Todd

This is a review of a decision of the Tax Court determining deficiencies in the income taxes for the calendar years 1940 and 1941 of each of the petitioners, for over twenty years equal partners under the name of Western Door and Sash Co., in a business of buying and selling, in the State of California, lumber products such as doors, wooden frames and sash.

Both partners have been married and living with their wives in California since before July 29, 1927, when the present community property law in California was enacted, and the wives acquired a half-interest in the earnings of their husbands. United States v. Malcolm, 282 U.S. 792 , 51 S.Ct. 184 , 75 L.Ed. 714 .

The parties here are agreed that on January 1, 1936, the partners had invested in their lumber business as their separate property $144,366.81, and that at least that sum remained as their separate capital in the business in 1940 and 1941, the tax years here in question.

The capital in the business had increased by plowing back much of its earnings in 1936, 1937, 1938, and 1939, until on January 1, 1940, it amounted to $226,890.77 and on January 1, 1941, to $285,678.98.

The dispute between the parties concerns the…

(dissenting).

It is the law of the State of California that earnings “plowed back” into the capital of the business shall be deemed to have earned 7% and no more unless the evidence introduced in the case indicates that the 7% rule would produce an erroneous result.

In this case the disclosure of facts to the Commissioner was comprehensive, and we may take it that he determined the 7% rule to be non-applicable. Upon such determination he proceeded to apply a formula designed for quite a different use. This produced a deficiency against the taxpayer.

A review before the Tax Court was had and that court approved the deficiency finding but, as specifically stated in its opinion, upon a presumption and not upon the merits of the controversy.

We have no doubt but that it is the law that a taxpayer cannot merely assert the incorrectness of the Commissioner’s determination and thereby shift the duty of justification to the Commissioner. The presumption of correctness would, in these circumstances, be fully effective. But these are not the circumstances of this case. The taxpayer accepted the statement of facts transmitted to the Tax Court as the basis of the Commissioner’s…