Carson v. U.S.

• Decision Date: 11 October 1977
• Docket Number: No. 75-3262,75-3262
• Parties: 78-1 USTC P 16,280 Archie Dale CARSON, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 693

560 F.2d 693

78-1 USTC P 16,280

Archie Dale CARSON, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 75-3262.

United States Court of Appeals, Fifth Circuit.

Oct. 11, 1977.

James F. Gaulding, Dallas, Tex., for plaintiff-appellant.

Frank D. McCown, U. S. Atty., William L. Johnson, Jr., Asst. U. S. Atty., Fort Worth, Tex., Scott P. Crampton, Robert E. Lindsay, Robert T. Duffy, Asst. Attys. Gen., Tax Div., U. S. Dept. of Justice, Gilbert E. Andrews, Act. Chief, Appellate Sec., U. S. Dept. of Justice, Myron C. Baum, Acting Asst. Atty. Gen., Tax Div., Dept. of Justice, Washington, D. C., for defendant-appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before TUTTLE, GOLDBERG and CLARK, Circuit Judges.

GOLDBERG, Circuit Judge:

Archie Dale Carson (taxpayer) appeals from the district court's rejection of his challenge to two excise tax assessments based on his alleged wagering activities during the fall and winter months of 1970-71 and 1971-72. He contends that those assessments, based on projections from his records of the bets he accepted during one week in January 1972, are arbitrary and excessive.

Disposing of this appeal requires examination of taxpayer's burden of proof and the significance of his destroying most of his wagering records other than those on which the government projections are based. These factors notwithstanding, we must conclude that the court below erred in sustaining the assessment for August 1970-January 1971. The record is utterly devoid of evidence that taxpayer was then engaged in the business of accepting wagers, as the government in effect concedes by relying solely on the presumption of correctness generally afforded its tax assessments. With taxpayer's testimony excluded, moreover, what evidence is in the record suggests if anything that appellant began to accept wagers in the fall of 1971. In these circumstances the district court's finding that taxpayer was in the business of accepting wagers during August 1970-January 1971 was clearly erroneous, and the portion of the judgment based on the 1970-1971 assessment must be reversed.

On the other hand, we readily affirm the court's judgment regarding the 1971-72 assessment. The district court could find that appellant was then engaged in accepting bets. The projection method as employed here was not unreasonable, and the court could properly reject appellant's challenges to it, which rested largely on his own testimony.

I. Facts

On January 15, 1972, local law enforcement officers searched a duplex rented by taxpayer and seized betting slips and other documents he had used to record wagers. The officers later turned the records over to the Internal Revenue Service.

Working solely from those records, IRS agents made the excise tax assessments at issue here. They did so by projecting over each week of the periods assessed the volume of bookmaking activity that occurred during the week of the search. In February 1972, the IRS assessed wagering excise taxes and interest, I.R.C. § 4401, for the period August 1971-January 1972 in the principal amount of $82,652.80. An assessment for the wagering occupational excise tax, I.R.C. § 4411, was also levied at this time for an eleven month period between August 1971 and June 1972, in the principal amount of $45.83.

Two years later, in May 1974, IRS assessed wagering excise taxes and interest for the months August 1970 through December 1970. In August 1974 an assessment for January 1971 was added. The total principal amount of the assessment Taxpayer paid the $45.83 occupational tax for 1971-72 and brought this refund suit in district court. The government counterclaimed for the remainder of the assessments.

for the 1970-71 period was $83,850.67. At this time the IRS assessed another eleven month occupational tax in the principal amount of $45.83.

With taxpayer's testimony favorable to himself excluded, the following facts emerged at the bench trial below. Carson operated a bookmaking establishment during the fall and winter months of 1971-72. Toward that end, in August or September 1971 he rented the duplex from which the wagering records would later be seized. In October 1971 he had additional telephone service installed in the duplex to facilitate his gambling operation. Also in October he borrowed $15,000 for use in accepting bets on football games. During the week ending on January 15, 1972, the date of the search, appellant accepted wagers of $35,936, divided into $18,536 on football and $17,400 on basketball.

In contrast to the light it sheds on the 1971-72 season, the record reveals absolutely nothing linking taxpayer to any gambling business during the same months of 1970-71. Prior to May 1971 appellant operated Dale's Blue Lounge Club in Wichita Falls. The government introduced one entry from a seized notebook that read "5/22 Bill Heath $10.00." Taxpayer testified that this entry, admittedly for 1969, was a loan. While contending the entry reflected a bet, the government did not attempt to show whether the bet was placed by taxpayer or accepted by him. In any case the government recognized that the single $10 1969 entry could not form the basis for any inference of a 1970-71 gambling operation of the nature reflected in the assessment.

The only other pre-1971 evidence is contained in a 1973 preliminary report attached to the 1974 assessment of taxes for the 1970-71 season. That report contains the statement of an IRS agent that an examination of the seized records "revealed that taxpayer received wagers in both August and November of 1970." The nature of the underlying evidence is not otherwise discussed in the report, and none of the records introduced below contain any evidence of such 1970 activity.

Relying on the presumption of correctness and what he regarded as taxpayer's failure to introduce evidence sufficient to overcome the presumption, the district judge upheld both assessments. Accordingly, he dismissed taxpayer's refund claim and granted a judgment in favor of the government for the full amount of its counterclaim.

II. The Absence of Records and the Taxpayer's Burden of Proof: A Framework

We may best begin by recalling observations to which both taxpayer and tax collector here might have paid better heed:

(W)e recognize that the absence of adequate tax records does not give the Commissioner carte blanche for imposing Draconian absolutes. . . . (However,) such absence does weaken any critique of the Commissioner's methodology.

Arithmetic precision was originally and exclusively in (the taxpayer's) hands, and he had a statutory duty to provide it. . . . Having defaulted in his duty, he cannot frustrate the Commissioner's reasonable attempts by compelling investigation and recomputation under every means of income determination. Nor should he be overly chagrined at the (district court's) reluctance to credit every word of his negative wails.

Webb v. Commissioner of Internal Revenue, 394 F.2d 366, 373 (5th Cir. 1968).

Alongside the significance of the absence of records and the limits of that significance, we must consider the burden of proof that lay with taxpayer below and the presumption of correctness that attends the Commissioner's assessments. The burden and the presumption, which are for the most part but the opposite sides of a single coin, combine to require the taxpayer always In a Tax Court deficiency proceeding, once the taxpayer has established that the assessment is erroneous, the burden shifts to the government to prove the correct amount of any taxes owed. In a refund suit, on the other hand, the taxpayer bears the burden of proving both the excessiveness of the assessment and the correct amount of any refund to which he is entitled. See Janis, supra, 96 S.Ct. at 3025; Bar L Ranch, Inc., supra, 426 F.2d at 998.

to prove by a preponderance of the evidence that the Commissioner's determination was erroneous. See United States v. Janis, 428 U.S. 433, 96 S.Ct. 3021, 3025, 49 L.Ed.2d 1046 (1976); Bar L Ranch, Inc. v. Phinney, 426 F.2d 995 (5th Cir. 1970); Higginbotham v. United States, 556 F.2d 1173, No. 75-1487 (4th Cir. 1977). This burden applies whether the proceeding is in Tax Court for redetermination of a deficiency or in district court upon a refund claim or a government counterclaim. See Bar L Ranch, Inc., supra, 426 F.2d at 998.

This court has held that, as in Tax Court deficiency proceedings, when the government attempts to collect a tax by way of a counterclaim in district court the taxpayer bears only the burden of proving the assessment erroneous. See Bar L Ranch, Inc., supra, 426 F.2d at 998. The Supreme Court has recently noted, but did not attempt to resolve, a split in the circuits over whether in such a situation the taxpayer ought not also have to prove the correct amount of any taxes owing. See Janis, supra, 96 S.Ct. at 3026.

While we find nothing in Janis that casts doubt on the continuing validity of Bar L Ranch, reliance on the latter decision is unnecessary to decision of the case at bar. As regards the taxpayer's activities during the fall and winter of 1970-71, the government's assessment falls within a narrow but important category noted in Janis or " 'naked' assessment without any foundation whatsoever, . . . not properly subject to the usual rule with respect to the burden of proof in tax cases." 96 S.Ct. at 3026. More specifically, the presumption of correctness notwithstanding, a wagering excise tax assessment cannot stand without some evidence tending to support an inference that the taxpayer engaged in gambling activities during the period assessed. See Gerardo v. Commissioner of Internal Revenue, 552 F.2d 549 (3d Cir. 1977); Pizzarello v. United States, 408 F.2d 579 (2d Cir. 1969).

The assessment for 1970-71 lacked that necessary foundation. On the other hand, the district court could properly conclude that the taxpayer had failed to...