STEEL, District Judge.
The sole issue is whether fraud penalties assessed and paid under § 293(b) of the I.R.C. of 1939 should be refunded 1. The income tax deficiencies upon which the penalties are based have been paid and no recovery of them is sought. Jurisdiction rests upon 28 U.S.C. § 1346(a) d).
During 1947 through 1950 inclusive, Charles A. Ries (herein “Charles”) and Joseph E. Ries (herein “Joseph”) were equal partners in a business engaged in buying, reconditioning and selling barrels. Charles and Joseph filed individual income tax returns for 1947, and joint returns with their wives for 1948, 1949 and 1950. Plaintiffs are Joseph, his wife, and the executor and administrator of the estates of Charles and his wife, respectively, the latter two persons having died in 1956 and 1953. Charles, Joseph and their wives are referred to as the taxpayers.
The income tax deficiencies resulted from alleged understatements of distributable income of the partnership. As a result of Government audit the distributable partnership income reported by the taxpayers was increased by $17,-190.57 for 1947, $22,103.61 for 1948, and $28,249.82 for 1950, and was decreased by $3,728.20 for 1949. Principally because of these changes, the following income tax deficiencies were assessed :
In addition, the following civil fraud penalties of 50 percent of the deficiencies were added to the tax:
In an action in a District Court for a refund of a fraud penalty, the burden of proving fraud is on the Government. Trainer v. United States, D.C.E.D.Pa.1956, 145 F.Supp. 786, 787 and authorities therein cited. The order of May 7, 1957 entered by Judge Kirkpatrick in this cause so provides; and the Government concedes that this is the rule of the case at this juncture. The fraud must be established by evidence which is clear and convincing. Bukowski v. United States, D.C.S.D.Tex.1955, 136 F.Supp. 91, 95; Powell v. Granquist, 9 Cir., 1958, 252 F.2d 56, 61. The same burden and quantum of proof is ap[931]*931plicable in a proceeding before the Tax Court when civil fraud is in issue. Valetti v. Commissioner, 3 Cir., 1958, 260 F.2d 185, 188. To warrant the imposition of a civil fraud penalty, a taxpayer must have engaged in an act of intentional wrongdoing with the specific purpose of evading a tax believed to be owing. Powell v. Granquist, supra, 252 F.2d at page 60; Wiseley v. Commissioner, 6 Cir., 1950, 185 F.2d 263, 266; Mitchell v. Commissioner, 5 Cir., 1941, 118 F.2d 308, 310.
The Government attempts to make much of the fact that the partnership reported total distributable income of only $18,000 for the years 1947 through 1950, whereas after audit this was increased to $82,000. The Government says that this determination of a 500 percent increase in the partnership distributable income, and the taxpayers’ acceptance of this determination by their execution of Form 875, establishes the fact that the taxable incomes had been substantially understated over a period of years, and that under Schwarzkopf v. Commissioner, 3 Cir., 1957, 246 F.2d 731, 734, this circumstance, in and of itself, is sufficient to sustain the commissioner’s finding of fraud 2.
This argument is based upon a misconception of the evidence and the law. While at the trial the taxpayers stipulated to the amounts by which the distributable income of the partnership was increased by the audit, in doing so they made it clear that they did not agree that the amount of the increase was correct. This qualification of the stipulation was accepted by the Government. In the Valetti case it was held that an adjudication by the Tax Court of income tax deficiencies over a four-year period signified only that the taxpayers were unable to overcome the presumption of correctness which the law accords to tax deficiency findings by the Commissioner; and that such findings are not enough in and of themselves to support a fraud finding which the Commissioner has the burden of proving. The Commissioner’s findings of income tax deficiencies and the acceptance thereof by the taxpayers in the case at bar can have no greater effect.
Schwarzkopf holds that the proven failure of a taxpayer to report as income $200,000 received over a five-year period is enough, without more, to establish a fraudulent intent to evade the payment of taxes. In the case at bar the Government makes no contention that the taxpayers have failed to report income which they received; and although it asserts that 50 percent of the payments claimed by the taxpayers as deductions [932]*932for the purchase of barrels were in fact never made, the evidence falls far short of establishing this with the persuasive force which the law exacts when fraud is claimed.
During the four years in question, the partnership paid for its barrels by check and by cash. The cash payments totaled approximately $100,000. These payments were shown by the stubs of the checks which were cashed to obtain the funds used in the cash transactions. The stubs did not reflect the names of the persons to whom the payments were to be made 3.
Although the partnership kept a rather complete set of books, the books and records pertaining to the cash purchases were missing when the Government made its audit. These records had been kept by Charles who bought the barrels. When the Revenue Agent asked Charles to name the persons to whom the cash had been paid, Charles refused. He said that such a disclosure “would ruin the business” and that it “would be against the business” because “people don’t want their names pushed out”4. Prior to trial, Charles died. Joseph likewise failed to divulge, during the audit, when his pre-trial deposition was taken by the Government, and at the trial, the names of suppliers to whom cash had been paid. He testified on deposition and at the trial that he didn’t know their names because he didn’t do the buying and had nothing to do with the books. After Charles’ death, Charles, Jr., and his brother assumed the buying responsibilities. Charles, Jr. admitted knowing the names of some of the suppliers for cash, but when his deposition was taken by the Government he refused to name them on the advice of counsel.
Finding itself thus thwarted in its efforts to obtain the facts concerning the cash purchases, the Government disallowed 50 percent of the cash payments and increased the distributable income of the partnership commensurately. The seemingly arbitrary disallowance was justified, according to the Government, because the relationships between cash purchases, gross receipts and net income, as reported by the taxpayers, disclosed “a very funny pattern”5. These relationships are shown in the following tabulations extracted from the Government’s brief:
[933]
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STEEL, District Judge.
The sole issue is whether fraud penalties assessed and paid under § 293(b) of the I.R.C. of 1939 should be refunded 1. The income tax deficiencies upon which the penalties are based have been paid and no recovery of them is sought. Jurisdiction rests upon 28 U.S.C. § 1346(a) d).
During 1947 through 1950 inclusive, Charles A. Ries (herein “Charles”) and Joseph E. Ries (herein “Joseph”) were equal partners in a business engaged in buying, reconditioning and selling barrels. Charles and Joseph filed individual income tax returns for 1947, and joint returns with their wives for 1948, 1949 and 1950. Plaintiffs are Joseph, his wife, and the executor and administrator of the estates of Charles and his wife, respectively, the latter two persons having died in 1956 and 1953. Charles, Joseph and their wives are referred to as the taxpayers.
The income tax deficiencies resulted from alleged understatements of distributable income of the partnership. As a result of Government audit the distributable partnership income reported by the taxpayers was increased by $17,-190.57 for 1947, $22,103.61 for 1948, and $28,249.82 for 1950, and was decreased by $3,728.20 for 1949. Principally because of these changes, the following income tax deficiencies were assessed :
In addition, the following civil fraud penalties of 50 percent of the deficiencies were added to the tax:
In an action in a District Court for a refund of a fraud penalty, the burden of proving fraud is on the Government. Trainer v. United States, D.C.E.D.Pa.1956, 145 F.Supp. 786, 787 and authorities therein cited. The order of May 7, 1957 entered by Judge Kirkpatrick in this cause so provides; and the Government concedes that this is the rule of the case at this juncture. The fraud must be established by evidence which is clear and convincing. Bukowski v. United States, D.C.S.D.Tex.1955, 136 F.Supp. 91, 95; Powell v. Granquist, 9 Cir., 1958, 252 F.2d 56, 61. The same burden and quantum of proof is ap[931]*931plicable in a proceeding before the Tax Court when civil fraud is in issue. Valetti v. Commissioner, 3 Cir., 1958, 260 F.2d 185, 188. To warrant the imposition of a civil fraud penalty, a taxpayer must have engaged in an act of intentional wrongdoing with the specific purpose of evading a tax believed to be owing. Powell v. Granquist, supra, 252 F.2d at page 60; Wiseley v. Commissioner, 6 Cir., 1950, 185 F.2d 263, 266; Mitchell v. Commissioner, 5 Cir., 1941, 118 F.2d 308, 310.
The Government attempts to make much of the fact that the partnership reported total distributable income of only $18,000 for the years 1947 through 1950, whereas after audit this was increased to $82,000. The Government says that this determination of a 500 percent increase in the partnership distributable income, and the taxpayers’ acceptance of this determination by their execution of Form 875, establishes the fact that the taxable incomes had been substantially understated over a period of years, and that under Schwarzkopf v. Commissioner, 3 Cir., 1957, 246 F.2d 731, 734, this circumstance, in and of itself, is sufficient to sustain the commissioner’s finding of fraud 2.
This argument is based upon a misconception of the evidence and the law. While at the trial the taxpayers stipulated to the amounts by which the distributable income of the partnership was increased by the audit, in doing so they made it clear that they did not agree that the amount of the increase was correct. This qualification of the stipulation was accepted by the Government. In the Valetti case it was held that an adjudication by the Tax Court of income tax deficiencies over a four-year period signified only that the taxpayers were unable to overcome the presumption of correctness which the law accords to tax deficiency findings by the Commissioner; and that such findings are not enough in and of themselves to support a fraud finding which the Commissioner has the burden of proving. The Commissioner’s findings of income tax deficiencies and the acceptance thereof by the taxpayers in the case at bar can have no greater effect.
Schwarzkopf holds that the proven failure of a taxpayer to report as income $200,000 received over a five-year period is enough, without more, to establish a fraudulent intent to evade the payment of taxes. In the case at bar the Government makes no contention that the taxpayers have failed to report income which they received; and although it asserts that 50 percent of the payments claimed by the taxpayers as deductions [932]*932for the purchase of barrels were in fact never made, the evidence falls far short of establishing this with the persuasive force which the law exacts when fraud is claimed.
During the four years in question, the partnership paid for its barrels by check and by cash. The cash payments totaled approximately $100,000. These payments were shown by the stubs of the checks which were cashed to obtain the funds used in the cash transactions. The stubs did not reflect the names of the persons to whom the payments were to be made 3.
Although the partnership kept a rather complete set of books, the books and records pertaining to the cash purchases were missing when the Government made its audit. These records had been kept by Charles who bought the barrels. When the Revenue Agent asked Charles to name the persons to whom the cash had been paid, Charles refused. He said that such a disclosure “would ruin the business” and that it “would be against the business” because “people don’t want their names pushed out”4. Prior to trial, Charles died. Joseph likewise failed to divulge, during the audit, when his pre-trial deposition was taken by the Government, and at the trial, the names of suppliers to whom cash had been paid. He testified on deposition and at the trial that he didn’t know their names because he didn’t do the buying and had nothing to do with the books. After Charles’ death, Charles, Jr., and his brother assumed the buying responsibilities. Charles, Jr. admitted knowing the names of some of the suppliers for cash, but when his deposition was taken by the Government he refused to name them on the advice of counsel.
Finding itself thus thwarted in its efforts to obtain the facts concerning the cash purchases, the Government disallowed 50 percent of the cash payments and increased the distributable income of the partnership commensurately. The seemingly arbitrary disallowance was justified, according to the Government, because the relationships between cash purchases, gross receipts and net income, as reported by the taxpayers, disclosed “a very funny pattern”5. These relationships are shown in the following tabulations extracted from the Government’s brief:
[933]*933The Government emphasizes that in the two years when the cash purchases were the largest, the partnership reported losses. There is nothing necessarily peculiar about this. The profitability of the sale of merchandise depends in large measure upon the difference between the selling price and the cost of the goods sold; and cost of goods sold can be determined only if the inventory at the beginning and end of the taxable period and the interim purchases are known 6. Notwithstanding that each of these factors is of importance in determining profit or loss, only one — the cost of goods purchased — is supplied in the Government’s tabulation. Nor is there anything incongruous in the year-to-year variations between payroll and cash purchase ratios which the Government points to. No evidence was offered that these ratios are normally constant, and no reason has been suggested why lack of such constancy is a circumstance of suspicion. The Government’s last observation that annual variations exist in the relationship between receipts and cash purchases is likewise meaningless without information as to the value of inventories at the beginning and end of each year. The so-called “very funny pattern” disclosed by the partnership figures affords no basis for the disal-lowance of 50 percent, or indeed any other percent, of the cash purchases which the taxpayers claim that they made,
The refusal of Charles and Charles, Jr., prior to trial to divulge the names of the persons to whom the cash payments, were made gives rise to a possible inference that the payments were fictitious. But this is not the only inference to be drawn from the testimony. Joseph testified that Charles had told the Revenue Agent that the suppliers did not want their names “pushed out” and that a disclosure of their identity would be ruinous to the partnership business. From this it is logical to infer that when Charles and Charles, Jr., withheld the names of the suppliers, they were motivated by bona fide business considerations. Since each of the two possible inferences is equally cogent, the failure of the taxpayers to designate the suppliers is not clear and convincing evidence that the payments were fictitious.
It is noteworthy that the Government took no action under § 3615 of the I.R.C. of 1939, 26 U.S.C. § 3615 to compel the taxpayers to reveal to the Revenue Agent the names of the suppliers to whom cash was paid7. And when the Government took pre-trial depositions and the witnesses refused to disclose the suppliers’ names, the Government purposely refrained from resorting to Rule 37, F.R.Civ.P. 28 U.S.C. to get the information. Apparently the Government was more eager to lay a basis for a test ease in which to seek judicial recognition of minimum standards of fraud than it was to ascertain the facts 8.
[934]*934The interest of the Government in sustaining a finding of fraud upon the basis of inferences rather than by direct proof, was again emphasized at the trial. There the Government asked Charles, Jr., to name four of the suppliers to whom cash had been paid, apparently with the expectation he would refuse. When the objection of the taxpayers to the question had been overruled, and it was apparent the question would be answered, the attorney for the Government said:
“I thank Your Honor for the ruling, but the Government prefers not to pursue it.”
[938]*938ment shall not in any way enlarge the rights of Flanders beyond the terms of this agreement.
[934]*934When the Court indicated impatience with the refusal of the Government to follow up this critical line of inquiry, the Government had .Charles, Jr., identify one of the cash suppliers, and then promptly withdrew its question directed to the disclosure of additional names. This head-in-the-sand attitude toward the most obvious source of direct evidence and the demonstrated preference of the Government to rely solely upon inference, makes- it particularly difficult to accept its proof as clear and convincing. Cf. Valetti v. Commissioner, supra, 260 F.2d at page 189.
The Government argues that the taxpayers claimed as business deductions certain personal expenditures such as those made in payment of medical and heating bills. The difficulty with this argument is that a fair reading of the testimony will not support the interpretation which the Government has placed upon it.
That the books and records pertaining to the cash purchases have disappeared is undoubtedly a suspicious- circumstance. But this fact in the circumstances of this case is not sufficient to establish fraud in the clear and convincing way the law requires.
The cases of Calafato v. Commissioner, 42 B.T.A. 881; affirmed 3 Cir., 1941, 124 F.2d 187, Masters v. Commissioner, 3 Cir., 1957, 243 F.2d 335, Mauch v. Commissioner, 3 Cir., 1940, 113 F.2d 555, and Estate of Bernstein v. Commissioner, 1956 P-H T.C. Memorandum Decisions, Par. 56-260 (1956) cited by the Government are without pertinence. Each involved the failure of a taxpayer to report as income large cash receipts which had been conclusively proven. This fact alone was held to constitute substantial evidence from which the Tax Court could make a fraud finding, since the Government’s proof had shifted to the taxpayer the burden of going forward with proof of exculpation which it had not satisfactorily done. This same principle would appear to apply when the validity of a deduction is in issue. The difficulty with utilizing it in the case at bar is that the Government has not established by the quantum of proof required in a fraud case that the cash purchases claimed to have been made by the taxpayers were fictitious. There is therefore no evidence sufficient to shift the burden of going forward to the taxpayers. The Government cannot use the taxpayers’ failure to prove that the payments were in fact made when the Government has introduced no evidence sufficient to sustain the burden which it carries to establish the contrary. To hold otherwise would be to relieve the Government of the burden of proving fraud and to require the taxpayers to sustain the burden of disproving it.
The taxpayers are entitled to a refund for fraud penalties which they have paid, with interest.
The foregoing constitutes the findings of fact and conclusions of law required by Rule 52(a).