraigned and entered a plea of not guilty. On April 2, 1956, he withdrew his plea of not guilty and entered a plea of guilty as charged. Sentencing was deferred until May 24,1956.
26. (a) On May 23, 1956, the day before his sentencing, Lewis Irolla filed individual Federal income tax returns for the years 1945,1946, and 1947, and filed joint Federal income tax returns with his wife, Margaret Irolla, for the years 1948 to 1954, inclusive. Prior to that time, he and his wife had not filed Federal income tax returns for any of those years.
(b) On May 23,1956, Lewis Irolla paid the taxes, interest, and penalties reflected on the returns as filed for 1945-1954, inclusive, which payments totaled over $100,000.
27. On May 24, 1956, Lewis Irolla received a suspended sentence, was placed on probation for 6 months, and was fined $2,000.
28. (a) The Federal income tax returns for the years 1946-1954, inclusive, filed on May 23, 1956, reflected the following sources and amounts of income:
*809
(b) The returns for 1946-1954 were filed before the Intelligence Division of the Internal Revenue Service completed its investigation, which investigation included an attempt to reconstruct Lewis Irolla’s income for each year.
(c) The returns for 1946-1954 were audited by the Internal Revenue Service, and were ultimately accepted as correctly reflecting income for those years.
29. Mrs. Irolla had no personal knowledge as to any information set forth in the joint returns for the years 1948 to 1954, inclusive, and simply signed them because they were given to her to sign.
30. (a) The individual Federal income tax returns for the calendar years 1946 and 1947, which Lewis Irolla filed with the District Director of Internal Revenue, Brooklyn, New York, on May 23, 1956, indicated liabilities as follows:
(b) The amounts shown as due were paid on May 23,1956.
31.(a) The joint Federal income tax returns for the calendar years 1948-1954, inclusive, which Lewis Irolla and Margaret Irolla filed with the District Director of Internal Revenue, Brooklyn, New York, on May 23, 1956, indicated liabilities as follows:
*810
(b) The amounts shown as due were paid on May 23,1956.
32. In August 1956, Lewis Irolla retired from his business, Doughnuts Unlimited, moved to Westchester County, New York, and purchased a home, paying for it with cash in the amount of $31,500.
33. The Internal Eevenue Service conducted an investigation with respect to whether civil fraud penalties should be assessed for the several years during the period 1945-1954. During the course of the investigation, the attorney then representing Mr. Irolla conferred with agents of the IES. Mr. Irolla’s attorney stated that the reason why Mr. Irolla did not file a tax return for 1945 was that in the spring of 1946 there was a strike involving Mr. Irolla’s suppliers which caused him to devote all of his time to the task of trying to keep his customers supplied, and thus he was unable to prepare and file his 1945 return. Mr. Irolla’s attorney said, with respect to subsequent years, that Mr. Irolla feared to file returns as he believed it would lead to the discovery of his past delinquency.
34. (a) The Internal Eevenue Service alleged fraud under Section 293 (b) of the Internal Eevenue Code of 1939 for the calendar years 1946 and 1947. The amounts of the proposed penalties for those years were $3,389.21 and $3,563.72, respectively.
(b) The penalties were assessed, and, on March 3, 1958, payment was made.
35. (a) The Internal Eevenue Service alleged fraud under Section 293 (b) of the Internal Eevenue Code of 1939 for the calendar years 1948-1953, inclusive, and under Section 6653(b) of the Internal Eevenue Code of 1954 for the calendar year 1954.
*811(b)The amounts of the proposed penalties for the respective years were as follows:
1948 _$2, 897. 20
1949 _ 1,612.69
1950 _ 2,724.99
1951 _ 4,595.15
1952 _ 5,213.53
1953 _ 5,341.70
1954 _ 2,834.95
(c) The amounts set out in paragraph (b) of this finding included both civil fraud penalties and amounts representing additions to taxes for substantial underestimation of estimated taxes.
(d) The amount listed for the year 1954 was computed in the following way: The Section 6653 (b) civil fraud penalty of $4,582.95 was reduced by the amount of $2,291.47, which was the Section 6651 delinquency penalty paid with the 1954 Federal income tax return. This adjustment resulted in a $2,291.48 civil fraud penalty, to which was added $543.47 for substantial underestimation of estimated taxes, which amounted to $2,834.95, the figure shown in paragraph (b) for the year 1954.
(e) The penalties shown in paragraph (b) of this finding were assessed and, on March 3, 1958, payment was made.
36. No civil fraud penalty was assessed against Lewis Irolla for the year 1945.
37. Lewis Irolla did not file New York State income tax returns or pay New York State income taxes for the years 1941-1954, inclusive, until on or about January 15, 1957.
38. Mrs. Irolla did not have, and does not have, any personal knowledge about her husband’s failure to file either Federal or State income tax returns, and she did not have, and does not have, any personal knowledge as to any reason or reasons for his not filing those returns.
39. On March 3, 1958, Lewis Irolla paid the civil fraud penalties assessed for the years 1946-1954, inclusive. Mrs. Irolla knew nothing about those payments. Mrs. Irolla did not have any independent source of income during her marriage, did not have any separate funds of her own, and did not pay any of the taxes, interest, or penalties involved in these cases.
*81240. On November 11, 1958, Lewis Irolla died. On January 8, 1959, Margaret Irolla was appointed as his legal representative, and she has acted as such at all material times since that date.
41. (a) At the time of his death in November 1958, Lewis Irolla owned stocks and bonds having a fair market value of $592,850.61, less obligations on stock margin accounts in the sum of $23,996.56 to Burton, Dana & Company and in the sum of $133,077.88 to Merrill Lynch, Pierce, Fenner & Smith.
(b)Mrs. Irolla did not learn about her husband’s stock and bond holdings, and the extent of his assets, until after his death.
42. On February 26,1960, Margaret Irolla, as administra-trix of the estate of Lewis Irolla, filed claims for refund for the years 1946 and 1947. That same day, Margaret Irolla, as administratrix of the estate of Lewis Irolla, and Margaret Irolla, individually, filed claims for refund for the years 1948-1954, inclusive.
43. (a) By letters dated December 28, 1960, notice was given that refunds would be allowed in the following amounts:
1946 -$363.13
1947 - 381.83
1948 - 310.41
1949 - 172.79
1950 - 291.96
1951 - 488.00
1952 - 654.25
1953 - 567.99
1954 - 543.47
(b) Except for the limited allowances referred to in paragraph (a) of this finding, the claims for refund were denied by statutory notices of disallowance dated January 10,1961.
(c) The amounts which were refunded were the additions to tax for the substantial underestimation of estimated taxes. The refund claims were allowed in that respect, but the claims for refund of the civil fraud penalties were disallowed.
(d) The civil fraud penalties for which recovery is sought in these cases are as follows:
Defendant’s Exhibit 3.
See defendant’s brief, p. 43.
Plaintiffs exceptions to commissioner’s findings, p. 3.
Parenthetical wording supplied.
Transcript of testimony, p. 98, lines 19-21.
Transcript pp. 150-751.
Defendant’s brief, p. 48, footnote 12.
See Section 6653(d), Internal Revenue Code of 1954, 26 U.S.C. § 6653(d) (1964).