Llorente v. Comm'r of Internal Revenue

• Decision Date: 13 May 1980
• Docket Number: Docket No. 10962-76.
• Citation: 74 T.C. 260
• Parties: RAUL LLORENTE, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

74 T.C. 260

RAUL LLORENTE, PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 10962-76.

United States Tax Court

Filed May 13, 1980.

Based upon information furnished to an undercover agent by an informant and the agent's personal knowledge, respondent determined that petitioner purchased cocaine during 1974. Held: Sufficient evidence introduced to render statutory notice not arbitrary and excessive. Jackson v. Commissioner, 73 T.C. 394 (1979), and Weimerskirch v. Commissioner, 596 F.2d 358 (9th Cir. 1979), revg. 67 T.C. 672 (1977), distinguished. Taxable income determined under the expenditures method. Held, further, dependency exemption deduction determined. Leonard Bailin, for the petitioner.

Lewis R. Mandel and Iris K. Rothman, for the respondent.

STERRETT, Judge:

By letter dated September 17, 1976, respondent determined a deficiency in petitioner's income taxes for the taxable year ended December 31, 1974, in the amount of $29,403.76. Respondent has also determined additions to tax pursuant to sections 6651(a), 6653(a), and 6654(a), I.R.C. 1954, in the amounts of $7,350.94, $1,470.19, and $940.93, respectively. After concessions, the primary issue remaining is whether petitioner had unreported income evidenced by his mortgage payments and purchase of cocaine in 1974, as determined by respondent utilizing the expenditures method to reconstruct petitioner's income for taxable year 1974. The other issues presented are (1) whether petitioner is liable for the following additions to tax for the taxable year 1974: section 6651(a) failure to file, section 6653(a) negligent underpayment of income tax, and section 6654(a) failure to make estimated tax payments, and (2) whether petitioner is entitled to dependency exemption deductions for two of his sons.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.

At the time Raul Llorente (petitioner) filed his petition herein he resided in Jamaica, N.Y. Petitioner did not file a Federal income tax return for calendar year 1974. Petitioner's wife, Cristina Llorente, filed a Federal income tax return for 1974 utilizing the filing status of married filing separately on which she reported gross income of $779. Two of petitioner's children, Carlos and Nestor, were students and lived with their parents during 1974. Petitioner's wife claimed Nestor as a dependent on her 1974 tax return.

Petitioner was born in Colombia, South America, and first came to the United States on February 2, 1965. Upon immigrating to the United States, petitioner brought with him $1,500 in cash. In August 1972, petitioner had $11,000 in savings of which he used $10,000 for a downpayment on his personal residence.

Petitioner and his wife reported gross income in the amount of $13,020, of which $565 represented interest income, on their joint Federal income tax return for calendar year 1973.

Petitioner's and his wife's cost of living for 1974 was between $900 and $1,000 per month. That amount included the one or two trips made by petitioner to Colombia at a cost of approximately $380 per trip. In January 1974, petitioner purchased the LaPaz Bar and Grill for $9,000 cash.

During 1974 and part of 1975, the New York City Police Department maintained an undercover investigation of illegal narcotics activity. As a result of that investigation, petitioner was arrested on March 8, 1975. At the time of his arrest, petitioner's bail was set at $1 million but was subsequently reduced to $300,000. Petitioner never raised the bail. On April 1, 1975, an indictment was filed in the Supreme Court of the State of New York against petitioner, accusing him of the crime of conspiracy in the first degree to commit the crimes of criminal possession of a controlled substance in the first degree, criminal possession of a controlled substance in the third degree, and criminal sale of a controlled substance in the first degree for the period from February 1974 to March 8, 1975.

On May 24, 1977, petitioner entered a plea of guilty to the crime of attempted conspiracy in the first degree to cover the indictment, and was sentenced on September 6, 1977, to time served, i.e., the time petitioner had spent in jail following his arrest on March 8, 1975, to his sentencing on September 6, 1977.

Hugo Sossa, Alvaro Doronzoro, and Louis Irving Taylor were patrons of petitioner's bar and grill and were known by him. During 1974, a police department undercover agent purchased cocaine and engaged in conversation and other transactions involving the purchase of cocaine with Louis Irving Taylor (Taylor) and Alvaro Doronzoro (Doronzoro) at petitioner's bar and grill. During one such transaction, the undercover agent was informed by Taylor that he would have to check to see if his shipment had arrived. Following that statement to the agent, Taylor left the table at which they were sitting and engaged in a conversation with petitioner. Upon returning, he informed the agent that his shipment had not arrived. On another occasion, the undercover agent entered petitioner's bar and grill to purchase cocaine from Doronzoro. The agent heard Doronzoro inquire of petitioner whether Doronzoro's shipment of cocaine was available. Further, the agent heard petitioner inform Doronzoro that the shipment had not arrived.

The undercover agent was informed by a confidential informant that petitioner, the informant, and Doronzoro had gone to Alfonso Velasco's house in Queens, N.Y., where there were 6 kilos of cocaine. According to the informant, at that time and location, petitioner examined the package because some of the merchandise had been delivered in a damp condition.

Upon completion of his investigation, the undercover agent advised respondent that petitioner had purchased 6 kilos of cocaine. He further advised respondent that the cost of a kilo of cocaine to petitioner was in the $9,000 to $14,000 range.

Based upon the information received from the undercover agent and a conversation with an assistant district attorney who worked on the criminal case, respondent determined that petitioner expended $54,000 for cocaine in 1974. In 1974, petitioner made payments with respect to a mortgage on his residence in the amount of $3,156. Petitioner, in the same year, received $5,300 as remuneration from Caveman Lounge, Inc. Petitioner was president of Caveman Lounge, Inc., and apparently the corporation was the legal owner of the LaPaz Bar and Grill.

OPINION

Petitioner argues that respondent's determination that he purchased illegal drugs is arbitrary, that the information used by respondent in reconstructing his income was insufficient to establish the correctness of the deficiency, thereby shifting the burden of going forward with the evidence to respondent. Petitioner argues in the alternative that, if the burden of going forward with the evidence is not shifted, he has met his burden.

Respondent argues that the statutory notice of deficiency is entitled to the ordinary presumption of correctness. Further, he argues that petitioner's testimony, which was the only evidence presented to support petitioner's argument, lacks sufficient credibility to shift the burden of going forward.

A statutory notice ordinarily carries with it a presumption of correctness that, except where provided in the Internal Revenue Code or the Tax Court Rules of Practice and Procedure, places the burden of proof and the burden of going forward with the evidence on the petitioner. Rule 142, Tax Court Rules of Practice and Procedure, and Welch v. Helvering, 290 U.S. 111 (1933). However, a showing by petitioner that the statutory notice is arbitrarily excessive or without foundation has the effect of shifting the burden of going forward with the evidence to respondent. Helvering v. Taylor, 293 U.S. 507 (1935). In neither circumstance is such a showing reason for finding the statutory notice null and void.

When petitioner asks the Court to find a statutory notice arbitrary, he is asking the Court to look behind the statutory notice. As a general rule, we will not honor such a request. Greenberg's Express, Inc. v. Commissioner, 62 T.C. 324, 327 (1974). The rare exception to this rule is where respondent, in a case involving unreported income, introduces no direct evidence but rests on the presumption of correctness and petitioner challenges the deficiency on the ground that it is arbitrary. Jackson v. Commissioner, 73 T.C. 394 (1979).

Petitioner argues that the instant case meets this exception and is therefore controlled by Jackson v. Commissioner, supra, and Weimerskirch v. Commissioner, 596 F.2d 358 (9th Cir. 1979), revg. 67 T.C. 672 (1977). Respondent argues that Weimerskirch is distinguishable.¹ For reasons hereinafter stated, we agree.

In Weimerskirch, the Circuit Court for the Ninth Circuit held that the Government must introduce substantive evidence linking the taxpayer with the charged activity. In so holding, the Circuit Court relied heavily upon the Supreme Court decision in United States v. Janis, 428 U.S. 433 (1976). In its discussion of the applicability of the exclusionary rule in civil tax cases, the Supreme Court in that case defined a “naked assessment” as “one ‘without rational foundation and excessive,‘ and not properly subject to the usual rule with respect to the burden of proof in tax cases.” United States v. Janis, supra at 441. The Court did not stop there, but went further and illustrated a “naked assessment” as occurring when the evidence “seized by the Los Angeles police cannot be used in the formulation of the assessment.” United States v. Janis, supra at 441. The ultimate holding of the Court was that “the judicially created exclusionary rule should not be extended to forbid the use in the civil proceeding of one sovereign of evidence seized by a criminal law enforcement agent of another...